<PAGE>   1


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

 [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001
                               -------------
                                       OR

 [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from           to

Commission file number  1-8712

                              BOWATER INCORPORATED
                              --------------------
             (Exact name of registrant as specified in its charter)

                      Delaware                         62-0721803
                      --------                         ----------
          (State or other jurisdiction of           (I.R.S. Employer
           incorporation or organization)          Identification No.)

           55 East Camperdown Way, P.O. Box 1028, Greenville, SC 29602
           -----------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (864) 271-7733
                                 --------------
              (Registrant's telephone number, including area code)

              (Former name, former address and former fiscal year,
                         if changed since last report.)

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS

   Indicate the number of shares outstanding (and held by non-affiliates) of
each of the issuer's classes of common stock, as of August 7, 2001.

                   Class                    Outstanding at August 7, 2001
                   ------                   -----------------------------

      Common Stock, $1.00 Par Value               50,409,434 Shares


<PAGE>   2



                              BOWATER INCORPORATED
                              --------------------

                                    I N D E X



                                                                           Page
                                                                          Number
                                                                          ------

PART I   FINANCIAL INFORMATION

         1.  Financial Statements:

                  Consolidated Balance Sheet at June 30, 2001,
                  and December 31, 2000                                       3

                  Consolidated Statement of Operations for the Three
                  and Six Months Ended June 30, 2001, and
                  June 30, 2000                                               4

                  Consolidated Statement of Capital Accounts
                  for the Six Months Ended June 30, 2001                      5

                  Consolidated Statement of Cash Flows for the
                  Six Months Ended June 30, 2001, and
                  June 30, 2000                                               6

                  Notes to Consolidated Financial Statements               7-12

         2.  Management's Discussion and Analysis of
               Financial Condition and Results of Operations              13-21

         3.  Quantitative and Qualitative Disclosures About Market Risk      21


PART II   OTHER INFORMATION

Exhibits and Reports on Form 8-K                                             22

SIGNATURES                                                                   23


                                       2

<PAGE>   3


                      BOWATER INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                     (Unaudited, in millions of US dollars)
<TABLE>
<CAPTION>
                                                                                June 30,     December 31,
                                                                                  2001           2000
                                                                              ------------   ------------
<S>                                                                           <C>            <C>
                                   ASSETS
Current assets:
  Cash and cash equivalents                                                   $       19.7   $       20.0
  Marketable securities                                                                0.4            0.4
  Accounts receivable, net                                                           336.1          380.8
  Inventories                                                                        171.2          161.9
  Other current assets                                                                33.0           52.5
                                                                              ------------   ------------
    Total current assets                                                             560.4          615.6
                                                                              ------------   ------------
Timber and timberlands                                                               256.2          265.2
Fixed assets, net                                                                  2,968.0        2,981.1
Notes receivable                                                                     --             146.0
Goodwill                                                                             854.9          866.8
Other assets                                                                         150.4          129.4
                                                                              ------------   ------------
                                                                              $    4,789.9   $    5,004.1
                                                                              ============   ============

                    LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current installments of long-term debt                                      $      103.9   $      141.4
  Short-term bank debt                                                               489.6          485.0
  Accounts payable and accrued liabilities                                           250.0          314.7
  Income taxes payable                                                                11.6         --
  Dividends payable                                                                   10.1           10.3
                                                                              ------------   ------------
    Total current liabilities                                                        865.2          951.4
                                                                              ------------   ------------

Long-term debt, net of current installments                                        1,228.3        1,304.7
Other long-term liabilities                                                          224.8          319.2
Deferred income taxes                                                                550.0          508.1
Minority interests in subsidiaries                                                    89.0          123.6

Commitments and contingencies                                                       --             --

Shareholders' equity:
   Common stock, issued 62,028,167 and 61,913,626 at June 30, 2001
         and December 31, 2000, respectively                                          62.0           61.9
   Exchangeable shares, outstanding and held by non-affiliates
         1,199,550 and 1,304,541 at June 30, 2001 and December 31, 2000,
         respectively                                                                 58.4           63.5
   Additional paid-in capital                                                      1,373.5        1,367.1
   Retained earnings                                                                 845.2          809.6
   Accumulated other comprehensive income (loss)                                     (19.5)         (18.0)
   Treasury stock, at cost                                                          (487.0)        (487.0)
                                                                              ------------   ------------
    Total shareholders' equity                                                     1,832.6        1,797.1
                                                                              ------------   ------------
                                                                              $    4,789.9   $    5,004.1
                                                                              ============   ============
</TABLE>

         See accompanying notes to consolidated financial statements

                                       3
<PAGE>   4


                      BOWATER INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
        (Unaudited, in millions of US dollars except per share amounts)
<TABLE>
<CAPTION>
                                                                     Three Months Ended             Six Months Ended
                                                                   -----------------------     ---------------------------
                                                                    June 30,     June 30,        June 30,        June 30,
                                                                      2001         2000            2001            2000
                                                                   ---------     ---------     -----------     -----------
<S>                                                                <C>           <C>           <C>             <C>
Sales                                                              $   585.2     $   607.6     $   1,190.1     $   1,170.5
Cost of sales, excluding depreciation, amortization
  and cost of timber harvested                                         385.2         386.8           761.2           748.2
Depreciation, amortization, and cost of timber harvested                74.8          70.5           151.6           142.3
Distribution costs                                                      41.3          40.9            81.2            83.3
Selling and administrative expense                                      29.2          21.5            46.0            54.3
Net gain on sale of assets                                              85.0           0.1            79.2             3.3
                                                                   ---------     ---------     -----------     -----------
    Operating income                                                   139.7          88.0           229.3           145.7

Other expense (income):
  Interest income                                                       (3.0)         (4.0)           (6.6)           (7.7)
  Interest expense, net of capitalized interest                         33.8          30.9            69.0            62.7
  Other, net                                                            10.5           4.8             5.9             5.8
                                                                   ---------     ---------     -----------     -----------
                                                                        41.3          31.7            68.3            60.8
                                                                   ---------     ---------     -----------     -----------

Income before income taxes and minority interests                       98.4          56.3           161.0            84.9

Provision for income tax expense                                        50.0          22.0            70.4            34.1
Minority interests in net income (loss) of subsidiaries                 29.8           0.6            34.3            (0.1)
                                                                   ---------     ---------     -----------     -----------

Net income                                                              18.6          33.7            56.3            50.9

Other comprehensive income (loss):
  Foreign currency translation adjustments                               2.0          (0.9)           (0.3)           (0.9)
  Unrealized gain (loss) on hedged transactions, net of taxes           14.7        --                (1.0)         --
  Minimum pension liability adjustments, net of taxes                 --            --                (0.2)         --
                                                                   ---------     ---------     -----------     -----------

Comprehensive income                                               $    35.3     $    32.8     $      54.8     $      50.0
                                                                   =========     =========     ===========     ===========

Basic earnings per common share*:                                  $    0.36     $    0.64     $      1.09     $      0.96
                                                                   =========     =========     ===========     ===========


Diluted earnings per common share*:                                $    0.36     $    0.63     $      1.08     $      0.95
                                                                   =========     =========     ===========     ===========
</TABLE>


* Basic and diluted earnings per share are based on net income and do not
include any impact from "Other comprehensive income (loss)." See Footnote 8.



         See accompanying notes to consolidated financial statements

                                       4

<PAGE>   5

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
                     For The Six Months Ended June 30, 2001
         (Unaudited, in millions of US dollars except per share amounts)
<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                               Additional                 Other
                                                       Common    Exchangeable    Paid-in    Retained  Comprehensive  Treasury
                                                       Stock        Shares       Capital    Earnings  Income (Loss)    Stock
                                                       ------    ------------  ----------   --------  -------------  --------
<S>                                                    <C>        <C>           <C>           <C>          <C>         <C>
Balance at December 31, 2000                           $ 61.9      $  63.5     $  1,367.1   $  809.6     $ (18.0)    $ (487.0)

Net income                                                --           --             --        56.3         --           --

Retraction of exchangeable shares (104,991 common
  and exchangeable shares)                                0.1         (5.1)           5.0        --          --           --

Dividends ($0.40 per share)                               --           --             --       (20.7)        --           --

Stock options exercised (9,550 common shares)             --           --             0.2        --          --           --

Tax benefit on exercise of stock options                  --           --             0.1        --          --           --

Stock option compensation                                 --           --             1.1        --          --           --

Pension plan additional minimum liability                 --           --             --         --         (0.2)         --


Unrealized gain (loss) on hedged
     transactions                                         --           --             --         --         (1.0)         --

Foreign currency translation adjustment                   --           --             --         --         (0.3)         --
                                                       ------      -------     ----------   --------     -------     --------

Balance at June 30, 2001                               $ 62.0      $  58.4     $  1,373.5   $  845.2     $ (19.5)    $ (487.0)
                                                       ======      =======     ==========   ========     =======     ========
</TABLE>

         See accompanying notes to consolidated financial statements

                                       5

<PAGE>   6


                      BOWATER INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                     (Unaudited, in millions of US Dollars)
<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                   -----------------------
                                                                   June 30,       June 30,
                                                                     2001           2000
                                                                   --------       --------
<S>                                                                <C>            <C>
Cash flows from operating activities:
Net income                                                         $   56.3       $   50.9
Adjustments to reconcile net income to net cash
  provided by operating activities:
Depreciation, amortization, and cost of timber harvested              151.6          142.3
Deferred income taxes                                                  29.8           16.5
Minority interests in net income (loss) of subsidiaries                34.3           (0.1)
Net gain on sale of assets                                            (79.2)          (3.3)
Payments on maturity of hedging contracts                              (9.3)          --
Changes in working capital:
  Accounts receivable, net                                             44.7          (40.3)
  Inventories                                                          (9.3)          (8.2)
  Accounts payable and accrued liabilities                            (47.9)         (19.4)
  Income taxes payable                                                 19.8           (2.0)
Other, net                                                            (10.5)          (8.2)
                                                                   --------       --------
          Net cash from operating activities                          180.3          128.2
                                                                   --------       --------

Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands                (115.0)        (112.0)
Purchase of assets previously leased                                   --            (24.2)
Disposition of fixed assets, timber and timberlands                    --              5.2
Proceeds from sale of note receivable                                 122.6           --
Cash paid on maturity of economic hedging contracts                    --            (12.9)
Cash invested in marketable securities                                 --            (50.7)
Cash from maturity of marketable securities                            --             52.5
                                                                   --------       --------
          Net cash from (used for) investing activities                 7.6         (142.1)
                                                                   --------       --------

Cash flows from financing activities:
Cash dividends, including minority interests                          (85.6)         (27.7)
Purchase of common stock                                               --            (92.1)
Short-term financing                                                  459.2          279.4
Short-term financing repayments                                      (454.6)        (126.3)
Long-term financing                                                    --              0.4
Purchases/payments of long-term debt                                 (107.4)         (30.9)
Stock options exercised                                                 0.2            1.6
Other                                                                  --              0.8
                                                                   --------       --------
          Net cash from (used for) financing activities              (188.2)           5.2
                                                                   --------       --------

Net decrease in cash and cash equivalents                              (0.3)          (8.7)

Cash and cash equivalents at beginning of year                         20.0           24.7
                                                                   --------       --------
Cash and cash equivalents at end of period                         $   19.7       $   16.0
                                                                   ========       ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest, including capitalized interest of $5.8 and $1.2        $   89.9       $   67.7
  Income taxes                                                     $   13.1       $   22.6
</TABLE>

          See accompanying notes to consolidated financial statements

                                       6

<PAGE>   7


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

1.   The accompanying consolidated financial statements include the accounts of
     Bowater Incorporated and Subsidiaries as of June 30, 2001. The consolidated
     balance sheets, statements of operations, capital accounts and cash flows
     are unaudited. However, in the opinion of our management, all adjustments
     (consisting of normal recurring adjustments) necessary for fair
     presentation of the interim financial statements have been made. The
     results of the interim period ended June 30, 2001 are not necessarily
     indicative of the results to be expected for the full year.

2.   In the second quarter of 2001, Bowater recognized a net pre-tax gain on the
     sale of assets of $85.0 million. In the fourth quarter of 1999, Calhoun
     Newsprint Company (CNC), a majority-owned subsidiary of Bowater, sold
     approximately 140,000 acres of timberlands in North Carolina and South
     Carolina for proceeds of $173.2 million (before expenses of $1.1 million).
     CNC received $26.2 million in cash and $145.9 million in notes. We recorded
     the transaction as an installment sale and had remaining deferred pre-tax
     gains of approximately $95.0 million. In the second quarter of 2001, we
     sold the $145.9 million notes receivable for net cash proceeds of $122.6
     million, met the requirements for full accrual and recorded a net pre-tax
     gain of $84.5 million. The net pre-tax gain was comprised of the $95.0
     million previously recorded deferred pre-tax gains and a $10.5 million loss
     on the sale of the notes receivable. The $10.5 million loss on the sale of
     the notes receivable was based on the original carrying amount of the
     notes, allocated between the assets sold and the retained interests based
     on its relative fair value at the date of the transfer. The principle
     variable in determining the fair value of future expected cash flows of the
     retained interest is the discount rate as it consists of two individual
     notes with a low level of credit risk, contractually due in 13.5 years and
     not subject to prepayment. The discount rates used for the two individual
     notes were 7.36% and LIBOR plus 0.89, respectively. The retained interest
     of $12.3 million at June 30, 2001 is included in Other Assets in the
     consolidated balance sheet. A dividend of $60.1 million was paid to the
     minority shareholder of CNC.

     In April 2001, Bowater reached a final settlement of certain matters
     regarding the sale of Great Northern Paper, Inc. (GNP) to Inexcon Maine,
     Inc. (Inexcon). As a result, we recognized a pre-tax charge of $5.8
     million, or $.07 per diluted share after tax, in the first quarter of 2001.

     During the first six months of 2000, we sold fixed assets resulting in a
     pre-tax gain of $3.3 million, or $.04 per diluted share after tax.

3.   Restructuring and environmental liabilities were recorded in connection
     with the 1998 acquisition of Avenor Inc., the related closure of the Gold
     River pulp mill and the sale of the Dryden white paper mill. During the
     first six months of 2001, we made payments against the reserves of $0.4
     million and reduced the reserves by $0.2 million due to foreign exchange.

     As of June 30, 2001, the remaining accrual for the above items is $17.2
     million. Of this remaining accrual, $3.0 million is included in "Accounts
     payable and accrued liabilities" and $14.2 million is included in "Other
     long-term liabilities" in the Consolidated Balance Sheet. As of June 30,
     2001, the cash requirements related to these liabilities are expected to be
     $3.0 million during the balance of 2001 and $14.2 million related to
     environmental matters in 2002 and beyond.

4.   During the first six months of 2001, the Board of Directors of CNC declared
     dividends of $139.4 million. As a result, $68.3 million was paid to the
     minority shareholder. In the first six months of 2000, the Board of
     Directors of CNC declared dividends of $12.5 million, resulting in a
     payment of $6.1 million to the minority shareholder.

5.   Bowater is involved in various legal proceedings relating to contracts,
     commercial disputes, taxes, environmental issues, employment and workers'
     compensation claims, and other matters. We periodically review the status
     of these proceedings with both inside and outside counsel. Our management
     believes that the ultimate disposition of these matters will not have a
     material adverse effect on our operations or our financial condition taken
     as a whole.

6.   No stock purchases were made in the first six months of 2001 under the
     stock repurchase program authorized in May 1999. During the first six
     months of 2000, we purchased 1.9 million shares of our common stock for
     $92.1 million. Since the beginning of this program, we have purchased a
     total of 3.2 million shares of our common stock at a total cost of $155.5
     million.

                                        7


<PAGE>   8


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

7.   "Other, net" in the Consolidated Statement of Operations includes the
     following:
<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------------------------
                                                      Three Months Ended                  Six Months Ended
                                              -----------------------------------------------------------------
                                                June 30,          June 30,          June 30,         June 30,
     (In millions)                                2001              2000              2001             2000
     ----------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>              <C>
     Foreign exchange loss                      $   11.4          $    4.8          $    6.6         $    5.3
     Miscellaneous (income) expense                 (0.9)               --              (0.7)             0.5
     ----------------------------------------------------------------------------------------------------------
                                                $   10.5          $    4.8          $    5.9         $    5.8
     ----------------------------------------------------------------------------------------------------------
</TABLE>

     Bowater's foreign exchange loss is primarily driven by the revaluation of
     unhedged foreign denominated liabilities into US dollars plus the
     ineffective portion of our cash flow hedges.

8.   The calculation of basic and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------------------------
                                                      Three Months Ended                  Six Months Ended
                                              -----------------------------------------------------------------
                                                June 30,          June 30,          June 30,         June 30,
     (In millions, except per share amounts)      2001              2000              2001             2000
     ----------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>              <C>
     Basic Computation:

     Net income                                 $   18.6          $   33.7          $   56.3         $   50.9

                                               ----------------------------------------------------------------
     Basic income available to common
          shareholders                          $   18.6          $   33.7          $   56.3         $   50.9
                                               ----------------------------------------------------------------

     Basic weighted average shares
          outstanding                               51.6              52.7              51.6             53.0
                                               ----------------------------------------------------------------

     Basic earnings per common share            $   0.36          $   0.64          $   1.09         $   0.96
                                               ----------------------------------------------------------------

     ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
     ----------------------------------------------------------------------------------------------------------
                                                      Three Months Ended                  Six Months Ended
                                              -----------------------------------------------------------------
                                                June 30,          June 30,          June 30,         June 30,
     (In millions, except per share amounts)      2001              2000              2001             2000
     ----------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>              <C>
     Diluted Computation:

     Diluted income available to common
          shareholders                          $   18.6          $   33.7          $   56.3         $   50.9
                                               ----------------------------------------------------------------

     Basic weighted average shares
          outstanding                               51.6              52.7              51.6             53.0

     Effect of dilutive securities:
          Options                                    0.3               0.5               0.4              0.5
                                               ----------------------------------------------------------------

     Diluted weighted average shares
          outstanding                               51.9              53.2              52.0             53.5
                                               ----------------------------------------------------------------

     Diluted earnings per common share          $   0.36          $   0.63          $   1.08         $   0.95
          common share common share
                                               ----------------------------------------------------------------

     ----------------------------------------------------------------------------------------------------------
</TABLE>

                                        8


<PAGE>   9


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


9.   Segment Information:

     Bowater has three reportable segments: the Newsprint Division, the Coated
     Paper Division and the Forest Products Division.

     *    The Newsprint Division is responsible for the manufacturing operations
          of eight sites in the United States, Canada and South Korea. It is
          also responsible for the worldwide marketing of newsprint and uncoated
          groundwood specialties.

     *    The Coated Paper Division is responsible for one manufacturing site
          that produces coated groundwood paper, newsprint, market pulp and
          uncoated groundwood specialties and operates a coating facility, both
          in the United States. This Division is responsible for the worldwide
          marketing and sales of coated groundwood paper.

     *    The Forest Products Division operates three sawmills and manages 1.8
          million acres of owned and leased timberlands in the United States and
          Canada, as well as 14.1 million acres of Crown-owned land in Canada on
          which we have cutting rights. This Division sells wood fiber to the
          Newsprint and Coated Paper Divisions, as well as markets and sells
          timber and lumber to third parties in North America.

     The Pulp Division has marketing and sales responsibility for all of our
     market pulp products; however, the financial results from these sales are
     included in both the Newsprint Division and the Coated Paper Division,
     depending upon which site manufactures the product. The Pulp Division's
     administrative expenses are included in "Corporate & other eliminations."
     Accordingly, no separate results are reported for this Division.

     The following tables summarize information about segment profit and loss
     and segment assets for the three and six months ended June 30, 2001 and
     2000:
<TABLE>
<CAPTION>
(Unaudited, in millions)
----------------------------------------------------------------------------------------------------------------------

                                                    Coated       Forest
       Three Months Ended            Newsprint      Paper       Products       Other       Corporate &
          June 30, 2001              Division      Division     Division       Items       Eliminations      Total
----------------------------------------------------------------------------------------------------------------------

<S>                                 <C>            <C>          <C>          <C>            <C>            <C>
Sales-including internal sales      $    457.4     $  116.4     $   85.8     $    --        $     --       $   659.6
Elimination of intersegment sales          --           --           --           --            (74.4)         (74.4)
----------------------------------------------------------------------------------------------------------------------
Sales - external customers               457.4        116.4         85.8          --            (74.4)         585.2
----------------------------------------------------------------------------------------------------------------------
Segment income (loss)                     70.5          4.3         (3.1)       85.0            (17.0)         139.7
----------------------------------------------------------------------------------------------------------------------
Total assets at 6/30/01             $  3,441.9     $  608.1     $  375.5     $    --        $   364.4      $ 4,789.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------

                                                   Coated        Forest                     Corporate/
        Three Months Ended           Newsprint      Paper       Products        Other          Other
          June 30, 2000              Division      Division     Division        Items      Eliminations      Total
----------------------------------------------------------------------------------------------------------------------

<S>                                 <C>            <C>          <C>          <C>            <C>            <C>
Sales-including internal sales      $    432.9     $  152.3     $  101.0     $    --        $     --       $   686.2
Elimination of intersegment sales          --           --           --           --            (78.6)         (78.6)
----------------------------------------------------------------------------------------------------------------------
Sales - external customers               432.9        152.3        101.0          --            (78.6)         607.6
----------------------------------------------------------------------------------------------------------------------
Segment income (loss)                     63.6         37.3          4.7         0.1            (17.7)          88.0
----------------------------------------------------------------------------------------------------------------------
Total assets at 6/30/00             $  3,125.3     $  508.2      $ 507.7     $    --        $   435.7     $  4,576.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                        9

<PAGE>   10


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------

                                      Coated                     Forest
        Six Months Ended             Newsprint      Paper       Products       Other       Corporate &
          June 30, 2001              Division      Division     Division       Items       Eliminations      Total
---------------------------------- ------------- ------------ ------------- ------------- --------------- ------------

<S>                                 <C>            <C>          <C>          <C>            <C>           <C>
Sales-including internal sales      $    911.9     $  255.1     $  180.3     $    --        $    --       $ 1,347.3
Elimination of intersegment sales          --           --           --           --          (157.2)        (157.2)
----------------------------------------------------------------------------------------------------------------------
Sales-including internal sales           911.9        255.1        180.3          --          (157.2)       1,190.1
----------------------------------------------------------------------------------------------------------------------
Segment income (loss)                    151.6         22.8         (2.3)        79.2          (22.0)         229.3
----------------------------------------------------------------------------------------------------------------------
Total assets at 6/30/01             $  3,441.9     $  608.1     $  375.5     $    --        $  364.4      $ 4,789.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------

                                                    Coated       Forest
        Six Months Ended            Newsprint       Paper       Products       Other       Corporate &
          June 30, 2000              Division      Division     Division       Items       Eliminations      Total
----------------------------------------------------------------------------------------------------------------------

<S>                                 <C>            <C>          <C>          <C>            <C>            <C>
Sales-including internal sales      $    835.7     $  286.1     $  220.6     $    --        $     --       $ 1,342.4
Elimination of intersegment sales          --           --           --           --           (171.9)        (171.9)
----------------------------------------------------------------------------------------------------------------------
Sales-including internal sales           835.7        286.1        220.6          --           (171.9)       1,170.5
----------------------------------------------------------------------------------------------------------------------
Segment income (loss)                    102.2         62.3         17.8          3.3           (39.9)         145.7
----------------------------------------------------------------------------------------------------------------------
Total assets at 6/30/00             $  3,125.3     $  508.2     $  507.7     $    --        $   435.7      $ 4,576.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>

     In the second quarter of 2001, Bowater recognized a net pre-tax gain on the
     sale of assets of $85.0 million. This gain is primarily the result of the
     sale of a note receivable and recognition of deferred income (previously in
     Other Long-term Liabilities) related to a 1999 installment sale of
     timberlands. The pre-tax gain on this sale was $84.5 million ($19.2 million
     after tax and minority interest). Other net gains on assets sales of $0.5
     million were recorded in the second quarter of 2001. In April 2001, Bowater
     reached a final settlement in connection with the sale of GNP to Inexcon.
     As a result, we recognized a $5.8 million pre-tax charge in the first
     quarter of 2001. For the first six months of 2000, the other item relates
     to a pre-tax gain on sale of fixed assets of $3.3 million.

     The line entitled "Segment income (loss)" in the preceding tables is equal
     to "Operating income" as presented in our Consolidated Statement of
     Operations. In addition, none of the income/loss items following "Operating
     income" in our Consolidated Statement of Operations are allocated to our
     segments, since they are reviewed separately by Bowater's management. These
     items include, but are not limited to, interest income and expense,
     provision for income tax expense, and minority interests in net income
     (loss) of subsidiaries.

10.  Effective January 1, 2001, Bowater adopted Statement of Financial
     Accounting Standards No. 133, "Accounting for Derivative Instruments and
     Hedging Activities", as amended (SFAS 133). SFAS 133 establishes accounting
     and reporting standards for derivative instruments and hedging activities
     and requires that we record all derivatives as either assets or liabilities
     in the balance sheet at fair value. There were no transition amounts
     recorded upon the adoption of SFAS 133.

     Bowater utilizes certain derivative instruments to enhance its ability to
     manage risk relating to cash flow exposure. Derivative instruments are
     entered into for periods consistent with related underlying cash flow
     exposures and do not constitute positions independent of those positions.
     We do not enter into contracts for speculative purposes; however, we do
     have commodity and currency option contracts that are not accounted for as
     accounting hedges. On the earlier of the date into which the derivative
     contract is entered or the date of transition, we designate the derivative
     as a cash flow hedge.

     A significant portion of our operating expenses is paid in Canadian dollars
     at our Canadian mill sites. To reduce our exposure to differences in the US
     and Canadian dollar exchange rate fluctuations, we enter into and designate
     Canadian dollar forward contracts to hedge certain of our forecasted
     Canadian dollar cash outflows at the Canadian mill operations.


                                       10

<PAGE>   11


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

     Changes in the derivative fair values that are designated effective and
     qualify as cash flow hedges will be deferred and recorded as a component of
     "Accumulated other comprehensive income (loss)" until the underlying
     transaction is recorded in earnings. When the hedged item affects earnings,
     gains or losses are reclassified from "Accumulated other comprehensive
     income (loss)" to the Consolidated Statement of Operations on the same line
     as the underlying transaction (cost of sales). The ineffective portion of a
     hedging derivative's change in fair value is recognized immediately in
     earnings.

     During the first six months of 2001, we recorded the change in value
     related to cash flow hedges amounting to a loss of $4.8 million ($3.0
     million, after tax) in "Accumulated other comprehensive income (loss)." Of
     this amount, $3.1 million ($2.0 million, after tax) was reclassified from
     "Accumulated other comprehensive income (loss)" to earnings, which was
     offset by net gains on the items being hedged. During the first six months
     of 2001, with the exception of the time value element of the hedging
     instruments, amounts that related to the ineffectiveness of our hedging
     instruments were insignificant. We expect to reclassify a $3.1 million loss
     ($1.9 million, after-tax) from "Accumulated other comprehensive income
     (loss)" to earnings during the next twelve months as the hedged items
     affect earnings.

     We formally document all relationships between hedging instruments and
     hedged items, as well as our risk-management objectives and strategies for
     undertaking various hedge transactions. We link all hedges that are
     designated as cash flow hedges to forecasted transactions. The maximum time
     period we have hedged transactions is two years. We also assess, both at
     the inception of the hedge and on an on-going basis, whether the
     derivatives that are used in hedging transactions are highly effective in
     offsetting changes in cash flows of hedged items. The change in the time
     value of the contracts is reported in earnings as exchange gain (loss) and
     amounted to a loss of $4.5 million ($2.8 million, after tax) in the first
     half of 2001. When it is determined that a derivative is not highly
     effective as a hedge, we discontinue hedge accounting prospectively.

     At June 30, 2001, we had $688.0 million of Canadian dollar contracts.
     Information regarding the carrying value, fair market value, and range of
     exchange rates of the contracts is summarized in the table below:
<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------
     (In millions)                                               Liability (Asset)
     -----------------------------------    Notional     ---------------------------------      Range Of
     Foreign Currency Exchange              Amount of        Carrying           Fair          US$/Canadian$
        Agreements                         Derivatives        Amount         Market Value     Exchange Rates
     -------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>             <C>              <C>
     Buy Currency:
     -------------------------------------------------------------------------------------------------------
         Canadian dollar
     -------------------------------------------------------------------------------------------------------
               Due in 2001                 $    193.0        $  (0.1)          $  (0.1)       .6565 - .6546
     -------------------------------------------------------------------------------------------------------
               Due in 2002                      357.0            3.1               3.1        .6545 - .6524
     -------------------------------------------------------------------------------------------------------
               Due in 2003                      138.0           (0.7)             (0.7)       .6524 - .6516
     -------------------------------------------------------------------------------------------------------
                    Total                  $    688.0        $   2.3           $   2.3        .6565 - .6516
     -------------------------------------------------------------------------------------------------------
</TABLE>


     We also enter into certain commodity forward contracts that are not
     designated as accounting hedges. These derivative instruments are primarily
     intended to reduce volatility of prices for old newsprint and magazines.
     During the first six months of 2001, an after tax loss of $0.4 million was
     recognized in earnings relating to these derivatives. At June 30, 2001, we
     had commodity forward contracts with a notional amount of 21,000 tons of
     old newspapers and old magazines, a carrying value of $0.3 million and a
     fair market value of $0.3 million. These commodity forward contracts are
     due in 2001.

     In May 2001, we purchased $250 million of Canadian dollar option contracts
     to cover the cash portion of consideration to be paid to the shareholders
     of Alliance Forest Products Inc. (AFP) in connection with the pending
     acquisition of AFP by Bowater. Related to these options, we paid a premium
     of $0.6 million, which is being amortized over the life of the options.
     These options are due in August 2001. Subsequent to June 30, 2001, we
     settled the Canadian dollar options resulting in a pre-tax loss of
     approximately $0.4 million.

11.  In the Consolidated Balance Sheet as of June 30, 2001, the line entitled
     "Accumulated other comprehensive income (loss)" includes $(1.7) million for
     cash flow hedges, $(17.2) million for pension plan additional minimum
     liabilities, $(8.1) million for foreign currency translation, and $7.5
     million for taxes.


                                       11

<PAGE>   12


                      BOWATER INCORPORATED AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

12.  Certain prior-year amounts in the financial statements and the notes have
     been reclassified to conform to the 2001 presentation.

13.  During the first six months of 2001, Bowater recognized a pre-tax charge of
     $5.5 million due to pine beetle damage to its woodlands. The continuing
     drought in the U.S. Southeast is contributing to conditions that allow the
     southern pine beetle to flourish and expand the range of its infestation.
     We have incurred pre-tax charges aggregating approximately $13.0 million
     over the past four quarters as a result of beetle damage. If there is no
     change in conditions, we may incur additional beetle damage.

14.  In April 2001, Bowater announced the signing of a definitive agreement by
     which Bowater will acquire all of the outstanding shares of Alliance Forest
     Products Inc. (Alliance). Under the terms of the agreement, Bowater will
     pay C$13.00 in cash plus 0.166 shares of Bowater stock for each Alliance
     common share based upon the average trading price for twenty days prior to
     the agreement, which results in an implied per share value of C$26 for each
     Alliance common share. The acquisition will be accounted for in accordance
     with Statement of Financial Accounting Standards No. 141, "Business
     Combinations" and for accounting purposes, the transaction will be valued
     based on the price of Bowater's shares a few days before and after the
     transaction date. Alliance shareholders may choose to receive shares of
     Bowater common stock or Canadian-listed shares of a Bowater Canadian
     subsidiary, which are exchangeable, on a one-for-one basis, at any time
     into Bowater shares. The exchangeable shares have voting and dividend
     rights substantially equivalent to those of Bowater common shares. The
     aggregate value of the transaction, including assumed debt, is
     approximately C$1.2 billion (U.S. $770 million, as of April 2001). The
     boards of directors of both companies and the shareholders of Alliance have
     approved the transaction. Approvals have also been received from Canadian
     regulatory authorities. Bowater is currently responding to the United
     States Department of Justice's request for additional information. Subject
     to the expiration or termination of any applicable waiting period under the
     Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Bowater
     now expects to close the purchase near the end of the third quarter of
     2001. If the transaction does not close by September 30, 2001, Bowater or
     Alliance may terminate the transaction, without penalty, in accordance with
     the definitive agreement.
















                                       12

<PAGE>   13

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      Management's Discussion and Analysis
                of Financial Condition and Results of Operations


                                  Organization

Bowater is organized into four divisions: the Newsprint Division, the Coated
Paper Division, the Pulp Division and the Forest Products Division. Each
division, with the exception of the Pulp Division, is responsible for the sales
and marketing of distinct product lines and the operation of certain
manufacturing sites. The Pulp Division is primarily a marketing and distribution
division. Therefore, Bowater's financial results are collected, analyzed and
reported through the Newsprint, Coated Paper and Forest Products Divisions.

                         Cautionary Statement Regarding
                           Forward-Looking Information

Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. They include, for example,
statements about our business outlook, assessment of market conditions,
strategies, future plans, future sales, prices for our major products, inventory
levels, capital spending and tax rates. These forward-looking statements are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. The risks and uncertainties relating to the
forward-looking statements in this report include those described under the
caption "Cautionary Statement Regarding Forward-Looking Information" in
Bowater's annual report on Form 10-K for the year ended December 31, 2000, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.

                              Results of Operations
                    Three Months Ended June 30, 2001, versus
                                  June 30, 2000

For the second quarter of 2001, Bowater had operating income of $139.7 million,
compared to $88.0 million for the second quarter of 2000. Operating income for
the second quarter of 2001 includes a net gain on asset sales of $85.0 million
compared to a net gain on asset sales of $0.1 million for the second quarter of
2000. Excluding these asset sales, operating income decreased $33.2 million.
Lower transaction prices for pulp ($43.5 million) and coated groundwood paper
($4.7 million) and higher selling, general and administrative expenses ($7.7
million) and higher operating costs ($14.8 million) account for the majority of
this decrease. Higher transaction prices for newsprint ($40.3 million) and
uncoated groundwood specialties ($2.0 million) partially offset this decrease.
Operating costs were higher as a result of maintenance and market-related
downtime ($22.3 million) and higher fuel ($3.4 million) and chemical costs ($6.4
million). These higher operating costs were partially offset by lower recovered
paper prices ($7.2 million) and a favorable Canadian dollar exchange ($10.0
million).
    Net income for the second quarter of 2001 was $18.6 million, or $0.36 per
diluted share, compared with net income of $33.7 million, or $0.63 per diluted
share, in the second quarter of 2000. Sales for the second quarter of 2001 were
$585.2 million compared with $607.6 million for the second quarter of 2000.
    Presented below is a discussion of each significant product line followed by
a discussion of the results of each of the reported divisions.

                            Product Line Information

Sales by Product
-----------------------------------------------------------------
                                         Three Months Ended
                                              June 30,
                                    -----------------------------
(Unaudited, in millions)                 2001          2000
-----------------------------------------------------------------

Sales:
   Newsprint                           $  366.7      $  327.6
   Market pulp                            100.7         147.5
   Coated groundwood                       74.3          83.6
   Uncoated groundwood specialties         32.1          26.5
   Lumber, timber and other wood
       products                            85.8         101.0
   Elimination of intersegment sales      (74.4)        (78.6)
                                    -----------------------------
              Total sales              $  585.2      $  607.6
-----------------------------------------------------------------


                                       13

<PAGE>   14


Newsprint  Bowater's average transaction price for newsprint increased 12% in
the second quarter of 2001 compared to the second quarter of 2000 and remained
unchanged compared to the first quarter of 2001. Our shipments for the second
quarter of 2001 were down slightly compared to same period last year due to the
market and maintenance downtime taken in 2001 partially offset by the inclusion
of the Grenada operations acquired in August 2000. During the second quarter of
2001, we took approximately 70,000 metric tons of downtime, of which 43,000
metric tons were market-related and the balance was related to maintenance. We
plan to take an additional 80,000 metric tons of downtime in the third quarter
of this year. Our newsprint inventory increased 19% compared to the second
quarter of 2000. As the United States economy weakened in the second quarter,
total United States newsprint demand and consumption declined. Newspaper
advertising lineage declined for the first five months of 2001 compared to the
same period a year ago. North American mill inventories and United States
customer inventories of newsprint increased in June 2001 compared to June 2000.
On both May 1, and July 1, 2001, Bowater adjusted its domestic prices downward
by $25 per metric ton, thereby rescinding the $50 per metric ton increase
announced March 1, 2001.

Market  Pulp Bowater's average transaction price for market pulp decreased 31%
in the second quarter of 2001 compared to the second quarter of 2000 and
decreased 23% compared to the first quarter of 2001. Our shipments decreased 4%
compared to the second quarter of 2000 and increased 24% compared to the first
quarter of 2001. Our market pulp inventories decreased significantly during the
second quarter to end the quarter with 17 days of supply. World pulp markets
remained weak during the second quarter. NORSCAN producers (United States,
Canada, Finland, and Sweden) took market-related downtime resulting in an 82%
operating rate for the second quarter of 2001. Consequently, NORSCAN inventories
decreased 128,000 metric tons during the second quarter to end the quarter with
1.8 million metric tons or 32 days of supply. Bowater took approximately 35,000
metric tons of market-related downtime during the second quarter and plans to
take an additional 30,000 metric tons of downtime in the third quarter.

Coated Groundwood  Bowater's average transaction price for coated groundwood
decreased 6% in the second quarter of 2001 compared to the second quarter of
2000. Our coated groundwood shipments decreased 6% in the second quarter of 2001
compared to the same period a year ago. Magazine advertising decreased in the
second quarter of 2001 compared to the second quarter of 2000 and while catalog
mailings were flat, total weight (measured by standard A mail weight) decreased
4% compared to the same period a year ago. United States inventories returned to
normal levels, decreasing from the higher levels of June 2000.

Lumber  Bowater's average transaction price for lumber products increased 1% in
the second quarter of 2001 compared to the second quarter of 2000. Overall,
prices bottomed early in the year and improved steadily into the second quarter
of 2001. Prices began to decline at the end of the quarter, but averaged higher
than the first quarter of 2001. Market-related downtime taken at the Maniwaki
Sawmill and downtime related to capital improvements taken at the Albertville
Sawmill were offset by increased production at the recently modernized Oakhill
Sawmill. Housing starts in the second quarter were strong with over 1.6 million
units, in each month, on a seasonally adjusted basis. Actual housing starts
increased 6% in the second quarter of 2001 compared to the same period last
year.

Timber  Bowater's average transaction price for timber decreased 13% in the
second quarter of 2001 compared to the second quarter of 2000. Our timber
product shipments decreased 36% in the second quarter of 2001 compared to the
same period a year ago. We plan to sell approximately 250,000 acres of our
United States timberlands and expect to complete the sale before the end of
2001. We have adjusted harvest activities in preparation for this sale.
Continued weak timber markets also adversely affected timber sales in the U.S.
South.

                             Divisional Performance

Sales by Division (1)
-----------------------------------------------------------
                                      Three Months Ended
                                           June 30,
                                   ------------------------
(In millions)                          2001         2000
-----------------------------------------------------------
Newsprint Division                   $ 457.4      $ 432.9
Coated Paper Division                  116.4        152.3
Forest Products Division                85.8        101.0
Corporate & eliminations               (74.4)       (78.6)
                                   ------------------------
    Total sales                      $ 585.2      $ 607.6
-----------------------------------------------------------


                                       14

<PAGE>   15


Operating Income (Loss) by Division (1)
------------------------------------------------------------
                                      Three Months Ended
                                           June 30,
                                  --------------------------
(In millions)                          2001         2000
------------------------------------------------------------
Newsprint Division                   $   70.5     $   63.6
Coated Paper Division                     4.3         37.3
Forest Products Division                 (3.1)         4.7
Other items                              85.0          0.1
Corporate & eliminations                (17.0)       (17.7)
                                  --------------------------
    Total operating income           $  139.7     $   88.0
------------------------------------------------------------

(1) Financial results for the production and sale of market pulp are included in
    the Newsprint Division or the Coated Paper Division, depending upon which
    site manufactures the product. The Pulp Division is responsible for the
    marketing and distribution of the product, and its administrative expenses
    are included in "Corporate & eliminations."

Newsprint Division: Sales for the Division increased $24.5 million for the
second quarter of 2001 compared to the second quarter of 2000. This increase is
primarily the result of higher average transaction prices for newsprint ($38.5
million) and uncoated groundwood specialties (1.3 million) and higher shipments
of newsprint ($10.7 million, which includes the acquisition of the Grenada
operations with the other sites having lower shipments) and uncoated groundwood
specialties ($2.4 million). This increase was partially offset by lower average
transaction prices for market pulp ($32.7 million). See the previous discussion
of product line results.
    Operating income for the second quarter of 2001 increased $6.9 million
compared with operating income of $63.6 million for the second quarter of 2000.
This increase is primarily the result of higher average transaction prices for
newsprint ($38.5 million) and uncoated groundwood specialties ($1.9 million).
This increase was partially offset by lower average transaction prices for
market pulp ($32.7 million) and slightly higher operating costs ($1.5 million).
Operating costs increased slightly in the second quarter of 2001 due to
maintenance and market-related downtime ($9.9 million) and higher prices for
fuel ($3.1 million) and chemicals ($2.2 million). This increase was partially
offset by lower prices for recovered paper ($7.2 million) and a favorable
Canadian dollar exchange rate ($10.0 million).

Coated Paper Division: Sales for the Division decreased $35.9 million, from
$152.3 million for the second quarter of 2000 to $116.4 million for the second
quarter of 2001. This decrease is due to lower average transaction prices for
pulp ($10.8 million) and coated groundwood paper ($4.5 million) and lower
shipments of newsprint ($11.7 million), market pulp (7.6 million) and coated
groundwood ($6.2 million). This decrease was partially offset by higher average
transaction prices for newsprint ($1.5 million) and uncoated groundwood
specialties ($0.6 million). See the previous discussion of product line results.
    Operating income decreased $33.0 million from $37.3 million for the second
quarter of 2000 to $4.3 million for the second quarter of 2001. This decrease
was primarily the result of lower average transaction prices for market pulp
($10.8 million) and coated groundwood ($4.5 million), higher operating costs due
to a biannual maintenance shut ($12.5 million), market-related downtime ($0.8
million) and higher prices for chemicals ($4.2 million). This decrease was
partially offset by higher transaction prices for newsprint ($1.5 million) and
uncoated groundwood specialties ($0.6 million).

Forest Products Division: Sales for the Division decreased $15.2 million from
$101.0 million for the second quarter of 2000 to $85.8 million for the second
quarter of 2001. This decrease is primarily the result of lower timber ($14.4
million) and lumber ($3.6 million) shipments partially offset by higher timber
transaction prices ($2.3 million). See the previous discussion of product line
results.
    Operating income for the Division decreased $7.8 million for the second
quarter of 2001 compared to the second quarter of 2000. Lower timber shipments
($1.9 million) and higher operating costs ($6.9 million) partially offset by
higher timber prices ($2.3 million) account for this decrease. Operating costs
for the Division were higher in the second quarter of 2001 compared to the same
period last year due to higher prices for timber cut from third party landowners
($4.5 million) and a charge for pine beetle damage ($3.4 million) offset
partially by lower fertilization expenses ($1.0 million).
    The continuing drought in the U.S. Southeast is contributing to conditions
that allow the southern pine beetle to flourish and expand the range of its
infestation. Bowater has incurred charges aggregating approximately $13.0
million over the past four quarters as a result of beetle damage. If

                                       15

<PAGE>   16

there is no change in conditions, we may incur additional beetle damage.

Other Items: In the second quarter of 2001, Bowater recognized a net pre-tax
gain on the sale of assets of $85.0 million. This gain is primarily the result
of the sale of a note receivable and recognition of deferred income (previously
in Other Long-term Liabilities) related to a 1999 installment sale of
timberlands. The pre-tax gain on this sale was $84.5 million ($19.2 million
after tax and minority interest). In the second quarter of 2000, we sold
timberlands resulting in a pre-tax gain of $0.1 million.

Corporate & Eliminations: The elimination of intersegment sales decreased $4.2
million, comparing the second quarter of 2001 to the second quarter of 2000.
Corporate expenses decreased $0.7 million.

Interest and Other Income and Expenses

Interest expense for the second quarter 2001 increased $2.9 million over the
same period in 2000. This increase was attributable to higher borrowings on our
credit facility due to the acquisition of the Grenada operations in August 2000.
Comparing the same periods, interest income decreased $1.0 million due to lower
average cash balances.
    Also in the second quarter of 2001, Bowater recorded a foreign exchange loss
of $11.4 million compared to a foreign exchange loss of $4.8 million during the
second quarter of 2000. The majority of our exchange gain (loss) amounts is
attributable to the change in currency exchange rates during the respective
quarters.
    Bowater's effective tax rate for the second quarter of 2001 was 50.8% versus
39.0% for the prior year's second quarter. The higher rate in 2001 was the
result of non-deductible foreign currency losses and the partially taxable
dividend received as a result of the sale of a note receivable.
    Minority interests in the net income of subsidiaries for the second quarter
of 2001 increased $29.2 million due primarily to the sale of a note receivable
and recognition of deferred income (previously in Other Long-term Liabilities)
related to a 1999 installment sale of timberlands.

                              Results of Operations
                     Six Months Ended June 30, 2001, versus
                                  June 30, 2000

For the first six months of 2001, Bowater had operating income of $229.3
million, compared to $145.7 million for the first six months of 2000. Operating
income for the first half of 2001 includes a net gain on sale of assets of $79.2
million compared to a net gain on sale of assets of $3.3 million for the first
half of 2000. Excluding these asset sales, operating income increased $7.7
million. Higher transaction prices for newsprint ($102.8 million) and uncoated
groundwood specialties ($4.8 million) partially offset by lower prices for
market pulp ($47.6 million) and coated groundwood ($2.4 million) and lower
shipments ($6.2 million, primarily pulp) account for the majority of this
increase. Higher operating costs as a result of maintenance and market-related
downtime ($43.5 million) higher fuel ($7.4 million) and chemicals ($10.4
million) costs, and a charge for beetle damage ($5.5 million) were partially
offset by lower prices for recovered paper ($7.6 million), a favorable Canadian
dollar exchange rate ($21.7 million), and lower selling, general and
administrative expenses ($8.3 million) primarily due to our stock-based
compensation programs.
    Net income for the first six months of 2001 was $56.3 million, or $1.08 per
diluted share, compared with net income of $50.9 million, or $0.95 per diluted
share, for the first six months of 2000. Sales for the first half of 2001 were
$1,190.1 million compared with $1,170.5 million for the first half of 2000.
    Presented below is a discussion of each significant product line followed by
a discussion of the results of each of the reported divisions.

                                       16

<PAGE>   17

                            Product Line Information

Sales by Product
-----------------------------------------------------------------
                                           Six Months Ended
                                               June 30,
                                      ---------------------------
(Unaudited, in millions)                  2001           2000
-----------------------------------------------------------------

Sales:
   Newsprint                            $   746.2     $   634.7
   Market pulp                              206.4         283.4
   Coated groundwood                        153.2         157.6
   Uncoated groundwood specialties           61.2          46.2
   Lumber, timber and other wood
       products                             180.3         220.4
   Elimination of intersegment sales       (157.2)       (171.8)
                                      ---------------------------
       Total sales                      $ 1,190.1     $ 1,170.5
-----------------------------------------------------------------

Newsprint  For the first six months of 2001, Bowater's average transaction price
for newsprint increased 16% compared to the first six months of 2000. On May 1,
and July 1, 2001, Bowater adjusted its domestic prices downward by $25 per
metric ton, thereby rescinding the $50 per metric ton increase announced March
1, 2001. We implemented price increases for our export newsprint markets during
the first half of 2001. Our shipments of newsprint were slightly higher compared
to shipments for the first six months of 2000, due primarily to the acquisition
of the Grenada operations in August 2000. Total United States demand and
consumption of newsprint decreased in the first six months of 2001 compared to
the first six months of 2000. Both North American mill inventories and United
States customer inventories increased, comparing the end of June 2001 levels to
the end of June 2000. North American offshore exports and U.S. imports of
newsprint decreased for the first half of 2001 compared to the first half of
2000.

Market Pulp  The average transaction price for Bowater's market pulp for the
first six months of 2001 decreased 19% compared to the first six months of 2000.
Our shipments of market pulp decreased 12% over the year ago period. NORSCAN
(United States, Canada, Finland, Norway and Sweden) market pulp shipments for
the first six months of 2001 decreased compared to the first six months of 2000.
NORSCAN producer pulp inventories ended the second quarter at 1.8 million metric
tons, or 32 day supply, 60% higher than at the end of June 2000.

Coated Groundwood  Bowater's average transaction price for coated groundwood
paper decreased 2% in the first six months of 2001 compared to the first six
months of 2000. Our shipments of coated groundwood paper were 1% lower compared
to shipments for the six months of 2000. For the industry, United States coated
groundwood paper shipments were 2% lower compared to the first half of 2000.
Coated groundwood paper inventory held by the United States mills at the end of
June 2001 decreased 10% compared to the end of June 2000. Magazine advertising
pages and catalog mailings (measured by standard A mail weight) decreased
compared to the first six months of 2000.

Lumber  For the first six months of 2001, Bowater's average transaction price
for lumber decreased 8% compared to the first six months of 2000. Shipments of
lumber were down 28% compared to the first six months of 2000. Market-related
curtailments and downtime for capital improvements resulted in lower shipments
for the period.

Timber  Bowater's shipments of timber products were down 25% in the first six
months of 2001 compared to the first six months of 2000. We plan to sell
approximately 250,000 acres of our United States timberlands and expect to
complete the sale before the end of 2001. We have adjusted harvest activities in
preparation for this sale. Continued weak markets have also adversely affected
timber sales in the U.S. South. The average transaction price for timber
decreased 9% from the year-ago period, primarily the result of weak timber
markets in the South.

                             Divisional Performance

Sales by Division (1)
-----------------------------------------------------------
                                       Six Months Ended
                                           June 30,
                                   ------------------------
(In millions)                          2001         2000
-----------------------------------------------------------
Newsprint Division                  $   911.9    $   835.7
Coated Paper Division                   255.1        286.1
Forest Products Division                180.3        220.6
Corporate & eliminations               (157.2)      (171.9)
                                   ------------------------
    Total sales                     $ 1,190.1    $ 1,170.5
-----------------------------------------------------------


                                       17

<PAGE>   18

Operating Income (Loss) by Division (1)
-----------------------------------------------------------
                                       Six Months Ended
                                           June 30,
                                   ------------------------
(In millions)                          2001         2000
-----------------------------------------------------------
Newsprint Division                  $  151.6     $   102.2
Coated Paper Division                   22.8          62.3
Forest Products Division                (2.3)         17.8
Other items                             79.2           3.3
Corporate & eliminations               (22.0)        (39.9)
                                 --------------------------
    Total operating income          $  229.3     $   145.7
-----------------------------------------------------------

(1) Financial results for the production and sale of market pulp are included in
    the Newsprint Division or the Coated Paper Division, depending upon which
    site manufactures the product. The Pulp Division is responsible for the
    marketing and distribution of the product, and its administrative expenses
    are included in "Corporate & eliminations."

Newsprint Division: Sales for the Division increased $76.2 million for the first
six months of 2001 compared to the first six months of 2000. This increase is
primarily the result of higher average transaction prices for newsprint ($96.8
million) and uncoated groundwood specialties ($4.6 million) and higher newsprint
shipments ($21.8 million, which includes the acquisition of the Grenada
operations with the other sites having lower shipments). This increase was
partially offset by lower pulp average transaction prices ($33.6 million) and
shipments ($19.2 million). See the previous discussion of product line results.

    Operating income for the first six months of 2001 increased $49.4 million
compared with operating income of $102.2 million for the first six months of
2000. Higher prices for newsprint ($96.8 million) and uncoated groundwood
specialties ($3.4 million) partially offset by lower prices for market pulp
($33.6 million) account for the majority of this increase. Operating costs for
the division increased in the six months of 2001 due to maintenance and
market-related downtime ($28.9 million) and higher prices for fuel (6.9 million)
and chemicals ($4.4 million). This increase was partially offset by lower
recovered paper prices ($7.6 million) and a favorable Canadian dollar exchange
rate (21.7 million).

Coated Paper Division: Sales for the Division decreased $31.0 million for the
first six months of 2001 compared to the first six months of 2000, due to lower
average transaction prices for market pulp ($14.1 million) and coated groundwood
paper ($2.2 million) and lower shipments of newsprint ($13.2 million) and pulp
($12.1 million). This decrease was partially offset by higher transaction prices
for newsprint ($5.9 million) and uncoated groundwood specialties ($2.2 million).
See the previous discussion of product line results.
    Operating income decreased $39.5 million for the first six months of 2001
compared to the first six months of 2000. This decrease was primarily the result
of lower transaction prices for market pulp ($14.1 million), lower shipments
($3.1 million, primarily newsprint and pulp) and higher operating costs due to a
biannual maintenance shut ($12.5 million), market-related downtime ($3.0
million) and higher prices for chemicals ($6.0 million) and fuel ($0.8 million).
This decrease was partially offset by higher transaction prices for newsprint
($5.9 million) and uncoated groundwood specialties ($2.2 million).

Forest Products Division: Sales for the Division decreased $40.3 million for the
first six months of 2001 compared to the first six months of 2000. This decrease
is primarily the result of lower lumber ($2.1 million) and timber ($6.3 million)
transaction prices and lumber ($9.8 million) and timber ($22.6 million)
shipments. See the previous discussion of product line results.
    Operating income for the Division decreased $20.1 million for the first six
months of 2001 compared to the first six months of 2000, due primarily to lower
lumber ($2.1 million) and timber ($6.3 million) transaction prices and lower
timber shipments ($3.7 million). Operating costs for the Division were higher in
the six months of 2001 compared to the same period last year due to a charge for
pine beetle damage ($3.4 million). Operating costs were also negatively impacted
by the startup of two recently modernized sawmills.
    The continuing drought in the U.S. Southeast is contributing to conditions
that allow the southern pine beetle to flourish and expand the range of its
infestation. Bowater has incurred charges aggregating approximately $13.0
million over the past four quarters as a result of beetle damage. If there is no
change in conditions, we may incur additional beetle damage.

Other Items: In the second quarter of 2001, Bowater recognized a net pre-tax
gain on the sale of assets of $85.0 million. This gain is primarily the result
of the sale of a note receivable and recognition of deferred


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<PAGE>   19

income (previously in Other Long-term Liabilities) related to a 1999 installment
sale of timberlands. The pre-tax gain on this sale was $84.5 million ($19.2
million after tax and minority interest). In April 2001, we reached a final
settlement in connection with the sale of GNP to Inexcon. As a result, we
recognized a pre-tax charge of $5.8 million in the first quarter of 2001. In the
first six months of 2000, we sold assets and timberlands resulting in a pre-tax
gain of $3.3 million.

Corporate & Eliminations: The elimination of intersegment sales decreased $14.7
million, comparing the first half of 2001 to the first half of 2000. Corporate
expenses decreased $17.9 million primarily due to credits recognized for
stock-based compensation (12.1 million) in the first six months of 2001 and
higher benefit costs ($6.7 million) in the first six months of 2000.

Interest and Other Income and Expenses

Interest expense for the first six months of 2001 increased $6.3 million over
the same period in 2000. This increase was attributable to higher borrowings on
our credit facility due to the acquisition of the Grenada operations in August
2000. Comparing the same periods, interest income decreased $1.1 million due to
lower average cash balances.
     Also in the first half of 2001, Bowater recorded a foreign exchange loss of
$6.6 million compared to a loss of $5.3 million during the first half of 2000.
The majority of our exchange gain (loss) amounts is the change in currency
exchange rates during the respective quarters.
    Bowater's effective tax rate for the first six months of 2001 was 43.7%
compared to 40.1% for the first six months of 2000. The higher rate in 2001 was
the result of non-deductible foreign currency losses and the partially taxable
dividend received as a result of the sale of a note receivable.
    Minority interests in the net income of subsidiaries for the first six
months of 2001 increased $34.4 million primarily due to the sale of a note
receivable and recognition of deferred income (previously in Other Long-term
Liabilities) related to a 1999 installment sale of timberlands.

                         Liquidity and Capital Resources

Bowater's cash and cash equivalents decreased $0.3 million to $19.7 million at
June 30, 2001, from $20.0 million at December 31, 2000. We generated cash from
operations of $180.3 million, generated $7.6 million of cash from investing
activities, and used $188.2 million of cash for financing activities. Cash flow
from operations, capital expenditures, the sale of a note receivable, dividends
and payments of long-term debt account for most of our significant cash
transactions during the first six months of 2001.

Cash from Operating Activities:
During the first six months of 2001, Bowater's operations generated $180.3
million of cash compared to $128.2 million of cash during the first six months
of 2000, an increase of $52.1 million. Higher operating income and lower working
capital needs accounted for the increase in 2001.

Cash from Investing Activities:
Cash generated by investing activities in the first half of 2001 totaled $7.6
million, compared with a use of $142.1 million during the six months of 2000.
During the first six months of 2001, we received $122.6 million from the sale of
a note receivable. Capital expenditures were $3.0 million higher than the
previous year due primarily to the construction of a new fiber line at our
Catawba location. In the first six months of 2000, we paid cash of $12.9 million
on the maturity of Canadian dollar hedging contracts. For the first six months
of 2001, the cash paid for the maturity of Canadian dollar hedging contracts is
included under Cash from Operating Activities.
    We had no marketable securities transactions in the first six months of 2001
compared with net proceeds of $1.8 million in the first six months of 2000.
    Bowater plans to sell approximately 250,000 acres of its United States
timberlands and expects to complete the sale before the end of 2001.

Cash from Financing Activities:
Cash used for financing activities was $188.2 million for the first six months
of 2001 compared with $5.2 million generated during the first six months of
2000. During the first six months of 2001, Bowater received $4.6 million (net of
payments of $454.6 million) from its short-term credit facilities. In June 2001,
we reduced the amount of our 364-day credit facility from $750 million to $450
million, while retaining our $350 million, five-year facility. In the first six
months of 2000, we had net proceeds from our short-term credit facilities of
$153.1 million. Also in the first six months of 2001, we made payments on
long-term borrowings amounting to $107.4 million. During the first six months of
the prior year, we

                                       19

<PAGE>   20

repurchased a portion of our 9.25% Debentures due 2002 for $20.8 million. Other
payments on our long-term borrowings during the first quarter of 2000 were $10.1
million for a total of $30.9 million.
    Cash dividends paid in the first six months of 2001 increased $57.9 million
from the prior year period primarily due to dividend payments to the minority
shareholder of Calhoun Newsprint Company.
    During 1999, the Board of Directors authorized a new stock repurchase
program allowing us to buy back up to 5.5 million shares of our outstanding
common stock. We made no purchases under this program during the first six
months of 2001. During the first six months of 2000, we have purchased 1.9
million shares at a cost of $92.1 million. Since the beginning of the program,
we purchased 3.2 million shares at a total cost of $155.5 million.
    We continually consider various options for the use of our cash, including
internal capital investments, share repurchases, investments to grow our
businesses and additional debt reductions.

                               Pending Transaction

In April 2001, Bowater announced the signing of a definitive agreement by which
Bowater will acquire all of the outstanding shares of Alliance Forest Products
Inc. (Alliance). Under the terms of the agreement, Bowater will pay C$13.00 in
cash plus 0.166 shares of Bowater stock for each Alliance common share based
upon the average trading price for twenty days prior to the agreement, which
results in an implied per share value of C$26 for each Alliance common share.
The acquisition will be accounted for in accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations" and for accounting
purposes, the transaction will be valued based on the price of Bowater's shares
a few days before and after the transaction date. Alliance shareholders may
choose to receive shares of Bowater common stock or Canadian-listed shares of a
Bowater Canadian subsidiary, which are exchangeable, on a one-for-one basis, at
any time into Bowater shares. The exchangeable shares have voting and dividend
rights substantially equivalent to those of Bowater common shares. The
definitive agreement provides for a termination fee of U.S. $20 million (C$31.5
million) payable by Alliance under certain circumstances, and Alliance has
agreed not to solicit or encourage any competing offers.
    The aggregate value of the transaction, including assumed debt, is
approximately C$1.2 billion (U.S. $770 million, as of April 2001). The boards of
directors of both companies and the shareholders of Alliance have approved the
transaction.
    In order to consummate the cash portion of the acquisition, Bowater has
arranged a $500 million 9-month bridge financing. Long-term notes or bonds are
expected to replace the bridge financing.
    Alliance is an integrated company specializing in timber harvesting and
forest management, as well as in the production and sale of newsprint, uncoated
groundwood papers, pulp, lumber and related products. Alliance has operations in
Canada and the United States. If the acquisition is consummated, Bowater will
increase its annual newsprint, coated and specialty papers capacity to
approximately 4.6 million metric tons. Annual lumber capacity will also increase
to 1.0 billion board feet.
    Canadian regulatory agencies have approved the transaction. Bowater is
currently responding to the United States Department of Justice request for
additional information. Subject to the expiration or termination of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, Bowater now expects to close the purchase near the end of
the third quarter of 2001. If the transaction does not close by September 30,
2001, Bowater or Alliance may terminate the transaction, without penalty, in
accordance with the definitive agreement.

                              Accounting Standards

In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Bowater
adopted this Standard on April 1, 2001, and accounts for transactions relating
to the Standard in accordance with its provisions.
    In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. The Alliance acquisition
will be accounted for under Statement 141. Under Statement 142, goodwill and
intangible assets with indefinite useful lives will no longer be amortized, but
be tested for impairment at

                                       20

<PAGE>   21

least on an annual basis in accordance with the provisions of Statement 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142. Bowater is required to adopt the provisions of Statement 141
immediately. Bowater is required to adopt Statement 142 on January 1, 2002,
except with regard to business combinations initiated prior to July 1, 2001. As
of June 30, 2001, Bowater has unamortized goodwill in the amount of $854.9
million. Amortization expense for the three and six months ended June 30, 2001
was $6.0 million and $11.9 million, respectively. Because of the extensive
effort needed to comply with adopting Statement 142, it is not practicable to
reasonably estimate the impact of adopting this Statement on our financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.

    In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation." This Statement requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. Statement 143 is effective for fiscal years beginning after June
15, 2002. Bowater will adopt the Statement effective January 1, 2003 and is
currently assessing the impact on its operations.

Item 3.  Market Risk

Bowater's market risk disclosure included in its 2000 Form 10-K, Part II, Item
7A, is still applicable as of June 30, 2001. We have updated the disclosure
concerning our Canadian dollar forward contracts and included additional
disclosure on our commodity and currency option contracts, which is included in
Footnote 10 in this Form 10-Q.

                                       21
<PAGE>   22


                      BOWATER INCORPORATED AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION


Item 1.  Legal Proceedings.

         In January 2000, the Antitrust Division of the United States Department
of Justice informed Bowater that it was conducting a review of possible
anti-competitive practices in the North American newsprint industry. In June
2001, the Antitrust Division informed Bowater that it had concluded its review
with no action being taken.

Item 4.  Submission of Matters to a Vote of Security Holders.

         On May 9, 2001, at the Company's Annual Meeting of Shareholders, the
following matter was submitted to a vote of the shareholders:

         A resolution electing the following class of directors for a term of
three years: Arnold M. Nemirow (45,484,539 votes in favor; 64,193 votes
withheld); Arthur R. Sawchuk (45,483,961 votes in favor; 64,771 votes withheld);
and Cinda A. Hallman (45,476,620 votes in favor; 72,112 votes withheld). The
names of each other director whose term of office as a director continued after
the meeting are: Francis J. Aguilar, Richard Barth, Kenneth M. Curtis, Charles
J. Howard, James L. Pate and John A. Rolls.


Item 6.  Exhibits and Reports on Form 8-K.

         (a)      Exhibits (numbered in accordance with Item 601 of
                  Regulation S-K):

         Exhibit No.    Description
         -----------    -----------

         10.1           Amendment No. 3 dated as of June 20, 2001, to the
                        Five-Year Credit Agreement dated as of June 24, 1998,
                        between Bowater Incorporated, The Chase Manhattan Bank,
                        as Administrative Agent, and the lenders signatory
                        thereto.

         10.2           Third Amended and Restated 364-Day Credit Agreement
                        dated as of June 20, 2001, between Bowater
                        Incorporated, The Chase Manhattan Bank, as
                        Administrative Agent, and the lenders signatory thereto.

         10.3           Bridge Credit Agreement, dated as of July 2, 2001,
                        between Bowater Incorporated, The Chase Manhattan Bank,
                        as Administrative Agent, and the lenders signatory
                        thereto.

         (b)      Reports on Form 8-K:

         On April 4, 2001, the Company filed a current report on Form 8-K dated
         April 2, 2001, disclosing the issuance of a press release announcing
         the signing of a definitive agreement by which the Company will acquire
         all of the outstanding shares of Alliance Forest Products Inc.

         On May 30, 2001, the Company filed Form 8-K/A as Amendment No. 1 to the
         Form 8-K dated April 2, 2001, disclosing the unaudited pro forma
         combined financial statements of the Company, which give effect to the
         anticipated acquisition of Alliance Forest Products Inc.



                                            22


<PAGE>   23


                      BOWATER INCORPORATED AND SUBSIDIARIES

                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                               BOWATER INCORPORATED

                                               By /s/  David G. Maffucci
                                                  -----------------------------
                                                  David G. Maffucci
                                                  Senior Vice President and
                                                  Chief Financial Officer



                                               By /s/  Michael F. Nocito
                                                  -----------------------------
                                                  Michael F. Nocito
                                                  Vice President and Controller





Dated:   August 14, 2001








                                       23

<PAGE>   24



                                INDEX TO EXHIBITS



         Exhibit No.    Description
         -----------    -----------

         10.1           Amendment No. 3 dated as of June 20, 2001, to the
                        Five-Year Credit Agreement dated as of June 24, 1998,
                        between Bowater Incorporated, The Chase Manhattan Bank,
                        as Administrative Agent, and the lenders signatory
                        thereto.

         10.2           Third Amended and Restated 364-Day Credit Agreement
                        dated as of June 20, 2001, between Bowater
                        Incorporated, The Chase Manhattan Bank, as
                        Administrative Agent, and the lenders signatory thereto.

         10.3           Bridge Credit Agreement, dated as of July 2, 2001,
                        between Bowater Incorporated, The Chase Manhattan Bank,
                        as Administrative Agent, and the lenders signatory
                        thereto.