---

**Exhibit 99.2**

Consolidated Financial Statements of

TEMBEC INC.

Years ended September 29, 2012 and September 24, 2011



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| |                                          |           |               
| | ---------------------------------------- | --------- | --------------
| | KPMG LLP                                 | Telephone | (514) 840-2100
| | Chartered professional
      accountants | Fax       | (514) 840-2187
| | 600 de Maisonneuve Blvd. West            | Internet  | www.kpmg.ca   
| | Suite 1500                               |           |               
| | Tour KPMG                                |           |               
| | Montréal (Québec) H3A 0A3                |           |               

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Tembec Inc.

We have audited the accompanying consolidated financial
statements of Tembec Inc., which comprise the consolidated balance sheets as at
September 29, 2012, September 24, 2011 and September 26, 2010, the consolidated
statements of net earnings (loss), comprehensive earnings (loss), changes in
shareholders equity and cash flows for the years ended September 29, 2012 and
September 24, 2011, and notes, comprising a summary of significant accounting
policies and other explanatory information.

Managements Responsibility for the Consolidated Financial
Statements

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

Auditors Responsibility

Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

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

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



---

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of Tembec
Inc. as at September 29, 2012, September 24, 2011 and September 26, 2010, and
its consolidated financial performance and its consolidated cash flows for the
years ended September 29, 2012 and September 24, 2011 in accordance with
International Financial Reporting Standards as issued by the International
Accounting Standards Board.

|                 
|-----------------
|November 30, 2012
|Montreal, Canada 

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

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|TEMBEC INC.                                                              
|-------------------------------------------------------------------------
|Consolidated Balance Sheets                                              
|                                                                         
|As at September 29, 2012, September 24, 2011 and September
      26, 2010
|(in millions of Canadian dollars)                                        

|                                                      |   | 2012  |   |   | 2011  |   |   | 2010  |  
|----------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | -
|ASSETS                                                |   |       |   |   |       |   |   |       |  
|Current assets:                                       |   |       |   |   |       |   |   |       |  
|Cash and cash equivalents                             | $ | 87    |   | $ | 99    |   | $ | 68    |  
|Cash held in trust                                    |   | 5     |   |   | 6     |   |   | 6     |  
|Trade and other receivables
      (notes 9 and 19)    |   | 200   |   |   | 182   |   |   | 209   |  
|Inventories (notes 5 and 9)                           |   | 255   |   |   | 261   |   |   | 255   |  
|Prepaid expenses                                      |   | 7     |   |   | 6     |   |   | 7     |  
|                                                      |   | 554   |   |   | 554   |   |   | 545   |  
|Property, plant and equipment (note 6)                |   | 485   |   |   | 491   |   |   | 496   |  
|Biological assets (note 7)                            |   | 4     |   |   | 4     |   |   | 7     |  
|Employee future benefits (note 12)                    |   | -     |   |   | 1     |   |   | -     |  
|Other long-term receivables (note 8)                  |   | 12    |   |   | 28    |   |   | 28    |  
|Deferred tax assets (note 18)                         |   | 4     |   |   | 15    |   |   | 27    |  
|                                                      | $ | 1,059 |   | $ | 1,093 |   | $ | 1,103 |  
|                                                      |   |       |   |   |       |   |   |       |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                  |   |       |   |   |       |   |   |       |  
|Current liabilities:                                  |   |       |   |   |       |   |   |       |  
|Operating bank loans (note 9)                         | $ | 68    |   | $ | 6     |   | $ | 1     |  
|Trade, other payables and
      accrued charges       |   | 230   |   |   | 240   |   |   | 233   |  
|Interest payable                                      |   | 10    |   |   | 8     |   |   | 3     |  
|Income tax payable                                    |   | 3     |   |   | 6     |   |   | -     |  
|Provisions (note 11)                                  |   | 3     |   |   | 8     |   |   | 5     |  
|Current portion of long-term debt (note 10)           |   | 16    |   |   | 18    |   |   | 17    |  
|                                                      |   | 330   |   |   | 286   |   |   | 259   |  
|                                                      |   |       |   |   |       |   |   |       |  
|Long-term debt (note 10)                              |   | 323   |   |   | 271   |   |   | 271   |  
|Provisions (note 11)                                  |   | 17    |   |   | 16    |   |   | 17    |  
|Employee future benefits (note 12)                    |   | 285   |   |   | 285   |   |   | 248   |  
|Other long-term liabilities                           |   | 2     |   |   | 2     |   |   | 8     |  
|                                                      |   | 957   |   |   | 860   |   |   | 803   |  
|                                                      |   |       |   |   |       |   |   |       |  
|Shareholders' equity:                                 |   |       |   |   |       |   |   |       |  
|Share capital (note 13)                               |   | 564   |   |   | 564   |   |   | 564   |  
|Deficit                                               |   | (453  | ) |   | (333  | ) |   | (264  | )
|Accumulated other comprehensive earnings
      (loss) |   | (9    | ) |   | 2     |   |   | -     |  
|                                                      |   | 102   |   |   | 233   |   |   | 300   |  
|                                                      | $ | 1,059 |   | $ | 1,093 |   | $ | 1,103 |  

Guarantees, commitments and contingencies (note 14)

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

On behalf of the Board:

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

- 1 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Consolidated Statements of Net Earnings (Loss)           
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)

|                                                                        |   | 2012  |   |   | 2011  |  
|----------------------------------------------------------------------- | - | ----- | - | - | ----- | -
|Sales                                                                   | $ | 1,666 |   | $ | 1,743 |  
|Freight and other deductions                                            |   | 232   |   |   | 237   |  
|Lumber export taxes                                                     |   | 7     |   |   | 13    |  
|Cost of sales (excluding depreciation and amortization)
      (note 15) |   | 1,290 |   |   | 1,321 |  
|Selling, general and administrative (note
      15)                     |   | 74    |   |   | 72    |  
|Share-based compensation (note 13)                                      |   | (1    | ) |   | 2     |  
|Depreciation and amortization                                           |   | 46    |   |   | 48    |  
|Other items (note
      16)                                             |   | 50    |   |   | 3     |  
|Operating earnings (loss)                                               |   | (32   | ) |   | 47    |  
|                                                                        |   |       |   |   |       |  
|Interest, foreign exchange and other                                    |   | 41    |   |   | 31    |  
|Exchange loss
      (gain) on long-term debt                            |   | (13   | ) |   | 1     |  
|Net finance costs (note 17)                                             |   | 28    |   |   | 32    |  
|Earnings (loss) before income taxes                                     |   | (60   | ) |   | 15    |  
|Income tax expense (note 18)                                            |   | 22    |   |   | 20    |  
|Net loss                                                                |   | (82   | ) |   | (5    | )
|                                                                        |   |       |   |   |       |  
|Basic and diluted
      net loss in dollars per share (note 13)         | $ | (0.82 | ) | $ | (0.05 | )

Consolidated Statements of Comprehensive Earnings (Loss)

Years ended September 29, 2012 and September 24, 2011 (in
millions of Canadian dollars)

|                                                                |   | 2012 |   |   | 2011 |  
|--------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Net loss                                                        | $ | (82  | ) | $ | (5   | )
|                                                                |   |      |   |   |      |  
|Other comprehensive earnings (loss), net of
      income taxes: |   |      |   |   |      |  
|Defined benefit pension plans (note 12)                         |   | (42  | ) |   | (64  | )
|Other benefit plans (note 12)                                   |   | 4    |   |   | -    |  
|Foreign currency translation differences for foreign operations |   | (11  | ) |   | 2    |  
|Total comprehensive loss                                        | $ | (131 | ) | $ | (67  | )

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

- 2 -

---

|TEMBEC INC.                                               
|----------------------------------------------------------
|Consolidated Statements of Changes in Shareholders Equity
|                                                          
|Years ended September 29, 2012 and September 24, 2011     
|(in millions of Canadian dollars)                         

|                                                                      |   |         |  |   | Translation |   |   |         |   |   |               |  
|--------------------------------------------------------------------- | - | ------- |  | - | ----------- | - | - | ------- | - | - | ------------- | -
|                                                                      |   | Share   |  |   | of foreign  |   |   |         |   |   | Shareholders' |  
|                                                                      |   | capital |  |   | operations  |   |   | Deficit |   |   | equity        |  
|Balance - beginning of year, September 26,
      2010                 | $ | 564     |  | $ | -           |   | $ | (264    | ) | $ | 300           |  
|                                                                      |   |         |  |   |             |   |   |         |   |   |               |  
|Net loss                                                              |   | -       |  |   | -           |   |   | (5      | ) |   | (5            | )
|Other comprehensive earnings (loss), net of income taxes:             |   |         |  |   |             |   |   |         |   |   |               |  
|Defined benefit pension plans
      (note 12)                         |   | -       |  |   | -           |   |   | (64     | ) |   | (64           | )
|Other benefit plans (note 12)                                         |   | -       |  |   | -           |   |   | -       |   |   | -             |  
|Foreign currency translation differences for
      foreign operations |   | -       |  |   | 2           |   |   | -       |   |   | 2             |  
|Balance - end of year, September 24, 2011                             |   | 564     |  |   | 2           |   |   | (333    | ) |   | 233           |  
|                                                                      |   |         |  |   |             |   |   |         |   |   |               |  
|Net loss                                                              |   | -       |  |   | -           |   |   | (82     | ) |   | (82           | )
|Other comprehensive earnings (loss), net of
      income taxes:       |   |         |  |   |             |   |   |         |   |   |               |  
|Defined benefit pension plans (note 12)                               |   | -       |  |   | -           |   |   | (42     | ) |   | (42           | )
|Other benefit plans (note 12)                                         |   | -       |  |   | -           |   |   | 4       |   |   | 4             |  
|Foreign currency translation differences for foreign operations       |   | -       |  |   | (11         | ) |   | -       |   |   | (11           | )
|Balance - end of year, September 29, 2012                             | $ | 564     |  | $ | (9          | ) | $ | (453    | ) | $ | 102           |  

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

- 3 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Statements of Cash Flows                
|                                                     
|Years ended September 29, 2012 and September 24, 2011
|(in millions of Canadian dollars)                    

|                                                                                    |   | 2012 |   |   | 2011 |  
|----------------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
|Cash flows from operating activities:                                               |   |      |   |   |      |  
|Net loss                                                                            | $ | (82  | ) | $ | (5   | )
|Adjustments for:                                                                    |   |      |   |   |      |  
|Depreciation and
      amortization                                                 |   | 46   |   |   | 48   |  
|Net
      finance costs (note 17)                                                   |   | 28   |   |   | 32   |  
|Income tax expense
      (note 18)                                                  |   | 22   |   |   | 20   |  
|Income
      tax paid                                                               |   | (14  | ) |   | (1   | )
|Excess cash
      contributions over employee future benefits expense               |   | (34  | ) |   | (22  | )
|Provisions (note 11)                                                                |   | 12   |   |   | 1    |  
|Impairment loss (note
      16)                                                     |   | 67   |   |   | -    |  
|Gain on
      sale of assets and deconsolidation of a subsidiary                    |   | (30  | ) |   | (7   | )
|Other                                                                               |   | (2   | ) |   | (2   | )
|                                                                                    |   | 13   |   |   | 64   |  
|Changes in non-cash working capital:                                                |   |      |   |   |      |  
|Trade and other receivables                                                         |   | (30  | ) |   | 33   |  
|Inventories                                                                         |   | (40  | ) |   | (7   | )
|Prepaid expenses                                                                    |   | (1   | ) |   | 1    |  
|Trade, other payables and accrued charges                                           |   | (14  | ) |   | 8    |  
|                                                                                    |   | (85  | ) |   | 35   |  
|                                                                                    |   | (72  | ) |   | 99   |  
|Cash flows from investing activities:                                               |   |      |   |   |      |  
|Additions to property, plant and equipment                                          |   | (108 | ) |   | (65  | )
|Proceeds from sale of net
      assets (note 16)                                    |   | 84   |   |   | 17   |  
|Other                                                                               |   | (1   | ) |   | 2    |  
|                                                                                    |   | (25  | ) |   | (46  | )
|Cash flows from financing activities:                                               |   |      |   |   |      |  
|Change in operating bank loans                                                      |   | 62   |   |   | 5    |  
|Increase in long-term debt                                                          |   | 74   |   |   | 8    |  
|Repayments of long-term debt                                                        |   | (11  | ) |   | (8   | )
|Interest paid                                                                       |   | (34  | ) |   | (25  | )
|Other                                                                               |   | -    |   |   | (2   | )
|                                                                                    |   | 91   |   |   | (22  | )
|                                                                                    |   | (6   | ) |   | 31   |  
|Foreign exchange
      loss on cash and cash equivalents held in foreign currencies |   | (6   | ) |   | -    |  
|Net increase (decrease) in cash and cash
      equivalents                          |   | (12  | ) |   | 31   |  
|Cash and cash
      equivalents, beginning of year                                  |   | 99   |   |   | 68   |  
|                                                                                    |   |      |   |   |      |  
|Cash and cash
      equivalents, end of year                                        | $ | 87   |   | $ | 99   |  

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

- 4 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Business Segment Information            
|                                                     
|Years ended September 29, 2012 and September 24, 2011
|(in millions of Canadian dollars)                    
|                                                     

|The Company operates an integrated forest products
      business, which is managed in four segments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Intersegment transfers of wood chips, pulp and other
      services are recorded at transfer prices agreed to by the parties, which
      are intended to approximate fair market value. The basis of presentation
      and the accounting policies used in these business segments are the same
      as those described in notes 2 and 3.                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The financial performance of each segment is measured
      based on earnings before interest, income taxes, depreciation and
      amortization, and other specific or non-recurring items (adjusted EBITDA).
      This measure is included in the internal reports that are reviewed by
      senior management. Segment adjusted EBITDA is used to measure performance
      as management believes that such information is the most relevant in
      evaluating financial results relative to other entities that operate
      within similar businesses. Net finance costs and income tax are not
      allocated to operating segments.

- 5 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Business Segment Information (continued)
|                                                     
|Years ended September 29, 2012 and September 24, 2011
|(in millions of Canadian dollars)                    

|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   | 2012         |  
|------------------------------------------------------- | - | -------- | - | - | ------------- |  | - | ----- | - | - | ----- |  | - | --------- | - | - | ------------- | - | - | ------------ | -
|                                                        |   |          |   |   | Specialty     |  |   | High- |   |   |       |  |   |           |   |   |               |   |   |              |  
|                                                        |   | Forest   |   |   | Cellulose and |  |   | Yield |   |   |       |  |   |           |   |   | Consolidation |   |   |              |  
|                                                        |   | Products |   |   | Chemical Pulp |  |   | Pulp  |   |   | Paper |  |   | Corporate |   |   | adjustments   |   |   | Consolidated |  
|Sales:                                                  |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|External                                                | $ | 348      |   | $ | 650           |  | $ | 322   |   | $ | 346   |  | $ | -         |   | $ | -             |   | $ | 1,666        |  
|Internal                                                |   | 84       |   |   | 12            |  |   | 30    |   |   | -     |  |   | 13        |   |   | (139          | ) |   | -            |  
|                                                        |   | 432      |   |   | 662           |  |   | 352   |   |   | 346   |  |   | 13        |   |   | (139          | ) |   | 1,666        |  
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|Freight and other deductions                            |   | 41       |   |   | 68            |  |   | 77    |   |   | 46    |  |   | -         |   |   | -             |   |   | 232          |  
|Lumber export taxes                                     |   | 7        |   |   | -             |  |   | -     |   |   | -     |  |   | -         |   |   | -             |   |   | 7            |  
|Cost of sales                                           |   | 385      |   |   | 481           |  |   | 298   |   |   | 252   |  |   | 13        |   |   | (139          | ) |   | 1,290        |  
|Selling, general and administrative                     |   | 15       |   |   | 21            |  |   | 6     |   |   | 11    |  |   | 21        |   |   | -             |   |   | 74           |  
|Share-based
      compensation                          |   | -        |   |   | -             |  |   | -     |   |   | -     |  |   | (1        | ) |   | -             |   |   | (1           | )
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|Earnings (loss) before the following (adjusted EBITDA): |   | (16      | ) |   | 92            |  |   | (29   | ) |   | 37    |  |   | (20       | ) |   | -             |   |   | 64           |  
|Depreciation
      and amortization                     |   | 10       |   |   | 21            |  |   | 13    |   |   | 2     |  |   | -         |   |   | -             |   |   | 46           |  
|Other items (note 16)                                   |   | (22      | ) |   | -             |  |   | 50    |   |   | -     |  |   | 22        |   |   | -             |   |   | 50           |  
|Operating earnings (loss)                               | $ | (4       | ) | $ | 71            |  | $ | (92   | ) | $ | 35    |  | $ | (42       | ) | $ | -             |   | $ | (32          | )
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              |  
|Additions to property, plant and equipment              | $ | 12       |   | $ | 91            |  | $ | 8     |   | $ | 7     |  | $ | 2         |   | $ | -             |   | $ | 120          |  
|Total assets                                            | $ | 216      |   | $ | 544           |  | $ | 156   |   | $ | 120   |  | $ | 23        |   | $ | -             |   | $ | 1,059        |  

|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   | 2011         | 
|------------------------------------------------------- | - | -------- | - | - | ------------- |  | - | ----- | - | - | ----- |  | - | --------- | - | - | ------------- | - | - | ------------ | 
|                                                        |   |          |   |   | Specialty     |  |   | High- |   |   |       |  |   |           |   |   |               |   |   |              | 
|                                                        |   | Forest   |   |   | Cellulose and |  |   | Yield |   |   |       |  |   |           |   |   | Consolidation |   |   |              | 
|                                                        |   | Products |   |   | Chemical Pulp |  |   | Pulp  |   |   | Paper |  |   | Corporate |   |   | adjustments   |   |   | Consolidated | 
|Sales:                                                  |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|External                                                | $ | 375      |   | $ | 681           |  | $ | 348   |   | $ | 339   |  | $ | -         |   | $ | -             |   | $ | 1,743        | 
|Internal                                                |   | 96       |   |   | 12            |  |   | 30    |   |   | -     |  |   | 7         |   |   | (145          | ) |   | -            | 
|                                                        |   | 471      |   |   | 693           |  |   | 378   |   |   | 339   |  |   | 7         |   |   | (145          | ) |   | 1,743        | 
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|Freight and other deductions                            |   | 47       |   |   | 66            |  |   | 79    |   |   | 45    |  |   | -         |   |   | -             |   |   | 237          | 
|Lumber export taxes                                     |   | 13       |   |   | -             |  |   | -     |   |   | -     |  |   | -         |   |   | -             |   |   | 13           | 
|Cost of sales                                           |   | 441      |   |   | 464           |  |   | 299   |   |   | 255   |  |   | 7         |   |   | (145          | ) |   | 1,321        | 
|Selling, general and administrative                     |   | 17       |   |   | 23            |  |   | 3     |   |   | 10    |  |   | 19        |   |   | -             |   |   | 72           | 
|Share-based
      compensation                          |   | -        |   |   | -             |  |   | -     |   |   | -     |  |   | 2         |   |   | -             |   |   | 2            | 
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|Earnings (loss) before the following (adjusted EBITDA): |   | (47      | ) |   | 140           |  |   | (3    | ) |   | 29    |  |   | (21       | ) |   | -             |   |   | 98           | 
|Depreciation
      and amortization                     |   | 14       |   |   | 19            |  |   | 11    |   |   | 3     |  |   | 1         |   |   | -             |   |   | 48           | 
|Other items (note 16)                                   |   | 3        |   |   | -             |  |   | -     |   |   | -     |  |   | -         |   |   | -             |   |   | 3            | 
|Operating earnings (loss)                               | $ | (64      | ) | $ | 121           |  | $ | (14   | ) | $ | 26    |  | $ | (22       | ) | $ | -             |   | $ | 47           | 
|                                                        |   |          |   |   |               |  |   |       |   |   |       |  |   |           |   |   |               |   |   |              | 
|Additions to property, plant and equipment              | $ | 10       |   | $ | 38            |  | $ | 5     |   | $ | 5     |  | $ | -         |   | $ | -             |   | $ | 58           | 
|Total assets                                            | $ | 267      |   | $ | 491           |  | $ | 173   |   | $ | 122   |  | $ | 40        |   | $ | -             |   | $ | 1,093        | 

- 6 -

---

|TEMBEC INC.                                          
|-----------------------------------------------------
|Consolidated Geographic Area Information             
|                                                     
|Years ended September 29, 2012 and September 24, 2011
|(in millions of Canadian dollars)                    

2012SpecialtyForest
    
    
    Cellulose and
    
    
    High-YieldProducts
    
    
    Chemical Pulp
    
    
    Pulp
    
    
    Paper
    
    
    ConsolidatedSales (by final destination):Canada
    $
    194
    
    $
    49
    
    $
    -
    
    $
    61
    
    $
    304United States
    
    145
    
    
    202
    
    
    2
    
    
    265
    
    
    614China
    
    6
    
    
    112
    
    
    116
    
    
    -
    
    
    234European Union
    
    -
    
    
    209
    
    
    57
    
    
    10
    
    
    276Other
    
    3
    
    
    78
    
    
    147
    
    
    10
    
    
    238$
    348
    
    $
    650
    
    $
    322
    
    $
    346
    
    $
    1,666


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


|                               |   | 2012 |  |   | 2011 |  |   | 2010 | 
|------------------------------ | - | ---- |  | - | ---- |  | - | ---- | 
|                               |   |      |  |   |      |  |   |      | 
|Property, plant and equipment: |   |      |  |   |      |  |   |      | 
|Canada                         | $ | 393  |  | $ | 407  |  | $ | 424  | 
|France                         |   | 91   |  |   | 83   |  |   | 70   | 
|Other                          |   | 1    |  |   | 1    |  |   | 2    | 
|                               | $ | 485  |  | $ | 491  |  | $ | 496  | 

- 7 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|1. | Reporting entity and nature of
operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Tembec Inc. (the Corporation) and its subsidiaries
      (collectively Tembec or the Company) operate an integrated forest
      products business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The Corporation is incorporated and domiciled in Canada
      and listed on the Toronto Stock Exchange under the symbol TMB. The address
      of the Company's registered office is 800 René-Lévesque Blvd. West, Suite
      1050, Montreal, Quebec, Canada, H3B 1X9.                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2. | Basis of presentation Statement of
    compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Effective September 26, 2010, the Company fully adopted
      International Financial Reporting Standards (IFRS) as issued by the
      International Accounting Standards Board (IASB) as the basis for
      preparation of financial information and accounting.                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | These audited consolidated financial statements and the
      notes thereto represent the first annual consolidated financial statements
      of the Company that have been prepared in accordance with IFRS as issued
      by the IASB. The Company has also complied with the requirements of IFRS
      1, First-time Adoption of IFRS. Subject to certain transition
      elections and exceptions disclosed in note 22, the Company consistently
      applied the accounting policies used in its opening IFRS consolidated
      balance sheet as at September 26, 2010, throughout all periods presented
      as if these policies had always been in effect.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | An explanation of how the transition to IFRS has affected
      the reported financial position, financial performance and cash flows of
      the Company is provided in note 22.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | These audited consolidated financial statements were
      authorized for issue by the Board of Directors on November 15,
  2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Basis of measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | The audited consolidated financial statements have been
      prepared on the historical cost basis, except for the following items in
      the consolidated balance sheet:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

- 8 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Basis of presentation (continued)
      Functional and presentation currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These audited consolidated financial statements are
      presented in Canadian dollars, which is the Companys functional currency.
      Management believes that the Canadian dollar best reflects the currency of
      the primary economic environment in which Tembec operates. All financial
      information presented has been rounded to the nearest million, unless
      otherwise noted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Use of estimates and judgements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The preparation of financial statements in conformity
      with IFRS requires management to make judgements, estimates and
      assumptions that affect the application of accounting policies and the
      reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and the
      reported amounts of revenues and expenses during the period. Actual
      results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Estimates and underlying assumptions are reviewed on an
      ongoing basis. Revisions to accounting estimates are recognized in the
      period in which the estimates are revised and in any future periods
      affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Significant areas requiring the use of management
      estimates in applying accounting policies that have the most significant
      effect on the amounts recognized in the consolidated financial statements
      and that may result in material adjustments to the carrying amounts within
      the next fiscal year include the determination of the net realizable value
      of inventories, provisions, recoverability of deferred tax assets, the
      measurement of defined benefit obligations and the valuation of pension
      plan assets.
      Other areas requiring the use of management estimates
      include the determination of the value of biological assets, financial
      instruments, guarantees, commitments, and contingencies. It also includes
      collectability of accounts receivable, estimating the useful life and
      residual value of property, plant and equipment, as well as assessing the
      recoverability of property, plant and equipment, and long- term
      receivables.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|3. | Significant accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The accounting policies set out below have been applied
      consistently in the audited consolidated financial statements and in
      preparing the opening IFRS balance sheet at September 26, 2010 (the
      Transition Date), for the purposes of the transition to IFRS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | These audited consolidated financial statements include
      the accounts of the Company. Investments over which the Corporation has
      effective control are fully consolidated. The financial statements of
      subsidiaries are included in the consolidated financial statements from
      the date that control commences until the date that control ceases. The
      accounting policies of subsidiaries have been changed when necessary to
      align them with the policies adopted by the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

- 9 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Significant accounting policies (continued)
      Foreign currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Foreign currency transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Transactions in foreign currencies are translated to the
      respective functional currencies of each operation using exchange rates at
      the dates of the transactions. Monetary assets and liabilities denominated
      in foreign currencies at the reporting date are translated to the
      functional currency using the exchange rate at that date. Non-monetary
      assets and liabilities denominated in foreign currencies that are measured
      at fair value are translated to the functional currency using the exchange
      rate at the date that the fair value was determined. Non-monetary items
      that are measured in terms of historical cost in a foreign currency are
      translated using the exchange rate at the date of the transaction. Foreign
      currency differences arising on translation are recognized in profit or
      loss.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Foreign operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The assets and liabilities of foreign operations with
      functional currencies other than the Canadian dollar are translated to
      Canadian dollars using the exchange rates at the reporting date. The
      income and expenses of foreign operations are translated to Canadian
      dollars using the average exchange rates during the reporting
    period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Foreign currency differences are recognized in other
      comprehensive income. When a foreign operation is disposed of, in part or
      in full, the relevant amount in the foreign currency translation reserve
      is transferred to the statement of earnings (loss) as part of the gain or
      loss on disposal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Non-derivative financial assets and
    liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Cash and cash equivalents, trade and other receivables
      and long- term receivables are classified as loans and receivables, which
      is the Companys only non- derivative financial asset. Operating bank
      loans, trade and other payables, interest payable and long- term debt are
      classified as other liabilities, which is the Companys only non-
      derivative financial liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company initially recognizes all financial assets and
      liabilities on the date that they are originated. Subsequent to initial
      recognition at fair value, the financial assets are accounted for on an
      amortized cost basis using the effective interest rate method. Subsequent
      to initial recognition at fair value plus any directly attributable
      transaction costs, the financial liabilities are accounted for on an
      amortized cost basis using the effective interest rate method.                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Transaction costs incurred upon the issuance of debt
      instruments or modification of a financial liability are deducted from the
      financial liability and are amortized using the effective interest method
      over the expected life of the related liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

- 10 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Significant accounting policies (continued)
      Financial instruments (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company may manage, from time to time, its foreign
      exchange exposure on anticipated net cash inflows, principally U.S.
      dollars and euros, through the use of options and forward
  contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company may manage, from time to time, its exposure
      to commodity price risk associated with sales of lumber, pulp and
      newsprint through the use of cash-settled hedge (swap) contracts. The
      Company does not hold or issue derivative financial instruments for
      trading or speculative purposes.
      The Company does not currently apply hedge
    accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company has also previously issued
      liability-classified derivatives over its own equity, all of which expired
      on February 29, 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | All derivatives are recognized initially at fair value.
      Attributable transaction costs are recognized in profit or loss as
      incurred. Subsequent to initial recognition, derivatives are measured at
      fair value and changes therein are accounted for in net finance
    costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Common shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Common shares are classified as equity. Incremental costs
      directly attributable to the issue of common shares are recognized as a
      deduction from equity, net of any tax effects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Finished goods, work-in-process, wood chips, logs, and
      other raw materials are valued at the lower of cost, determined on an
      average cost basis, and net realizable value. In the case of manufactured
      inventories and work-in-process, cost includes expenditure incurred in
      acquiring raw materials, production or conversion costs and other costs
      incurred in bringing the inventory to their existing location and
      conditions as well as an appropriate share of production overheads based
      on normal operating capacity. For all raw materials to be used in the
      production of finished goods, net realizable value is determined on an as
      -converted- to-finished-goods basis. Operating, maintenance and spare
      parts inventories are valued at lower of average cost and net realizable
      value.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Recognition and measurement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Property, plant and equipment are recorded at cost, after
      deducting investment tax credits and government assistance, less
      accumulated depreciation and accumulated impairment losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Cost includes expenditures that are directly attributable
      to acquiring and bringing the assets to a working condition for their
      intended use. The Company capitalizes borrowing costs, which are directly
      attributable to the acquisition, construction or production of qualifying
      assets, unless development activities on these qualifying assets are
      suspended, in which case borrowing costs are
expensed.                                                                                                                                                                                                                                                                                                                                                                                                                           

- 11 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Significant accounting policies (continued)
      Property, plant and equipment
(continued)                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Subsequent costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The cost of replacing a component of an item of property,
      plant and equipment is recognized in the carrying amount of the item if it
      is probable that the future economic benefits embodied within the part
      will flow to the Company, and its cost can be measured reliably. The
      carrying amount of the replaced component is derecognized. The costs of
      the day-to-day servicing of property, plant and equipment are recognized
      in profit or loss as incurred.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Depreciation is calculated over the depreciable amount,
      which is the cost of an asset less its residual value. Depreciation is
      recognized in profit or loss on a straight-line basis over the estimated
      useful lives of each part of an item of property, plant and
    equipment.                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The estimated useful lives of the current and comparative
      periods are as follows:                                                                                                                                                                                                                                                                                                                                                                                                             

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


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

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

Biological assets

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

Leased assets

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

- 12 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

- 13 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

- 14 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

- 15 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

- 16 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

- 17 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Significant accounting policies (continued)
      Income taxes (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Current tax is the expected tax payable or receivable on
      the taxable income or loss for the year, using tax rates enacted or
      substantively enacted at the reporting date, and any adjustment to tax
      payable in respect of previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Deferred tax is recognized using the balance sheet
      method, with respect to temporary differences between the carrying amounts
      of assets and liabilities for financial reporting purposes and the amounts
      used for taxation purposes. Deferred tax is not recognized for the
      following temporary differences: the initial recognition of assets or
      liabilities in a transaction that is not a business combination and that
      affects neither accounting nor taxable profit or loss, and differences
      relating to investments in subsidiaries and associates to the extent that
      it is probable that they will not reverse in the foreseeable future.
      Deferred tax is measured at the tax rates that are expected to be applied
      to temporary differences when they reverse, based on the laws that have
      been enacted or substantively enacted by the reporting date. Deferred tax
      assets and liabilities are offset if there is a legally enforceable right
      to offset current tax liabilities and assets, and they relate to income
      taxes levied by the same tax authority on the same taxable entity, or on
      different tax entities, but they intend to settle current tax liabilities
      and assets on a net basis or their tax assets and liabilities will be
      realized simultaneously.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | A deferred tax asset is recognized for unused tax losses,
      tax credits and deductible temporary differences, to the extent that it is
      probable that future taxable profits will be available against which they
      can be utilized. Deferred tax assets are reviewed at each reporting date
      and are reduced to the extent that it is no longer probable that the
      related tax benefit will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Freight and other deductions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Freight associated with shipping products to customer and
      handling finished goods as well as discounts on prompt payment are
      included in Freight and other deductions in the consolidated statements of
      net earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

- 18 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. | New standards and interpretation not yet
      adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | IFRS 7 Financial Instruments 
  Disclosures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In December 2011, the IASB amended the standard IFRS 7,
      Financial Instruments  Disclosures, to provide additional
      information about offsetting of financial assets and financial
      liabilities. IFRS 7 has been amended to require disclosures that will
      enable users of financial statements to evaluate the effect or potential
      effect of netting arrangements, including rights of set-off associated
      with an entitys recognized financial assets and recognized financial
      liabilities, on the entitys balance sheet. An entity provides information
      including the gross amounts subject to rights of set-off, amounts set off
      in accordance with the offsetting criteria, amounts of financial
      instruments subject to master netting arrangements or similar agreements,
      and the related net amounts to meet the disclosure objective.
      These amendments are effective for annual periods
      beginning on or after January 1, 2013. The Company 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.                                                                                                            

- 19 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. | New standards and interpretation not yet adopted
      (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | 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.

- 20 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |            
|-- | -----------
|5. | Inventories

| |                                             |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Finished goods                              | $ | 118  |  | $ | 112  |  | $ | 111  | 
| | Logs and wood chips                         |   | 61   |  |   | 66   |  |   | 64   | 
| | Supplies and materials                      |   | 76   |  |   | 83   |  |   | 80   | 
| |                                             | $ | 255  |  | $ | 261  |  | $ | 255  | 
| | Inventories carried at net realizable value | $ | 48   |  | $ | 32   |  | $ | 30   | 

For the years ended in September 2012
and 2011, cost of sales consists primarily of inventories recognized as an
expense. Inventories at September 29, 2012, were written down by $6 million
(2011 - $4 million; 2010 - $4 million) to reflect net realizable value being
lower than cost. The write-down and reversal, if any, are included in cost of
sales.

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

| |                                       |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Forest Products                       | $ | 1    |  | $ | 3    |  | $ | 4    | 
| | Specialty Cellulose and Chemical Pulp |   | 1    |  |   | -    |  |   | -    | 
| | High-Yield Pulp                       |   | 4    |  |   | 1    |  |   | -    | 
| | Paper                                 |   | -    |  |   | -    |  |   | -    | 
| |                                       | $ | 6    |  | $ | 4    |  | $ | 4    | 

- 21 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                                       |   |      |   |   |           |   |   | Production equipment |   |   | Forest  |   |   | Assets |   |   |              |  
| | ----------------------------------------------------- | - | ---- | - | - | --------- | - | - | -------------------- | - | - | ------- | - | - | ------ | - | - | ------------ | -
| |                                                       |   |      |   |   |           |   |   | Pulp and             |   |   |         |   |   | access |   |   | under        |  
| |                                                       |   | Land |   |   | Buildings |   |   | Paper                |   |   | Sawmill |   |   | roads  |   |   | construction |  
| | Cost                                                  |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Balance, September 26, 2010                           | $ | 12   |   | $ | 77        |   | $ | 440                  |   | $ | 90      |   | $ | 11     |   | $ | 11           |  
| | Additions                                             |   | -    |   |   | 2         |   |   | 21                   |   |   | 3       |   |   | 6      |   |   | 26           |  
| | Disposals                                             |   | -    |   |   | -         |   |   | (21                  | ) |   | (1      | ) |   | -      |   |   | -            |  
| | Balance, September 24, 2011                           |   | 12   |   |   | 79        |   |   | 440                  |   |   | 92      |   |   | 17     |   |   | 37           |  
| | Additions                                             |   | -    |   |   | 1         |   |   | 47                   |   |   | 7       |   |   | 3      |   |   | 62           |  
| | Interest capitalized on
    assets under construction |   | -    |   |   | -         |   |   | -                    |   |   | -       |   |   | -      |   |   | 2            |  
| | Disposals                                             |   | (1   | ) |   | (4        | ) |   | (4                   | ) |   | (30     | ) |   | (12    | ) |   | (4           | )
| | Effect of movements in
    exchange rates             |   | -    |   |   | (1        | ) |   | (8                   | ) |   | -       |   |   | -      |   |   | (1           | )
| | Balance, September 29, 2012                           | $ | 11   |   | $ | 75        |   | $ | 475                  |   | $ | 69      |   | $ | 8      |   | $ | 96           |  
| | Depreciation                                          |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | Balance, September 26, 2010                           | $ | -    |   | $ | 14        |   | $ | 81                   |   | $ | 50      |   | $ | -      |   | $ | -            |  
| | Depreciation                                          |   | -    |   |   | 5         |   |   | 31                   |   |   | 11      |   |   | 1      |   |   | -            |  
| | Disposals                                             |   | -    |   |   | -         |   |   | (7                   | ) |   | -       |   |   | -      |   |   | -            |  
| | Balance, September 24, 2011                           |   | -    |   |   | 19        |   |   | 105                  |   |   | 61      |   |   | 1      |   |   | -            |  
| | Depreciation                                          |   | -    |   |   | 6         |   |   | 31                   |   |   | 8       |   |   | 1      |   |   | -            |  
| | Impairment loss                                       |   | -    |   |   | -         |   |   | 43                   |   |   | -       |   |   | 1      |   |   | -            |  
| | Disposals                                             |   | -    |   |   | (3        | ) |   | (2                   | ) |   | (19     | ) |   | (1     | ) |   | -            |  
| | Effect of movements in
    exchange rate              |   | -    |   |   | -         |   |   | (2                   | ) |   | -       |   |   | -      |   |   | -            |  
| | Balance, September 29, 2012                           | $ | -    |   | $ | 22        |   | $ | 175                  |   | $ | 50      |   | $ | 2      |   | $ | -            |  
| | Carrying amounts                                      |   |      |   |   |           |   |   |                      |   |   |         |   |   |        |   |   |              |  
| | At September 26, 2010                                 | $ | 12   |   | $ | 63        |   | $ | 359                  |   | $ | 40      |   | $ | 11     |   | $ | 11           |  
| | At September 24, 2011                                 | $ | 12   |   | $ | 60        |   | $ | 335                  |   | $ | 31      |   | $ | 16     |   | $ | 37           |  
| | At September 29, 2012                                 | $ | 11   |   | $ | 53        |   | $ | 300                  |   | $ | 19      |   | $ | 6      |   | $ | 96           |  

During fiscal 2012, the Company
recorded an impairment loss of $44 million related to property, plant and
equipment of the Chetwynd, British Columbia, high-yield pulp mill. Subsequent to
the announced indefinite idling of the pulp mill and following a review of its
business plan, the Company undertook an impairment review and found that the
carrying value of its assets exceeded their recoverable amount being the fair
value less cost to sell. The recoverable amount was determined to be nominal.

As at the end of September 2012, assets
under construction include $59 million (2011  $3 million) of the $190 million
capital investment to upgrade the specialty cellulose manufacturing facility at
Temiscaming, Quebec (see note 14, Commitments  Capital Investment).

- 22 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7. | Biological assets                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                            
|   | The Companys private timberlands are classified as a
      growing forest, with the standing timber defined and recognized as a
      biological asset at fair value less costs to sell at each reporting date,
      with the underlying land being considered a component of property, plant
      and equipment and recognized at cost.

| | Balance, September 26, 2010                   | $ | 7  |  
| | --------------------------------------------- | - | -- | -
| | Harvested timber transferred to inventories   |   | (1 | )
| | Change in fair value less costs to sell       |   | (2 | )
| | Balance, September 24, 2011                   | $ | 4  |  
| | Disposals                                     |   | (1 | )
| | Change in fair
      value less costs to sell |   | 1  |  
| | Balance, September 29, 2012                   | $ | 4  |  

| |             |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ----------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Current     | $ | -    |  | $ | -    |  | $ | -    | 
| | Non-current |   | 4    |  |   | 4    |  |   | 7    | 
| |             | $ | 4    |  | $ | 4    |  | $ | 7    | 

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

| |                               |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ----------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Loan receivable - Temlam Inc. | $ | 7    |  | $ | 23   |  | $ | 23   | 
| | Long-term loans to employees  |   | 2    |  |   | 1    |  |   | 2    | 
| | Other                         |   | 3    |  |   | 4    |  |   | 3    | 
| |                               | $ | 12   |  | $ | 28   |  | $ | 28   | 

In October 2008, the Company assumed
the rank of secured lender in Temlam Inc. by effecting a payment of $22 million
plus $1 million of custodial fees. The Company retains a 50% ownership position
in Temlam Inc., which is currently under creditor protection and owns an idled
laminated veneer lumber (LVL) facility located in Amos, Quebec. During fiscal
2012, the Company recorded an impairment loss of $16 million related to the loan
receivable. The cutting rights that were previously attached to the LVL facility
were granted to another company. In the absence of a guaranteed fiber supply,
the Company has concluded that the re-start of the facility is unlikely and has
adjusted its carrying value to the amount anticipated to be realized upon
liquidation or sale.

- 23 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9. | Operating bank loans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | On March 4, 2011, the Company entered into a new $200
      million asset-based revolving five- year working capital facility (ABL)
      expiring in February 2016. The facility has a first priority charge over
      the receivables and inventories of the Companys Canadian operations. As
      at September 29, 2012, the amount available, based on eligible receivables
      and inventories, was $144 million of which $65 million was drawn and $48
      million was reserved for letters of credit. Interest is calculated based
      either on the BA Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base
      Rate, as the case may be, plus an applicable margin.                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | 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. 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. 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 French operations are supported by receivable
      factoring agreements. As such, the borrowing base fluctuates
      periodically, depending on shipments and cash receipts. At the end of
      September 2012, the amount available was $20 million of which $3 million
      was drawn.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The Companys exposure to interest rate risk, foreign
      currency and liquidity risk is disclosed in note
19.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 24 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

2012
    
    
    2011
    
    
    2010Tembec Industries Inc.11.25% senior secured notes US $305 million
      (2011 and 2010 - US $255 million), due December 15, 2018, with semi-annual
      interest payments due June 15 and December 15 of each year
    $
    300
    
    $
    262
    
    $
    261Tembec Tartas SASSecured term loans € 6 million
      (2011 - € 5 million; 2010 - nil), bearing interest at EURIBOR plus 2%,
      repayable in quarterly instalments beginning in March 2012 and maturing in
      December 2017
    
    8
    
    
    7
    
    
    -Unsecured term loans € 11
      million (2011 - € 12 million; 2010 - € 9 million), non-interest bearing,
      repayable and maturing at various dates from June 2014 to September 2020.
      The effective interest rate on these loans is 6%
    
    14
    
    
    17
    
    
    12Other
    
    -
    
    
    1
    
    
    2Tembec Energy LP6.35% secured term loan,
      interest payable on a monthly basis, repayable in blended monthly
      instalments beginning July 15, 2014 to June 15, 2022 with a balloon
      payment of $12 million in July 2022
    
    20
    
    
    -
    
    
    -Kirkland Lake Engineered Wood Products
      Inc.
    
    8
    
    
    8
    
    
    8Tembec Inc.6% unsecured notes
    
    -
    
    
    5
    
    
    9Other
    
    2
    
    
    2
    
    
    2Tembec
      Envirofinance SAS
    
    -
    
    
    -
    
    
    7$
    352
    
    $
    302
    
    $
    301Less current portion
    
    16
    
    
    18
    
    
    17Less unamortized
      financing costs
    
    13
    
    
    13
    
    
    13$
    323
    
    $
    271
    
    $
    271


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

- 25 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10. | Long-term debt (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The previously issued notes were registered following an
      exchange offer and registration with the Securities and Exchange
      Commission (SEC) completed on March 31, 2011. The add- on offering notes
      were registered following an exchange offer and registration with the SEC
      completed on September 28, 2012. Since registration, the add- on offering
      notes are trading fungibly with the previously issued notes.                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In addition, the Company must maintain their registration
      with the SEC throughout the life of the notes. If the obligations under
      the registration rights agreement are not satisfied, the Company will be
      required to pay additional interest to the holders of the notes up to a
      maximum annual amount of US $3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | On June 29, 2012, the Company entered into a $30 million
      term loan facility to assist with the financing of the specialty cellulose
      project in Temiscaming, Quebec, which is described in more detail in note
      14. The interest rate on this loan will be the greater of 6.35% and the
      yield on equivalent term 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 the
      project assets. On July 12, 2012, the Company drew a first tranche of $20
      million bearing interest at 6.35%.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Companys credit agreements contain covenants that
      could in certain circumstances restrict the ability of the Company to
      incur or guarantee additional indebtedness, to encumber or dispose of its
      assets or make certain payments or distributions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The Companys exposure to interest rate risk, foreign
      currency and liquidity risk is disclosed in note 19.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Instalments on consolidated long- term debt for the five
      years following September 29, 2012, are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | 2013 | $ | 16 | 
| | ---- | - | -- | 
| | 2014 | $ | 6  | 
| | 2015 | $ | 7  | 
| | 2016 | $ | 7  | 
| | 2017 | $ | 4  | 

- 26 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                                      |   |                  |  |   |               |   |   |       |  |   | Total      |  
| | ---------------------------------------------------- | - | ---------------- |  | - | ------------- | - | - | ----- |  | - | ---------- | -
| |                                                      |   | Site restoration |  |   | Reforestation |   |   | Other |  |   | provisions |  
| |                                                      |   |                  |  |   |               |   |   |       |  |   |            |  
| | Balance, beginning of year, September 26,
      2010 | $ | 4                |  | $ | 13            |   | $ | 5     |  | $ | 22         |  
| | Provisions made during the year                      |   | -                |  |   | 5             |   |   | -     |  |   | 5          |  
| | Unwinding of discount                                |   | -                |  |   | 1             |   |   | -     |  |   | 1          |  
| | Paid during the
      year                           |   | -                |  |   | (4            | ) |   | -     |  |   | (4         | )
| | Balance, end of year, September 24, 2011             |   | 4                |  |   | 15            |   |   | 5     |  |   | 24         |  
| | Provisions made during the year                      |   | 9                |  |   | 4             |   |   | -     |  |   | 13         |  
| | Paid during the year                                 |   | -                |  |   | (1            | ) |   | -     |  |   | (1         | )
| | Sale of BC
      Sawmills (note 16)                  |   | -                |  |   | (16           | ) |   | -     |  |   | (16        | )
| | Balance, end of year, September 29, 2012             | $ | 13               |  | $ | 2             |   | $ | 5     |  | $ | 20         |  

| |             |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ----------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Current     | $ | 3    |  | $ | 8    |  | $ | 5    | 
| | Non-current |   | 17   |  |   | 16   |  |   | 17   | 
| |             | $ | 20   |  | $ | 24   |  | $ | 22   | 

Site restoration

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

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

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

- 27 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | Provisions (continued)
      Reforestation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | In accordance with British Columbia law, the Company has
      an obligation to perform certain reforestation activities during periods
      of 12 to 15 years following the harvest. Because of the long- term nature
      of the liability, the most significant uncertainty in estimating the
      provision is the costs that will be incurred. In particular, the Company
      has assumed that current reforestation practice will continue to meet
      government policy, that adequate forest fire protection is in place, that
      suitable external funding will be made available to manage incremental
      forest pests and disease issues and that government policy with respect to
      reforestation will not change materially. The provision includes
      reforestation of different harvested areas, which are at different stages
      in the reforestation process. On March 23, 2012, the Company sold its
      British Columbia sawmills and, as part of the agreement, the buyer assumed
      the related reforestation obligation for an amount of $16
  million.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12. | Employee future benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Defined contribution pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company contributes to defined contribution pension
      plans, provincial and labour sponsored pension plans, group registered
      retirement savings plans, deferred profit sharing plans, and 401(k) plans.
      The pension expense of $9 million (2011  $11 million) under these plans
      is equal to the Companys contribution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Defined benefit pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company has several defined benefit pension plans.
      Non-unionized employees in Canada joining the Company after January 1,
      2000, participate in defined contribution pension plans. Some of the
      defined benefit pension plans are contributory. The pension expense and
      the obligation related to the defined benefit pension plans are
      actuarially determined using managements most probable
  assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Other benefit plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The Company offers post-employment life insurance,
      healthcare and dental care plans to some of its retirees. The Company
      offers other long-term benefits as healthcare and dental care plans to
      disabled employees. The Company also assumes other long-term benefits as
      life insurance coverage to some of its disabled employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The other benefit plans expenses and the obligations
      related to these plans are actuarially determined using managements most
      probable assumptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Actuarial valuations of these plans for accounting
      purposes are conducted on a triennial basis unless there are significant
      changes affecting the plans. The latest actuarial valuations were
      conducted as at May 1, 2012 or January 1, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The other benefit plans are
unfunded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

- 28 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | Employee future benefits (continued)
      Company contributions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Total cash payments for employee future benefits consist
      of cash contributed by the Company to its funded pension plans, cash
      payments directly to beneficiaries for its unfunded benefit plans and cash
      contributed to its defined contribution plans. The Company contributions
      were $53 million for 2012 (2011  $44 million) . In 2013, the Company
      expects to contribute approximately $54 million to all its plans in
      accordance with its normal funding policy.                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Description of fund assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The assets of the registered defined benefit pension
      plans are held by an independent trustee and accounted for separately in
      the Companys pension funds. Based on the fair value of assets held at
      September 29, 2012, the defined benefit pension plan assets were comprised
      of 1% (1% in 2011) in cash and short-term investments, 5% (5% in 2011) in
      real estate, 47% (52% in 2011) in bonds and 47% (42% in 2011) in Canadian,
      U.S. and foreign equity.                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Funding policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Companys funding policy for registered defined
      benefit pension plans is to contribute annually the amount required to
      provide for benefits earned in the year and to fund past service
      obligations over periods not exceeding those permitted by the applicable
      regulatory authorities. Actuarial valuations for funding purposes are
      conducted on a triennial basis, unless required earlier by pension
      legislation or as deemed appropriate by management from time to time. The
      latest funding actuarial valuations were conducted for two plans on
      January 1, 2012, 12 plans on December 31, 2011, one plan on December 31,
      2010, and one plan on December 31, 2009.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Investment policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company follows a disciplined investment strategy,
      which provides diversification of investments by asset class, foreign
      currency, sector and company. The Corporate Governance and Human Resources
      Committee of the Board of Directors has approved an investment policy that
      establishes long-term asset mix targets based on a review of historical
      returns achieved by world-wide investment markets. Investment managers may
      deviate from these targets to the extent permitted by the investment
      policy. Their performance is evaluated in relation to the market
      performance on the target mix.                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The actual return on plan assets was $70 million for the
      year ended September 29, 2012, and $13 million for the year ended
      September 24, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | As at September 29, 2012, September 24, 2011 and
      September 26, 2010, the assets of the plan do not directly include the
      Companys own financial instruments or any property occupied by, or other
      assets issued by, the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

- 29 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                                                       |   | Pension plans |   |   | Other benefit plans |  
| | --------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
| |                                                                       |   | 2012          |   |   | 2011                |  
| | Defined benefit obligation, at beginning of
      year                | $ | 857           |   | $ | 812                 |  
| | Current service cost                                                  |   | 9             |   |   | 8                   |  
| | Interest cost                                                         |   | 37            |   |   | 39                  |  
| | Employee contributions                                                |   | 2             |   |   | 2                   |  
| | Benefits paid                                                         |   | (61           | ) |   | (46                 | )
| | Actuarial loss (gain)                                                 |   | 73            |   |   | 41                  |  
| | Decrease in obligation due to curtailment                             |   | (2            | ) |   | -                   |  
| | Decrease in obligation due to deconsolidation of Tembec USA
      LLC |   | -             |   |   | -                   |  
| | Past service cost                                                     |   | 1             |   |   | -                   |  
| | Foreign exchange
      rate changes                                   |   | (6            | ) |   | 1                   |  
| | Defined benefit obligation, at end of year                            | $ | 910           |   | $ | 857                 |  

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

| |                                                                       |   | Pension plans |   |   | Other benefit plans |  
| | --------------------------------------------------------------------- | - | ------------- | - | - | ------------------- | -
| |                                                                       |   | 2012          |   |   | 2011                |  
| | Fair value of defined benefit plan assets,
      at beginning of year | $ | 618           |   | $ | 617                 |  
| | Expected return on plan assets                                        |   | 39            |   |   | 40                  |  
| | Actuarial gain (loss)                                                 |   | 31            |   |   | (27                 | )
| | Employer contributions                                                |   | 42            |   |   | 32                  |  
| | Employee contributions                                                |   | 2             |   |   | 2                   |  
| | Benefits paid                                                         |   | (61           | ) |   | (46                 | )
| | Foreign exchange rate changes                                         |   | (4            | ) |   | -                   |  
| | Fair value of
      defined benefit plan assets, at end of year       | $ | 667           |   | $ | 618                 |  

- 30 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

Pension plans
    
    
    Other benefit plans2012
    
    
    2011
    
    
    2010
    
    
    2012
    
    
    2011
    
    
    2010Fair value of plan assets
    $
    667
    
    $
    618
    
    $
    617
    
    $
    -
    
    $
    -
    
    $
    -Defined benefit
      obligation, wholly or partially funded plans
    
    (867
    )
    
    (820
    )
    
    (777
    )
    
    -
    
    
    -
    
    
    -Plan deficit
    
    (200
    )
    
    (202
    )
    
    (160
    )
    
    -
    
    
    -
    
    
    -Defined benefit obligation, unfunded plans
    
    (43
    )
    
    (37
    )
    
    (35
    )
    
    (41
    )
    
    (44
    )
    
    (47
    )Unamortized past service costs
    
    1
    
    
    -
    
    
    1
    
    
    1
    
    
    2
    
    
    -Liability arising
      from minimum funding requirement
    
    (3
    )
    
    (3
    )
    
    (7
    )
    
    -
    
    
    -
    
    
    -Net defined benefit liability
    $
    (245
    )
    $
    (242
    )
    $
    (201
    )
    $
    (40
    )
    $
    (42
    )
    $
    (47
    )


The following table presents the
experience adjustments arising from plan liabilities and plan assets as a result
of the differences between actuarial assumptions made at the beginning of the
year and the actual experience during the year:

Pension plans
    
    
    Other benefit plans2012
    
    
    2011
    
    
    2010
    
    
    2012
    
    
    2011
    
    
    2010Experience loss (gain) arising from plan
      liabilities
    $
    (4
    )
    $
    (9
    )
    
    n/a
    
    $
    (6
    )
    $
    -
    
    
    n/aExperience loss
      (gain) arising from plan assets
    $
    (31
    )
    $
    27
    
    
    n/a
    
    $
    -
    
    $
    -
    
    
    n/a


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

Pension plans
    
    
    Other benefit plans2012
    
    
    2011
    
    
    2010
    
    
    2012
    
    
    2011
    
    
    2010Defined benefit asset
    $
    -
    
    $
    1
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -Defined benefit
      liability
    
    (245
    )
    
    (243
    )
    
    (201
    )
    
    (40
    )
    
    (42
    )
    
    (47
    )Net defined benefit liability
    $
    (245
    )
    $
    (242
    )
    $
    (201
    )
    $
    (40
    )
    $
    (42
    )
    $
    (47
    )


- 31 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | Employee future benefits (continued)
      Components of benefit cost                                                                                        
|    |                                                                                                                                                              
|    | The following tables present the impact on net earnings
      (loss) and other comprehensive earnings (loss) of the Companys employee
      future benefits:
|    |                                                                                                                                                              
|    | Recognized in net earnings
(loss)                                                                                                                            

| |                                                       |   | Pension plans |   |   | Other benefit plans |  
| | ----------------------------------------------------- | - | ------------- | - | - | ------------------- | -
| |                                                       |   | 2012          |   |   | 2011                |  
| | Recognized costs for defined benefit plans:           |   |               |   |   |                     |  
| | Current service cost                                  | $ | 9             |   | $ | 8                   |  
| | Past service cost                                     |   | -             |   |   | 1                   |  
| | Total
      included in personnel expenses            |   | 9             |   |   | 9                   |  
| | Curtailment gain                                      |   | (2            | ) |   | -                   |  
| | Deconsolidation of Tembec USA LLC                     |   | -             |   |   | -                   |  
| | Total included in other items                         |   | (2            | ) |   | -                   |  
| | Interest cost                                         |   | 37            |   |   | 39                  |  
| | Expected return on plan assets                        |   | (39           | ) |   | (40                 | )
| | Total
      included in net finance costs             |   | (2            | ) |   | (1                  | )
| |                                                       |   | 5             |   |   | 8                   |  
| | Recognized costs
      for defined contribution plans |   | 9             |   |   | 11                  |  
| | Total expense for employee future benefits            | $ | 14            |   | $ | 19                  |  

Recognized in other comprehensive
earnings (loss)

| |                                                |   | Pension plans |  |   | Other benefit plans |  
| | ---------------------------------------------- | - | ------------- |  | - | ------------------- | -
| |                                                |   | 2012          |  |   | 2011                |  
| |                                                |   |               |  |   |                     |  
| | Actuarial loss (gain)                          | $ | 42            |  | $ | 68                  |  
| | Effect of limit on
      recognition of assets |   | -             |  |   | (4                  | )
| | Defined benefit plans                          | $ | 42            |  | $ | 64                  |  

The cumulative amount recognized in
deficit as at September 29, 2012, is $102 million (2011  $64 million; 2010 
nil).

- 32 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                            |  | 2012  |  |  | 2011  |  |  | 2010  | 
| | ------------------------------------------ |  | ----- |  |  | ----- |  |  | ----- | 
| |                                            |  |       |  |  |       |  |  |       | 
| | Defined benefit obligation at end of year: |  |       |  |  |       |  |  |       | 
| | Discount rate                              |  | 3.69% |  |  | 4.42% |  |  | 4.87% | 
| | Rate of compensation increase              |  | 2.50% |  |  | 2.50% |  |  | 2.50% | 
| |                                            |  |       |  |  |       |  |  |       | 
| | Net periodic benefit cost for the year:    |  |       |  |  |       |  |  |       | 
| | Discount rate                              |  | 4.42% |  |  | 4.87% |  |  | n/a   | 
| | Rate of compensation increase              |  | 2.50% |  |  | 2.50% |  |  | n/a   | 
| | Expected
      long-term return on assets  |  | 6.39% |  |  | 6.53% |  |  | n/a   | 

Significant assumptions for other
benefit plans (weighted average):

| |                                                                     |   | 2012  |   |   | 2011  |   |   | 2010  | 
| | ------------------------------------------------------------------- | - | ----- | - | - | ----- | - | - | ----- | 
| | Defined benefit obligation at end of year:                          |   |       |   |   |       |   |   |       | 
| | Discount rate                                                       |   | 3.68% |   |   | 4.19% |   |   | 4.73% | 
| | Rate of compensation increase                                       |   | 2.50% |   |   | 2.50% |   |   | 2.50% | 
| |                                                                     |   |       |   |   |       |   |   |       | 
| | Net periodic benefit cost for the year:                             |   |       |   |   |       |   |   |       | 
| | Discount rate                                                       |   | 4.19% |   |   | 4.73% |   |   | n/a   | 
| | Rate of compensation increase                                       |   | 2.50% |   |   | 2.50% |   |   | n/a   | 
| |                                                                     |   |       |   |   |       |   |   |       | 
| | Assumed healthcare cost trend rate at end
      of year:            |   |       |   |   |       |   |   |       | 
| | Initial healthcare cost trend                                       |   | 7.00% |   |   | 7.50% |   |   | 8.00% | 
| | Annual rate of decline in trend rate                                |   | 0.50% |   |   | 0.50% |   |   | 0.50% | 
| | Ultimate healthcare cost trend rate                                 |   | 5.00% |   |   | 5.00% |   |   | 5.00% | 
| | Year ultimate rate is reached                                       |   | 2016  |   |   | 2016  |   |   | 2016  | 
| |                                                                     |   |       |   |   |       |   |   |       | 
| | Effect of change in healthcare cost trend
      rate (1% increase): |   |       |   |   |       |   |   |       | 
| | Total of service cost and interest cost                             | $ | -     |   | $ | -     |   | $ | -     | 
| | Defined benefit obligation                                          | $ | 2     |   | $ | 3     |   | $ | -     | 
| |                                                                     |   |       |   |   |       |   |   |       | 
| | Effect of change in healthcare cost trend
      rate (1% decrease): |   |       |   |   |       |   |   |       | 
| | Total of service cost and interest cost                             | $ | -     |   | $ | -     |   | $ | -     | 
| | Defined benefit obligation                                          | $ | (2    | ) | $ | (3    | ) | $ | -     | 

- 33 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | Share capital                                                                                                                                                         
|    |                                                                                                                                                                       
|    | Authorized                                                                                                                                                            
|    |                                                                                                                                                                       
|    | Unlimited number of common voting shares, without par
      value.                                                                                                    
|    |                                                                                                                                                                       
|    | Unlimited number of non- voting Class A preferred shares
      issuable in series without par value, with other attributes to be
      determined at time of issuance.
|    |                                                                                                                                                                       
|    | Nil warrants (2011 and 2010  11,111,111) convertible in
      equal amount of common shares that expired unexercised on February 29,
      2012.                     
|    |                                                                                                                                                                       
|    | Issued and fully paid                                                                                                                                                 

| |                                                                                           |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ----------------------------------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | 100,000,000 common shares                                                                 | $ | 564  |  | $ | 564  |  | $ | 564  | 
| | Nil warrants (2011
      and 2010 - 11,093,943) (included in other long-term liabilities) |   | -    |  |   | -    |  |   | 5    | 

Net loss per share

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

| |                                                                    |   | 2012        |   |   | 2011        |  
| | ------------------------------------------------------------------ | - | ----------- | - | - | ----------- | -
| | Net loss                                                           | $ | (82         | ) | $ | (5          | )
| | Weighted average number of common shares outstanding               |   | 100,000,000 |   |   | 100,000,000 |  
| | Dilutive effect of employee share options
      and warrants       |   | -           |   |   | -           |  
| | Weighted average number of diluted common shares
      outstanding |   | 100,000,000 |   |   | 100,000,000 |  
| | Basic and diluted net loss in dollars per share                    | $ | (0.82       | ) | $ | (0.05       | )

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

Warrants

Concurrently with the first drawdown on
the $75 million term loan facility to assist with the $190 million capital
investment to upgrade its specialty cellulose manufacturing facility at
Temiscaming, Quebec, the Company has granted the lender an option to acquire 3
million common shares of the Corporation at a price of $7 per share. These
warrants vest on the first loan disbursement date and expire on August 30, 2017.
The Company received, on October 19, 2012, its first draw of $9 million on the
term loan (see note 14, Commitments  Capital Investment).

- 34 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | Share capital (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Share-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | Under the prior Long-Term Incentive Plan, the Company
      had, from time to time, granted options to its employees. The plan
      provided for the issuance of common shares at an exercise price equal to
      the market price of the Companys common shares on the date of the grant.
      These options vest over a five-year period and expire ten years from the
      date of issue. No options have been granted since 2006. No compensation
      expense was recorded for the years ended September 29, 2012 and September
      24, 2011.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | The following table summarizes the changes in options
      outstanding and the impact on weighted average per share exercise price
      during the year:                                                                                                                                                                                                                                                                                                                                                                                                

| |                                |  |         |   |   | 2012     |  |  |         |   |   | 2011     | 
| | ------------------------------ |  | ------- | - | - | -------- |  |  | ------- | - | - | -------- | 
| |                                |  |         |   |   |          |  |  |         |   |   |          | 
| |                                |  |         |   |   | Weighted |  |  |         |   |   | Weighted | 
| |                                |  |         |   |   | average  |  |  |         |   |   | average  | 
| |                                |  |         |   |   | exercise |  |  |         |   |   | exercise | 
| |                                |  | Shares  |   |   | price    |  |  | Shares  |   |   | price    | 
| | Balance, beginning of year     |  | 122,020 |   | $ | 75.01    |  |  | 161,123 |   | $ | 89.01    | 
| | Options cancelled              |  | (17,033 | ) |   | 129.74   |  |  | (39,103 | ) |   | 132.67   | 
| | Balance, end of year           |  | 104,987 |   | $ | 66.13    |  |  | 122,020 |   | $ | 75.01    | 
| | Exercisable, end
      of year |  | 104,987 |   | $ | 66.13    |  |  | 122,020 |   | $ | 75.01    | 

Of the total 17,033 (2011  39,103)
options cancelled, 5,791 (2011  4,001) expired and 11,242 (2011  35,102) were
forfeited.

The following table summarizes the
weighted average per share exercise price and the weighted remaining contractual
life of the options outstanding as at September 29, 2012:

| | Outstanding options and exercisable options | 
| | ------------------------------------------- | 
| |                                             | 
| |                                             | 
| |                                             | 
| | Year granted                                | 
| | 2003                                        | 
| | 2004                                        | 
| | 2005                                        | 
| | 2006                                        | 
| |                                             | 

- 35 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | Share capital (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Other share-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | During fiscal 2009, the Company established a
      Performance- Conditioned Restricted Share Units (PCRSU) plan for
      designated senior executives. During the December 2011 quarter, 880,968
      PCRSUs were forfeited as performance conditions attached to it were not
      achieved, and the remaining 1,143,039 PCRSUs were paid for a total
      consideration of $3 million. There are no PCRSUs outstanding and this plan
      was terminated.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The following table summarizes the grant of PCRSUs that
      has occurred over the past three years:                                                                                                                                                                                                                                                                                                                                                           

| |                            |  | 2012       |   |  | 2011      |   |  | 2010      |  
| | -------------------------- |  | ---------- | - |  | --------- | - |  | --------- | -
| | Balance, beginning of year |  | 2,024,007  |   |  | 1,563,000 |   |  | 1,116,000 |  
| | Grants                     |  | -          |   |  | 732,201   |   |  | 536,000   |  
| | Paid                       |  | (1,143,039 | ) |  | -         |   |  | -         |  
| | Forfeitures                |  | (880,968   | ) |  | (271,194  | ) |  | (89,000   | )
| | Balance, end of year       |  | -          |   |  | 2,024,007 |   |  | 1,563,000 |  
| | Vested, end of
      year  |  | -          |   |  | 622,940   |   |  | -         |  

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

The following table summarizes the
grant of DSUs that has occurred over the past three years:

| |                            |  | 2012      |  |  | 2011      |   |  | 2010    | 
| | -------------------------- |  | --------- |  |  | --------- | - |  | ------- | 
| | Balance, beginning of year |  | 1,119,836 |  |  | 411,222   |   |  | 411,222 | 
| | Grants                     |  | -         |  |  | 750,999   |   |  | -       | 
| | Paid                       |  | -         |  |  | (42,385   | ) |  | -       | 
| | Balance, end of
      year |  | 1,119,836 |  |  | 1,119,836 |   |  | 411,222 | 
| | Vested, end of year        |  | 869,503   |  |  | 619,170   |   |  | 411,222 | 

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

- 36 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | Share capital (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Other share-based compensation
  (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | On November 15, 2011, the Board approved the
      establishment of a Performance-Conditioned Share Unit (PCSU) plan. Under
      the PCSU plan, designated senior executives will be granted a specified
      number of DSUs or PCSUs annually, which vest over successive three- year
      periods, based on total shareholder return over the performance period as
      determined relative to a peer group and the increase in value of the
      Companys weighted average share price over the performance period. On
      January 26, 2012, 373,147 DSUs were granted.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The following table summarizes the grant of DSUs that has
      occurred during the year:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                            |  | 2012    |  
| | -------------------------- |  | ------- | -
| | Balance, beginning of year |  | -       |  
| | Grants                     |  | 373,147 |  
| | Forfeited                  |  | (5,564  | )
| | Balance, end of
      year |  | 367,583 |  
| | Vested, end of year        |  | -       |  

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

| |                                                                          |   | 2012 |   |   | 2011 | 
| | ------------------------------------------------------------------------ | - | ---- | - | - | ---- | 
| | Performance-conditioned restricted share
      unit plan                 | $ | -    |   | $ | 2    | 
| | Directors' share award plan                                              |   | (1   | ) |   | -    | 
| | Performance-conditioned share unit plan                                  |   | -    |   |   | -    | 
| |                                                                          | $ | (1   | ) | $ | 2    | 
| | Total carrying amount of liabilities for cash-settled
      arrangements | $ | 2    |   | $ | 5    | 

|14. | Guarantees, commitments and contingencies
      Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company and certain of its subsidiaries have granted
      irrevocable letters of credit, issued by highly-rated financial
      institutions, to third parties to indemnify them in the event the Company
      does not perform its contractual obligations. The Company has not recorded
      any additional liability with respect to these guarantees, as the Company
      does not expect to make any payments in excess of what is recorded in the
      Companys financial statements. The letters of credit mature at various
      dates in fiscal 2013.

- 37 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | Guarantees, commitments and contingencies (continued)
      Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Capital investment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | On March 16, 2012, the Company announced a $190 million
      capital investment to upgrade its specialty cellulose manufacturing
      facility at Temiscaming, Quebec. The project involves the replacement of
      three old boilers with a new high- pressure boiler designed to burn waste
      sulphite liquor, a co-product of the specialty cellulose manufacturing
      process, producing steam for use at the facility. The project also calls
      for the installation of a new electrical turbine that will increase the
      Temiscaming facility's electricity production capacity from its current 10
      megawatts to 60 megawatts. As at the end of September 2012, the Company
      had incurred $59 million of capital expenditures for this project and had
      $51 million of outstanding commitments.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Company has entered into a 25-year power purchase
      contract with Hydro-Quebec that will allow the Company to sell to Hydro-
      Quebec up to 50 megawatts of the incremental electricity generated by the
      new turbine at green energy rates of $106 per MW/hour, indexed annually to
      the consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | In connection with the project, the Company entered into
      the following term loan facilities to assist with the financing:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Operating leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | The Company has entered into operating leases for
      expected cash outflows of $12 million. Outflows for the years following
      September 29, 2012, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | 2013                | $ | 4 | 
| | ------------------- | - | - | 
| | 2014                | $ | 3 | 
| | 2015                | $ | 2 | 
| | 2016                | $ | 2 | 
| | 2017 and thereafter | $ | 1 | 

- 38 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | Guarantees, commitments and contingencies (continued)
      Contingencies                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                               
|    | The Company is party to claims and litigations arising in
      the normal course of operations. The Company does not expect that the
      resolution of these matters will have a material adverse effect on the
      Companys financial condition, earnings or liquidity.
|    |                                                                                                                                                                                                                                                                               
|15. | Analysis of expenses by
nature                                                                                                                                                                                                                                                

| |                                             |   | 2012  |   |   | 2011  |  
| | ------------------------------------------- | - | ----- | - | - | ----- | -
| | Wages and salaries                          | $ | 275   |   | $ | 271   |  
| | Employee benefits expense                   |   | 97    |   |   | 109   |  
| | Raw materials and other manufacturing costs |   | 1,004 |   |   | 1,000 |  
| | Changes in inventories                      |   | (37   | ) |   | (7    | )
| | Other expenses                              |   | 25    |   |   | 20    |  
| |                                             | $ | 1,364 |   | $ | 1,393 |  
| |                                             |   |       |   |   |       |  
| | Cost of sales                               | $ | 1,290 |   | $ | 1,321 |  
| | Selling, general and administrative         |   | 74    |   |   | 72    |  
| |                                             | $ | 1,364 |   | $ | 1,393 |  

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

| |                                                          |   | 2012 |   |   | 2011 |  
| | -------------------------------------------------------- | - | ---- | - | - | ---- | -
| | High-Yield Pulp:                                         |   |      |   |   |      |  
| | Impairment loss - Chetwynd, British Columbia, pulp mill  | $ | 50   |   | $ | -    |  
| |                                                          |   | 50   |   |   | -    |  
| | Forest Products:                                         |   |      |   |   |      |  
| | Gain on sale of British
      Columbia sawmills          |   | (24  | ) |   | -    |  
| | Loss on sale/closure of hardwood flooring
      plants   |   | 2    |   |   | -    |  
| | Cranbrook planer mill closure
      charge               |   | -    |   |   | 1    |  
| | Taschereau sawmill closure charge                        |   | -    |   |   | 2    |  
| |                                                          |   | (22  | ) |   | 3    |  
| | Corporate:                                               |   |      |   |   |      |  
| | Costs for permanently idled
      facilities             |   | 10   |   |   | 7    |  
| | Impairment loss - Temlam loan receivable                 |   | 16   |   |   | -    |  
| | Gain on sale of minority
      equity investment         |   | (4   | ) |   | -    |  
| | Gain on sale of Smooth Rock Falls, Ontario,
      assets |   | -    |   |   | (3   | )
| | Gain on deconsolidation of Tembec USA LLC                |   | -    |   |   | (4   | )
| |                                                          |   | 22   |   |   | -    |  
| | Other items                                              | $ | 50   |   | $ | 3    |  

- 39 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

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

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

On December 22, 2011, the Company
recorded a gain of $4 million relating to the sale of a minority equity position
in two dissolving pulp mills located in the Province of New Brunswick.

On November 25, 2011, the Company sold
its Toronto, Ontario, flooring plant for proceeds of $13 million. Concurrently,
the Company also announced the closure of its Huntsville, Ontario, hardwood
flooring plant. The sale of the Toronto plant and the closure of the Huntsville
plant resulted in a charge of $2 million that has been recorded in the December
2011 quarter.

- 40 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|16. | Other items (continued)
      2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | During fiscal 2011, the Company recorded charges of $7
      million relating to several permanently idled facilities. The costs relate
      to legal costs, site security and custodial costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | During the June 2011 quarter, the Company finalized the
      sale of its hydro-electric generating assets located in Smooth Rock Falls,
      Ontario, and recorded a gain of $3 million. Total consideration for the
      assets, which had a capacity of 7.4 megawatts, was $16 million paid in
      cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | During the June 2011 quarter, the Company announced that
      its non- operating U.S. subsidiary, Tembec USA LLC, had filed a petition
      seeking relief under Chapter 7 of the Bankruptcy Code of the United
      States. As a result of the filing, the Company determined that it no
      longer exercised control over this investment. The Company recorded a gain
      of $4 million relating to the deconsolidation of this subsidiary, arising
      primarily from the reduction in its consolidated accrued benefit
      obligation.
      During the March 2011 quarter, the Company announced the
      permanent closure of the Taschereau, Quebec sawmill. The facility had been
      idled since October 2009. The Company recorded a charge of $2 million
      relating to severance and other items.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | During the March 2011 quarter, the Company recorded a
      charge of $1 million for severance relating to the Cranbrook, British
      Columbia planer mill operation. The mill has been indefinitely idled since
      November 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|17. | Net finance costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                                                              |   | 2012 |   |   | 2011 |  
| | ---------------------------------------------------------------------------- | - | ---- | - | - | ---- | -
| | Interest on long-term debt                                                   | $ | 36   |   | $ | 31   |  
| | Interest on short-term debt                                                  |   | 2    |   |   | 1    |  
| | Bank charges and other financing expenses                                    |   | 2    |   |   | 6    |  
| | Net foreign exchange loss (gain), excluding exchange on
      long-term debt |   | 4    |   |   | -    |  
| | Derivative financial instruments                                             |   | -    |   |   | (1   | )
| | Interest income                                                              |   | (1   | ) |   | (1   | )
| | Exchange loss (gain) on long-term debt                                       |   | (13  | ) |   | 1    |  
| | Net change in fair value of warrants                                         |   | -    |   |   | (5   | )
| | Interest capitalized on assets under construction                            |   | (2   | ) |   | -    |  
| |                                                                              | $ | 28   |   | $ | 32   |  
| |                                                                              |   |      |   |   |      |  
| | Finance costs                                                                | $ | 42   |   | $ | 39   |  
| | Finance income                                                               |   | (14  | ) |   | (7   | )
| | Net finance costs                                                            | $ | 28   |   | $ | 32   |  

- 41 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                                                                                                       |   | 2012 |   |   | 2011 | 
| | --------------------------------------------------------------------------------------------------------------------- | - | ---- | - | - | ---- | 
| | Earnings (loss) before income taxes                                                                                   | $ | (60  | ) | $ | 15   | 
| |                                                                                                                       |   |      |   |   |      | 
| | Income tax expense (recovery) based on combined federal
      and provincial income tax rates of 26.3% (2011 - 27.8%) | $ | (16  | ) | $ | 4    | 
| | Increase (decrease) resulting from:                                                                                   |   |      |   |   |      | 
| | Unrecognized tax asset arising
      from current losses                                                              |   | 32   |   |   | 10   | 
| | Difference in statutory income tax rate                                                                               |   | 6    |   |   | 6    | 
| | Non-taxable portion of
      exchange gain on long-term debt                                                          |   | (2   | ) |   | -    | 
| | Other
      permanent differences                                                                                     |   | 2    |   |   | -    | 
| |                                                                                                                       |   | 38   |   |   | 16   | 
| | Income tax expense                                                                                                    | $ | 22   |   | $ | 20   | 
| | Income taxes:                                                                                                         |   |      |   |   |      | 
| | Current                                                                                                               | $ | 11   |   | $ | 8    | 
| | Deferred                                                                                                              |   | 11   |   |   | 12   | 
| | Income tax expense                                                                                                    | $ | 22   |   | $ | 20   | 

Unrecognized deferred tax assets

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

| |                                                                                                               |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ------------------------------------------------------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Deferred tax assets:                                                                                          |   |      |  |   |      |  |   |      | 
| | Non-capital loss carry-forwards and pool
      of deductible scientific research and development expenditures | $ | 405  |  | $ | 390  |  | $ | 360  | 
| | Property, plant and equipment                                                                                 |   | 66   |  |   | 36   |  |   | 27   | 
| | Employee future benefits                                                                                      |   | 78   |  |   | 79   |  |   | 69   | 
| | Capital loss carry-forwards                                                                                   |   | 3    |  |   | 3    |  |   | 7    | 
| | Financing charges                                                                                             |   | -    |  |   | -    |  |   | 7    | 
| | Other                                                                                                         |   | 9    |  |   | 12   |  |   | 15   | 
| |                                                                                                               | $ | 561  |  | $ | 520  |  | $ | 485  | 

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

- 42 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | Income taxes (continued)                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                        
|    | Unrecognized deferred tax assets
  (continued)                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                        
|    | As at September 29, 2012, certain subsidiaries have
      accumulated the following losses and deductions for income tax purposes,
      which may be carried forward to reduce taxable income and taxes payable in
      future years:

| |                                                                           |   |         |  |  | Expiring           | 
| | ------------------------------------------------------------------------- | - | ------- |  |  | ------------------ | 
| |                                                                           |   | Amounts |  |  | dates              | 
| | Non-capital loss carried forward for:                                     |   |         |  |  |                    | 
| | Canadian subsidiaries                                                     | $ | 1,158   |  |  | 2014 to 2032       | 
| | U.S. subsidiaries                                                         | $ | 13      |  |  | 2028 to
      2032 | 
| | Pool of deductible
      scientific research and experimental development | $ | 368     |  |  | Unlimited          | 

Recognized deferred tax assets and
liabilities

| |                                                |   | Deferred tax assets |   |   | Deferred tax liabilities |   |   |             |  
| | ---------------------------------------------- | - | ------------------- | - | - | ------------------------ | - | - | ----------- | -
| |                                                |   | Non-capital         |   |   | Property,                |   |   |             |  
| |                                                |   | loss carry-         |   |   | plant and                |   |   | Other       |  
| |                                                |   | forwards            |   |   | equipment                |   |   | liabilities |  
| | Balance, September 26, 2010                    | $ | 23                  |   | $ | 6                        |   | $ | (2          | )
| | Through statement
      of net earnings (loss) |   | (12                 | ) |   | (1                       | ) |   | 1           |  
| | Balance, September 24, 2011                    |   | 11                  |   |   | 5                        |   |   | (1          | )
| |                                                |   |                     |   |   |                          |   |   |             |  
| | Through statement of net earnings (loss)       |   | (11                 | ) |   | (1                       | ) |   | 1           |  
| | Balance, September
      29, 2012              | $ | -                   |   | $ | 4                        |   | $ | -           |  

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

| |                |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | -------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Carrying value | $ | 339  |  | $ | 289  |  | $ | 288  | 
| | Fair value     |   | 369  |  |   | 294  |  |   | 301  | 

- 43 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | Financial instruments (continued)
      Fair value (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The fair value of the senior secured notes was estimated
      using quoted market prices; the fair value of the other long- term debt
      was estimated based on discounted cash flows using year-end market yields
      of similar instruments having the same maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Derivative financial instruments are the only financial
      instruments of the Company measured at fair value on a recurring basis and
      have been valued in accordance with Level 1 of the fair value hierarchy,
      which is based on unadjusted quoted prices in an active market. The
      Company had no derivative financial instruments at September 29, 2012
      (2011  negligible; 2010  nil).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Financial risk management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company has exposure to the following risks from its
      use of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Board of Directors has overall responsibility for the
      establishment and oversight of the Companys risk management policy. The
      policy defines the method by which the Company manages its risk through
      properly and prudently administering the Companys financial assets,
      liabilities and derivatives. Internal Audit measures the adequacy of the
      business control systems through the execution of an Internal Audit Plan
      approved by the Audit Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Exposure to credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Credit risk arises from the possibility that entities to
      which the Company sells products may experience financial difficulty and
      be unable to fulfill their contractual obligations. The Company does not
      have a significant exposure to any individual customer or counterparty. As
      required in the Risk Management Policy, the Company reviews a new
      customers credit history before extending credit and conducts regular
      reviews of its existing customers credit performance. All credit limits
      are subject to evaluation and revision at any time based on changes in
      levels of creditworthiness and must be reviewed at least once per year.
      Sales orders cannot be processed unless a credit limit has been properly
      approved. The Company may require payment guarantees, such as letters of
      credit, or obtain credit insurance coverage. Bad debt expense has not been
      significant in the past. The allowance for doubtful accounts for the
      Company, as at September 29, 2012, was negligible (2011  negligible; 2010
      - $1 million).
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company also has credit risk relating to cash and
      cash equivalents. The Company manages risk by dealing only with
      highly-rated financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 44 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                                                                       |   | 2012 |  |   | 2011 |  |   | 2010 | 
| | ------------------------------------------------------------------------------------- | - | ---- |  | - | ---- |  | - | ---- | 
| | Loans and receivables, other than cash,
      cash equivalents and cash held in trust | $ | 212  |  | $ | 206  |  | $ | 236  | 
| | Cash, cash
      equivalents and cash held in trust                                   | $ | 92   |  | $ | 105  |  | $ | 74   | 

The maximum exposure to credit risk for
trade accounts receivable as at September 29, 2012 and September 24, 2011, by
geographical region was as follows:

| |                                               |   | 2012 |  |   | 2011 | 
| | --------------------------------------------- | - | ---- |  | - | ---- | 
| | Canada                                        | $ | 19   |  | $ | 24   | 
| | United States                                 |   | 51   |  |   | 49   | 
| | European Union                                |   | 42   |  |   | 37   | 
| | China                                         |   | 5    |  |   | 15   | 
| | Other                                         |   | 24   |  |   | 8    | 
| |                                               |   | 141  |  |   | 133  | 
| | Allowance for doubtful accounts               |   | -    |  |   | -    | 
| | Trade receivables net                         |   | 141  |  |   | 133  | 
| | Other receivables including input tax credits |   | 59   |  |   | 49   | 
| | Accounts
      receivable                     | $ | 200  |  | $ | 182  | 

The aging of trade accounts receivable
was as follows:

| |                     |   |       |  |   | 2012      |  |   |       |  |   | 2011      | 
| | ------------------- | - | ----- |  | - | --------- |  | - | ----- |  | - | --------- | 
| |                     |   | Gross |  |   | Allowance |  |   | Gross |  |   | Allowance | 
| | Not past due        | $ | 134   |  | $ | -         |  | $ | 125   |  | $ | -         | 
| | Past due 0-30 days  |   | 5     |  |   | -         |  |   | 6     |  |   | -         | 
| | Past due 31-60 days |   | 2     |  |   | -         |  |   | 2     |  |   | -         | 
| |                     | $ | 141   |  | $ | -         |  | $ | 133   |  | $ | -         | 

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

| |                            |   | 2012 |  |   | 2011 |  
| | -------------------------- | - | ---- |  | - | ---- | -
| | Balance, beginning of year | $ | -    |  | $ | 1    |  
| | Bad debt written
      off |   | -    |  |   | (1   | )
| | Balance, end of year       | $ | -    |  | $ | -    |  

- 45 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Exposure to liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Liquidity risk arises from the possibility that the
      Company will not be able to meet its financial obligations as they fall
      due. The Company has an objective of maintaining liquidity equal to 12
      months of maintenance capital expenditures, interest and principal
      repayments and seasonal working capital requirements, which would require
      approximately $135 million to $150 million of liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | A liquidity reserve in the form of cash, cash equivalents
      and undrawn revolving credit facilities is maintained to assist in the
      solvency and financial flexibility of the Company. Liquidity reserves as
      at September 29, 2012, totalled $140 million (2011  $229 million) .
      Repayment of amounts due within one year may also be funded by normal
      collection of current trade accounts receivable and cash on
hand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | 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 asset-based
      loan (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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | 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 Companys liquidity
      position at September 29, 2012, includes $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 following are the contractual maturities of financial
      liabilities, including interest payments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

2012Carrying
    
    
    Contractual
    
    
    
    
    
    
    
    
    
    
    
    Afteramount
    
    
    cash flows
    
    
    Year 1
    
    
    Years 2-3
    
    
    Years 4-5
    
    
    5 yearsSecured bank loans
    $
    336
    
    $
    561
    
    $
    37
    
    $
    79
    
    $
    79
    
    $
    366Unsecured loans
    
    16
    
    
    18
    
    
    7
    
    
    7
    
    
    3
    
    
    1Operating bank loans
    
    68
    
    
    68
    
    
    68
    
    
    -
    
    
    -
    
    
    -Trade and others
    
    243
    
    
    243
    
    
    243
    
    
    -
    
    
    -
    
    
    -$
    663
    
    $
    890
    
    $
    355
    
    $
    86
    
    $
    82
    
    $
    367


- 46 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | It is not expected that the cash flows included in the
      maturity analysis could occur significantly earlier, or, excluding the
      effects of foreign exchange fluctuations on US dollar liabilities, at
      significantly different amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Foreign currency rate risk management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Company is exposed to currency risk on sales,
      purchases and long-term debt that are denominated in a currency other than
      the Canadian dollar. The currencies in which these transactions are
      primarily denominated are Canadian dollar, US dollar and euro.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The Companys revenues for most of its products are
      affected by fluctuations in the relative exchange rates of the Canadian
      dollar, the US dollar and the euro. The 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.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | To reduce the impact of fluctuations in the value of the
      US dollar, the Company has adopted a policy, which allows for hedging up
      to 50% of its anticipated US $ receipts for up to 36 months in duration.
      As at September 29, 2012, September 24, 2011 and September 26, 2010, the
      Company does not hold any foreign exchange contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Foreign currency rate sensitivity
  analysis                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | 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:                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | Sales
      increase                               | $ | 11 | 
| | -------------------------------------------------- | - | -- | 
| | Cost of sales
      increase                       |   | 3  | 
| | Adjusted EBITDA                                    |   | 8  | 
| | Loss on
      translation of US $ denominated debt |   | 3  | 
| | Pre-tax earnings increase                          | $ | 5  | 

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

Interest rate risk management and
sensitivity analysis

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

- 47 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | Financial instruments (continued)
      Financial risk management (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Fluctuations of market interest rates have little impact
      on the Companys financial results since the majority of the Companys
      debts are fixed rate debts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Commodity price and operational risk
    management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Companys financial performance is dependent on the
      selling prices of its products. The markets for most lumber, pulp and
      paper products are cyclical and are influenced by a variety of factors.
      These factors include periods of excess product supply due to industry
      capacity additions, periods of decreased demand due to weak general
      economic activity, inventory de- stocking by customers, and fluctuations
      in currency exchange rates. During periods of low prices, the Company is
      subject to reduced revenues and margins, resulting in substantial declines
      in profitability and possibly net losses. The Company may periodically
      purchase lumber, pulp and newsprint price derivative commodity contracts
      to mitigate the impact of price volatility. The Company did not hold any
      significant product price derivative commodity contracts at September 29,
      2012, September 24, 2011 and September 26, 2010.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The manufacturing activities conducted by the Companys
      operations are subject to a number of risks, including availability and
      price of fibre and competitive prices for purchased energy and raw
      materials. To mitigate the impact of price fluctuations, the Company may
      periodically purchase derivative commodity contracts. The Company does not
      currently hold any significant derivative commodity contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|20. | Capital management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | It is the Companys objective to manage its capital to
      ensure adequate capital resources exist to support operations while
      maintaining its business growth. The Company sets the amount of capital in
      proportion to risk. The Company manages the capital structure and makes
      adjustments to it in light of changes in economic conditions and the risk
      of characteristics of the underlying assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Company monitors capital on the basis of net debt to
      total capitalization ratio. Net debt is calculated as a total debt (long-
      term debt plus bank indebtedness and operating bank loans) less cash, cash
      equivalents and cash held in trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Total capitalization includes net debt plus provisions,
      accrued benefit liability, deferred income taxes, other long- term
      liabilities, and shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The Companys strategy is to maintain the net debt to
      total capitalization ratio at 40% or less. The objective is to keep a
      strong balance sheet and maintain the ability of the Company to access
      capital markets at favourable rates. The net debt to total capitalization
      ratio for the Company was 45% as at September 29, 2012 (2011  27%; 2010 
      28%). The increase was due to fiscal 2012 losses, which reduced
      shareholders equity, combined with higher net debt due primarily to
      finance the Temiscaming specialty cellulose project. The Company
      anticipates that the net debt to total capitalization ratio will remain in
      excess of its target until the Temiscaming project is completed and begins
      to generate the projected incremental adjusted EBITDA.                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | There were no changes in the Companys approach to
      capital management during fiscal 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

- 48 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

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

| |                                  |   | 2012 |   |   | 2011 | 
| | -------------------------------- | - | ---- | - | - | ---- | 
| | Short-term compensation benefits | $ | 4    |   | $ | 4    | 
| | Share-based
      compensation   |   | (1   | ) |   | 2    | 
| |                                  | $ | 3    |   | $ | 6    | 

|22. | Explanation of transition to IFRS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The accounting policies set out in note 3 have been
      applied in preparing the audited consolidated financial statements for the
      years ended September 29, 2012 and September 24, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In preparing its opening IFRS balance sheet, the Company
      has adjusted amounts reported previously in financial statements prepared
      in accordance with previous Canadian Generally Accepted Accounting
      Principles (GAAP). An explanation of how the transition from previous GAAP
      to IFRS has affected the Companys financial position, financial
      performance and cash flows is set out in the following tables and the
      notes that accompany the tables.                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In such tables, reclassification has been made to conform
      to IAS 1  Presentation of Financial Statements, minimum disclosure
      requirements. Additionally, in preparing its consolidated financial
      statements in accordance with IFRS 1  First-time Adoption of
      International Financial Reporting Standards, the Company applied the
      mandatory exemptions and elected to apply the following optional
      exemptions from full retrospective application:                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Employee benefits exemption                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | IFRS 1 provides the option to retrospectively apply IAS
      19, Employee Benefits, for the recognition of unamortized actuarial
      gains and losses, past service costs and transitional obligations and
      assets or to recognize these balances previously deferred under previous
      Canadian GAAP in opening retained earnings at the Transition Date. The
      Company has elected to recognize all unamortized cumulative actuarial
      losses and past service costs at the Transition Date as an adjustment to
      opening retained earnings for all of its employee future benefit
    plans.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Foreign currency translation differences                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Retrospective application of IFRS would require the
      Company to determine cumulative currency translation differences in
      accordance with IAS 21, The Effects of Changes in Foreign Exchange
      Rates, from the date a subsidiary or equity method investee was formed
      or acquired. IFRS 1 permits cumulative translation gains and losses to be
      reset to zero at the Transition Date. The Company elected to reset all
      cumulative translation gains and losses to zero in opening retained
      earnings at its Transition Date.                                                     

- 49 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Event driven fair value of property, plant and
      equipment as deemed cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IFRS 1 provides the choice of recording assets and
      liabilities based on a deemed cost, which can be an event driven valuation
      where some or all of the assets and liabilities were valued and recognized
      at fair value under previous Canadian GAAP. As a result of the
      recapitalization transaction that occurred within the Company in 2008, the
      Company has elected to apply this exemption to property, plant and
      equipment and used such event driven fair value measurements as deemed
      cost for IFRS at the date of that measurement.                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Business combinations exemption                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IFRS 1 provides the option to apply IFRS 3, Business
      Combinations, retrospectively or prospectively - either from the
      Transition Date or a particular date prior to the Transition Date. The
      Company has elected to apply IFRS 3 prospectively to business combinations
      that occur after the Transition Date. Accordingly, business combinations
      prior to this date have not been restated.                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Share-based payment transaction
exemption                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IFRS 1 provides an optional exemption to the application
      of IFRS 2, Share-based Payment, for those share options granted
      subsequent to November 7, 2002, that have fully vested as at the
      Transition Date and to liabilities arising from share- based payment
      transactions that were settled before the Transition Date. The Company has
      elected this exemption.                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | Borrowing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | IFRS 1 provides the option to apply IAS 23, Borrowing
      Costs, retrospectively or prospectively from the Transition Date. IAS
      23 requires an entity to capitalize borrowing costs that are directly
      attributable to the acquisition, construction or production of a
      qualifying asset as part of the cost of that asset. A qualifying asset is
      an asset that necessarily takes a substantial period of time to get ready
      for its intended use or sale. The Company elected to apply this exemption
      prospectively in respect of qualifying assets for which the commencement
      date for capitalization was on or after the Transition
  Date.

- 50 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS (continued)
      Reconciliation of Consolidated Balance
    Sheets

September 26, 2010Previous
    
    
    
    
    
    Effect ofCanadian
    
    
    Reclassi-
    
    
    transitionNote
    
    
    GAAP
    
    
    fication
    
    
    to IFRS
    
    
    IFRSASSETSCurrent assets:Cash and cash equivalents
    
    
    
    $
    68
    
    $
    -
    
    $
    -
    
    $
    68Cash held in trust
    
    
    
    
    6
    
    
    -
    
    
    -
    
    
    6Trade and other receivables
    
    
    
    
    209
    
    
    -
    
    
    -
    
    
    209Inventories
    
    
    
    
    255
    
    
    -
    
    
    -
    
    
    255Prepaid expenses
    
    
    
    
    7
    
    
    -
    
    
    -
    
    
    7545
    
    
    -
    
    
    -
    
    
    545Property, plant and equipment
    
    (b)(c)(d)
    
    
    498
    
    
    -
    
    
    (2
    )
    
    496Biological assets
    
    (a)
    
    
    -
    
    
    -
    
    
    7
    
    
    7Employee future benefits
    
    (e)
    
    
    -
    
    
    6
    
    
    (6
    )
    
    -Other long-term receivables
    
    
    
    
    -
    
    
    28
    
    
    -
    
    
    28Other assets
    
    
    
    
    34
    
    
    (34
    )
    
    -
    
    
    -Deferred tax
      assets
    
    
    
    
    27
    
    
    -
    
    
    -
    
    
    27$
    1,104
    
    $
    -
    
    $
    (1
    )
    $
    1,103LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Operating bank loans
    
    
    
    $
    1
    
    $
    -
    
    $
    -
    
    $
    1Trade, other payables and accrued charges
    
    (g)
    
    
    238
    
    
    (5
    )
    
    -
    
    
    233Interest payable
    
    
    
    
    3
    
    
    -
    
    
    -
    
    
    3Income tax payable
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -Provisions
    
    (g)
    
    
    -
    
    
    5
    
    
    -
    
    
    5Current portion of long-term debt
    
    
    
    
    17
    
    
    -
    
    
    -
    
    
    17259
    
    
    -
    
    
    -
    
    
    259Long-term debt
    
    
    
    
    271
    
    
    -
    
    
    -
    
    
    271Provisions
    
    (g)
    
    
    -
    
    
    19
    
    
    (2
    )
    
    17Employee future benefits
    
    (e)
    
    
    -
    
    
    187
    
    
    61
    
    
    248Other long-term liabilities
    
    (e)(f)(g)
    
    
    209
    
    
    (206
    )
    
    5
    
    
    8739
    
    
    -
    
    
    64
    
    
    803Shareholders' equity:Share capital
    
    (f)
    
    
    570
    
    
    -
    
    
    (6
    )
    
    564Contributed surplus
    
    (h)
    
    
    5
    
    
    -
    
    
    (5
    )
    
    -Deficit
    
    
    
    
    (210
    )
    
    -
    
    
    (54
    )
    
    (264
    )Accumulated other comprehensive earnings
      (loss)
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -365
    
    
    -
    
    
    (65
    )
    
    300$
    1,104
    
    $
    -
    
    $
    (1
    )
    $
    1,103


- 51 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS (continued)
      Reconciliation of Consolidated Balance Sheets
      (continued)

September 24, 2011Previous
    
    
    
    
    
    Effect ofCanadian
    
    
    Reclassi-
    
    
    transitionNote
    
    
    GAAP
    
    
    fication
    
    
    to IFRS
    
    
    IFRSASSETSCurrent assets:Cash and cash equivalents
    
    
    
    $
    99
    
    $
    -
    
    $
    -
    
    $
    99Cash held in trust
    
    
    
    
    6
    
    
    -
    
    
    -
    
    
    6Trade and other receivables
    
    
    
    
    182
    
    
    -
    
    
    -
    
    
    182Inventories
    
    
    
    
    261
    
    
    -
    
    
    -
    
    
    261Prepaid expenses
    
    
    
    
    6
    
    
    -
    
    
    -
    
    
    6554
    
    
    -
    
    
    -
    
    
    554Property, plant and equipment
    
    (b)(c)(d)
    
    
    493
    
    
    -
    
    
    (2
    )
    
    491Biological assets
    
    (a)
    
    
    -
    
    
    -
    
    
    4
    
    
    4Employee future benefits
    
    (e)
    
    
    -
    
    
    16
    
    
    (15
    )
    
    1Other long-term receivables
    
    
    
    
    -
    
    
    28
    
    
    -
    
    
    28Other assets
    
    
    
    
    44
    
    
    (44
    )
    
    -
    
    
    -Deferred tax
      assets
    
    (e)
    
    
    16
    
    
    -
    
    
    (1
    )
    
    15$
    1,107
    
    $
    -
    
    $
    (14
    )
    $
    1,093LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Operating bank loans
    
    
    
    $
    6
    
    $
    -
    
    $
    -
    
    $
    6Trade, other payables and accrued charges
    
    (g)
    
    
    248
    
    
    (8
    )
    
    -
    
    
    240Interest payable
    
    
    
    
    8
    
    
    -
    
    
    -
    
    
    8Income tax payable
    
    
    
    
    6
    
    
    -
    
    
    -
    
    
    6Provisions
    
    (g)
    
    
    -
    
    
    8
    
    
    -
    
    
    8Current portion of long-term debt
    
    
    
    
    18
    
    
    -
    
    
    -
    
    
    18286
    
    
    -
    
    
    -
    
    
    286Long-term debt
    
    
    
    
    271
    
    
    -
    
    
    -
    
    
    271Provisions
    
    (g)
    
    
    -
    
    
    18
    
    
    (2
    )
    
    16Employee future benefits
    
    (e)
    
    
    -
    
    
    168
    
    
    117
    
    
    285Other long-term liabilities
    
    (e)(f)(g)
    
    
    188
    
    
    (186
    )
    
    -
    
    
    2745
    
    
    -
    
    
    115
    
    
    860Shareholders' equity:Share capital
    
    (f)
    
    
    570
    
    
    -
    
    
    (6
    )
    
    564Contributed surplus
    
    (h)
    
    
    5
    
    
    -
    
    
    (5
    )
    
    -Deficit
    
    
    
    
    (213
    )
    
    -
    
    
    (120
    )
    
    (333
    )Accumulated other comprehensive earnings
      (loss)
    
    (c)
    
    
    -
    
    
    -
    
    
    2
    
    
    2362
    
    
    -
    
    
    (129
    )
    
    233$
    1,107
    
    $
    -
    
    $
    (14
    )
    $
    1,093


- 52 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)                               
|    |                                                                                 
|    | Reconciliation of Consolidated Statements of
      Comprehensive Earnings (Loss)

| |                                                                 |  | September 24, 2011 | 
| | --------------------------------------------------------------- |  | ------------------ | 
| |                                                                 |  |                    | 
| |                                                                 |  |                    | 
| |                                                                 |  | Note               | 
| | Sales                                                           |  |                    | 
| | Freight and sales deductions                                    |  |                    | 
| | Lumber export taxes                                             |  |                    | 
| | Cost of sales (excluding depreciation and amortization)         |  | (a)(b)(e)          | 
| | Selling, general and administrative                             |  |                    | 
| | Share-based compensation                                        |  |                    | 
| | Depreciation and amortization                                   |  | (b)                | 
| | Other items                                                     |  | (e)                | 
| | Operating earnings (loss)                                       |  |                    | 
| | Interest, foreign exchange and other                            |  | (c)(d)(e)(f)(g)    | 
| | Exchange loss on long-term debt                                 |  | (c)                | 
| | Net finance costs                                               |  |                    | 
| | Earnings (loss) before income taxes                             |  |                    | 
| |                                                                 |  |                    | 
| | Income tax expense                                              |  | (e)                | 
| | Net loss                                                        |  |                    | 
| | Other comprehensive earnings (loss), net of
      income taxes: |  |                    | 
| | Defined benefit pension plans                                   |  | (e)                | 
| | Other benefit plans                                             |  |                    | 
| | Foreign currency translation differences for foreign operations |  | (c)                | 
| | Total comprehensive loss                                        |  |                    | 
| |                                                                 |  |                    | 
| | Basic and diluted net loss in dollars per share                 |  |                    | 

- 53 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)                                         
|    |                                                                                           
|    | Notes to the reconciliation of equity and statement of
      comprehensive earnings (loss)

| | (a) | Biological assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | In accordance with IAS 41, Agriculture, the
      Companys standing timber on its private timberlands is considered to be a
      biological asset that is measured at fair value less costs to sell at each
      reporting date, with changes in fair value less costs to sell recognized
      in net earnings (loss) at each period. As a result of this IFRS guidance,
      the Companys standing timber on its private timberlands has been
      separately identified on the consolidated balance sheet as biological
      assets and recorded at fair value less costs to sell.                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The effect of the above on the Companys balance sheet
      resulted in an increase in biological assets of $4 million at September
      24, 2011 (September 26, 2010 - $7 million), and resulted in a decrease of
      the deficit of $4 million (September 26, 2010 - $7 million).                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The impact on total comprehensive loss for the year ended
      September 24, 2011, increased by $3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (b) | Component accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | Under previous Canadian GAAP, the Company did not apply
      component accounting to the significant separable component parts of an
      item of property, plant and equipment since no guidance was provided on
      evaluating the cost of a component, replacement of a component and the
      level at which component accounting was required. Under IFRS, the major
      assets must be separated into components and the cost of replacement or
      overhaul of these components are considered to be a part of property,
      plant and equipment, and are amortized over their individual estimated
      useful lives.                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The effect of the above on the Companys balance sheet
      resulted in an increase in property, plant and equipment of $6 million at
      September 24, 2011 (September 26, 2010 - $6 million), and resulted in a
      decrease of the deficit of $6 million (September 26, 2010 - $6
      million).                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | The impact on total comprehensive loss for the year ended
      September 24, 2011, was negligible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (c) | Translation of foreign operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     | Under previous Canadian GAAP, non-monetary assets and
      liabilities of the foreign operations were translated to Canadian dollars
      at the historical rate relevant to the particular transaction date at
      which such assets or liabilities were originated. Under IFRS, all assets
      and liabilities of the foreign operations with functional currencies other
      than the Canadian dollar are translated to Canadian dollar at the exchange
      rate prevailing at period- end and are recognized in other comprehensive
      loss. In accordance with IFRS 1, the Company elected to reset all
      cumulative translation gains and losses to zero in opening deficit at its
      Transition Date.

- 54 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                  
|--- | -------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)

| | (c) | Translation of foreign operations
    (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The effect of the above on the Companys balance sheet
      resulted in a decrease in property, plant and equipment of $7 million at
      September 24, 2011 (September 26, 2010 - $7 million), and resulted in an
      increase of the deficit of $9 million (September 26, 2010 - $7 million)
      and an increase of accumulated other comprehensive earnings of $2 million
      (September 26, 2010 - nil). The impact on total comprehensive loss for the
      year ended September 24, 2011, decreased by $2 million.                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (d) | Site restoration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Under previous Canadian GAAP, the cost of decommissioning
      and restoration of landfill sites were part of property, plant and
      equipment and depreciated over the estimated useful life of the landfill
      site. Under IFRS, decommissioning and restoration costs incurred through
      the production of inventory are included as part of inventory
  costs.                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The effect of the above on the Companys balance sheet
      resulted in a decrease in property, plant and equipment of $1 million at
      September 24, 2011 (September 26, 2010 - $1 million), and resulted in an
      increase of the deficit of $1 million (September 26, 2010 - $1
      million).                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | For the year ended September 24, 2011, the impact on
      total comprehensive loss was negligible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (e) | Recognition of unamortized actuarial losses at date of
      transition to IFRS into equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | As permitted by previous Canadian GAAP, the Company
      measured its employee future benefits obligation for accounting purposes
      as at June 30 of each fiscal year. This was often referred as the early
      measurement date accounting policy choice. Under IAS 19 - Employee
      Benefits, the measurement date of the employee future benefits
      obligation must coincide with the fiscal year- end of the Company.
      Therefore, upon transition to IFRS, the Company measured its employee
      future benefits obligation at the date of the opening balance sheet in
      accordance with IAS 19.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | In addition, as permitted by IFRS 1 - First-time
      Adoption of International Financial Reporting Standards, management
      elected the optional exemption to recognize all unamortized cumulative
      actuarial losses at the Transition Date as an adjustment to opening
      retained earnings for all of its employee future benefit plans.                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Under IFRS, the Companys accounting policy is to
      recognize all actuarial gains and losses, arising on its defined benefit
      pension and other non- pension post retirement plans, immediately in other
      comprehensive earnings (loss).                                                                                                                                                                                                                                                                                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The cumulative effect of the above on the Company's
      balance sheet was to decrease employee future benefits assets by $15
      million at September 24, 2011 (September 26, 2010 - $6 million), and
      increase the employee future benefits liabilities by $117 million
      (September 26, 2010 - $61 million), which resulted in a corresponding
      increase to deficit of $132 million (September 26, 2010 - $67 million)
      .                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The impact on total comprehensive loss for the year ended
      September 24, 2011 increased by $65 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 55 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                  
|--- | -------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)

| | (f) | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Under IFRS, the warrants have been classified as a
      liability because of the possibility that they may be settled in cash in
      the event of a change of control. They are recorded at fair value with
      value being adjusted every quarter.                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The effect of the above on the Companys balance sheet
      resulted in a decrease in share capital of $6 million at September 24,
      2011 (September 26, 2010 - $6 million), and resulted in an increase of the
      other long-term liabilities by a negligible amount (September 26, 2010 -
      $5 million), and a decrease of the deficit of $6 million (September 26,
      2010 - $1 million) .                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | Total comprehensive loss decreased by $5 million for the
      year ended September 24, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (g) | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | IAS 37  Provisions, Contingent Liabilities and
      Contingent Assets, has measurement differences when compared to
      previous Canadian GAAP. These measurement differences include the
      requirement to reflect the risks associated with the Companys provisions
      in either the cash flows or the discount rate.                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The effect of the above on the Companys balance sheet
      resulted in a decrease in long- term provisions of $2 million at September
      24, 2011 (September 26, 2010 - $2 million), and resulted in a decrease of
      the deficit of $2 million (September 26, 2010 - $2 million).                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | For the year ended September 24, 2011, the impact on
      total comprehensive loss was negligible.                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (h) | Contributed surplus                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The previous Canadian GAAP requires that a future income
      tax asset that was not recognized at the date of a comprehensive
      revaluation as a result of a financial reorganization be subsequently
      recognized first as a reduction of any unamortized intangible asset and
      then in a manner consistent with the revaluation adjustment recorded at
      the date of the comprehensive revaluation. Under IFRS, this recognition of
      a future income tax asset is recorded to profit and loss.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | The effect of the above on the Companys balance sheet
      resulted in a decrease in contributed surplus of $5 million at September
      24, 2011 (September 26, 2010 - $5 million), and resulted in a decrease of
      the deficit of $5 million (September 26, 2010 - $5 million).                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |     | For the year ended September 24, 2011, the impact on
      total comprehensive loss was nil.                                                                                                                                                                                                                                                                                                                                                                                                                            

- 56 -

---

|TEMBEC INC.                                              
|---------------------------------------------------------
|Notes to Consolidated Financial Statements               
|                                                         
|Years ended September 29, 2012 and September 24, 2011    
|(in millions of Canadian dollars, unless otherwise noted)
|                                                         

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|22. | Explanation of transition to IFRS
    (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | Explanation of material adjustments to the cash flow
      statements for fiscal 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    | The adoption of IFRS has had no impact on the net cash
      flows of the Company. The changes made to the consolidated balance sheet
      and to the consolidated statements of net earnings (loss) have resulted in
      reclassifications of various amounts on the consolidated statements of
      cash flows. There have been no significant changes to the net cash flows,
      other than the Companys accounting policy choice to classify interest
      paid as financing activity under IFRS compared to operating activity under
      previous Canadian GAAP.

| |                                    |   | September 24, 2011 | 
| | ---------------------------------- | - | ------------------ | 
| |                                    |   | Cash flow from     | 
| |                                    |   | operating          | 
| |                                    |   | activities         | 
| | Previous Canadian GAAP             | $ | 69                 | 
| | Reclassification for interest paid |   | 25                 | 
| | Other                              |   | 5                  | 
| | IFRS                               | $ | 99                 | 

- 57 -

---