Exhibit 99.1

TEMBEC INC.
CONSOLIDATED BALANCE SHEETS

(unaudited) (in millions of Canadian dollars)

		Sept. 24,			Sept. 25,
		2011			2010
					(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	99		$	68
Cash held in trust		6			6
Accounts receivable		182			209
Inventories (note 3)		261			255
Prepaid expenses		6			7
		554			545
Fixed assets		493			498
Other assets (note 4)		44			34
Future income taxes (note 10)		16			27
	$	1,107		$	1,104
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans (note 5)	$	6		$	1
Accounts payable and accrued charges		254			238
Interest payable		8			3
Current portion of long-term debt (note 5)		18			17
		286			259
Long-term debt (note 5)		271			271
Other long-term liabilities and credits (note 6)		188			209
Shareholders' equity:
Share capital (note 7)		570			570
Contributed surplus		5			5
Deficit		(213	)		(210	)
		362			365
	$	1,107		$	1,104

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TEMBEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

Quarters and years ended September 24, 2011 and September 25, 2010
(unaudited) (in millions of Canadian dollars, unless otherwise noted)

		Quarters						Years
		2011			2010			2011			2010
Sales	$	421		$	444		$	1,743		$	1,877
Freight and other deductions		57			59			237			234
Lumber export taxes		3			2			13			10
Cost of sales		331			327			1,324			1,426
Selling, general and administrative		17			20			72			73
Share-based compensation (note 7)		(6	)		-			2			2
Depreciation and amortization		11			12			45			56
Other items (note 8)		2			9			1			13
Operating earnings		6			15			49			63
Interest, foreign exchange and other (note 9)		5			10			32			51
Exchange loss (gain) on long-term debt		11			(1	)		1			(27	)
Earnings (loss) before income taxes
and non-controlling interest		(10	)		6			16			39
Income tax expense (recovery) (note 10)		7			4			19			(15	)
Non-controlling interest		-			-			-			2
Net earnings (loss) and comprehensive earnings (loss)		(17	)		2			(3	)		52
Deficit, beginning of period		(196	)		(212	)		(210	)		(262	)
Deficit, end of period	$	(213	)	$	(210	)	$	(213	)	$	(210	)
Basic and diluted earnings (loss) in dollars per share (note 7)	$	(0.17	)	$	0.02		$	(0.03	)	$	0.52

- 2 -

TEMBEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Quarters and years ended September 24, 2011 and September 25, 2010
(unaudited) (in millions of Canadian dollars)

		Quarters						Years
		2011			2010			2011			2010
Cash flows from operating activities:
Net earnings (loss)	$	(17	)	$	2		$	(3	)	$	52
Adjustments for:
Depreciation and amortization		11			12			45			56
Unrealized foreign exchange and other		1			(8	)		(2	)		(1	)
Exchange loss (gain) on long-term debt		11			(1	)		1			(27	)
Future income tax expense (recovery) (note 10)		(1	)		4			11			(15	)
Other items (note 8)		1			9			(11	)		13
Excess cash contributions over pension expense		(6	)		(7	)		(20	)		(20	)
Other		-			1			(1	)		-
		-			12			20			58
Changes in non-cash working capital:
Accounts receivable		18			(29	)		33			(41	)
Inventories		5			(2	)		(6	)		16
Prepaid expenses		2			2			1			5
Accounts payable, accrued charges and interest payable		38			29			21			40
		63			-			49			20
		63			12			69			78
Cash flows from investing activities:
Additions to fixed assets		(28	)		(8	)		(55	)		(25	)
Proceeds on land sales and other		-			1			17			7
Proceeds on sale of French mills		-			-			-			86
Other		(6	)		-			(5	)		(1	)
		(34	)		(7	)		(43	)		67
Cash flows from financing activities:
Change in operating bank loans		4			1			5			(117	)
Cash held in trust		-			(1	)		-			(6	)
Increase in long-term debt		3			264			8			272
Repayments of long-term debt		(1	)		(311	)		(8	)		(318	)
Change in other long-term liabilities		(4	)		1			(1	)		2
Financing costs and other		2			(13	)		1			(15	)
		4			(59	)		5			(182	)
		33			(54	)		31			(37	)
Foreign exchange on cash and cash equivalents held in foreign currencies		-			2			-			-
Net increase (decrease) in cash and cash equivalents		33			(52	)		31			(37	)
Cash and cash equivalents, beginning of period		66			120			68			105
Cash and cash equivalents, end of period	$	99		$	68		$	99		$	68
Supplemental information:
Interest paid	$	1		$	6		$	25		$	29
Income taxes paid	$	1		$	-		$	1		$	-

- 3 -

TEMBEC INC.
CONSOLIDATED BUSINESS SEGMENT INFORMATION

Quarters ended September 24, 2011 and September 25, 2010
(unaudited) (in millions of Canadian dollars)

September 24, 2011
					Dissolving
		Forest			& Chemical		High-Yield					Corporate
		Products			Pulp		Pulp			Paper		& other			Consolidated
Sales:
External	$	96		$	174	$	67		$	84	$	-		$	421
Internal		25			6		9			-		2			42
		121			180		76			84		2			463
Earnings (loss) before the following:		(10	)		30		(9	)		6		2			19
Depreciation and amortization		2			5		2			1		1			11
Other items (note 8)		-			-		-			-		2			2
Operating earnings (loss)		(12	)		25		(11	)		5		(1	)		6
Net fixed asset additions		4			21		1			2		-			28

September 25, 2010
					Dissolving
		Forest			& Chemical		High-Yield					Corporate
		Products			Pulp		Pulp		Paper			& other			Consolidated
Sales:
External	$	90		$	160	$	98	$	96		$	-		$	444
Internal		23			6		6		-			1			36
		113			166		104		96			1			480
Earnings (loss) before the following:		(5	)		30		13		4			(6	)		36
Depreciation and amortization		4			6		2		-			-			12
Other items (note 8)		-			-		-		7			2			9
Operating earnings (loss)		(9	)		24		11		(3	)		(8	)		15
Net fixed asset additions		3			4		-		1			-			8

- 4 -

TEMBEC INC.
CONSOLIDATED BUSINESS SEGMENT INFORMATION

Years ended September 24, 2011 and September 25, 2010
(unaudited) (in millions of Canadian dollars)

September 24, 2011
					Dissolving
		Forest			& Chemical		High-Yield					Corporate
		Products			Pulp		Pulp			Paper		& other			Consolidated
Sales:
External	$	375		$	681	$	348		$	339	$	-		$	1,743
Internal		96			12		30			-		7			145
		471			693		378			339		7			1,888
Earnings (loss) before the following:		(46	)		138		(4	)		28		(21	)		95
Depreciation and amortization		13			18		10			3		1			45
Other items (note 8)		4			-		-			-		(3	)		1
Operating earnings (loss)		(63	)		120		(14	)		25		(19	)		49
Net fixed asset additions		10			38		3			4		-			55

September 25, 2010
					Dissolving
		Forest			& Chemical			High-Yield					Corporate
		Products			Pulp			Pulp		Paper			& other			Consolidated
Sales:
External	$	346		$	816		$	367	$	348		$	-		$	1,877
Internal		88			14			28		-			5			135
		434			830			395		348			5			2,012
Earnings (loss) before the following:		(10	)		120			47		(2	)		(23	)		132
Depreciation and amortization		16			27			10		3			-			56
Other items (note 8)		(2	)		(12	)		-		7			20			13
Operating earnings (loss)		(24	)		105			37		(12	)		(43	)		63
Net fixed asset additions		7			12			3		3			-			25

- 5 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

1.	Business of the Company
	The Company operates an integrated forest products business. The performance of each segment is evaluated by the management of the Company against short-term and long-term financial objectives as well as environmental, safety and other key criteria. During the December 2010 quarter, the Company reorganized its internal reporting structure. Prior to the changes, the Company had reported its financial results based on five reportable segments: Forest Products, Pulp, Paper, Chemicals, and Corporate. The Pulp segment included six pulp mills. Subsequent to the organizational changes, the Pulp segment has been divided into two segments: Dissolving and Chemical Pulp and High-Yield Pulp. Each segment includes three pulp mills. As well, the Chemicals segment is now part of the Dissolving and Chemical Pulp segment. A significant portion of chemical product sales are related to by -products generated by the two dissolving pulp mills. The Forest Products, Paper and Corporate segments were unaffected by the organizational changes. The Forest Products segment consists primarily of forest and sawmill operations, which produce lumber and building materials. The Dissolving and Chemical Pulp segment consists primarily of manufacturing and marketing activities of dissolving and chemical pulps including the transformation and sale of resins and pulp by-products. The High-Yield Pulp segment includes the manufacturing and marketing activities of high-yield pulps. The Paper segment consists primarily of production and sales of coated bleached board and newsprint. Intersegment transfers of wood chips, pulp and other services are recorded at transfer prices agreed to by the parties, which are intended to approximate fair market value. The accounting policies used in these business segments are the same as those described in the annual audited consolidated financial statements. Comparative prior period segment information has been restated to conform with the new segment presentation.
2.	Significant accounting policies
	These interim consolidated financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP), which require management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. These interim consolidated financial statements do not include all disclosures required under Canadian GAAP for annual financial statements and, accordingly, should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual consolidated financial statements. The same accounting policies as described in the Company’s latest annual consolidated financial statements have been used.
3.	Inventories

		Sept. 24,		Sept. 25,
		2011		2010
Finished goods	$	112	$	111
Logs and wood chips		66		64
Supplies and materials		83		80
	$	261	$	255

The provision to adjust inventories to net realizable values relating to logs and finished goods was $4 million (Sept. 2010 - $4 million).

- 6 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

4. Other assets

		Sept. 24,		Sept. 25,
		2011		2010
Loan receivable - Temlam	$	23	$	23
Deferred pension costs		16		6
Long-term loans to employees		1		2
Note receivable		-		2
Other		4		1
	$	44	$	34

5.	Operating bank loans and long-term debt
	Operating bank loans
	On March 4, 2011, the Company entered into a new $200 million asset-based revolving five-year working capital facility expiring in February 2016. The new facility effectively replaces the prior $205 million revolving working capital facility due to expire in December 2011. The new facility has a first priority charge over the receivables and inventories of the Company’s Canadian operations. As at September 24, 2011, the amount available and unused, based on eligible receivables and inventories, was $140 million of which $34 million was reserved for letters of credit. Interest is calculated based either on the BA Rate, the LIBOR, the Canadian Prime Rate or the U.S. Base Rate, as the case may be, plus an applicable margin.
	The French operations are supported by “receivable factoring” agreements. As such, the borrowing base fluctuates periodically, depending on shipments and cash receipts. As at September 24, 2011, the amount available was $18 million net of borrowings of $6 million.
	Long-term debt

			Sept. 24,		Sept. 25,
	Maturity		2011		2010
Tembec Inc. - 6% unsecured notes	09/2012	$	5	$	9
Tembec Industries Inc. - US $255 million, 11.25% senior secured notes	12/2018		262		261
Tembec French operations	Various		25		21
Kirkland Lake Engineered Wood Products Inc.	Various		8		8
Other	Various		2		2
			302		301
Less current portion			18		17
Less unamortized financing costs			13		13
		$	271	$	271

On August 17, 2010, the Company completed a private offering of US $255 million in aggregate principal amount of 11.25% senior secured notes (the “Notes”) due December 15, 2018. The notes are senior obligations secured by a first priority lien on certain of the property and assets of the Company and the guarantors of the notes, other than receivables, inventory and certain intangibles upon which the note holders have a second priority lien. The notes are guaranteed by the Company and certain of its subsidiaries. The proceeds from the offering, together with cash on hand, were used to permanently repay all outstanding indebtedness under the previous US $300 million term loan facility, to pay prepayment premiums in connection therewith and to pay fees and expenses related to the offering.

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

- 7 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

6. Other long-term liabilities and credits

		Sept. 24,		Sept. 25,
		2011		2010
Accrued benefit liability - pension benefit plans	$	119	$	130
Accrued benefit liability - other benefit plans		50		57
Reforestation		9		9
Environmental and other asset retirement obligations		4		4
Other		6		9
	$	188	$	209

7.	Share capital
	Authorized
	Unlimited number of common voting shares, without par value.
	Unlimited number of non- voting Class A Preferred shares issuable in series without par value, with other attributes to be determined at time of issuance.
	11,111,111 warrants convertible in equal amount of common shares and expiring February 29, 2012. The warrants shall be deemed to be exercised and shall be automatically converted into new common shares when the 20-day volume- weighted average trading price of a single common share reaches or exceeds $12.00 or immediately prior to any transaction that would constitute a change of control at a purchase price per common share equal to at least $12.00.

a) Common shares and warrants issued

		Sept. 24,		Sept. 25,
		2011		2010
Issued and fully paid:
100,000,000 common shares	$	564	$	564
11,093,943 warrants		6		6
	$	570	$	570

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

		Quarters					Years
		2011			2010		2011			2010
Net earnings (loss)	$	(17	)	$	2	$	(3	)	$	52
Weighted average number of common shares outstanding		100,000,000			100,000,000		100,000,000			100,000,000
Dilutive effect of employees share options and warrants		-			-		-			-
Weighted averaged number of diluted common shares outstanding		100,000,000			100,000,000		100,000,000			100,000,000
Basic and diluted earnings (loss) in dollars per share	$	(0.17	)	$	0.02	$	(0.03	)	$	0.52

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

- 8 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

7. Share capital (continued)

c)	Share-based compensation
	Under the prior Long-Term Incentive Plan, the Company had, from time to time, granted options to its employees. The plan provided for the issuance of common shares at an exercise price equal to the market price of the Company’s common shares on the date of the grant. These options vest over a five-year period and expire ten years from the date of issue.
	The following table summarizes the changes in options outstanding and the impact on weighted average per share exercise price during the period:

September 24, 2011
	Shares		Weighted average
			exercise price
Balance, beginning of fiscal year	161,123	$	89.01
Options cancelled	2,858		172.59
Balance, end of December 2010	158,265	$	87.50
Options cancelled	1,437		147.89
Balance, end of March 2011	156,828	$	86.94
Options cancelled	584		37.93
Balance, end of June 2011	156,244	$	87.13
Options cancelled	34,224		130.31
Balance, end of September 2011	122,020	$	75.01

Of the total 39,103 options cancelled, 4,001 expired and 35,102 were forfeited.

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

		Quarters					Years
		2011			2010		2011		2010
Performance-conditioned restricted share unit plan	$	(4	)	$	-	$	2	$	1
Directors' share award plan		(2	)		-		-		1
	$	(6	)	$	-	$	2	$	2

On November 17, 2010, under the directors’ share award plan, non-executive members of the Board were granted 655,175 Deferred Share Units (DSUs), and on January 27, 2011, 95,824 additional DSUs were granted. These DSUs are vesting in three equal amounts over the next three Annual General Shareholders' meetings beginning on January 27, 2011.

8.	Other items
	2011
	During the September 2011 quarter, the Company recorded a charge of $2 million relating to several permanently idled facilities. The costs relate to pension and healthcare benefits, legal costs, site security and custodial costs. For the year ended September 24, 2011, these charges amount to $8 million.
	During the June 2011 quarter, the Company finalized the sale of its hydro-electric generating assets located in Smooth Rock Falls, Ontario, and recorded a pre- tax gain of $3 million. Total consideration for the assets, which had a capacity of 7.4 megawatts, was $16 million paid in cash.

- 9 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

8.	Other items (continued)
	2011 (continued)
	During the June 2011 quarter, the Company announced that its non-operating U.S. subsidiary, Tembec USA LLC, had filed a petition seeking relief under Chapter 7 of the Bankruptcy Code of the United States. As a result of the filing, the Company determined that it no longer exercised control over this investment. The Company recorded a gain of $8 million relating to the deconsolidation of this subsidiary, arising primarily from the reduction in its consolidated accrued benefit obligation.
	During the March 2011 quarter, the Company announced the permanent closure of the Taschereau, Quebec sawmill. The facility had been idled since October 2009. The Company recorded a charge of $3 million relating to severance and other items.
	During the March 2011 quarter, the Company recorded a charge of $1 million for severance relating to the Cranbrook, British Columbia planer mill operation. The mill has been indefinitely idled since November 2007.
	2010
	During the September 2010 quarter, the Company incurred a net charge of $7 million relating to the permanent closure of its newsprint mill located in Pine Falls, Manitoba. The write-down of assets for $13 million and the accrual for severances and other for $10 million were partially offset by the recognition of a curtailment gain in employee future benefits totalling $16 million.
	On May 7, 2010, the Company finalized the sale of the kraft pulp mills located in Tarascon and Saint-Gaudens, France to Paper Excellence B.V. and recorded a pre-tax gain of $12 million ($16 million after-tax). Proceeds amounted to 66 million euros ($88 million) for the shares. Total proceeds of $88 million were reduced by $2 million for cash balance left in the two mills. Approximately $6 million of this amount will be held in escrow with the Company’s counsel until May 2012 (changed from May 2011 under the terms of the escrow agreement) to secure certain undertakings made by the Company. Paper Excellence B.V. also assumed 31 million euros ($41 million) of debt.
	As a result of an order issued by the Ontario Ministry of the Environment, the Company has had to undertake the removal of black liquor from storage tanks and pipelines of the bankrupt Marathon, Ontario pulp facility. Costs for the September, June and March 2010 quarters amounted to $2 million, $2 million, and $3 million respectively.
	In April 2009, the Company sold the St. Francisville, Louisiana, coated paper mill facility and related equipment to West Feliciana Acquisition, LLC (WFA). The paper mill had been idle since July 2007. A portion of the consideration received by the Company included two US $5 million interest bearing notes. Principal payments on the notes were due on various dates beginning in March 2011 and ending in March 2016. On January 17, 2010, WFA filed for relief under Chapter 11 of the U.S. Bankruptcy Code. It was unlikely that the Company would recover any portion of the interest- bearing notes and, as a result, a charge of $12 million relating to these notes was recorded during the March 2010 quarter. During the June 2010 quarter, the Company recorded a charge of $1 million relating to pension and healthcare benefits, which the Company has continued to incur following the sale.
	During the March 2010 quarter, the Company completed the sale of a number of land properties and recorded a gain of $1 million.
	During the December 2009 quarter, the Company completed the sale of a number of land properties and recorded a gain of $1 million.

- 10 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

9. Interest, foreign exchange, and other

		Quarters						Years
		2011			2010			2011			2010
Interest on long-term debt	$	7		$	7		$	31		$	27
Interest on short-term debt		1			1			1			3
		8			8			32			30
Exchange loss (gain) on conversion of integrated foreign subsidiaries		1			(8	)		(2	)		(1	)
Other foreign exchange items		(3	)		4			1			14
Fees - new revolving working capital facility		-			-			2			-
Term loan prepayment premium		-			6			-			6
Bank charges and other financing income and expenses		(1	)		-			(1	)		2
		(3	)		2			-			21
	$	5		$	10		$	32		$	51

Foreign exchange items included in the financial statements are as follows:

		Quarters						Years
		2011			2010			2011			2010
Exchange loss (gain) on long-term debt	$	11		$	(1	)	$	1		$	(27	)
Exchange loss (gain) on conversion of integrated foreign subsidiaries		1			(8	)		(2	)		(1	)
Other foreign exchange items		(3	)		4			1			14
	$	9		$	(5	)	$	-		$	(14	)

- 11 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

10. Income taxes

		Quarters						Years
		2011			2010			2011			2010
Earnings (loss) before income taxes and non-controlling interest	$	(10	)	$	6		$	16		$	39
Income tax expense (recovery) based on combined federal and provincial income tax rates of 27.8% (2010 - 29.8%)	$	(3	)	$	2		$	4		$	12
Increase (decrease) resulting from:
Future income tax adjustment due to rate enactments		-			-			-			2
Change in valuation allowance		6			2			11			(20	)
Difference in statutory income tax rate		2			-			5			4
Permanent differences:
Non-deductible (taxable) portion of exchange loss (gain) on long-term debt		1			(1	)		-			(3	)
Non-deductible (taxable) exchange loss (gain) on conversion of integrated foreign subsidiaries		1			(1	)		-			(10	)
Other permanent differences		-			2			(1	)		-
		10			2			15			(27	)
Income tax expense (recovery)	$	7		$	4		$	19		$	(15	)
Income taxes:
Current	$	8		$	-		$	8		$	-
Future		(1	)		4			11			(15	)
Income tax expense (recovery)	$	7		$	4		$	19		$	(15	)

11.	Employee future benefits
	The following table presents the Company’s employee future benefit costs:

		Quarters					Years
		2011		2010			2011		2010
Defined benefit pension plans	$	2	$	(14	)	$	11	$	-
Other employee future benefit plans		-		-			3		3
Defined contribution and other retirement plans		3		3			11		9
	$	5	$	(11	)	$	25	$	12

- 12 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

12.	Financial instruments
	Fair value
	The carrying amount of cash and cash equivalents, cash held in trust, derivative financial instruments, accounts receivable, bank indebtedness, operating bank loans, accounts payable and accrued charges, and interest payable approximates their fair values because of the near-term maturity of those instruments.
	The carrying value and the fair value of long-term debt were as follows:

		Sept. 24,		Sept. 25,
		2011		2010
Carrying value	$	289	$	288
Fair value	$	294	$	301

Credit risk

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

		Sept. 24,		Sept. 25,
		2011		2010
Loans and receivables	$	206	$	236
Cash, cash equivalents and cash held in trust	$	105	$	74

Liquidity risk

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

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

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

13.	Capital management
	It is the Company’s objective to manage its capital to ensure adequate capital resources exist to support operations while maintaining its business growth. The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk of characteristics of the underlying assets.
	The Company monitors capital on the basis of net debt to total capitalization ratio. Net debt is calculated as a total debt (long-term debt plus bank indebtedness/operating lines) less cash, cash equivalents, and cash held in trust. Total capitalization includes net debt plus future income taxes, other long- term liabilities and credits, and shareholders’ equity.

- 13 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

13.	Capital management (continued)
	The Company’s strategy is to maintain the net debt to total capitalization ratio at 40% or less. The objective is to keep a strong balance sheet and maintain the ability of the Company to access capital markets at favourable rates. The net debt to total capitalization ratio for the Company as at September 24, 2011 and September 25, 2010, were at 27% and 28%, respectively.
14.	Supplemental condensed consolidating financial information
	The following condensed consolidating financial information has been included in these consolidated financial statements in compliance with National Instrument 51-102 – Continuous Disclosure Obligations under Canadian securities laws.
	The senior secured notes (the “Notes”) of Tembec Industries Inc. (the "Subsidiary Issuer") are fully and unconditionally guaranteed on a joint and several basis by Tembec Inc. (the "Parent Company") and most of the Subsidiary Issuer’s subsidiaries located in Canada (the “Guarantor Subsidiaries”). The Subsidiary Issuer and each of the Guarantor Subsidiaries are 100% owned by the Parent Company. The Notes are not guaranteed by the Company’s other subsidiaries (the “Other Subsidiaries”).
	The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets as at September 24, 2011 and September 25, 2010, and the statements of operations and cash flows for the years ended September 24, 2011 and September 25, 2010, for the Parent Company and for the Subsidiary Issuer. It also provides the same information on a combined basis for the Guarantor Subsidiaries and the Other Subsidiaries.
	The supplemental condensed consolidating financial information, which has been prepared in accordance with Canadian GAAP, reflects the investments of the Parent Company in the Subsidiary Issuer using the equity method. Investments of the Subsidiary Issuer in the Guarantor Subsidiaries and Other Subsidiaries are also accounted for using this method.

- 14 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14. Supplemental condensed consolidating financial information (continued) Condensed consolidated balance sheets under Canadian GAAP

September 24, 2011
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-		$	-		$	40		$	59		$	-		$	99
Cash held in trust		-			-			-			6			-			6
Accounts receivable		35			299			140			49			(341	)		182
Inventories		-			-			232			29			-			261
Prepaid expenses		-			1			5			-			-			6
		35			300			417			143			(341	)		554
Investments		333			647			-			-			(980	)		-
Fixed assets		-			5			389			99			-			493
Other assets		-			29			13			2			-			44
Future income taxes		1			-			-			15			-			16
	$	369		$	981		$	819		$	259		$	(1,321	)	$	1,107
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans	$	-		$	-		$	-		$	6		$	-		$	6
Accounts payable and accrued charges		-			194			319			88			(347	)		254
Interest payable		-			8			-			-			-			8
Current portion of long-term debt		5			-			-			13			-			18
		5			202			319			107			(347	)		286
Long-term debt		2			249			-			26			(6	)		271
Other long-term liabilities and credits		-			127			46			15			-			188
Future income taxes		-			61			(60	)		(1	)		-			-
Shareholders' equity:
Share capital		570			555			668			34			(1,257	)		570
Contributed surplus		5			5			-			5			(10	)		5
Retained earnings (deficit)		(213	)		(218	)		(154	)		73			299			(213	)
		362			342			514			112			(968	)		362
	$	369		$	981		$	819		$	259		$	(1,321	)	$	1,107

- 15 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14. Supplemental condensed consolidating financial information (continued) Condensed consolidated balance sheets under Canadian GAAP (continued)

September 25, 2010
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	-		$	1		$	24		$	43		$	-		$	68
Cash held in trust		-			-			-			6			-			6
Accounts receivable		38			350			175			41			(395	)		209
Inventories		-			-			231			24			-			255
Prepaid expenses		-			1			5			1			-			7
		38			352			435			115			(395	)		545
Investments		337			565			-			-			(902	)		-
Fixed assets		-			5			404			89			-			498
Other assets		-			27			6			1			-			34
Future income taxes		1			-			-			26			-			27
	$	376		$	949		$	845		$	231		$	(1,297	)	$	1,104
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating bank loans	$	-		$	-		$	-		$	1		$	-		$	1
Accounts payable and accrued charges		-			170			305			157			(394	)		238
Interest payable		-			3			-			-			-			3
Current portion of long-term debt		5			-			-			12			-			17
		5			173			305			170			(394	)		259
Long-term debt		6			248			-			23			(6	)		271
Other long-term liabilities and credits		-			133			48			28			-			209
Future income taxes		-			54			(53	)		(1	)		-			-
Shareholders' equity:
Share capital		570			551			669			(27	)		(1,193	)		570
Contributed surplus		5			5			-			5			(10	)		5
Retained earnings (deficit)		(210	)		(215	)		(124	)		33			306			(210	)
		365			341			545			11			(897	)		365
	$	376		$	949		$	845		$	231		$	(1,297	)	$	1,104

- 16 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14. Supplemental condensed consolidating financial information (continued) Condensed consolidated statements of operations and deficit under Canadian GAAP

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

- 17 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14.	Supplemental condensed consolidating financial information (continued)
	Condensed consolidated statements of operations and deficit under Canadian GAAP (continued)

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

- 18 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14. Supplemental condensed consolidating financial information (continued) Condensed consolidated statements of cash flows under Canadian GAAP

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

- 19 -

TEMBEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited) (in millions of Canadian dollars, unless otherwise noted)

14. Supplemental condensed consolidating financial information (continued) Condensed consolidated statements of cash flows under Canadian GAAP (continued)

Year ended September 25, 2010
		Parent			Subsidiary			Guarantor			Other			Consolidation
		Company			Issuer			Subsidiaries			Subsidiaries			adjustments			Consolidated
Cash flows from operating activities:
Net earnings (loss)	$	52		$	45		$	9		$	99		$	(153	)	$	52
Adjustments for:
Depreciation and amortization		-			-			43			13			-			56
Unrealized foreign exchange and other		-			1			-			(2	)		-			(1	)
Exchange loss (gain) on long-term debt		-			(19	)		-			(8	)		-			(27	)
Future income tax expense (recovery)		-			15			(15	)		(15	)		-			(15	)
Other items		-			19			6			(12	)		-			13
Excess cash contributions over pension expense		-			(9	)		(3	)		(8	)		-			(20	)
Share of results of significanlty influenced companies		(52	)		(101	)		-			-			153			-
Other		-			(1	)		(1	)		2			-			-
		-			(50	)		39			69			-			58
Changes in non-cash working capital:
Accounts receivable		4			97			(37	)		(105	)		-			(41	)
Inventories		-			-			12			4			-			16
Prepaid expenses		-			-			5			-			-			5
Accounts payable, accrued charges and interest payable		-			(3	)		34			9			-			40
		4			94			14			(92	)		-			20
		4			44			53			(23	)		-			78
Cash flows from investing activities:
Additions to fixed assets		-			-			(18	)		(7	)		-			(25	)
Proceeds on land sales and other		-			3			2			2			-			7
Proceeds on sale of French mills		-			-			-			86			-			86
Other		-			-			2			(3	)		-			(1	)
		-			3			(14	)		78			-			67
Cash flows from financing activities:
Change in operating bank loans		-			-			(96	)		(21	)		-			(117	)
Cash held in trust		-			-			-			(6	)		-			(6	)
Increase in long-term debt		-			263			-			9			-			272
Repayments of long-term debt		(4	)		(309	)		-			(5	)		-			(318	)
Change in other long-term liabilities		-			-			1			1			-			2
Other		-			(14	)		(3	)		2			-			(15	)
		(4	)		(60	)		(98	)		(20	)		-			(182	)
		-			(13	)		(59	)		35			-			(37	)
Foreign exchange on cash and cash equivalents held in foreign currencies		-			-			-			-			-			-
Net increase (decrease) in cash and cash equivalents		-			(13	)		(59	)		35			-			(37	)
Cash and cash equivalents, beginning of period		-			14			83			8			-			105
Cash and cash equivalents, end of period	$	-		$	1		$	24		$	43		$	-		$	68
Supplemental information:
Interest paid																$	29
Income tax paid																$	-

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

- 20 -