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Exhibit 99.1





Tembec Inc.

Annual Information Form



December 14, 2012For the fiscal year ended September
29, 2012

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TABLE OFCONTENTS

|ITEM 1 -                             | DATE OF ANNUAL
      INFORMATION FORM          | 5                                                              
|------------------------------------ | ---------------------------------------------- | ---------------------------------------------------------------
|ITEM 2 -                             | CORPORATE STRUCTURE                            | 5                                                              
|ITEM 3 -                             | GENERAL DEVELOPMENT
      OF THE BUSINESS      | 7                                                              
|                                     | 3.1                                            | BUSINESS OVERVIEW                                              
|                                     | 3.2                                            | THREE-YEAR HISTORY                                             
|                                     | 3.3                                            | TRENDS                                                         
|ITEM 4 -                             | NARRATIVE DESCRIPTION
      OF THE BUSINESS    | 11                                                             
|                                     | 4.1                                            | PRINCIPAL OPERATIONS                                           
|                                     |                                                | 4.1.1                                                          
|                                     |                                                | 4.1.2                                                          
|                                     |                                                | 4.1.3                                                          
|                                     |                                                | 4.1.4                                                          
|                                     | 4.2                                            | ENVIRONMENTAL AND
      SOCIAL POLICIES                        
|                                     | 4.3                                            | ENERGY                                                         
|                                     | 4.4                                            | RESEARCH AND
      DEVELOPMENT                                 
|                                     | 4.5                                            | COMPETITION                                                    
|                                     | 4.6                                            | RISK FACTORS                                                   
|ITEM 5 -                             | DIVIDENDS                                      |                                                                
|ITEM 6 -                             | GENERAL DESCRIPTION
      OF CAPITAL STRUCTURE | 31                                                             
|                                     | 6.1                                            | GENERAL DESCRIPTION OF CAPITAL
      STRUCTURE                 
|                                     | 6.2                                            | RATINGS                                                        
|ITEM 7 -                             | MARKET FOR SECURITIES OF THE
      CORPORATION | 32                                                             
|ITEM 8 -                             | DIRECTORS AND
      OFFICERS                   | 33                                                             
|                                     | 8.1                                            | INFORMATION CONCERNING DIRECTORS                               
|                                     |                                                | 8.1.1                                                          
|                                     | 8.2                                            | AUDIT COMMITTEE                                                
|                                     |                                                | 8.2.1                                                          
|                                     |                                                | 8.2.2                                                          
|                                     |                                                | 8.2.3                                                          
|                                     |                                                | 8.2.4                                                          
|                                     |                                                | 8.2.5                                                          
|                                     | 8.3                                            | INFORMATION CONCERNING NON-DIRECTOR
      OFFICERS             
|                                     | 8.4                                            | CEASE TRADE ORDERS,
      BANKRUPTCIES, PENALTIES AND SANCTIONS
|ITEM 9 -                             | LEGAL PROCEEDINGS                              | 41                                                             
|ITEM 10 -                            | TRANSFER AGENT AND
      REGISTRAR             | 41                                                             
|ITEM 11 -                            | MATERIAL CONTRACTS                             | 41                                                             
|ITEM 12 -                            | INTERESTS OF EXPERTS                           | 42                                                             
|ITEM 13 -                            | ADDITIONAL INFORMATION                         | 43                                                             
|DEFINITIONS                          | 44                                            
|SCHEDULE A AUDIT COMMITTEE CHARTER | 45                                            

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DOCUMENTS INCORPORATED BY REFERENCE

CERTAIN SPECIFICALLY IDENTIFIED PAGES OF THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2012
(THE 2012 FINANCIAL STATEMENTS) AND THE MANAGEMENTS DISCUSSION AND ANALYSIS
DATED NOVEMBER30, 2012 (THE 2012 MD&A), FILED WITH THE SECURITIES
COMMISSION OR SIMILAR AUTHORITY IN EACH OF THE PROVINCES OF CANADA, ARE
INCORPORATED BY REFERENCE INTO AND FORMAN INTEGRAL PART OF THIS ANNUAL
INFORMATION FORM (THE AIF).

GLOSSARY

Unless otherwise noted or the context otherwise indicates,
references to the Corporation in this AIF are to Tembec Inc. References
to Tembec are to, as the context may require, either the Corporation or
Former Tembec, as defined below, or the Corporation or Former Tembec together
with one or more of their respective subsidiaries (the Subsidiaries),
affiliates and its interests in joint ventures and other entities. Reference to
Tembec Industries is to Tembec Industries Inc., a wholly-owned
subsidiary of the Corporation. In addition, unless otherwise defined herein,
certain terms are defined in the Definitions section of this AIF. All dollar
figures are in Canadian dollars unless stated otherwise.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this AIF include
forward-looking statements within the meaning of securities laws. Such
statements relate, without limitation, to the Corporations or managements
objectives, projections, estimates, expectations or predictions of the future
and can be identified by words such as may, will, could, anticipate,
estimate, expect and project, the negative or variation thereof, and
expressions of similar nature. Forward-looking statements are based on certain
assumptions and analyses made by the Corporation in light of its experience,
information available to it and its perception of future developments. The
forward-looking statements contained in this AIF reflect the Corporations
expectations as of the date hereof and are subject to change after such date.
The Corporation disclaims any intention to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
unless required by applicable securities legislation.

Such statements are subject to a number of risks and
uncertainties, including, but not limited to

- The demand and prices for the products that Tembec sells;
- Fluctuations in the exchange rate of the Canadian dollar to the U.S.
  dollar and to the euro;
- Raw material availability and prices;
- Energy availability and costs;
- Labour availability and labour disruptions;
- The effect and enforcement of environmental and other governmental
  regulations;
- Levels of capital expenditures required to maintain and upgrade processes;
- Fluctuations in export taxes and/or volume restrictions imposed on lumber
  exported to the United States;
- Debt service requirements;
- Performance of pension fund assets;
- Scope of insurance coverage; and
- First Nations' land claims.

Many of these risks are beyond the control of the Corporation
and, therefore, may cause actual actions or results to materially differ from
those expressed or implied herein. In addition, other risks could adversely
affect Tembec and it is not possible to predict or assess all risks. Tembecs
actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and, accordingly,
no assurance can be given that any of the events anticipated by the
forward-looking statements will occur, or if any of them do so, what benefits,
including the amount of proceeds, Tembec will derive from them. Except as otherwise indicated, forward-looking statements
do not take into account the effect that transactions or non-recurring or other
special items announced or occurring after the statements are made may have on
Tembecs business. Such statements do not, unless otherwise specified by Tembec,
reflect the impact of dispositions, sales of assets, monetizations, mergers,
acquisitions, combinations or transactions, asset write-downs or other charges
announced or occurring after forward-looking statements are made. The financial
impact of these transactions and non-recurring and other special items can be
complex and depends on the facts particular to each of them, and cannot be
expressed in a meaningful way or in the same way Tembec presents known risks
affecting its business.

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IFRS REPORTING

Effective September 26, 2010, the Corporation 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.

An explanation of how the transition to IFRS has affected the
reported financial position, financial performance and cash flows of the
Corporation is provided in note 22 of the 2012 Financial Statements.

NON-IFRS FINANCIAL MEASURES

The following summarizes non-IFRS financial measures utilized
in the 2012 MD&A. As there is no generally accepted method of calculating
these financial measures, they may not be comparable to similar measures
reported by other companies. Adjusted EBITDA refers to earnings before interest,
income taxes, depreciation, amortization and other items. Since the Corporation
excludes other items such as gains and losses on significant asset disposals,
restructuring charges and custodial costs for permanently idled facilities, it
differs from EBITDA. Adjusted EBITDA does not have any standardized meaning
according to IFRS. The Corporation defines adjusted EBITDA as sales less cost of
sales and selling, general and administrative expenses, meaning it represents
operating earnings before depreciation, amortization and other items. The
Corporation considers adjusted EBITDA to be a useful indicator of the financial
performance of the Corporation, the business segments and the individual
business units. The most comparable financial measure is operating earnings or
loss. A reconciliation of operating earnings to the Corporation's definition of
adjusted EBITDA is provided in the 2012 MD&A.

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TEMBEC INC.ANNUAL INFORMATION FORM

|ITEM 1 - | DATE OF ANNUAL INFORMATION FORM
|-------- | -------------------------------

This AIF is dated as of December 14, 2012. Except as otherwise
indicated, the information contained in this AIF is stated as at September 29,
2012.

|ITEM 2 - | CORPORATE STRUCTURE
|-------- | -------------------

On February 29, 2008, the former Tembec Inc. (Former
Tembec), completed a recapitalization transaction (the
Recapitalization).

On January 16, 2008, a new entity, Tembec Arrangement Inc., was
incorporated under the Canada Business Corporations Act to carry on business as
of February 29, 2008 under the name of Tembec Inc. As part of the
Recapitalization, Former Tembec Inc. became Tembec Holdings Inc. and Tembec
Arrangement Inc. changed its name to Tembec Inc. Former Tembec was dissolved
effective December 8, 2010. Additional information relating to the
Recapitalization may be found on SEDAR at www.sedar.com. In this AIF, all references made to
Tembec Inc. or to the Corporation refer to this new Tembec Inc. incorporated on
January 16, 2008, unless specified otherwise. References to Tembec refer to
the Corporation or Former Tembec together with one or more of their respective
subsidiaries.

The Corporations head office is located at Suite 1050, 800
René-Lévesque Blvd. West, Montreal, Québec, H3B 1X9, telephone: 514-871-0137.
Its website address is www.tembec.com.

The chart below depicts Tembecs principal facilities by
industry segment as at the date of this AIF and, where appropriate, the
Subsidiaries or affiliates that own substantially all of the assets of such
operating facilities.

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CORPORATEORGANIZATIONCHART



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|ITEM 3 - | GENERAL DEVELOPMENT OF THE BUSINESS
|-------- | -----------------------------------

|3.1 | BUSINESSOVERVIEW
|--- | ----------------

Tembec is a diversified and integrated forest products Company
with operations principally located in Canada and France. Its business segments
are forest products, specialty cellulose and chemical pulp, high-yield pulp and
paper.

Tembec can currently produce approximately 930 million board
feet of lumber, 580,000 tonnes of specialty cellulose and chemical pulp, 805,000
tonnes of High Yield pulp and 420,000 tonnes of paper. A breakdown of production
capacities by operating facility is included in the Segment Review section of
the 2012 MD&A. For the fiscal year ended September 29, 2012, Tembec had
sales of $1.7 billion, adjusted EBITDA of $64 million, an operating loss of $32
million and a net loss of $82 million. Tembecs total assets at that date were
$1.1 billion and it employed approximately 3,700 people. The segmented results
and the breakdown of sales of the Corporations products by geographic areas are
included in the Corporations 2012 Financial Statements.

Tembecs strategy is to maintain low cost, efficient operations
and utilize its technical and operating expertise to develop niche products and
markets within its business segments.

|3.2 | THREE-YEARHISTORY
|--- | -----------------

The following summarizes major events that have occurred over
the past three years:

Forest Products Segment

In Fiscal 2010, 2011 and 2012,Tembec incurred a series
of production curtailments and shutdowns, ranging from a few weeks to indefinite
periods of time, at various sawmill and engineered wood facilities. These
production curtailments and shutdowns were due to several factors, including low
product pricing resulting from declining demand, the high relative value of the
Canadian dollar versus the U.S. dollar, the internal requirement for by-product
chips and the related need to manage inventory levels and working capital.

In Fiscal 2011, Tembec permanently closed its sawmill in
Taschereau, Québec. The facility had been idle since October 2009. The majority
of the log supply was reallocated to Tembecs La Sarre and Bearn sawmills.

In Fiscal 2012, Tembec sold its Toronto (Ontario) flooring
plant assets, as well as its Muskoka and Vintage brands, for proceeds of $13
million.

In Fiscal 2012, Tembec sold its Elko and Canal Flats sawmills
located in British Columbia and the associated Crown tenures, which consisted of
approximately 1.1 million cubic meters of combined Crown, private land and
contract annual allowable cut, for proceeds of $66 million.

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Specialty Cellulose and Chemical Pulp Segment

In Fiscal 2010 and 2011, demand for specialty cellulose pulp
improved and remained favorable throughout fiscal 2012 and the mills had full
operations with no market related downtime.

While markets were favorable in 2010 and 2011 for chemical pulp
(NBSK), market conditions were significantly weaker during the most recent year.

In Fiscal 2010, Tembec completed the sale of the two Kraft pulp
mills and related operations located in Southern France to Paper Excellence B.V.
for a total consideration including assumption of debt of approximately $127
million dollars which remains subject to closing working capital adjustments.

High Yield Pulp Segment

In the first quarter of Fiscal 2010, Tembec incurred market
related downtime at its Chetwynd, BC mill totaling 67,200 tonnes due to low
pricing and the continuing strength of the Canadian dollar versus the US dollar.
A fire occurred at this facility in the fourth quarter of Fiscal 2010 which
temporarily halted production and removed a further 17,400 tonnes.

In Fiscal 2011, the unionized employees at Tembecs High Yield
pulp mill in Matane, Québec, went on strike following a breakdown in labour
discussions. Consequently, production activities at the pulp mill were
interrupted and resulted in 127 days of downtime before the mill resumed
operations in mid September 2011. Total lost annual production was approximately
81,400 tonnes.

In Fiscal 2012, Tembec inaugurated a new anaerobic treatment
facility which will produce methane biogas and greatly reduce the use of fossil
fuels at its high-yield pulp mill in Matane, Québec. Funding for the investment
was provided mainly by the Government of Canada with $19.7 million and the
Government of Québec with $6.3 million. The overall project represents a total
gross investment of $29 million - $26 million for the anaerobic facility and $3
million for the installation of the new electric boiler.

In Fiscal 2012, due to continuing low product prices and the
operations relative cost, the Chetwynd high yield pulp mill was indefinitely
idled. This mill has a rated annual capacity of 240,000 tonnes. Additionally,
during the first half of the year, market-related production curtailments
totaling 27,000 tonnes were taken at the Matane and Temiscaming mills.

Paper Segment

In Fiscal 2010, Tembec announced temporary production
curtailments and shutdown, which reduced newsprint output by 273,000 tonnes. At
the end of Fiscal 2011, the previously idled paper machine #3 at Kapuskasing,
Ontario newsprint mill was deemed to be permanently shutdown and consequently
90,000 tonnes were removed from newsprint production capacity figures provided
in this AIF. These production curtailments and shutdowns were necessary due to
low product pricing and declining demand for newsprint.

In Fiscal 2010, West Feliciana Acquisition LLC (WFA),
the entity that purchased the St. Francisville paper mill from Tembec USA LLC,
filed for creditor protection. Given the prior ranking of another creditor, the
Corporation has taken a special charge of $12 million to write off all amounts
receivable from WFA.

In Fiscal 2010, Tembec announced the permanent closure of its
newsprint mill located in Pine Falls, Manitoba.

In Fiscal 2012, Tembec sold its newsprint mill and related
assets located in Pine Falls, Manitoba, for nominal net proceeds.

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In Fiscal 2011, Tembec USA LLC filed a petition seeking relief
under Chapter 7 of the Bankruptcy Code of the United States. As a result of the
filing, Tembec reduced its consolidated accrued benefit obligations by US$4
million.

In Fiscal 2012, the Kapuskasing newsprint mill operated fully
with stable pricing available in the eastern North American markets. The board
mill operated at full capacity in both 2011 and fiscal 2012, with no market
downtime taken in either year.

Corporate

In Fiscal 2010, Tembec Industries completed a private offering
of US$255 million in aggregate principal amount of 11.25% senior secured notes
due in December 2018 (Notes). The Notes were sold in a private offering
to qualified institutional buyers as defined in Rule 144A under the U.S.
Securities Act of 1933, as amended (the Securities Act), and outside
the United States in reliance on Regulation S under the Securities Act. In March
2011, Tembec Industries completed its exchange offer to exchange up to US $255
million in aggregate principal amount of 11.25% senior secured notes due 2018
registered under the Securities Act (2018 Senior Secured Notes), for
any and all of its outstanding US $255 million Notes, which were issued in
August 2010, in transactions exempt from registration under the Securities Act.
This exchange offer followed an undertaking by Tembec Industries to file an
exchange offer registration statement with the U.S. Securities and Exchange
Commission (the SEC) with respect to the Notes issued in August 2010 to allow
for the Notes to be sold without restrictions on transfer. The proceeds from the
offering, together with cash on hand, were used to permanently repay all
outstanding indebtedness under Tembecs existing US$300 million term loan
facility, to pay prepayment premium in connection therewith and to pay fees and
expenses related to the offering.

In Fiscal 2012, Tembec Industries issued an additional US$50
million in aggregate principal amount of 11.25% senior secured notes due in
December 2018 (Additional Notes), bringing the aggregate principal
amount of 2018 Senior Secured Notes issued by Tembec Industries to US$305
million. The Additional Notes were sold in a private offering to qualified
institutional buyers as defined in Rule 144A under the Securities Act, and
outside the United States in reliance on Regulation S under the Securities Act.
In September 2012, Tembec Industries completed its exchange offer to exchange up
to US $50 million in aggregate principal amount of 11.25% Senior Secured Notes
due 2018 registered under the Securities Act, for any and all of its outstanding
US $50 million Additional Notes, which were issued in transactions exempt from
registration under the Securities Act. This exchange offer followed an
undertaking by Tembec Industries to file an exchange offer registration
statement with the SEC with respect to the Additional Notes issued in February
2012 to allow for the notes to be sold without restrictions on transfer. The
proceeds from the offering, together with cash on hand, were used for general
corporate purposes, as additional liquidity to support Tembecs capital
expenditure initiatives and to pay fees and expenses related to the offering.

The 2018 Senior Secured Notes are senior secured obligations of
Tembec Industries, secured by a first priority lien on certain of the property
and assets of Tembec Industries and certain subsidiaries of the Corporation,
other than receivables, inventory and certain intangibles upon which the note
holders have a second priority lien. The 2018 Senior Secured Notes are
guaranteed by the Corporation and certain of the other Corporations
subsidiaries.

In Fiscal 2011, the Corporation (as Guarantor), and
Tembec Industries, Tembec Enterprises Inc., A.R.C. Resins Corporation and Tembec
General Partnership (as Borrowers), entered into a financing agreement
with GE Canada Finance Holding Company and a syndicate of lenders (ABL
lenders) for a revolving credit facility of $200 million (ABL
Facility) maturing on March 4, 2016 secured by a first priority charge over
receivables and inventory of the Borrowers. Interest is based on the prime rate
or the bankers acceptance rate, as the case may be. As at September 29, 2012,
the amount available under this facility was $144 million, amount of which $65
million was drawn and $48 million was reserved for letters of credit. In April
2011, the Ontario Court of Appeal rendered a decision in the restructuring
proceedings involving Indalex Limited under the Companies Creditors Arrangement Act(CCAA).The Court of
Appeal held that defined benefit pension plan deficiency claims had priority
over security held by debtor-in-possession (DIP) lenders in the context of a
sale made under a CCAA proceeding. This decision is currently being appealed to
the Supreme Court of Canada. The agent for the ABL lenders syndicate recently
expressed concern regarding the solvency deficits of the Companys Ontario
defined benefit pension plans. In light of the uncertainty surrounding the
decision of the Ontario Court of Appeal, the ABL agent requested that the
Corporation 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 Corporation is currently under discussions with the ABL agent regarding this
request as it considers the risk to be minimal and the position of the agent to
be unwarranted.

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The Corporations French operations are supported by
receivable factoring agreements. As such, the borrowing base fluctuates
periodically, depending on shipments and cash receipts. As at September 29,
2012, the amount available under such agreements was $20 million, of which $3
million was drawn.

In Fiscal 2012 Tembec, Tembec Industries Inc. and Tembec Energy
L.P. entered into a $75-million loan with Investissement Québec, a governmental
agency, which will be used to finance a portion of the total cost of the project
to upgrade Tembecs specialty cellulose manufacturing facility in Temiscaming,
Québec which is currently estimated at $190 million (the Project). The
loan is secured by a second ranking charge over the Projects assets. Tembec has
also granted to Investissement Québec a five-year option starting on the first
loan disbursement date to acquire 3 million common shares of Tembec at a price
of $7 per share.

In Fiscal 2012, Tembec Energy L.P. entered into a $30 million
loan (IPD Loan) with Integrated Private Debt Fund III LP
(IPD), which will be used to finance the acquisition of the boiler and
the turbine required in connection with the Project. Tembec intervened to the
IPD Loan to guarantee all obligations of Tembec Energy L.P. thereunder. The IPD
Loan is secured by a first ranking charge over the Projects assets.

Other Developments

In Fiscal 2011, Tembec completed the sale of its hydro-electric
generating assets which have a capacity of approximately 7.4 megawatts, located
in Smooth Rock Falls, Ontario to Gemini-SRF Power Corporation for a total
consideration of $16.5 million.

The Corporation is proceeding with a capital expenditure
program of approximately $300 million to be spent over the next five years to
modernize the Temiscaming specialty cellulose mill. As part of the first phase,
the Corporation is undertaking an energy investment of $190 million for the
installation of a high pressure liquor recovery boiler and an electrical
turbine, which will result in the production of an additional 40 megawatts of
electricity on average. The Corporation entered into a Power Purchase Agreement
with Hydro Québec as part of the investment. Part of the Project will be
financed with $105 million of the new debt, which consists of a $75 million loan
from Investissement Québec and a $30 million loan from IPD. The Corporation
recently indicated that due to various circumstances, including the fact that
recent quotes provided by potential vendors for construction labor have
significantly exceeded the budgeted amounts, it has decided to reduce
construction activity over the winter months. As a result, the boiler start-up,
initially scheduled for December 2013, will likely be delayed by approximately
three months. The impact on the start-up of the turbine, scheduled for May 2014,
is still under review.

In Fiscal 2012, Tembec Energy L.P. has entered into a long term
power purchase contract with Hydro Québec, acting through its Hydro Québec
Distribution Division. The agreement will allow Tembec to sell to Hydro Québec,
for a 25 year term, up to 50 megawatts of the electricity generated by a new
turbine to be installed at the Temiscaming site as part of the Project.

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|3.3 | TRENDS
|--- | ------

Reference is made to the Segment Review section of the 2012
MD&A.

|ITEM 4 - | NARRATIVE DESCRIPTION OF THE BUSINESS
|-------- | -------------------------------------

|4.1 | PRINCIPALOPERATIONS
|--- | -------------------

Tembecs business is centered on the production and sale of
forest, pulp and paper products. The manufacturing assets of Tembec are located
primarily in Canada, with a fairly large presence in the eastern part of the
country, namely, Northeastern Ontario and Northwestern Québec.

Tembec has approximately 3,700 employees of which approximately
2,500 are covered by collective bargaining agreements. At the end of Fiscal
2012, there were seven agreements covering 431 employees that had expired.
During Fiscal 2013, no collective agreements will expire. The lumber and paper
businesses are North American in nature and Tembecs assets in these segments
are located in this market. The pulp businesses are more global in nature, with
Europe and China being the largest consumers. One specialty dissolving pulp mill
is located in France. The other five pulp mills are located in Canada.

The following sections provide specifics in relation to each of
Tembecs principal business segments.

|4.1.1 | Forest Products Segment
|----- | -----------------------

The Forest Products Segment produces an extensive range of
forest products focusing on two main product groups: SPF and Specialty Wood
products. For the fiscal year ended September 29, 2012, the Forest Products
Segment generated consolidated sales of $348 million as compared to $375 million
in Fiscal 2011, negative adjusted EBITDA of $16 million as compared to a
negative adjusted EBITDA of $47 million in Fiscal 2011 and an operating loss of
$4 million as compared to an operating loss of $64 million in Fiscal 2011. The
Forest Products Segments annual sales accounted for approximately 21% of
Tembecs total consolidated sales in Fiscal 2012 as compared to 22% in Fiscal
2011.

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The following table summarizes the annual operating levels of
each operating facility by product group:

SPRUCE, PINE, FIR LUMBERLocation and Product
    
    MBFStud LumberLa Sarre, QC
    
    135,000Senneterre, QC
    
    150,000Cochrane, ON
    
    110,000Kapuskasing, ON
    
    105,000Random LumberHearst, ON
    
    160,000Chapleau, ON
    
    135,000Bearn, QC
    
    110,000Finger Joint LumberCranbrook, BC
    
    25,000930,000SPECIALTY WOODLocation and Product
    
    MBFHardwood Lumber - Huntsville, ON
    
    30,00030,000ENGINEERED WOODLocation and ProductEngineered Finger Joint LumberMBFLa
      Sarre, QC -
    
    60,000Kirkland Lake, ON
    
    30,00090,000


Products and Markets

The Softwood (SPF) lumber sawmills produce various types,
species and grades of lumber which are used primarily for residential and
commercial construction. Higher value SPF lumber products include J-Grade,
TemPlusTM and TemSelectTM and machine stress rated (MSR) grades. Hardwood lumber
is used in a wide variety of applications, including furniture, flooring and
specialty residential and commercial applications. In addition, the Forest
Products Segment produced and shipped approximately 1.0 million tonnes of wood
chips in Fiscal 2012, approximately 80% of which were directed to Tembecs pulp
and paper facilities.

The SPF lumber industry is subject to both cyclical and
seasonal fluctuations in demand, which can lead to volatility in prices. North
American solid wood products demand is influenced by the general level of
economic activity, consumer confidence and interest rates. All of the
above impact on housing construction starts, which is generally regarded as the
best indicator of lumber demand. Total North American lumber demand in 2012 was
estimated at 45 billion board feet, with U.S. demand of approximately 37 billion
board feet and the balance being consumed in Canada. U.S. producers currently
supply 26 billion board feet, leaving a U.S. domestic shortfall of approximately
11 billion board feet. Canadian producers sold a total of 24 billion board feet,
shipping 9 billion board feet to the U.S. and exporting 7 billion board feet
outside North America. The remaining 8 billion board feet was consumed
domestically in Canada. Tembecs production capacity represents approximately
1.3% of North American SPF lumber capacity of 70 billion board feet.

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The Forest Products Segment business fosters a highly
diversified customer base. Products are sold by Tembecs own internal sales
force directly to large retailers, industrial end-users and distributors. Tembec
markets most of its solid wood products in North America. In Fiscal 2012, 56% of
Tembecs consolidated sales occurred in Canada, 42% in the United States and 2%
offshore.

As a result of the significant dependence on the U.S. market,
Tembecs forest products competitiveness is heavily influenced by the relative
strength of the Canadian dollar versus the U.S. dollar. Tembec competes directly
with other Canadian and U.S. producers of SPF lumber. While selling prices,
product quality and customer service are important factors affecting
competition, other factors such as fibre costs, foreign exchange rates and the
2006 Softwood Lumber Agreement (SLA) also have an impact on Tembecs
competitive position. The SLA, which came into force on October 12, 2006,
required Canadian exporters to the U.S to pay an export tax which varied
inversely with the price of lumber. Effective October 12, 2006, Tembecs Québec
and Ontario sawmills became subject to a combination of export taxes and volume
restraints or quotas that vary depending on the option selected by individual
Canadian provinces. Tembecs Eastern Canadian sawmills located in Ontario were
subject to an average export tax of 4.4% in fiscal 2012. Tembecs Québec
sawmills were subject to an average export tax of 6.9% . The difference in tax
rate is on account for an adverse arbitration award that came into effect in
March 2011. For the six months ended March 2012, Tembecs British Columbia
sawmills were subject to a 15% export tax but shipments were not restricted by
any quota. On January 18, 2011, the United States filed a request for
arbitration under the SLA alleging that Canada had been underpricing timber in
British Columbia and that such measures constituted a breach of the SLA. The
United States was seeking compensatory adjustments to the export measures in the
vicinity of $304 million. On July 18 2012, a tribunal of the London court of
International arbitration dismissed all claims by the United States. The SLA
which was set to expire on October 12, 2013 was extended for an additional two
years, to October 2015.

Timber Supply

Tembecs Canadian forestry operations are managed by the Forest
Products Group. This includes the harvesting of timber, either directly or
through contractors, and all silviculture and regeneration work required to
ensure a sustainable supply of wood fibre to the manufacturing units. The Forest
Products Group is also responsible for third-party timber purchases and wood
chip production from whole log chippers which are required to supplement total
requirements. Its main objective is the optimization of the flow of timber to
the various manufacturing units.

Tembec seeks to maximize the utilization of timberlands for
which it is responsible through efficient management and by following
sustainable forest management practices so that the timberlands provide a
continuous supply of wood for future needs. Site preparation, planting and
harvesting techniques are continually improved through a variety of methods,
such as research to improve the timber yield of the forests.

As Tembecs forestry activity in Canada is conducted primarily
on Crown land, the Forest Products Group works closely with provincial
governments to ensure harvesting plans and operations comply with established
laws & regulations.

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Québec

Tembec has timber supply and forest management agreements
(commonly known as Contrats daménagement et dapprovisionnement forestier
CAAFs) with the Ministry of Natural Resources (Québec) for the supply
of its Québec sawmills. Each CAAF has a term of 25 years and is subject to
review and renewal every five years. Renewal at the end of each five-year period
remains at the discretion of the Ministry of Natural Resources (Québec) and is
subject to its determination that Tembec has satisfied the obligations specified
under the relevant CAAF. The Province of Québec has renewed CAAFs for the five
year period starting April 1, 2008.

The Province of Québec announced reforms to its forest tenure
regime. Once the reforms become effective in 2013, available harvest volumes
will be reduced by 30%, and an undetermined portion of the current contractual
volumes will be reallocated to a timber marketing board for sale on the open
market and social economic development projects, leaving the remaining 70%
available to current license holders. In furtherance to these reforms, Tembec is
working with the Ministry of Natural Resources (Québec) to ensure the best
transition to the new Québec Forest Act in 2013. In September 2011, the Chief
Forester of the Province of Québec rendered public an update of the forestry
allowable harvest volumes for the various forest management units in the
Province of Québec. This data update is temporary for the 2013-2014 period and
does not constitute the final data for the 2013-2018 five-year period. This
temporary calculation was necessary to allow the Ministry of Natural Resources
(Québec) to plan the attribution of timber supply and determine the guaranteed
annual supply for the period 2013-2014. This update confirmed a global decrease
of the forestry allowable harvest volume in the Province of Québec in the order
of 10%.

Ontario

Tembecs cutting rights in Ontario are provided principally
through several Sustainable Forest Licenses on Crown land issued by the Ministry
of Natural Resources (Ontario). These licenses expire at different dates and
have 20-year terms and are renewable every five years. Their renewal is based on
satisfactory performance determined by independent audits and approval of the
Ministry of Natural Resources (Ontario). The Province of Ontario has approved
legislation for reforms of its forest tenure regime and where the Ministry of
Natural Resources (Ontario) will facilitate the trial of new tenure systems over
the next 5 years. Tembec will continue to monitor developments and work with the
Ministry of Natural Resources (Ontario) in connection therewith.

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Manitoba

In Fiscal 2012, Tembec sold its newsprint mill and related
assets for nominal net proceeds. Tembec is working with the Province of Manitoba
to ensure obligations are fulfilled related to the Forest Management License
currently held by Tembec. Tembec expects to complete all outstanding obligations
in Fiscal 2013.

British Columbia

Approximately 95% of all timberlands in the Province of British
Columbia are Crown lands. Rights to harvest Crown timber may be granted on
behalf of the Crown in the form of forest tenures regulated under the British
Columbia Forest Act, the Forest Practices Code of British Columbia
Act and the Forest and Range Practices Act and associated
regulations.

The forms of forest tenures held by Tembec are two
Non-Replaceable Forest Licenses (20-year term) and a Pulp Wood Agreement
(25-year term). Such licenses typically confer to their holder the right to
harvest a specific volume of timber on Crown lands. In harvesting these tenures,
Tembec is required to satisfy specific government objectives which include
forest management, protection of non-timber resources, harvesting, reforestation
and protection of archaeology and cultural heritage sites. Tembec also manages
two Managed Forests which are comprised of 103,690 ha of privately held
lands.

Timber Resources Availability

Tembec harvests timber under forest tenures held by it in
British Columbia, Ontario and Québec and has a total allowable annual cut (AAC
) of approximately 4.8 million cubic meters. Tembecs Canadian wood fibre
requirements are also met with deliveries from our Free holds, open market
purchases and exchanges on either a spot or contract basis (Business to
Business).

The following table sets out Tembecs timber resources
available as at September 29, 2012:

CUBIC METERSChetwynd (High Yield
      Pulp)Forest Licenses (non-replaceable)
    
    335,500Pulpwood Agreement 13
    
    200,000Sub-total  Crown (HYP)
    
    535,500Managed Forests (Free
      Hold)
    
    123,700Total British Columbia
    
    659,200OntarioSawmillsSustainable Forest Licenses
    
    2,471,800Sub-total  Crown
    
    2,471,800Free Hold
    
    50,000Business to Business
    
    130,000Total Ontario
    
    2,651,800QuébecSawmillsCAAF
    
    1,446,500Sub-total  Crown (sawmills)
    
    1,446,500Matane & Témiscaming
      (HYP)CAAF
    
    394,500Sub-total  Crown (HYP)
    
    394,500Total Québec
    
    1,841,000


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Stumpage and Other Charges

Provincial authorities impose stumpage fees on volumes of wood
cut on Crown land. These fees are determined under specific mechanisms in each
province. Part of the mandate of the Corporations Forest Resources Management
Group is to ensure that stumpage charged by the provincial governments reflects
the fair value of the timber being harvested.

|4.1.2 | Specialty Cellulose and Chemical Pulp
      Segment
|----- | ---------------------------------------------------

The Specialty Cellulose and Chemical Pulp segment consists of
three market pulp manufacturing facilities. The facilities are divided into two
main types. Two dissolving pulp mills produce specialty cellulose pulps. The
remaining facility produces chemical softwood kraft paper pulp (NBSK). The two
specialty cellulose pulp mills generate lignin as a by-product of the sulphite
process, which is sold to third parties. The Temiscaming mill also includes a
facility that produces ethanol as a by-product that is also sold to third
parties. The segment also includes a stand-alone resin business, which produces
powder and liquid phenolic resins at two operating sites in Québec: Temiscaming
and Longueuil. The Corporation also operates a third facility located in Toledo,
Ohio, United States which manufactures powder and liquid amino-resins. The
chemical business also purchases and re-sells pulp mill by-product chemicals
from third parties.

NBSK is produced by chemical processes. Kraft paper pulps are
used to produce a variety of high-quality paper products with specific
brightness and strength characteristics. Softwood kraft normally sells for a
premium over hardwood kraft as its longer fibres provide required strength
properties for paper producers and it costs more to produce.

In Fiscal 2012, the Specialty Cellulose and Chemical Pulp
Segment generated consolidated sales of $650 million as compared to $681 million
in Fiscal 2011, adjusted EBITDA of $92 million as compared to $140 million in
Fiscal 2011 and operating earnings of $71 million as compared to operating
earnings of $121 million in Fiscal 2011.

The following table summarizes the products and current
capacity levels of each facility by main type:

Location and ProductTonnesSpecialty cellulose PulpsTemiscaming, QC  Specialty
      cellulose and
    
    160,000Commodity
      Dissolving PulpTartas, France  Specialty
      cellulose Pulp
    
    150,000310,000Chemical PulpsSkookumchuck, BC
      - NBSK
    
    270,000


Products and Markets

The specialty cellulose pulp produced at the two pulp mills is
high purity cellulose utilized in a wide variety of specialized products such as
pharmaceuticals, food additives, and industrial chemicals. The Temiscaming
specialty cellulose pulp mill also produces ′′viscose grade pulp, which is
utilized in the production of viscose staple fibre, which in turn is used to
produce rayon for the textile industry.

The chemical pulp market is international in nature, with large
volumes of pulp moving duty-free between net-producing regions and net-consuming
regions. Global market demand for this pulp in 2012 was approximately 53 million
tonnes. North America and Latin America are the largest producing regions with
respective capacity of 16 million tonnes and 17 million tonnes. Western Europe,
including Nordic countries can produce 12 million tonnes. Western Europe is the
largest consuming region at 16million tonnes per year, followed by China
at 14 million tonnes per year and North America at 7million tonnes per
year.

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Tembec markets its specialty and chemical pulp on a world-wide
basis, primarily through its own sales force, with a network of offices in
Toronto, Canada, Dax, France, and Beijing, China. This is consistent with
Tembecs strategy of selling directly to customers and establishing long-term
strategic relationships. Sales from the Specialty Cellulose and Chemical Pulp
Segment represented approximately 39% of Tembecs total consolidated sales in
Fiscal 2012.

Fibre Supply

The two North American pulp mills purchased approximately
852,000 bone dry tonnes of wood chips in fiscal 2012, up from 845,000 in the
prior year. Of this amount, approximately 49% was supplied by the Forest
Products segment, compared to 67% in the prior year. This volume is
significantly lower for 2012 as the BC sawmills were sold and were only
considered internal suppliers for the first 6 months. The remaining requirements
were purchased from third parties under contracts and agreements of various
durations. The pulp mill located in Southern France purchased approximately
287,000 bone dry tonnes of wood in Fiscal 2012 as compared to 308,000 bone dry
tonnes in the prior year. The fibre is sourced from many private landowners.

|4.1.3 | High Yield Pulp Segment
|----- | -----------------------

The High Yield Pulp Segment consists of three facilities
manufacturing hardwood high yield paper pulp.

In Fiscal 2012, the High Yield Pulp Segment generated
consolidated sales of $322 million as compared to $348 million in Fiscal 2011,
negative adjusted EBITDA of $29 million as compared to negative adjusted EBITDA
of $3 million in Fiscal 2011 and an operating loss of $92 million as compared to
an operating loss of $14 million in Fiscal 2011.

The following table summarizes the products and current
capacity levels of each facility

Location and Product**Tonnes**Hardwood High YieldTemiscaming, QC
    
    315,000Matane, QC
    
    250,000Chetwynd, BC1
    
    240,000Total
    
    805,000


Products and Markets

High-yield market pulps have been produced in North America
since the mid 1980s. Initially, most high-yield pulps were manufactured with
softwood and utilized in tissue and towel applications, where their superior
bulk and absorbency are desired characteristics. However, Tembec has always
maintained a strategy of targeting the use of high-yield pulps in paper and
board production. The strategy led to the development of hardwood high-yield
grades made from birch, aspen and maple. Although high-yield pulps are lower
than kraft pulps in tensile and tear strength, they offer advantages in bulk and
opacity.

The high-yield pulp market is relatively small compared to the
chemical pulp market. At approximately 5 million tonnes, it is less than one
tenth the size. Canada is the principal producer at 2 million tonnes per year of capacity, followed by Western Europe at 1 million tonnes. The
principal market is China which consumes 2 million tonnes, followed by other
Asian countries and Western Europe which consume 1 million tonnes each.

_________________________________________1 On
September 16, 2012, Tembec indefinitely idled its high-yield pulp mill in
Chetwynd, British Columbia due to market related conditions.

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Tembec markets its high-yield pulp mainly to Asian and European
destinations, primarily through its own sales force, with a network of offices
in Toronto, Canada, Dax, France, and Beijing, China. This is consistent with
Tembecs strategy of selling directly to customers and establishing long-term
strategic relationships. Sales from the High-Yield Pulp Segment represented
approximately 19% of Tembecs total consolidated sales in Fiscal 2012.

Fibre Supply

Tembecs High Yield Pulp mills procured 707,600 bone dry tonnes
of wood chips in Fiscal 2012. Of this amount, approximately 24% was supplied by
the Forest Products Segment.Theremainder was purchased from
third parties under contracts and agreements of various durations.

|4.1.4 | Paper Segment
|----- | -------------

The Paper Segment currently consists of two facilities with a
total of three paper machines. The mill located in Kapuskasing, Ontario,
produces newsprint on two machines. The facility located in Temiscaming, Quebec,
produces multi-ply coated bleached board on one machine. In Fiscal 2012, Tembec
sold its Pine Falls Manitoba Newsprint Mill and related assets. For Fiscal 2012,
the Paper Segment generated consolidated sales of $346 million as compared to
$339 million in Fiscal 2011, adjusted EBITDA $37 million as compared to EBITDA
of $29 million in Fiscal 2011 and operating earnings of $35 million as compared
to operating earnings of $26 million in Fiscal 2011.

The following table summarizes the products and current
capacity levels of each facility:

Location and ProductTonnesCoated
      Bleached BoardTemiscaming,
      QC
    
    180,000NewsprintKapuskasing,
      ON
    
    240,000Total
    
    420,000


Products and Markets

Tembecs coated bleached board sales focus is on lightweight,
fully bleached coated board used in commercial printing. Target markets include
book cover, directory cover, lightweight premium packaging and coated
linerboard. The board is sold primarily in North America through its own sales
force located in the U.S. and Canada. Board is also sold to merchants and large
commercial printers.

Newsprint is used primarily for the publication of daily
newspapers. It is generally considered to be a commodity product, having a
uniform definition and few distinct differences. Newsprint demand is driven
primarily by the requirements of daily newspapers. Canadian manufacturers of
newsprint are very dependent on export markets, particularly the U.S. market. In
calendar year 2012, total North American newsprint demand is expected to be
approximately 4.9 million tonnes with the U.S. market consuming approximately
4.2 million tonnes. Another 1.9 million tonnes will be shipped to export markets
outside North America. U.S. capacity is 3.0 million tonnes while Canadian
newsprint capacity is 4.0 million tonnes of the approximate total 7.0 million
tonnes of capacity in North America. Tembecs newsprint capacity represents
approximately 3.4% of total North American production capacity.

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The focus of the Paper Segment is the North American market
which accounted for 94% of consolidated sales in Fiscal 2012, with the U.S.
representing 77% of consolidated sales. For Fiscal 2012, the Paper Segment
represented 21% of the Corporations consolidated sales.

Fibre Supply

The Paper Segments newsprint mill purchased 238,500 bone dry
tonnes of virgin fibre in the last fiscal year, of which approximately 80% was
internally sourced.

The coated bleached board mill utilizes a combination of
chemical kraft high yield pulps to produce a three-ply sheet. During Fiscal
2012, the mill utilized 17,300 tonnes of NBSK supplied by the Corporations
Skookumchuck pulp mill. The mill also consumed 60,000 tonnes of high-yield pulp
supplied by the Temiscaming mill.

|4.2 | ENVIRONMENTAL ANDSOCIALPOLICIES
|--- | -------------------------------

Tembec is committed to demonstrating responsible stewardship of
resources and continuous improvement of its environmental performance. Tembecs
objectives are to:

- Maintain compliance with its corporate principles and environmental
  policy;
- Comply with all applicable environmental legislation and continually
  improve its environmental performance;
- Integrate sustainable development into its business and operating plans;
- Respond effectively to environmental issues; and
- Maintain recognized environmental certifications.

Tembecs environmental policy is available on the Corporations
website at www.tembec.com

Environmental Management Programs:

These objectives have been incorporated into the Environmental
Management Programs , which minimize the impact of manufacturing activities and
forest operations on the environment. These EMPs are administered under an
Environmental Management System (EMS) in accordance with ISO 14001
standard.

In 2012, a certifiable EMS is in place in our manufacturing and
forest operations. Each year, Tembec fully reviews all progress accomplished
through its EMS to ensure continuous improvement in its environmental
performance.

Environmental Management System (ISO 14001)

Every business unit must implement an appropriate EMS, in
accordance with the ISO 14001 standard. Teams of internal auditors audit all EMS
procedures to ensure compliance with ISO 14001 and Tembecs environmental
requirements. Tembecs operating pulp manufacturing are certified to the ISO
14001 standard. Also, audits are conducted at each site to ensure compliance
with all applicable laws and regulations.

Integration of the OHSAS-18001 Health and Safety through the
EMS (ISO 14001) Environmental System

The implementation of the OHSAS 18001 Health and Safety
Management System continues across Tembec. The majority of our mills continue to
maintain the system in place and perform internal audits regularly. Tembec will
continue to monitor the implementation for those who are not at 100%.

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Environmental Performance

Tembec has developed environmental performance indicators to
continually monitor the progress of each of its business units towards the
achievement of EMS as well as regulatory standards.

On the whole, Tembecs environmental performance is in
compliance with statutory and regulatory requirements governing atmospheric
emissions, effluent and solid waste. In fact, through its EMS, Tembec exceeds in
many cases statutory and regulatory requirements.

Over the years, Tembec has implemented voluntary measures to
protect the environment. Since 1990, Tembec has been taking action to
significantly reduce its greenhouse gas emissions, and has actively supported
and promoted the Kyoto Protocol. Tembec has established specific objectives and
targets to reduce energy consumption and greenhouse gas emissions at its mills,
and has set goals to improve biomass recovery as a source of energy.

Tembecs initiatives, including those described above, have
already led to significant improvements in its overall environmental
performance. Moreover, the implementation of Tembecs EMS at all sites will
ensure continuous improvement of Tembecs environmental performance in
accordance with its strong commitment to environmental protection and
sustainable development.

In Fiscal 2012, Tembec spent approximately $4,212,000 on
capital projects as part of its commitment to continuously improve its
environmental performance as per its policy and to comply with applicable
environmental requirements.

Forest Certification

The portfolio of Forest Stewardship Council (FSC)
forest management certificates held by Tembec and partners in Canada consists of
seven certified forests across more than 8.5 million hectares forming a
substantial base of certified wood supply for company facilities. As a leader in
the achievement of FSC forest certification in Canada, Tembec is active in
renewing forest certificates consistent with the five year anniversary date. In
2013, the Ministry of Natural Resources in Québec will assume accountability for
FSC certification. Tembec is working closely with the Ministry of Natural
Resources (Québec) personnel in support of that objective.

Assessment of external fibre supply sources is guided by
Tembecs Fibre Procurement Policy (2006). Tembec provides evidence of Chain of
Custody certification to customers to enable them to produce and label their own
products as certified. All of Tembec facilities are linked to a corporate
multi-site FSC chain of custody and FSC Controlled Wood system. All of Tembec
pulp mills additionally have Program for Endorsement of Forest Certification
(PEFC) Chain of Custody (COC) certification. These independent
third party audited systems ensure Tembec fibre procurement personnel source
fibre from known sources with certainty and assurance.

Forest conservation, as an integral component of well managed
forests, is a key theme for the Tembec Forest Resources Management
(FRM) Group. The identification and conservation of habitat of rare,
threatened and endangered species is a strong priority across Tembecs Canadian
Boreal and British Columbia interior operations. Detailed engagement with
government and environmental organizations regarding the conservation of
woodland caribou in Ontario was undertaken in 2012. Tembec and other signatories
to the Canadian Boreal Forest Agreement (BCFA) presented a woodland caribou
conservation plan to the Ontario government in June 2012. Work to implement this
plan will continue through 2013.

Tembec is a signatory to the Canadian Boreal Initiative and the
Canadian Boreal Forest Agreement. Both initiatives bring non-government
interests together to identify strategies to advance forest conservation
initiatives and support world leading forest management practices in the
Canadian Boreal forest region.

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Tembecs boreal forest tenures are included in the scope of
these agreements and Tembec FRM personnel lead Tembecs participation.

Advocating for a strengthened integration of Ecosystem-Based
Management (EBM) principles in forest management is a strong focus for
Tembecs forest management group in Québec. Tembec continued its ongoing
involvement in EBM projects in the Abitibi Region of the Boreal Forest and in
the Mixed Forest of the Temiscaming Region.

First Nations Policy

As part of sustainable forest management and corporate social
responsibility, Tembec recognizes its operations in Canada take place on
territories on which Aboriginal People assert rights and interests. Tembec has
adopted a First Nations Policy, the purpose of which is to build and maintain
relationships with Aboriginal communities located in the vicinity of Tembec
operations. Tembecs policy addresses such priorities as capacity building,
employment, information-sharing, business relations and measures to harmonize
traditional land use and forestry operations.

To strengthen relations with specific nations and communities,
Tembec has entered into agreements with First Nations communities or Tribal
Councils across Canada. Tembec has agreements in place with Ktunaxa Nation
Tribal Council, representing four communities in southeastern British Columbia
and with three Treaty 8 communities in the vicinity of Chetwynd in northeastern
British Columbia. Tembec has entered into these agreements to promote a positive
long-term working relationship between the parties, and to identify approaches
to accommodation of community interests. These agreements are under review and
will be modified or terminated given Tembec has sold its sawmills in southern BC
and the Chetwynd facility is indefinitely closed.

In Québec, Tembec has agreements in place with Long Point First
Nation, Eagle Village First Nation, Wolf Lake First Nation, Pikogan First
Nation, Lac Simon First Nation and Timiskaming First Nation. These agreements
are in place to accommodate the traditional activities of the communities during
forestry planning and operations through the identification of areas of concern
and development of measures to harmonize. Financial support to assist the
community in engaging resource management expertise is also provided. These
agreements terminate in March 2013 and are under review pending the
implementation of the new forestry regime in Québec.

In Ontario, Tembec has partnership agreements in place with
communities or businesses associated with Missanabie Cree First Nation,
Wahgoshig First Nation, Brunswick House First Nation and Taykwa Tagamou Nation
to recognize the interests of the respective communities in participating in
forest management activities, the creation of economic opportunities and
consultation initiatives. In north central Ontario, Tembec and a unique
collaboration involving five First Nation communities called the Northeast
Superior Chiefs Forum signed a Memorandum of Understanding. The goal of the
agreement is to work collaboratively on forestry activities taking place in the
Chapleau, Ontario region. On-going, regular dialogue occurs between other First
Nation communities in northeastern Ontario and Tembec depending on the unique
interests of specific communities.

|4.3 | ENERGY
|--- | ------

Tembec is committed to operating energy efficient plants and to
making full use of its forest resources. To this end, Tembec converts waste
pulping liquors, mill effluent and biomass wastes into energy through various
processes. Tembec also plans to further improve its capacity to convert these
wastes. In Fiscal 2012, Tembec generated approximately 490,000 MWhrs of
electricity which represents approximately 16% of Tembecs total electricity
consumption.

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Skookumchuck

This Kraft pulp mill is a net exporter of electricity generated
through the combustion of mill process black liquor and biomass wastes.

Temiscaming and Kapuskasing

Both the Temiscaming and Kapuskasing mill complexes utilize
biomass boilers fired on bark, sawdust and shavings to generate approximately 4%
of their total electricity consumption.

Chapleau

The Chapleau cogeneration facility exports the bulk of its
power under a non-utility generator contract with the Ontario Power Authority.
Steam is then fed to the sawmill kilns to dry lumber. The Chapleau cogeneration
facility consumes residual biomass from the sawmill and the surrounding region.

Tartas

The Tartas mill burns both waste sulphite liquor and biomass at
its cogeneration facility. Since the commissioning of its new turbine, the
Tartas mill generates approximately 67% of its electricity needs.

Other Green Energy

Tembec also converts effluent to energy through two operating
anaerobic effluent treatment plants. Current methane consumption of approx.
156,000 GJ/year (Tembec I & II) will be increased with the completion of a
third installation at the Matane mill. Methane is used to offset fossil fuel
purchases in pulp dryers. Recovered biomass is also sold to third parties for
cogeneration purposes.

|4.4 | RESEARCH ANDDEVELOPMENT
|--- | -----------------------

Tembec considers research and development (R&D)
essential to its growth and to its long-term ability to compete successfully on
world markets. Tembecs mission of minimizing costs and encouraging innovation
while protecting the environment is backed by its history of continued research
investment. R&D activities are carried out with specialized research
centers, Canadian and foreign universities, strategic equipment and technology
developers, in conjunction with in-house development and trials. The R&D
thrust is a crucial aspect of Tembecs activities, enabling Tembec to continue
meeting its customers and other key stakeholders ever-growing expectations.
Recent research efforts are focused on further enhancing Tembecs already sound
environmental practices, improving delivered fiber costs, developing value-added
products and exploiting waste to energy opportunities.

|4.5 | COMPETITION
|--- | -----------

The lumber, pulp and paper industries are essentially commodity
markets in which producers compete primarily on the basis of price. In addition,
since the majority of Tembecs lumber, pulp and paper production is directed to
export markets, it competes on a worldwide basis against many producers with
approximately the same or larger capacity. In export markets, Tembec generally
competes with U.S., Latin American, Asian and Scandinavian producers. Some of
Tembecs competitors have lower energy and labor costs and fewer environmental
and governmental regulations to comply with than Tembec does. Others are larger
in size, allowing them to achieve greater economies of scale. Also, some of
Tembecs foreign competitors may benefit fromincentives given by
foreign governments, which may ultimately adversely affect Tembecs competitive
position.

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|4.6 | RISKFACTORS
|--- | -----------

The following information is a summary of certain risk factors
relating to the business of Tembec and is qualified in its entirety by reference
to, and must be read in conjunction with, information appearing elsewhere in
this AIF and the 2012 MD&A.

Demand and prices for Tembecs products are cyclical, which
could have a material adverse effect on its business, financial condition and
results of operations.

Demand and prices 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 increases, periods of
decreased demand due to generally reduced economic activity or product-specific
activity, inventory de-stocking by customers and fluctuations in currency
exchange rates. Tembec has in the past, and may in the future, decide to
schedule production curtailments and shutdowns as a result of weak economic
conditions, reduced demand for its products, lack of economically viable fibre,
declining demand for newsprint, reduced market prices and other factors. If
global economic conditions were to deteriorate in the future, prolonged
curtailments of production or extended shutdowns could have a material adverse
effect on its business, financial condition and results of operations. In
addition, the relatively high fixed cost component of certain manufacturing
processes, specifically in pulp and paper, requires producers to operate
facilities with target efficiency in the 80-85% range even when demand is not
sufficient to absorb all of the output. This excess production may saturate the
market and have a negative impact on product prices, further increasing the
inherent cyclicality of the industry.

Tembec does not currently engage in hedging transactions to
mitigate the impact of price volatility. However, even if Tembec were to engage
in hedging transactions, there can be no assurance that such transactions would
eliminate the risks of demand and price cyclicality and their impact on Tembecs
business, financial condition and results of operations.

Tembec is exposed to the risk of exchange rate fluctuations.

Revenues for most of Tembecs products are affected by
fluctuations in the relative exchange rates of the Canadian dollar, the U.S.
dollar and the euro. The prices for many of Tembecs products, including those
that Tembec sells in Canada and Europe, are generally driven by prices
referenced in U.S. dollars. Tembec generates approximately 1.1 billion of U.S.
dollar denominated sales annually from its Canadian operations. As a result, any
decrease in the value of the U.S. dollar and the euro relative to the Canadian
dollar reduces the amount of revenues Tembec realizes on its sales in local
currency. In addition, because Tembecs business units purchase the majority of
their production materials in local currency, fluctuations in foreign exchange
rates can significantly affect a units relative profitability when compared to
competing manufacturing sites in other currency jurisdictions.

Direct U.S. dollar purchases of raw materials, supplies and
services provide a partial offset to the impact of exchange rate fluctuations on
sales. To further reduce the risks associated with exchange rate fluctuations,
Tembec has a policy which permits hedging up to 50% of its anticipated U.S.
dollar receipts for up to 36 months in duration. Notwithstanding such policy,
Tembec does not currently engage in hedging transactions to mitigate the impact
of exchange rate fluctuations. However, if Tembec were to engage in such
transactions, there can be no assurance that it will be able to do so on
commercially reasonable terms or at all, or that such transactions will reduce
the risks associated with such fluctuations.

The availability of, and prices for, wood fibre
significantly impact Tembecs business.

Fibre is the most important raw material for the production of
wood products, pulp and paper. Regulatory developments and environmental
litigation have caused, and may cause in the future, significant reductions in
the amount of timber available for commercial harvest in Canada, thereby
increasing prices for alternative sources of wood fibre. The availability of
harvested timber may further be limited by natural and man-made events. In addition, future domestic or foreign legislation,
litigation advanced by Aboriginal groups and litigation concerning the use of
timberlands, the protection of endangered species, the promotion of forest
diversity and the response to and prevention of wildfires could also affect
timber supplies.

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In Canada, virgin fibre or timber is sourced primarily from
Crown lands through agreements with provincial authorities. In fiscal 2012,
approximately 83% of Tembecs virgin fibre and timber requirements were sourced
from Crown lands. Tembecs current agreements with provincial authorities grant
timber tenure for terms varying from 5 to 25 years and may be subject to
renewals every five years. These agreements contain commitments with respect to
sustainable forest management, silvicultural work, forest and soil renewal, as
well as cooperation with other forest users. The price and availability of
Tembecs fibre depends, in large part, on Tembecs ability to replace or renew
these agreements on acceptable terms or enter into acceptable alternative fibre
supply arrangements with provincial authorities. The terms of any replacement,
renewal or alternative arrangement are based on legislative and regulatory
provisions as well as governmental policy. Therefore, changes in legislation,
regulatory regimes or policy in the provinces in which Tembec operates, may
reduce the availability of fibre and increase costs through the imposition of
additional and more stringent harvesting, rehabilitation and silvicultural
standards or the alteration of fee structures. There can be no assurance that
Tembecs agreements with provincial authorities for the supply of fibre will be
renewed, extended or replaced in the future on acceptable terms, or at all, or
that the amount of timber that Tembec is allowed to harvest will not decrease.

Additionally, evolving tenure legislation and regulation may
have an impact on Tembecs access to fibre. The province of British Columbia
reformed its forest tenure regime in 2006 and, in July 2010 implemented a timber
pricing mechanism by which stumpage fees increasingly resemble a market pricing
system. This system may exert upward pressure on timber pricing in the mid-term,
thereby reducing profitability. Similarly, the Province of Québec recently
reformed its tenure regime. In Québec, once the reform becomes effective in
2013, it is possible that available harvest volumes will be reduced, as an
undetermined portion of the current contractual volumes will be reallocated to a
timber marketing board for sale on the open market and socio-economic
development projects. Also, Québecs new regime removes from commercial parties,
such as Tembec, authority over forest planning and harvesting. Accordingly,
Tembec may be unable to ensure that the fibre processed at its Québec mills
benefits from its current certifications, such as those provided by the Canadian
Forest Stewardship Council, or FSC.

The Province of Ontario also recently reformed its tenure
system with amendments that came into force in June 2011, but that will only be
implemented over the next five to seven years. Similar to the Québec regime, in
Ontario, new local Crown corporations (Local Forest Management Corporations)
will manage forest planning and market harvesting rights and enhanced
sustainability. Forest Licenses to manage Crown forests may be issued to
corporations formed by groups of mills and/or harvester companies. Ontario is
also moving towards a timber pricing system driven by competitive markets.
Availability of fibre and prices could be materially affected by forest tenure
reform in the provinces of British Columbia, Québec and Ontario. It is too early
to assess these and other possible effects of the reforms in British Columbia,
Québec and Ontario. To the extent the availability of fibre from Crown lands is
insufficient, Tembec will be required to increase its purchases of fibre on the
open market. Further, even if sufficient fibre is available from these Crown
lands, there can be no assurance that fibre will be available at prices that
will allow Tembec to operate its mills at desired and/or profitable levels of
production.

In addition to sourcing its fibre requirements from Crown
lands, Tembec also sources a significant amount of fibre by purchasing from
third parties pursuant to contracts and agreements of various durations and on
the open market. Tembecs dependence on external sources of fibre could increase
materially in the future as a result of, among other things, the factors
discussed above, which may limit the availability of timber Tembec harvests from
Crown lands. Fibre is a commodity and prices historically have been cyclical.
Fibre pricing is also subject to regional market influences, and Tembecs cost
of fibre may increase in particular regions in which it operates due to market
shifts in those regions. Tembecs more geographically diversified competitors
may not be affected to the same degree by such regional price volatility. Any
sustained increase in fibre prices, whether sourced from Crown lands or from third parties, could
materially increase Tembecs operating costs and thereby materially reduce
Tembecs operating margins to the extent that Tembec cannot pass through
equivalent increases in the prices for its products to its customers.
Additionally, if one or more of Tembecs major suppliers of fibre stops selling
to Tembec, Tembecs financial condition and operating results may suffer.

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Tembec is dependent on the supply of certain raw materials.

As noted above, Tembec depends on the supply of fibre. Tembec
also depends on the supply of other raw materials used in its production
facilities, including certain chemicals. Any disruption in the supply of any of
these raw materials could affect Tembecs ability to manufacture its products
and meet customer demand in a timely manner, which could thereby harm Tembecs
reputation and its results of operations. In addition, any material increase in
the cost of these raw materials could have a negative impact on Tembecs
profitability.

In addition, natural and man-made events, including forest
fires, adverse weather conditions, insect infestation, tree disease, ice storms,
prolonged drought, flooding, periodically affect the industry in which Tembec
operates. The occurrence of any of these events could have a material adverse
effect on the availability of, and could significantly increase prices for, raw
materials. One example is the mountain pine beetle, which currently poses a
significant threat to the lodge pole pine forest in the interior regions of
British Columbia. The beetle can infest lodge pole pine forests, and once
infested, pine trees typically die within one year. Lodge pole pine currently
accounts for a majority of the total timber volume harvested in British Columbia
and approximately 70% of the total timber volume harvested by Tembec in the
province over the last five years. If the outbreak continues to spread, the
potential implications include reduced fibre supply, a change in lumber product
mix, increased costs and a decrease in the quality of lumber produced.

Tembec relies heavily on third parties, typically railroads or
trucks, to transport its manufactured products and to deliver the necessary raw
materials for its production processes. If any of Tembecs transportation
providers were to fail to deliver these raw materials or manufactured products
in a timely manner and Tembec were unable to find a comparable transportation
provider in a timely manner, its reputation and customer relationships could be
adversely affected, and it may be unable to sell such products at full value, or
at all. In addition, if any of Tembecs transportation providers were to cease
operations or cease doing business with Tembec, it may be unable to replace them
at a reasonable cost.

Reductions in the availability of energy supplies or an
increase in energy costs may increase Tembecs operating costs.

Tembec is affected by the cost of natural gas and electricity.
Natural gas and electricity are important components of mill costs, especially
for high-yield pulp mills, newsprint and paper mills. For fiscal 2012, purchased
energy costs totaled approximately $125 million, 63% of which was electricity,
which accounted for 10% of the total cost of sales. The price and availability
of natural gas and electricity are influenced by a number of factors that are
often beyond Tembecs control, including mechanical failures, weather, political
factors and unanticipated or sudden increases in demand. While Tembec purchases
electricity primarily from large public utilities at rates set by regulatory
bodies, in certain other jurisdictions, electricity is deregulated, which can
lead to greater price volatility.

Tembec purchases its electricity, natural gas and other fossil
fuel requirements at market rates. To mitigate the effect of price fluctuations
on its financial performance, Tembec employs several tactics, including securing
longer term supply agreements and operational curtailments in periods of high
prices. Tembec does not currently hold any electricity or natural gas derivative
commodity contracts. If Tembec is unable to continue to purchase its natural gas
and electricity requirements for its operations on commercially reasonable
terms, Tembecs operations could be disrupted and its business, financial
condition and results of operations could be materially adversely affected.

Tembec may not be able to successfully renegotiate its
collective agreements with its unionized employees, which could affect its labor
costs and operations.

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As of September 29, 2012, Tembec had approximately 2,500 hourly
paid employees covered by collective agreements. Collective agreements governing
approximately 430 unionized employees will be under negotiation in the next
fiscal year. There is a risk, however, that Tembec may not be able to negotiate
collective agreements on acceptable terms. If Tembec is not able to renegotiate
its collective agreements, it could face a strike or work stoppage or be
obligated to pay higher wages and more benefits to union members. Any disruption
in the operations of Tembec or higher ongoing labor costs could have a material
adverse effect on its business, financial condition and results of operations.

Furthermore, at many of Tembecs facilities, as well as those
of the North American industry as a whole, reductions in employment levels due
to technological and process improvements have resulted in a workforce with
longer average years of service. This increases the cost of pensions and
benefits.

Tembec is subject to the risk of substantial environmental
liability and limitations on its operations brought about by the requirements of
environmental laws and regulations.

Tembec is subject to various federal, state, provincial and
local environmental, health and safety laws and regulations concerning such
issues as air emissions, wastewater discharges, solid and hazardous materials
and waste handling and disposal, forestry operations, endangered species,
landfill operation and closure, and the investigation and remediation of
contamination. These laws and regulations are increasingly stringent. While
Tembec believes that its facilities are and will continue to be in material
compliance with all applicable environmental laws and regulations, the risks of
substantial additional costs and liabilities related to compliance with such
laws and regulations are an inherent part of its business.

| | (i) | Marathon Pulp Inc.
| | --- | ------------------

Tembec Industries was subject to a number of orders issued by
the Ministry of the Environment (Ontario) (MOE) in connection with the
operation of a mill located in Marathon, Ontario, owned by Marathon Pulp Inc.
(MPI). MPI, formerly a joint venture between Tembec Industries and
Kruger Inc., filed a notice of intention to make a proposal under the Canadian
Bankruptcy and Insolvency Act in February 2009. MPI was deemed bankrupt in March
of that year. The MOE issued the orders primarily on the alleged ground that
Tembec Industries had management and control of the site or business of MPI at
the site (MPI Site). The orders compelled Tembec Industries to, among
other matters, safeguard the MPI Site from immediate environmental harm; to
monitor, record and report on contamination at the MPI Site; to develop and
execute plans to close waste disposal sites and an industrial lagoon; to
remediate existing contamination at the MPI Site; to address mercury and
polychlorinated biphenyls contaminated sediments in the harbour
("Harbour") adjacent to the MPI Site; and to provide financial assurance
of approximately $4.6 million for the performance of the work.

Tembec Industries appealed the MOE orders to the Environmental
Review Tribunal ("ERT") and vigorously contested the MOE orders. Tembec
Industries sought stays of the MOE orders pending the hearing of the appeals,
but the ERT was only able to grant partial stays. Tembec Industries was
compelled to comply with the unstayed portions of the MOE orders. As of
September 2012, Tembec Industries has spent a total of $16.6 million to effect
this compliance, including legal costs and a provision of $6 million for future
site remediation obligations.

On September 7, 2011, Tembec Industries, without admission of
liability, reached a settlement with the MOE regarding the MPI Site and the
Harbour, which remained subject to a certain number of conditions, all of which
were met by December 23, 2011. Other parties to the settlement included Ball
Packaging Products Canada Corp. (Ball) and Georgia Pacific LLC (GP), two
corporations with previous involvement at the MPI Site. The settlement
contemplates (i) financial contribution by Ball and GP towards remediation work
regarding the Harbour and the MPI Site, and (ii) the undertaking by Tembec
Industries to develop and implement remediation and closure plans in connection
with specifically identified environmental concerns and facilities and to
conduct ongoing monitoring activities, the cost of which is estimated to amount
to $6 million over the next several years. Tembec Industries also agreed to effect
periodic monitoring activities for a period of up to 25 years. Annual monitoring
costs are not expected to be material.

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Unless the MPI Site is sold, Tembec Industries must implement
the remediation and closure work on the MPI site. The actual cost of the
remediation and closure work may be greater than presently estimated. In the
event that conditions surface which are not contemplated in the settlement
agreement, any or all of Tembec, Ball and GP could be exposed to additional
expenses. Such further expenses could have a material adverse effect on Tembecs
business, financial condition and results of operations.

| | (ii) | Other Environmental
Matters
| | ---- | ---------------------------

In addition to costs and liabilities relating to compliance
with environmental laws and regulations, Tembec could become liable for
environmental conditions at sites where it is currently operating, sites it
formerly owned or operated and sites at which its wastes have been disposed.
Tembecs operations produce wastes, including hazardous waste, which must be
properly disposed of under applicable environmental laws. These laws can impose
clean up liability on generators of hazardous waste and other substances that
are shipped off-site for disposal, regardless of fault or the legality of the
disposal activities. Other laws may require Tembec to investigate and remediate
contamination at its properties, including contamination that was caused in
whole or in part by third parties. While Tembec believes that it can comply with
environmental legislation and regulatory requirements and that the costs of
doing so have been included within its budgeted cost estimates, it is possible
that such compliance will prove to be more limiting and costly than anticipated
as new laws, more stringent enforcement of existing requirements, or discovery
of currently unknown conditions could result in additional costs and limitations
on Tembecs operations.

In addition to potential clean up liability, Tembec may become
subject to enforcement actions and sanctions and substantial monetary fines and
penalties for violations of applicable laws, regulations or administrative
conditions. Tembec may also be subject from time to time to legal proceedings
brought by private parties or governmental agencies with respect to
environmental matters, including matters involving alleged property damage or
personal injury.

Future greenhouse gas/carbon legislation or regulations
could increase Tembecs costs of compliance with environmental laws and
regulations.

The federal government of Canada has indicated its intent to
regulate priority air pollutants and greenhouse gases (GHGs) under the
Canada Clean Air Act and the Canadian Environmental Protection Act. The forest
products sector is expected to be one of the targeted sectors for regulation
under both acts. The priority air pollutants include particulate matter, sulphur
oxides (SOx) and greenhouse gases. Under the proposed targets, Tembecs
mills may be required to reduce air pollutants, such as particulate matter, SOx
emissions and GHGs. The cost of making any such reductions is currently unknown.
Québec, Ontario and British Columbia have already passed legislation,
establishing frameworks to reduce GHGs through cap-and-trade systems. Only the
Corporations Temiscaming site in Québec would be subject in 2013 to these new
regulatory standards. Many elements of these systems, such as the entities
subject to emissions reductions and the caps to be imposed on each industrial
sector, have not yet been established in other provinces. Additionally, Canadian
federal laws and the laws of the provinces of Québec, Ontario and British
Columbia already impose mandatory GHG reporting requirements on facilities that
emit carbon dioxide equivalent (CO2e) beyond certain thresholds.

Certain provinces have also implemented carbon taxes. In
British Columbia, the carbon tax is a consumer tax imposed on all businesses and
individuals who purchase or use fuel in the province, or burn combustibles for
heat or energy. The tax rates, from July 1, 2012 to June 30, 2013, are based on
$25 per tonne of CO2 emissions from the combustion of each fuel. The tax rate
increased by $5 per tonne to $30 per tonne. Québec introduced a carbon tax in
2007, although at a smaller rate, requiring energy producers, distributors and
refiners in the province to pay about $200-million a year in taxes until 2013.
In 2013, the Temiscaming site in Québec should not be subject to the carbon tax.
Although Tembecs obligations to pay carbon taxes in British Columbia and Québec are currently not material, there is a risk that future
charges created to address environmental issues may have an adverse effect on
Tembec.

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The enactment of Canadian federal and other provincial climate
change regulation may depend on regulatory initiatives undertaken in the United
States. The United States has indicated its intention to introduce environmental
legislation and/or regulation and implement policies to reduce GHG emissions.
The U.S. Environmental Protection Agency (the EPA) issued a rule that
requires monitoring and reporting of GHG emissions annually by operators of
large emitters. The EPA also issued a final rule regulating GHG emissions from
new and modified large sources of GHG. However, since the U.S. Congress has not
enacted a cap-and-trade program, the Canadian government has followed suit and
no emission caps are expected in the near future. It is too early to determine
the overall impact that U.S. and Canadian federal or provincial regulations
and/or initiatives will have on Tembec when they come into effect.

Additional regulatory initiatives may be implemented in other
jurisdictions to address GHG emissions and other climate-change-related
concerns. If such initiatives are implemented and to the extent Tembec operates
or offers its products for sale in affected jurisdictions, it may be required to
incur additional capital expenditures, operating costs or mitigating expenses,
such as carbon taxes or other charges, to comply with any such initiatives.
Tembec cannot assure that the increased costs associated with compliance of
future environmental laws and regulations will not have a material adverse
effect on its business, financial condition and results of operations.

Increased capital expenditures could have an adverse impact
on Tembecs business, financial condition and results of operations.

The production of lumber, pulp and paper is capital intensive.
The Corporation estimates that it must invest approximately $35 million to $40
million per year on capital expenditures to avoid degradation of its current
operations. As the majority of the funding is provided by cash flow from
operations, there can be no assurance that the funds will be available to meet
all of the Corporations capital expenditure needs. Failure to reinvest can lead
to older equipment that is less productive, less reliable and more costly to
maintain and operate. The risk of technological obsolescence also increases.
Capital expenditure projects can be large in scale, requiring the Corporation to
maintain and/or acquire expertise in the design, planning and execution of major
capital projects. There are inherent risks in the capital expenditure process,
including the potential for project cost overruns, new equipment that does not
perform to anticipated or projected levels, a lengthy start-up period and
disruptions to normal operations. Due to relatively low operating cash flow
generation over the last several years, the Corporation has limited capital
expenditures. This has led to a backlog of capital expenditure projects in
many operating facilities. The Corporation is proceeding with a capital
expenditure program of approximately $300 million to be spent over the next five
years to modernize the Temiscaming specialty cellulose mill. As part of the
first phase, the Corporation is undertaking an energy investment of $190 million
for the installation of a high pressure liquor recovery boiler and an electrical
turbine, which will result in the production of an additional 40 megawatts of
electricity on average. The Corporation entered into a Power Purchase Agreement
with Hydro Québec as part of the investment. Part of project will be financed
with $105 million of new debt, which consists of a $75 million loan from
Investissement Québec and a $30 million loan from IPD. These project credit
facilities contain terms and conditions specific to the project, including
project completion commitments. If general economic conditions were to
deteriorate significantly or if the Company was unable to meet the terms of the
new project credit facilities, or if future operating performance is
significantly below expectations, the Company may have to reduce or defer its
capital expenditure plans.

Restrictions on trade through tariffs, quotas or other trade
barriers could adversely affect the ability of Tembec to access markets outside
Canada.

Tembecs financial results are highly dependent on its ability
to sell its products outside of Canada. Although Tembecs manufacturing
operations are located primarily in Canada, sales to the Canadian market
represented only 18% of its consolidated sales in fiscal 2012. Tariffs, quotas
and other trade barriers that reduce or prohibit the movement of Tembecs
products across international borders constitute an ongoing significant risk.

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Since October 12, 2006, as a result of the Softwood Lumber
Agreement, all Tembecs sawmills are subject to an export tax on shipments to
the U.S., while Québec and Ontario sawmills are also subject to an export quota.
Effective October 12, 2006, Tembecs Québec and Ontario sawmills became subject
to a combination of export taxes and volume restraints or quotas that vary
depending on the option selected by individual Canadian provinces. Tembecs
eastern Canadian sawmills, located in Québec and Ontario, were subject to export
quota limitations. Additionally, Tembecs Ontario sawmills were subject to an
average export tax of 4.4% in fiscal 2012. Tembecs Québec sawmills were subject
to an average export tax of 6.9% . The difference in tax rate is an account of
an adverse arbitration award that came into effect in March 2011. For the six
months ended March 2012, Tembecs British Columbia sawmills were subject to a
15% export tax but shipments were not restricted by any quota. The tax and
quotas may adversely affect Tembecs competitive cost position.

If new tariffs or quotas are created, or if existing tariffs
increase or quotas decrease, there can be no assurance that Tembec will be able
to effectively access foreign markets, which could have a material adverse
effect on Tembecs volume of sales and financial results.

Tembecs substantial debt could adversely affect its
financial condition and prevent it from fulfilling its obligations under its
outstanding indebtedness.

Tembec has a substantial amount of debt, which requires
significant interest and principal payments. There is no assurance that Tembecs
business will generate sufficient cash flow from operations in the future to
service Tembecs debt and meet its other ongoing obligations.

Tembecs principal term debt does not require periodic payments
for principal amortization. As the entire principal amount of US$305 million
will become due in December 2018, it is possible Tembec will not have the
required funds/liquidity to repay the principal due. Tembec may require access
to the public or private debt markets to issue new debt instruments to replace
or partially replace the existing term loan. There is no assurance that Tembec
will be able to refinance this loan on commercially acceptable terms.

The credit agreements covering Tembecs revolving and term debt
contain covenants that may limit managements ability to act in certain
circumstances. This may place restrictions on Tembecs ability to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments and investments and to sell or otherwise dispose of assets and merge or
consolidate with other entities. A failure to comply with the obligations
contained in the credit agreements governing Tembecs debt could result in
acceleration of the related debt and acceleration of debt under other
instruments that contain cross acceleration or cross default provisions.

In April 2011, the Ontario Court of Appeal rendered a decision
in the restructuring proceedings involving Indalex Limited under CCAA.The Court of Appeal held that defined benefit pension plan deficiency claims
had priority over security held by debtor-in-possession (DIP) lenders in the
context of a sale made under a CCAA proceeding. This decision is currently being
appealed to the Supreme Court of Canada. The agent for the ABL Lenders
syndicate recently expressed concern regarding the solvency deficits of the
Corporations Ontario defined benefit pension plans. In light of the uncertainty
surrounding the decision of the Ontario Court of Appeal, the ABL agent requested
that the Corporation 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 Corporation is currently under discussions with the ABL
agent regarding this request as it considers the risk to be minimal and the
position of the agent to be unwarranted. The ruling of the Supreme Court of
Canada is expected in the near term and the Corporation anticipates it will
resolve the situation. However, there can be no assurance at this time that the
decision of the Ontario Court of Appeal will not be maintained by the Supreme
Court of Canada, nor that a decision will be rendered in a timely manner. The
Corporations liquidity position at September 29, 2012, was at $140 million,
including $31 million related to the unutilized portion of the ABL. If the unutilized ABL portion was to remain unavailable
for an extended period of time, the Corporations liquidity would fall below its
stated objective of $135 million to $150 million.

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Significant changes in pension fund investment performance
or assumptions relating to pension costs, as well as increased funding
contributions, may have a material effect on Tembecs pension
obligations, the funded status of its pension plans and its pension costs.

The funded status of Tembecs pension plans is dependent upon
many factors, including changes to the level of benefits provided by the plans,
the future performance of assets set aside in trusts for these plans, the level
of interest rates used to determine obligations and minimum funding levels,
actuarial assumptions and any changes in governmental laws and regulations.
Declines in the market value of the securities and other investments held by the
plans and changes in interest rates could materially reduce the funded status of
the plans and affect the level of pension expense and required
contributions.

Tembec may not have adequate insurance for potential
liabilities.

Tembec maintains insurance to cover many of its potential
losses, and it is subject to various self-retentions and deductibles under its
insurance. Actual or claimed defects in the products Tembec distributes may give
rise to claims against it for losses and expose it to claims for damages.
Tembecs insurance may be inadequate or unavailable to protect it in the event
of a claim or its insurance coverage may be cancelled or otherwise terminated.
Tembec faces the following additional risks under its insurance coverage: (i) it
may not be able to continue to obtain insurance on commercially reasonable terms
or at all; (ii) it may be faced with types of liabilities that will not be
covered by its insurance, such as damages from environmental contamination or
terrorist attacks; (iii) the dollar amount of any liabilities may exceed its
policy limits; and (iv) it may incur losses from interruption of its business
that exceed its insurance coverage.

In addition, in the ordinary course of business, Tembec becomes
the subject of various claims, lawsuits and administrative proceedings seeking
damages or other remedies concerning its commercial operations, products,
employees and other matters, including occasional claims by individuals alleging
exposure to hazardous materials as a result of its products or operations. Some
of these claims relate to the activities of businesses that Tembec has sold, and
some relate to the activities of businesses that Tembec has acquired, even
though these activities may have occurred prior to the acquisition of such
businesses. Even a partially uninsured claim, if successful and of significant
size, could have a material adverse effect on Tembecs business, financial
condition and results of operations. To mitigate risk associated with insurance
coverage, Tembec reviews its strategy annually and assesses the various
insurance products available to achieve better coverage at the lowest cost
possible.

Aboriginal land claims may affect Tembecs
operations.

Aboriginal groups have claimed substantial portions of land in
various provinces over which they claim aboriginal title or in which they have a
traditional interest. Canadian courts have recognized that aboriginal people may
possess rights in respect of land used or occupied by their ancestors and have
encouraged the federal and provincial governments and aboriginal people to
resolve rights claims through the negotiation of treaties.

Tembec operates in territories in which aboriginal people
assert rights and interests. To accommodate the traditional activities of the
communities during forestry planning and operations, Tembec has concluded
agreements with many First Nations including, in British Columbia, the Ktunaxa
Nation Tribal Council, the West Moberly First Nation, the Saulteau First Nation,
the Blueberry First Nation, in Ontario, the Missanabie Cree First Nation, the
Wahgoshig First Nation, the Nipissing First Nation, the Taykwa Tagamou Nation,
the Northeast Superior Regional Chiefs Forum (comprised of six First Nations
which are the Brunswick House First Nation, the Chapleau Cree First Nation, the
Hornepayne First Nation, the Michipicoten First Nation, the Missanabie Cree
First Nation and Pic Mobert First Nation), and in Québec, the Timiscaming First
Nation, the Wolf Lake First Nation, the Eagle Village First Nation, the Lac
Simon First Nation, the Pikogan First Nation and the Long Point First Nation. In addition Tembec and Grand
Council of the Cree (Québec) signed a communication protocol pertaining to the
undertaking of Forest Stewardship Council (FSC) certification on the Paix des
Braves territory. These agreements identify areas of concern, develop measures
to harmonize Tembecs interests with those of aboriginal groups, outline
communications protocols and provide dispute resolution processes. Tembec also
provides financial support to assist the community in engaging resource
management expertise.

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Tembec cannot predict whether future aboriginal land claims
will affect its ability to harvest timber from its current sources, or its
ability to renew or secure other sources in the future. Furthermore, any failure
to reach an agreement, conflict or disagreement with an aboriginal group could
have a material adverse effect on its operations.

|ITEM 5 - | DIVIDENDS
|-------- | ---------

The Corporation has not paid dividends on any of its shares
since its incorporation. There is currently no restriction preventing the
Corporation from paying dividends, other than as described below, nor any
specific dividend policy. The Corporation is essentially dependent on its
operating subsidiaries to generate the funds required for any dividend payment.
The indenture dated as of August 17, 2010 (Indenture) which governs the
2018 Senior Secured Notes contains certain restrictions on the payment of
dividends. Reference is made to the section on Limitation on Restricted Payments
of the Indenture, which was filed on SEDAR on August 27, 2010 and may be found
at www.sedar.com. The GE Canada Facility
Agreement (as this expression is defined under Item 11 below) also contains
certain restrictions on the payment of dividends. Reference is made to the
Restrictive Payments section of the GE Canada Facility Agreement, which
was filed on SEDAR and may be found at www.sedar.com.

|ITEM 6 - | GENERAL DESCRIPTION OF CAPITAL STRUCTURE
|-------- | ----------------------------------------

|6.1 | GENERALDESCRIPTION OFCAPITALSTRUCTURE
|--- | -------------------------------------

The Corporation is authorized to issue an unlimited number of
common shares and an unlimited number of Class A preferred shares.

The holders of common shares are entitled to one vote for each
common share held, at any meeting of shareholders of the Corporation, other than
meetings of the holders of another class of shares, and to receive dividends and
to share in the remaining properties and assets in the event of liquidation,
dissolution or winding up of the Corporation.

As at December 14, 2012, there were 100,000,000 common shares
issued and outstanding. The Class A preferred shares may be issued in one or
more series, each series to consist of such number of shares as may be fixed by
the board of directors of the Corporation (the Board of Directors or the
Board). The Board may further fix the designation, rights, privileges,
instructions and conditions attaching to, each series of preferred shares
including, without limitation, any voting rights, dividends, terms and
conditions of redemption, purchase and conversion or other provisions. As at
December 14, 2012, there were no preferred shares issued or outstanding.

|6.2 | RATINGS
|--- | -------

Pursuant to the previously noted issuance of the 2018 Senior
Secured Notes, Moodys Investors Service, Inc. (Moodys) assigned a B3 rating to
the new long-term debt and the same level for the Corporations corporate credit
rating. Standard and Poors (S&P) assigned a Long Term Issuer Credit Rating
of B- to the 2018 Senior Secured Notes as well as to the Corporations corporate
credit rating. While Moodys has a stable outlook with respect to its rating,
S&P has a negative outlook.

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Moodys credit ratings are on a long-term debt rating scale
that ranges from Aaa to C, which represents the range from highest to lowest
quality of such securities rated. According to the Moodys rating system, an
obligation rated B3 is considered to be speculative and is subject to high
credit risk. Moody applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa in its corporate bond rating system. The
modifier 1 indicates that the issue ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

S&Ps credit ratings are on a long-term debt rating scale
that ranges from AAA to D, which represents the range from highest to lowest
qualities of such securities rated. According to the S&Ps rating system, an
obligation rated B- is more vulnerable to adverse business, financial, and
economic conditions but currently has the capacity to meet its financial
commitment. Adverse business, financial, or economic conditions will likely
impair the obligors capacity or willingness to meet its financial commitments.
The ratings from AA to CCC may be modified by the addition of a + or  sign to
show relative standing within the major rating categories.

Moodys also assigns Speculative Grade Liquidity Ratings
(SGL ratings) to corporations having a long term speculative rating.
These SGL ratings are opinions of an issuers ability to generate cash from
internal sources and the availability from external sources of committed
financing, in relation to its cash obligations over the coming 12 months. It is
on a scale between SGL-1 (the best) and SGL-4 (the worst). Moodys assigned the
Corporation a SGL-2 rating. According to Moodys rating system, issuers rated
SGL-2 possess good liquidity; they are likely to meet their obligations over the
coming 12 months through internal resources but may rely on external sources of
committed financing. The issuers ability to access committed sources of
financing is highly likely based on Moodys evaluation of near-term covenant
compliance.

The credit ratings assigned to the Corporation by the rating
agencies are not a recommendation to buy, sell or hold securities of the
Corporation and may be subject to revision or withdrawal at any time by the
credit rating agencies.

|ITEM 7 - | MARKET FOR SECURITIES OF THE CORPORATION
|-------- | ----------------------------------------

The Corporations common shares are listed on the Toronto Stock
Exchange under the symbol TMB. The following table sets forth the market price
range, in Canadian dollars, and trading volumes of the Corporations common
shares on the Toronto Stock Exchange each month since September 24, 2011.

COMMON SHARESFiscal Year fromSeptember 24, 2011to
    
    
    
    
    
    
    
    Close
    
    
    TradingSeptember 29, 2012
    
    High
    
    
    Low
    
    
    Price
    
    
    VolumesSept. 25 to 30, 2011
    
    2.69
    
    
    2.36
    
    
    2.40
    
    
    659,103October 2011
    
    3.47
    
    
    2.12
    
    
    3.20
    
    
    3,166,000November 2011
    
    3.20
    
    
    2.44
    
    
    2.67
    
    
    1,785,003December 2011
    
    3.00
    
    
    2.55
    
    
    2.79
    
    
    1,961,111January 2012
    
    3.94
    
    
    2.83
    
    
    3.75
    
    
    2,201,247February 2012
    
    4.15
    
    
    3.60
    
    
    4.00
    
    
    2,189,131March 2012
    
    4.02
    
    
    3.30
    
    
    3.48
    
    
    2,821,627April 2012
    
    3.61
    
    
    2.95
    
    
    3.02
    
    
    2,208,448May 2012
    
    3.27
    
    
    2.01
    
    
    2.11
    
    
    2,768,695June 2012
    
    2.50
    
    
    2.02
    
    
    2.30
    
    
    3,852,958July 2012
    
    2.35
    
    
    2.10
    
    
    2.18
    
    
    830,244August 2012
    
    2.50
    
    
    2.18
    
    
    2.29
    
    
    819,752Sept. 1 to 29, 2012
    
    2.34
    
    
    1.97
    
    
    2.08
    
    
    5,155,331


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|ITEM 8 - | DIRECTORS AND OFFICERS
|-------- | ----------------------

The directors of the Corporation (the Directors) are
elected annually to hold office until the next annual meeting or until a
successor is elected or appointed.

|8.1 | INFORMATIONCONCERNINGDIRECTORS
|--- | ------------------------------

The Board of Directors of the Corporation is composed of 11
members. The chairman of the Board and the majority of Directors and members of
Board committees are independent, except for the Environment, Health &
Safety Committee, which is composed of four members, two of which are
independent and two who are not considered independent, namely, Mr. James M.
Lopez (the President and Chief Executive Officer of the Corporation) and Mr.
Michel J. Dumas (Executive Vice President, Finance and Chief Financial Officer
of the Corporation).

Set forth below is information pertaining to the Directors of
the Corporation based on data furnished by the Directors. The information with
respect to ownership of common shares includes those shares for which such
persons have voting power or investment power. Voting power and investment power
are not shared with others unless specifically stated. All holdings information
presented below is given as of September 29, 2012.

NORMAN M. BETTS, New Brunswick (Canada). Mr. Betts is an
Associate Professor at the Faculty of Business Administration, University of New
Brunswick. He is also the former Finance Minister and Minister of Business with
the Province of New Brunswick. Mr. Betts chairs the Board of Starfield Resources
Inc. and chairs the audit committees of Tanzanian Royalty Exploration Corp., and
Adex Mining Inc.

Mr. Betts was a Director of Former Tembec from January 2005
until February 29, 2008 and is a Director of the Corporation since February 29,
2008. He serves as chairman of the Audit Committee.

Mr. Betts owns 146 common shares, 258 stock options and 118,618
deferred share units related to common shares of the Corporation of which 93,714
have vested.

JAMES E. BRUMM, New York (United States of America).
Currently, Mr. Brumm is President of Glastonbury Commons, Ltd., a consulting
firm. He is also an Executive Advisor to Mitsubishi International Corporation
(MIC), the North American subsidiary of Mitsubishi Corporation. At MIC, Mr.
Brumm previously served as Executive Vice President, General Counsel and as a
Director of both MIC and its parent company Mitsubishi Corporation in Japan. Mr.
Brumm is a member of the Boards of Visitors of Columbia University Law School
and California State University, Fresno, and is a board member of First Peoples
Worldwide, an organization supporting indigenous peoples communities. Mr. Brumm
also chairs the American Bird Conservancy and is a board member of The
International Crane Foundation.

Mr. Brumm was a Director of Former Tembec from April 1999 until
February 29, 2008 and is a director of the Corporation since February 29, 2008.
He serves as member of the Corporate Governance and Human Resources Committee.

Mr. Brumm owns 2,263 common shares, 3,665 stock options, and
117,098 deferred share units related to common shares of the Corporation of
which 92,194 have vested.

JAMES N. CHAPMAN,Connecticut (United States of
America). Mr. Chapman is non-executive Advisory Director of SkyWorks Capital,
LLC, an aircraft management services company, which he joined in December 2004.
Prior to SkyWorks, he was associated with Regiment Capital Advisors, LP, an
investment advisor based in Boston specializing in high yield investments, which
he joined in January 2003. Mr. Chapman serves as a member of the board of
directors of the public companies AerCap Holdings NV and Tower International, Inc. In addition, Mr. Chapman is a member of the
board of directors of some private companies. Mr. Chapman was a director of
Anchor Glass Container Corporation from August 2002 to March 2006, as well as
Chrysler LLC from September 2007 to April 2009 and American Media Inc. from
March 2009 to January 2011. In addition, Mr. Chapman serves on the Finance
Committee of the Whitby School in Greenwich. Mr. Chapman has been a Directorof the Corporation since February 29, 2008 and serves as a member of the
Corporate Governance and Human Resources Committee, as well as the Special
Committee for Strategic Purposes.

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Mr. Chapman owns 0 common shares, 0 stock options, and 116,264
deferred share units of the Corporation of which 91,360 have vested.

JAMES V. CONTINENZA, Minnesota (United States of
America). Mr. Continenza has served in senior leadership roles at a number of
companies. Mr. Continenza currently services on the boards of directors of The
Berry Company, LLC, Blaze Recycling, LLC, Neff Rental, LLC, Portola Packaging,
Inc., Southwest Georgia Ethanol, LLC, and Tembec Inc. and previously served on
the boards of directors of Anchor Glass Container Corp, Inc., Arch Wireless,
Inc., Hawkeye Renewables, LLC, MAXIM Crane Works, Inc., Microcell
Telecommunications, Inc., Rath Gibson, Inc., Rural Cellular Corp, Inc., and U.S.
Mobility, Inc.

Mr. Continenza owns 0 common shares, 0 stock options, and
323,240 deferred share units of the Corporation of which 254,275 have
vested.

MICHEL J. DUMAS,Ontario (Canada). Mr. Dumaswas
named Executive Vice President, Finance and Chief Financial Officer of the
Corporation in 1997. Mr. Dumas joined the Corporation in 1985 as Controller for
the high-yield pulp mill in Temiscaming, Québec. In 1991, he became Vice
President, Finance and Chief Financial Officer of Spruce Falls Inc., an
affiliate of the Corporation. Mr. Dumas has also acted as a Director of various
subsidiaries of the Corporation.

Mr. Dumas has been a Director of the Corporation since January
27, 2011 and is a member of the Environment, Health & Safety Committee.

Mr. Dumas owns 61,653 common shares, 15,667 stock options and
37,297 deferred share units of the Corporation.

JACQUES LEDUC,Québec (Canada). Mr. Leduc is a Director
of Terrestar Corporation since April 2006. He is a co-founder and managing
partner of Trio Capital Inc., a private equity and venture capital firm that he
started in January 2006, which invests primarily in telecommunications and new
media. He is also Chief Financial Officer and Treasurer of Terrestar Solutions
Inc. since November 2009. He served as Chief Financial Officer of Microcell
Telecommunications Inc., a nationwide wireless operator in Canada from February
2001 through November 2004, and as Vice President Finance and Director Corporate
Planning from January 1995 to February 2001. Mr. Leduc is a Chartered
Accountant.

Mr. Leduc has been a Director of the Corporation since January
27, 2011 and is a member of the Audit Committee.

Mr. Leduc owns 0 common shares, 0 stock options, and 47,912
deferred share units of the Corporation of which 31,942 have vested.

JAMES M. LOPEZ, Ontario (Canada). Mr. Lopez was
appointed President and Chief Executive Officer in January 2006 and has been a
Director of the Corporation since January 2006. Prior to being named President
and Chief Executive Officer, Mr. Lopez served as Executive Vice President and
President of the Corporations Forest Products Segment from August 2003 to
January 2006. From 1999 to August 2003, Mr. Lopez was Executive Vice President,
Forest Resource Management Group of Tembec. Mr. Lopez also holds a seat on, and
is chairman of the board of directors of the Forest Products Association of
Canada (FPAC) and is a co-chairman of the Bi-National Softwood Lumber Council and Softwood Lumber Board
between Canada and the United States. He is a member of the board of directors
of FP Innovations and he sits on the Presidents Board of Advisors for
California University of Pennsylvania.

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Mr. Lopez was a Director of Former Tembec from January 2006
until February 29, 2008 and a Director of the Corporation since February 29,
2008. He is a member of the Environment, Health & Safety Committee.

Mr. Lopez owns 66,480 common shares 16,818 stock options and
115,486 deferred share units of the Corporation.

PIERRE LORTIE,Québec (Canada). Mr. Lortie is Senior
Business Advisor at the law firm Fraser Milner Casgrain LLP. He is also a
director of Canam Group Inc., Element Financial Corporation and Arianne
Resources. Mr. Lortie also served as President of the Transition Committee of
the Agglomeration of Montreal from its inception in June 2004 to the end of its
mandate in December 2005. Mr. Lortie served as President and Chief Operating
Officer of Bombardier Transportation, Bombardier Capital, Bombardier
International, and as President of Bombardier Aerospace, Regional Aircraft. He
has also served as Chairman of Canadas Royal Commission on Electoral Reform and
Party Financing. He has been Chairman of the Board, President and Chief
Executive Officer of Provigo Inc., President and Chief Executive Officer of the
Montreal Stock Exchange and a Senior Partner of Secor Inc.

Mr. Lortie has been a Director of the Corporation since January
27, 2011 and is a member of the Environment, Health & Safety Committee.

Mr. Lortie owns 20,000 common shares, 0 stock options, and
47,912 deferred share units of the Corporation of which 31,942 have vested.

FRANCIS M. SCRICCO, Massachusetts (United States of
America). Mr. Scricco retired in November 2008 from Avaya Inc., a global
provider of communications systems and software for enterprises where, since
February 2007, he was the Senior Vice President, Manufacturing Logistics and
Procurement. Prior to that, he was President of Avaya Global Services.
Additionally, Mr. Scricco was formerly President and Chief Executive Officer of
Arrow Electronics Inc. one of the worlds largest distributors of electronic
components and computer products, as well as Inglis Ltd., Whirlpool
Corporations Canadian subsidiary. Mr Scricco is Chairman of the Board of
Directors of Visteon Corporation and is a member of the board of directors of
some private companies. Mr. Scricco began his career at The Boston Consulting
Group and was also previously a General Manager at General Electric.

Mr. Scricco has been a Director of the Corporation since
February 29, 2008 and serves as chairman of the Corporate Governance and Human
Resources Committee.

Mr. Scricco owns 100,000 common shares, 0 stock options and
116,264 deferred share units of the Corporation of which 91,360 have vested.

DAVID J. STEUART, Ontario (Canada). Mr. Steuart worked
37 years in the pulp and paper industry in senior executive positions, most
recently from August 1998 to December 2006 with Bowater Incorporated as
President, Pulp Division and as Senior Vice President. Mr. Steuart is a past
Chairman of the Ontario Forest Industries Association. From September 1993 to
July 1998, Mr. Steuart was President of the Pulp Division at Avenor Inc.

Mr. Steuart has been a Director of the Corporation since
February 29, 2008, serves as chairman of the Environment, Health and Safety
Committee.

Mr. Steuart owns 0 common shares, 0 stock options and 116,264
deferred share units of the Corporation of which 91,360 have vested.

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LORIE WAISBERG, Ontario (Canada). Mr. Waisberg is a
corporate director. Between August 2000 and October 2002, Mr. Waisberg served as
Executive Vice President, Finance and Administration for Co-Steel Inc., a steel
manufacturing company. From 1974 to August 2000, he was a partner at the Toronto
office Goodmans LLP, a Canadian law firm. Mr. Waisberg is Chairman and a trustee
of Chemtrade Logistics Income Fund and a director of Chantrell Ventures Corp.,
Metalex Ventures Limited, Primary Energy Recycling Corporation and U.S. Silver
and Gold Inc., all publicly traded companies in Canada.

Mr. Waisberg has been a Director of the Corporation since
February 29, 2008 and is a member of the Audit Committee.

Mr. Waisberg owns 4,000 common shares, 0 stock options and
116,264 deferred share units of the Corporation of which 91,360 have vested.

|8.1.1 | Independence
|----- | ------------

The Corporation considers that all Directors, except Messrs.
Lopez and Dumas, qualify as independent Directors within the meaning of National
Instrument 58-101 Disclosure of Corporate Governance Practices and all
Audit Committee members qualify as independent within the meaning of
Multilateral Instrument 52-110  Audit Committees.Mr. James M. Lopez is
President and Chief Executive Officer of the Corporation and Mr. Michel J. Dumas
is Executive Vice President, Finance and Chief Financial Officer of the
Corporation, and are, therefore, not considered independent.

|8.2   | AUDITCOMMITTEE
|----- | --------------
|      |               
|8.2.1 | General       

The Corporation has an Audit Committee which currently consists
of Messrs. Norman M. Betts (chairman), Jacques Leduc and Lorie Waisberg. All the
members of the Audit Committee are considered independent and financially
literate within the meaning of Multilateral Instrument 52-110  Audit
Committees with Messrs. Betts and Leduc possessing the professional
designation of Chartered Accountant.

|8.2.2 | Charter of the Audit
Committee
|----- | ------------------------------

The mandate of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities and as such reviews the
financial reporting process, the system of internal control and management of
financial risks, the audit process, the attestation process regarding internal
controls and the Corporations process for monitoring compliance with laws and
regulations and its own corporate policies. In performing its duties, the
committee maintains effective working relationships with the Board of Directors,
management and internal and external auditors. The Audit Committee charter is
attached hereto as Schedule A and is also posted on Tembecs website at
www.tembec.com.

|8.2.3 | Relevant Education and Experience of the Audit
      Committee Members
|----- | ----------------------------------------------------------------------

The following is a brief summary of the education and
experience of each member of the Audit Committee that is relevant to the
performance of his responsibilities as a member of the Audit Committee,
including any education or experience that has provided the member with an
understanding of the accounting principles used by the Corporation to prepare
its annual and interim financial statements.

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|Name of Audit Committee
      Member | Relevant Education and
      Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Norman M. Betts                      | Mr. Betts is a Fellow Chartered Accountant and received a
      doctor of philosophy degree in management, with a concentration in
      accounting and finance from Queens University. He is an Associate
      Professor at the Faculty of Business Administration, University of New
      Brunswick. He was made a Fellow of the New Brunswick Institute of
      Chartered Accountants in 2001. He is also the former Finance Minister and
      Minister of Business with the Province of New Brunswick.                                                                                                                            
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                     | Mr. Betts chairs the Board of Starfield
      Resources Inc. and chairs the audit committees  of Tanzanian
      Royalty Exploration Corp., Adex Mining Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Jacques Leduc                        | Mr. Leduc is a Chartered Accountant and holds a Master of
      Business Administration degree from HEC Montreal and a bachelor's degree
      in Business Administration from the Université du Québec à Montreal and
      was admitted by the Canadian Institute of Chartered Accountants in 1986.                                                                                                                                                                                                                                                                                                                                      
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                     | Mr. Leduc is Chief Financial Officer and Treasurer of
      Terrestar Solutions Inc. since November 2009. He served as Chief Financial
      Officer of Microcell Telecommunications Inc., a nationwide wireless
      operator in Canada from February 2001 through November 2004, and as Vice
      President Finance and Director Corporate Planning from January 1995 to
      February 2001.                                                                                                                                                                                                                                          
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Lorie Waisberg                       | Mr. Waisberg has participated in numerous continuing
      education programs regarding accounting issues. While practicing law for
      30 years with Goodmans LLP, he provided legal advice on a wide range of
      accounting issues. In addition, Mr. Waisberg was retained as an expert
      witness on the role and responsibilities of boards and audit committees in
      relation to financial statements. Furthermore, Mr. Waisberg served as
      Executive Vice President of Co-Steel Inc. where the Chief Financial
      Officer reported to him and he was the principal liaison for internal and
      external audit.
|                                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                     | For over 30 years, Mr. Waisberg has served on
      the audit committee of several publicly traded entities. He currently
      serves as the chair of the audit committee of the public company Metalex
      Ventures Limited and also serves on the audit committee of the public
      company Chemtrade Logistics Income Fund.                                                                                                                                                                                                                                                                                                        

|8.2.4 | External Auditor Service
Fees
|----- | -----------------------------

The following table shows fees paid to KPMG LLP in Canadian
dollars in the past two fiscal years for various services provided to the
Corporation:

Year Ended
    
    
    Year EndedSeptember 24, 2011
    
    
    September 29, 2012Audit Fees
    $
    1,096,000
    
    $
    1,292,000Audit-Related Fees
    
    137,000
    
    $
    75,000Tax Fees
    
    127,000
    
    $
    106,000Total
    $
    1,360,000
    
    $
    1,473,000


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Audit Fees

These fees include professional services rendered by the
external auditors for statutory audits of the annual financial statements and
for other audits.

Audit-Related Fees

These fees include professional services that reasonably relate
to the performance of the audit or review of Tembecs financial statements.
These services include accounting consultations related to accounting, financial
reporting or disclosure matters not classified as Audit Services; assistance
with understanding and implementing new accounting and financial reporting
guidance from rulemaking authorities; financial audits of employee benefit
plans; agreed upon or expanded procedures related to accounting records required
to respond to or comply with financial, accounting or regulatory reporting
matters.

Tax Fees

These fees include professional services for tax compliance,
tax advice and tax planning. These services include review of tax returns,
assistance with tax audits, capital structure, corporate transactions and other
special purpose mandates approved by the Audit Committee.

|8.2.5 | Policies and Procedures for the Engagement of
      Non-Audit Services
|----- | ----------------------------------------------------------------------

The Corporations Audit Committee has adopted the Pre-Approval
Policy and Procedures for Non-Audit Services Provided by External Auditors (as
defined in the External Auditor Services and Fees Policy) which sets forth the
procedures and the conditions pursuant to which these services proposed to be
performed by external auditors are pre-approved. Under the terms of the policy,
the Audit Committee has delegated to the Chairman of the Audit Committee
pre-approval authority for Non-Audit Services not previously approved by the
Audit Committee which involve the payment of fees not in excess of $50,000. Any
service approved by the Chairman is reported to the Audit Committee at its next
meeting subsequent to such pre-approval.

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|8.3 | INFORMATIONCONCERNINGNON-DIRECTOR PRINCIPALOFFICERS
|--- | ---------------------------------------------------

|Non-Director Principal
      Officers | Office with the
      Corporation                                                 | **Province/State
      and** **Country of Residence**
|------------------------------------- | --------------------------------------------------------------------------------- | -----------------------------------------------------
|Réginald Bastien                      | Corporate Controller                                                              | Québec, Canada                                       
|Chris Black                           | Executive Vice President, President,
      Paper Pulp Group                       | Ontario, Canada                                      
|Linda Coates                          | Vice President,
      Human Resources and Corporate Affairs                       | Ontario, Canada                                      
|Paolo Dottori                         | Vice President, Energy, Environment
      and Technology                          | Ontario, Canada                                      
|Patrick LeBel                         | Vice President,
      General Counsel and Corporate Secretary                     | Québec, Canada                                       
|Marcus Moeltner                       | Vice President, Business Development                                              | Ontario, Canada                                      
|Stephen J. Norris                     | Treasurer                                                                         | Québec, Canada                                       
|Mahendra Patel                        | Vice President, Engineering,
      Purchasing and Services                        | Ontario, Canada                                      
|Yvon Pelletier                        | Executive Vice
      President, President, Specialty Cellulose and Chemical Group | Québec, Canada                                       
|Dennis Rounsville                     | Executive Vice President, President,
      Forest Products Group                  | B.C., Canada                                         

During the past five years, each of the non-Director principal
officers of the Corporation (the Principal Officers) have been engaged
in their present principal occupations or in other executive capacities of the
Corporation or with related or affiliated companies, except for Patrick LeBel
who, from September 2006 to December 2009 was Senior Counsel for Tembec, Marcus
Moeltner who from May 2008 to January 2011 was Vice President, Corporate
Development of Tembec and from January 2005 to May 2008 was Vice President,
Finance of Grant Forest Products Inc., Réginald Bastien who from January 1998 to
September 2011 was Director of Taxation of Tembec and Linda Coates who from May
2011 to July 2012 was Vice President, Communications and Public Affairs, and
from January 2007 to April 2011 was a consultant in communications and public
affairs. As at September 29, 2012, the Directors and Principal Officers
beneficially owned, as a group, or exercised control or direction over, directly
or indirectly, approximately 376,089 common shares representing approximately
0.38% of the common shares outstanding.

|8.4 | Cease Trade Orders, Bankruptcies, Penalties
      and Sanctions
|--- | ---------------------------------------------------------------

To the knowledge of the Corporation and based on the
information furnished by the nominee Directors, none of the proposed nominees
for election as directors of the Corporation: (a) is, as at the date of this
Circular, or has been within the 10 years before the date of this Circular, a
director, chief executive officer or chief financial officer of any corporation
that: (i) while the nominee Director was acting in that capacity was subject to
a cease trade or similar order or an order that denied the relevant corporation
access to any exemption under securities legislation, for a period of more than
30 consecutive days; or (ii) was subject to a cease trade or similar order or an
order that denied the relevant corporation access to any exemption under
securities legislation, for a period of more than 30 consecutive days, that was
issued after the nominee Director ceased to be a director, chief executive
officer or chief financial officer and which resulted from an event that
occurred while that person acted as director, chief executive officer or chief
financial officer; (b) is, as at the date of this Circular, or has been within
the 10 years before the date of this Circular, a director or executive officer
of any corporation that: while the nominee Director was acting as director or
executive officer or within one year of that person ceasing to act in that
capacity, became bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
(c) has, within the 10 years before the date of this Circular, become bankrupt,
made a proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise with
creditors, or had a receiver, receiver manager or trustee appointed to hold his
assets, except that:

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| | i)    | Messrs. Norman M. Betts, James E. Brumm, James M. Lopez
      were directors of Former Tembec and Tembec Industries Inc. for varying
      periods of time immediately prior to the completion of the
      Recapitalization and Michel J. Dumas was a director of Tembec Industries
      Inc. prior to the Recapitalization;                                                                                                                                 
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ii)   | At the request of Tembec, Mr. James M. Lopez was a
      director of Marathon Pulp Inc. when it was declared bankrupt after failing
      to file a proposal within 30 days of filing a notice of intention to file
      a proposal under the Bankruptcy and Insolvency Act(Canada)
      ("BIA") in March 2009;                                                                                                                                              
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | iii)  | At the request of Tembec, Mr. Michel J. Dumas was a
      director of Gestion Papiers Gaspésia Inc. and its subsidiary, Papiers
      Gaspésia Inc., when they filed for protection under CCAA in January 2004.
      On July 4, 2005, the plan of arrangement submitted by Papiers Gaspésia
      Inc. and Papiers Gaspésia Limited Partnership to their creditors was
      homologated by the Court and has been fully implemented;                         
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | iv)   | At the request of Tembec, Mr. Michel J. Dumas was a
      director of Marathon Pulp Inc. when it was declared bankrupt after failing
      to file a proposal within 30 days of filing a notice of intention to file
      a proposal under the BIA in March 2009;                                                                                                                                                                                             
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | v)    | At the request of Tembec, Mr. Michel J. Dumas was a
      director of Jager Building Systems Inc. when it filed a voluntary
      assignment in bankruptcy under the BIA in September 2008;                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | vi)   | At the request of Tembec, Mr. Michel J. Dumas was a
      director of Temlam Inc. when it filed a voluntary assignment in bankruptcy
      under the BIA in September 2008;                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | vii)  | Mr. James N. Chapman was a director of Anchor Glass
      Container Corporation when it filed for bankruptcy in August 2005 due to
      high natural gas prices and excess leverage;                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | viii) | Mr. James N. Chapman was a director of Chrysler LLC when
      it filed for protection from its creditors under Chapter 11 of the United
      States Bankruptcy Code in April 2009;                                                                                                                                                                                                                                                                           
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ix)   | Mr. James N. Chapman was a director of American Media
      Inc. when it filed for voluntary petitions for relief under Chapter 11 of
      the United States Bankruptcy Code in November 2010;                                                                                                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | x)    | Mr. Jacques Leduc was an executive officer of Microcell
      Telecommunications Inc. when it filed for and received protection under
      the CCAA in January 2003;                                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | xi)   | Mr. Jacques Leduc is a director of Terrestar Corporation
      since April 2006 and is Chief Financial Officer and Treasurer of Terrestar
      Solutions Inc. and Terrestar Networks (Canada) Inc. since November 2009.
      Terrestar Corporation, Terrestar Networks (Canada) Inc. and Terrestar
      Networks Holdings (Canada) Inc. filed for and received protection under
      Chapter 11 of the United States Bankruptcy Code on October 19,
  2010;
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | xii)  | Mr. Lorie Waisberg was a director of McWatters Mining
      Inc. when it initiated insolvency proceedings in 2001 and in 2004.
      Canadian securities regulators issued cease trade orders by reason of
      McWatters Mining Inc.s failure to file required financial statements. The
      cease trade orders are no longer in effect and McWatters Mining Inc. has
      emerged from bankruptcy;                                                      

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| | xiii) | Mr. Lorie Waisberg was a director of FMF Capital Group
      Ltd. when a subsidiary of FMF Capital Group Ltd., of which Mr. Waisberg
      was not a director, conveyed its assets to a trustee to facilitate the
      orderly wind-up of its business in May 2007.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

None of the proposed nominees for election as directors of the
Corporation has been subject to: (i) any penalties or sanctions imposed by a
court relating to securities legislation or by a securities regulatory authority
or has entered into a settlement agreement after December 31, 2000 with a
securities regulatory authority; or (ii) any other penalties or sanctions
imposed by a court or regulatory body that would likely be considered important
to a reasonable security holder in deciding whether to vote for the proposed
Director.

|ITEM 9 - | LEGAL PROCEEDINGS
|-------- | -----------------

Tembec is involved in various legal proceedings relating to
contracts, commercial disputes, taxes, environmental issues, employment and
workers compensation claims and other matters. The Corporation periodically
reviews the status of these proceedings with both inside and outside counsel.
The Corporation believes that the ultimate disposition of these matters will not
have a material adverse effect on its financial position.

|ITEM 10 - | TRANSFER AGENT AND REGISTRAR
|--------- | ----------------------------

Tembecs transfer agent and registrar is Computershare Trust
Company of Canada. The register of transfers of the common shares of Tembec
maintained by Computershare Trust Company of Canada is located at its offices in
Montreal, Québec

|ITEM 11 - | MATERIAL CONTRACTS
|--------- | ------------------

On August 17, 2010 Tembec Industries entered into an Indenture
with Wilmington Trust FSB which governs the 2018 Senior Secured Notes issued by
Tembec Industries in an aggregate principal amount of US$255 million. On
February 23, 2012, Tembec Industries issued an additional US$50 million in 2018
Senior Secured Notes, bringing the aggregate principal amount of 2018 Senior
Secured Notes issued by Tembec Industries to US$305 million. The 2018 Senior
Secured Notes are guaranteed by the Corporation and certain of the Corporations
subsidiaries. The Indenture requires compliance with certain covenants that
could in certain circumstances restrict the ability of the Corporation or its
subsidiaries to incur additional indebtedness, to encumber or dispose of its
assets or make certain payments or distributions. The Indenture also includes
cross default provisions which may deem the Corporation and certain of its
subsidiaries in default under the Indentures if one or more of them were to
default on their obligations under other agreements. Reference is made to the
Indenture, which was filed on SEDAR and may be found at www.sedar.com.

On May 7, 2010, Tembec SAS, a wholly owned subsidiary of
Tembec, entered into a share purchase agreement for the sale of 100% of the
shares of Tembec Saint-Gaudens SAS and Tembec Tarascon SAS, two subsidiaries of
Tembec SAS. Paper Excellence B.V. paid 66 million Euros for the shares and
assumed 34 million euros of debt of the two European subsidiaries. Total
consideration for the transaction was approximately 100 million euros (C $127
million), which remains subject to closing working capital adjustments.
Reference is made to the share purchase agreement which was filed on SEDAR and
may be found at www.sedar.com.

On March 4, 2011, the Corporation (as Guarantor), and
Tembec Industries, Tembec Enterprises Inc., A.R.C. Resins Corporation and Tembec
GP (as Borrowers), entered into a financing agreement with GE Canada
Finance Holding Company and a syndicate of lenders for a revolving credit
facility of $200 million maturing in February, 2016 secured by a first priority
charge over receivables and inventories of the Borrowers (GE Canada
Facility Agreement). Interest is based on the prime rate or the bankers
acceptances rate, as the case may be. As at September 29, 2012, the amount
available under this facility was $144 million, amount of which $65 million was
drawn and $48 million was reserved for letters of credit. This facility requires
compliance with certain covenants that could in certain circumstances restrict
the ability of the Corporation or its subsidiaries to incur additional indebtedness, to encumber or dispose of its assets
or make certain payments or distributions. The GE Canada Facility Agreement also
includes cross default provisions which may deem the Borrowers and the Guarantor
in default under the GE Canada Facility Agreement if one or more of them were to
default on their obligations under other agreements. Reference is made to the GE
Canada Facility Agreement, which was filed on SEDAR and may be found at www.sedar.com.

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On March 9, 2012 Tembec, Tembec Industries and Tembec Energy
L.P. entered into a $75-million loan (IQ Loan) with Investissement
Québec, a governmental agency, which will be used to finance a portion of the
total cost of the project to upgrade Tembecs specialty cellulose manufacturing
facility in Temiscaming, Québec which is currently estimated at $190 million
(the Project). The loan bears interest at a rate of 5.5% compounded
yearly and is secured by a second ranking charge over the Projects assets. The
loan shall be reimbursed in equal monthly payments over a period of 12 years
starting 36 months after the initial loan disbursement and is subject to
compliance with certain covenants and undertakings customary with such types of
loans. Tembec has also granted to Investissement Québec a five-year option
starting on the first loan disbursement date to acquire three million common
shares of Tembec at a price of $7 per share. The IQ Loan also includes cross
default provisions which may deem Tembec, Tembec Industries and Tembec Energy
L.P. in default under the IQ Loan if any of them were to default on their
obligations under other agreements. Reference is made to the IQ Loan which was
filed on SEDAR and may be found at www.sedar.com.

On March 16, 2012 Tembec Energy L.P., entered into a long-term
power purchase contract with Hydro-Québec acting through its Hydro-Québec
Distribution division. The agreement will allow Tembec Energy L.P. to sell to
Hydro-Québec, for a 25-year term, up to 50 megawatts of the electricity
generated by a new turbine to be installed at its Temiscaming mill at green
energy rates of $106 MW/hour, indexed annually with Consumer Price Index. (CPI)
Reference is made to the power purchase contract which was filed on SEDAR and
may be found at www.sedar.com.

On June 29, 2012, Tembec Energy L.P. entered into a $30 million
loan (IPD Loan) with Integrated Private Debt Fund III LP
(IPD), which will be used to finance the acquisition of the boiler and
the turbine required in connection with the Project. Tembec intervened to the
Loan to guarantee all obligations of Tembec Energy LP thereunder. The IPD Loan
is secured by a first ranking change over all the Projects assets. The interest
rate on the IPD Loan will be the greater of 6.35% and the yield on equivalent
terms Government of Canada bonds plus 4.25% at the date the funds are advanced.
The loan shall be reimbursed in blended monthly installments 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 and is subject to compliance with certain covenants and undertakings
customary with such types of loans. The IPD Loan also includes cross default
provisions which may deem Tembec and Tembec Energy L.P. in default under the IPD
Loan if any of them were to default on their obligations under other agreements.
Reference is made to the IPD Loan, which was filed on SEDAR and may be found at
www.sedar.com .

|ITEM 12 - | INTERESTS OF EXPERTS
|--------- | --------------------

KPMG LLP are the external auditors of the Corporation who
prepared the Independent Auditors' Report to the shareholders dated November 30,
2012, with respect to the 2012 Financial Statements consisting of consolidated
balance sheets as of September 29, 2012, September 24, 2011 and September 26,
2010 and the consolidated statements of net earnings (loss), comprehensive
earnings (loss), changes in shareholders equity and cash flows for the years
ended September 29, 2012 and September 24, 2011. KPMG LLP is independent with
respect to Tembec within the meaning of the Code of Ethics of the Comptables
professionels agréés du Québec.

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|ITEM 13 - | ADDITIONAL INFORMATION
|--------- | ----------------------

Additional information relating to Tembec, including the
documents incorporated by reference in this AIF, may be found on SEDAR at
www.sedar.com.

Additional information, including Directors and Executive
Officers remuneration and indebtedness, principal holders of the Corporations
securities and securities authorized for issuance under equity compensation
plans, where applicable is contained in the Management Information Circular
prepared in connection with the Annual and Special Meeting of Shareholders of
the Corporation to be held on January 31, 2013. Additional financial information
is provided in the Corporations 2012 Financial Statements and 2012 MD&A.

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DEFINITIONS

ADMT Air Dryed Metric Tonne.

BIA Bankruptcy and Insolvency Act
(Canada).

Biomass  Bark and residual wood waste used as fuel to
operate cogeneration facilities or boilers.

Board feet  The plural of board foot; a board foot is
calculated by multiplying 1 x 12 x 12 = 1 foot board measure gross count.
Lumber is then finished (planed/sanded) to a smaller size and sold based on the
original gross count. The difference between gross size and net size is
approximately 72%.

Capacity  The number of units which can be produced in
a year based on operating with the normal number of shifts and maintenance
interruptions.

Cogeneration  Generation of power in an industrial
power plant to produce both steam and electricity for in-plant use, as well as
electricity for sale to outside utility companies.

Adjusted EBITDA  Earnings before interest, income
taxes, depreciation, amortization and other items.

Effluent  Outflowing waste discharge from a pulp and
paper mill.

Hectare  2.471 acres.

ISO-14001 is an independent third party certification
that confirms that Tembecs internal Environmental Management system meets
internationally accepted standards for protecting environmental values, and that
the system is properly maintained and applied by Tembec.

Measurements

Tonne  metric ton  1,000
kilograms or 2,204 pounds (1.1023 tons).

MBF  One thousand board feet
(see board feet).

NBSK northern bleached softwood kraft pulp.

Newsprint  A printing paper whose major use is in
newspapers. It is made largely from groundwood or mechanical pulp.

Pulp the generic term describing the fibres derived
from wood. Pulp can result from a variety of pulping processes including
cooking, refining, grinding or the processing and cleaning (de-inking) of waste
paper. Pulp can be either in a wet or dry state. Types of pulp include:

Kraft pulp  chemical pulp
produced by an alkaline cooking process using sodium sulphate.

High-yield pulp  pulp produced
by a combined chemical, thermal and refining process.

Specialty cellulose pulp 
chemical pulp produced by an acid cooking process which can be either ammonia,
sodium or calcium based.

Wood chips- Small pieces of wood used to make pulp. The
wood chips are produced either from wood waste in a sawmill or a log
merchandiser or from pulp wood cut specifically for this purpose. Wood chips are
generally uniform in size and are larger and coarser than sawdust.

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SCHEDULE AAUDIT COMMITTEE CHARTER

TEMBEC INC.

|I. | OVERALL PURPOSE /
OBJECTIVES
|-- | ----------------------------

The Audit Committee (the Committee)
will assist the Board of Directors (the Board) of Tembec Inc.
(the Corporation) in fulfilling its oversight responsibilities.
The Committee will review the financial reporting process, the system of
internal control and management of financial risks, the audit process, the
attestation process regarding internal controls and the Corporations process
for monitoring compliance with laws and regulations and its own corporate
policies. In performing its duties, the Committee will maintain effective
working relationships with the Board, management, and the internal and external
auditors. The Corporation shall ensure that appropriate funding is provided to
the Committee to compensate the auditors and any other advisors engaged by the
Committee, as well as for ordinary administrative expenses.

Subject to any power (i) conferred to
the Committee under the Corporations by-laws or any applicable laws, rules or
regulations (including those of any stock exchange), or (ii) otherwise assigned
to the Committee by resolution of the Board of Directors, the Committee shall
have no decision-making authority other than as specifically contemplated in
this Charter.

|II. | COMPOSITION
|--- | -----------

The Committee shall consist of not
fewer than three directors, each of whom shall be independent, as defined in
applicable securities legislation. All members of the Committee shall be
financially literate, as defined in applicable securities legislation. Members
of the Committee shall be appointed by the Board and shall serve at the pleasure
of the Board. Unless a chairman is appointed by the Board, the members of the
Committee will select its chairman (the Chairman).

|III. | MEETINGS
|---- | --------

The Committee shall meet at least four
times annually. The Committee shall meet at least quarterly with the external
auditors and at least annually with the internal auditors to discuss any matters
that the Committee believes should be discussed, including privately held
conversations. Meetings of the Committee may be called by its Chairman or the
chairman of the Board, the external auditors or the internal auditors. Minutes
of all meetings of the Committee shall be maintained and submitted as soon as
practicable to the Board. In addition, the Committee will report to the Board on
the Committees activities at the Board meeting following each Committee
meeting.

A majority of Committee members shall
constitute a quorum.

The members of the Committee shall have
the right, for the purposes of discharging the powers and responsibilities of
the Committee, to inspect any relevant records of the Corporation and its
subsidiaries. The Committee shall also have the authority to hire independent
counsel and other advisors at the Corporations expense, if necessary to carry
out its duties and the authority to set and pay the compensation for any
independent counsel or advisor employed by the Committee. The Committee shall
also have the authority to communicate directly with internal and external
auditors.

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IV.RESPONSIBILITIES AND DUTIES

The Audit Committee shall:

Documents/Reports Review

| | (1) | Review and reassess the adequacy of this Charter
      annually, report to the Board thereon and ensure that it is reproduced in
      the annual information form on an annual basis and posted in an up-to-date
      format on the Corporations website.    
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                 
| | (2) | Review and discuss with management and the external
      auditor and, if appropriate, recommend for approval by the Board prior to
      any disclosure:                                                                                                       
| |     |                                                                                                                                                                                                                                                                 
| |     | i.                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                 
| |     | ii.                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                 
| |     | iii.                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                 
| |     | iv.                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                 
| |     | v.                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                 
| |     | vi.                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                 
| |     | vii.                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                 
| | (3) | Review any report which accompanies published financial
      statements (to the extent such a report discusses financial condition or
      operating results) for consistency of disclosure with the financial
      statements themselves.                   
| |     |                                                                                                                                                                                                                                                                 
| | (4) | Obtain an explanation from management of all significant
      variances between comparative reporting periods and an explanation from
      management for items which vary from expected or budgeted amounts as well
      as from previous reporting periods.
| |     |                                                                                                                                                                                                                                                                 
| | (5) | Review uncertainties, commitments, and contingent
      liabilities material to financial reporting.                                                                                                                                                            

External Audit

| | (6) | Recommend to the Board the firm to be proposed to the
      Corporations shareholders for appointment or reappointment as external
      auditors and recommend the fees to be paid to the external auditors. The
      external auditors are accountable to the Board and the Committee, as
      representatives of the Corporations shareholders, and the external
      auditors shall confirm same in their annual engagement letter. The
      external auditors must report directly to the Committee.                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (7) | Pre-approve all services to be provided by the external
      auditors to the Corporation or any of its subsidiaries or adopt specific
      policies and procedures for the engagement of such services,
    provided that such pre-approval policies and procedures are
      detailed as to the particular service, the Committee is informed of each
      service and the procedures do not include delegation of the Committee
      responsibilities to management. The Committee may delegate to one or more
      members of the Committee the authority to pre-approve services provided by
      external auditors, provided that such member or members must present any
      such services so approved to the full Committee at its first scheduled
      meeting following such pre-approval.

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| | (8)  | On an annual basis, review and discuss a written report
      by the external auditors detailing all factors that might have an impact
      on the auditors independence, including all services provided and fees
      charged by the external auditors.                                                                                                                                                                                                               
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (9)  | Oversee the work, review the performance of the external
      auditors and approve any proposed change of the external auditors. In such
      a case, approve the information required to be disclosed by
      regulations.                                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (10) | Approve the scope and plan of the annual audit, of the
      attest services and require the external auditors to review the quarterly
      financial statements and related documents.                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (11) | Review the audit findings and recommendations and
      managements response thereto.                                                                                                                                                                                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (12) | Review any analysis prepared by management and/or the
      external auditor setting forth significant financial reporting issues and
      judgements made in connection with the preparation of the financial
      statements, including any analysis of the effects of alternative generally
      accepted accounting principles methods on the financial
  statements.                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (13) | Review annually with the external auditors the
      acceptability and the quality of the implementation of generally accepted
      accounting principles focused on the accounting estimates and judgments
      made by management and their selection of accounting principles.                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (14) | Review any disagreement between management and the
      external auditors regarding financial reporting and, to the extent
      possible, resolve any such disagreements.                                                                                                                                                                                                                                                                                                
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (15) | At least annually consult with the external auditors out
      of the presence of management about the adequacy of internal controls
      (including the steps to be adopted in light of any material control
      deficiencies), the fullness and accuracy of the financial statements and
      any significant difficulties encountered during the course of the audit,
      including any restrictions on the scope of work or access to required
      information.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (16) | Monitor the rotation of the lead audit partner,
      concurring partner and other audit partners;                                                                                                                                                                                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (17) | Review and approve the Corporations hiring policies for
      partners, employees and former partners and employees of its present
      external auditors and of its former external
auditors.                                                                                                                                                                                                                                                                           

Internal Audit and Internal Control

| | (18) | Review any decisions related to the need for internal
      auditing, including whether this function should be outsourced and in that
      case, approve the supplier which shall not be the external
  auditors.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                    
| | (19) | Review and approve the appointment or removal of the
      director of internal audit who shall report to a senior officer other than
      the Corporate Controller.                                              
| |      |                                                                                                                                                                                                                    
| | (20) | Approve the mandate of the internal audit function, and
      review annually the internal audit plan and the corresponding
    budgets.                                                                           

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| | (21) | Ensure that management has established and maintained
      adequate internal controls and procedures for financial reporting and
      accounting, with particular emphasis on controls over computerized
      systems, and review annually a management assessment of the effectiveness
      of internal controls. In the event of a material deficiency in internal
      controls, the Committee shall work with the external auditors and internal
      auditors to resolve such deficiency.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (22) | Review significant internal audit findings,
      recommendations and managements response.                                                                                                                                                                                                                                                                                                                                                                                                        
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (23) | Ensure the coordination of the work between internal and
      external auditors.                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (24) | Ensure the internal auditor has ongoing access to the
      Chairman as well as all officers of the Corporation, particularly the
      chairman of the Board and the President.                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (25) | At least annually, undertake private discussions with
      staff of the internal audit function to establish internal audit
      independence, the level of co-operation received from management, the
      degree of interaction with the external auditor, and any unresolved
      material differences of opinion or disputes.                                                                                                                                                               

Risk Management

| | (26) | Review periodically and inquire of management, the
      internal auditors and the external auditors concerning the financial and
      business risks or exposures of the Corporation and assess the steps
      management has taken to control such risks. Business risks include, but
      are not limited to, risks in the nature of treasury-related risks
      (including foreign exchange risks), information systems-related risks,
      disclosure quality and standards relating to financial
  reporting.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financial Reporting Processes

| | (27) | In consultation with the external auditors and the
      internal auditors, review the integrity and adequacy of the financial
      reporting processes, both internal and external, including procedures for
      review of the Corporations public disclosure of financial information
      extracted or derived from its financial statements.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                      
| | (28) | Consider and approve, if appropriate, changes to the
      accounting principles and practices as recommended by the external
      auditors, management or the internal auditors.                                                                                                                                                                   

Disclosure Policy Oversight

| | (29) | Review, report and, where appropriate, provide
      recommendations to the Board on the Corporations disclosure policy and
      other related policies and procedures, and recommend changes as deemed
      appropriate. The Committee, in performing this task, will review any
      reports on or proposed amendments to the disclosure policy submitted to it
      by the Disclosure Committee.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                         
| | (30) | Assist the Disclosure Committee and the Board in
      interpreting and applying the Corporations disclosure policy and other
      related policies and procedures.                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                         
| | (31) | Oversee compliance with the Corporations disclosure
      policy.                                                                                                                                                                                                                                                                                                                                      

Legal compliance and other
responsibilities

| | (32) | Oversee that management has the proper review system in
      place to ensure that financial statements, reports and other financial
      information disseminated to governmental organizations and the public
      satisfies legal and regulatory requirements.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (33) | Review incidents of fraud, illegal acts, conflicts of
      interest and related-party transactions.                                                                                                                                                                                                                                                  
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (34) | Establish procedures for the receipt, retention and
      treatment of complaints received by the Corporation regarding accounting,
      internal accounting controls, or auditing matters, and the confidential,
      anonymous submission by employees of the Corporation of concerns regarding
      questionable accounting or auditing matters.
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (35) | Review claims or potential claims and any other legal
      matters as reported to the Committee that could have an impact on the
      financial statements.                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (36) | Review the expenses of, including the use of Corporation
      assets by officers.                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (37) | Review material matters relating to audits of
      subsidiaries.                                                                                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (38) | Review, assess and, if appropriate, recommend for
      approval by the Board any and all new borrowings.                                                                                                                                                                                                                                             
| |      |                                                                                                                                                                                                                                                                                                                                                       
| | (39) | Perform any other activities consistent with this
      Charter, the Corporations by-laws and policies and governing laws, as the
      Committee or the Board deems necessary or
appropriate.                                                                                                                                                       

Remuneration of Committee Members

| | (40) | No member of the Committee may earn fees from the
      Corporation or any of its subsidiaries other than fees for acting as a
      member of the Board or any Board committee (which fees may include cash or
      other in-kind consideration ordinarily available to directors, as well as
      all of the regular benefits that other directors receive). For greater
      certainty, no member of the Committee shall accept, directly or
      indirectly, any consulting, advisory or other compensatory fee from the
      Corporation.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 49
| | --

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