<PAGE>

                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, 2002

                                       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 of each of the issuer's
classes of common stock, as of August 9, 2002.

                 Class                             Outstanding at August 9, 2002
       Common Stock, $1.00 Par Value                    55,250,039 Shares
<PAGE>

                              BOWATER INCORPORATED

                                    I N D E X

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                              Number
                                                                                              ------
<S>             <C>                                                                         <C>
PART I   FINANCIAL INFORMATION

         1.  Financial Statements:

                  Consolidated Balance Sheet at June 30, 2002,
                  and December 31, 2001                                                          3

                  Consolidated Statement of Operations for the Three and
                  Six Months Ended June 30, 2002, and
                       June 30, 2001                                                             4

                  Consolidated Statement of Capital Accounts
                  for the Six Months Ended June 30, 2002                                         5

                  Consolidated Statement of Cash Flows for the
                  Six Months Ended June 30, 2002, and
                  June 30, 2001                                                                  6

                  Notes to Consolidated Financial Statements                                  7-14

         2.  Management's Discussion and Analysis of
                 Financial Condition and Results of Operations                               15-24

         3.  Quantitative and Qualitative Disclosures About Market Risk                         25

  PART II   OTHER INFORMATION

  Exhibits and Reports on Form 8-K                                                              26

  SIGNATURES                                                                                    27
</TABLE>


                                        2
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                     (UNAUDITED, IN MILLIONS OF US DOLLARS)

<TABLE>
<CAPTION>
                                                                                      June 30,        December 31,
                                                                                        2002             2001
                                                                                      --------        ------------
<S>                                                                                   <C>             <C>
                                ASSETS
Current assets:
   Cash and cash equivalents                                                          $   29.7         $   28.3
   Marketable securities                                                                   0.5              2.1
   Accounts receivable, net                                                              357.5            367.0
   Inventories                                                                           257.4            250.5
   Other current assets                                                                   54.6             41.7
                                                                                      --------         --------
      Total current assets                                                               699.7            689.6
                                                                                      --------         --------

   Timber and timberlands                                                                198.7            227.7
   Fixed assets, net                                                                   3,738.2          3,818.4
   Goodwill                                                                              843.0            843.0
   Other assets                                                                          197.5            182.3
                                                                                      --------         --------
      Total assets                                                                    $5,677.1         $5,761.0
                                                                                      ========         ========

                 LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current installments of long-term debt                                             $   80.8         $   73.0
   Short-term bank debt                                                                  178.0            341.7
   Accounts payable and accrued liabilities                                              337.1            437.9
   Income taxes payable                                                                    6.8               --
   Dividends payable                                                                      11.1             10.9
                                                                                      --------         --------
      Total current liabilities                                                          613.8            863.5
                                                                                      --------         --------

   Long-term debt, net of current installments                                         2,049.1          1,828.0
   Other long-term liabilities                                                           362.0            362.3
   Deferred income taxes                                                                 583.4            600.0
   Minority interests in subsidiaries                                                     77.8             85.2
   Commitments and contingencies                                                            --               --

Shareholders' equity:

   Common stock, $1 par value. Authorized 100,000,000 shares; issued 66,831,867
      and 66,323,992 shares at June 30, 2002 and December 31,
      2001, respectively                                                                  66.8             66.3
   Exchangeable shares, no par value. Unlimited shares authorized;
      1,683,063 and 2,008,588 outstanding at June 30, 2002 and
      December 31, 2001, respectively                                                     80.2             96.0
   Additional paid-in capital                                                          1,592.6          1,569.9
   Retained earnings                                                                     771.5            837.8
   Accumulated other comprehensive income (loss)                                         (33.8)           (61.6)
   Treasury stock, at cost.  11,618,678 and 11,619,812 shares at June 30,
      2002 and December 31, 2001, respectively                                          (486.3)          (486.4)
                                                                                      --------         --------
      Total shareholders' equity                                                       1,991.0          2,022.0
                                                                                      --------         --------
      Total liabilities and shareholders' equity                                      $5,677.1         $5,761.0
                                                                                      ========         ========
</TABLE>

           See accompanying notes to consolidated financial statements


                                        3
<PAGE>

                      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,
                                                                   2002          2001           2002          2001
                                                                ----------    ----------    ----------     ----------
<S>                                                             <C>           <C>           <C>            <C>
Sales                                                            $ 646.8       $ 585.2       $ 1,271.0     $ 1,190.1
Cost of sales, excluding depreciation, amortization
   and cost of timber harvested                                    508.5         385.2           979.1         761.2
Depreciation, amortization and cost of timber harvested             86.1          74.8           172.4         151.6
Distribution costs                                                  50.7          41.3           107.2          81.2
Selling and administrative expense                                  40.4          29.2            75.9          46.0
Net gain on sale of assets                                           3.5          85.0            75.0          79.2
                                                                 -------       -------       ---------     ---------
    Operating income (loss)                                        (35.4)        139.7            11.4         229.3

Other expense (income):
  Interest income                                                   (1.2)         (3.0)           (2.2)         (6.6)
  Interest expense, net of capitalized interest                     41.3          33.8            83.1          69.0
  Other, net                                                         5.2          10.5             5.1           5.9
                                                                 -------       -------       ---------     ---------
                                                                    45.3          41.3            86.0          68.3
                                                                 -------       -------       ---------     ---------

Income (loss) before income taxes and minority interests           (80.7)         98.4           (74.6)        161.0

Provision for income tax expense (benefit)                         (22.8)         50.0           (25.3)         70.4
Minority interests in net income (loss) of subsidiaries             (4.2)         29.8            (5.8)         34.3
                                                                 -------       -------       ---------     ---------

Net income (loss)                                                  (53.7)         18.6           (43.5)         56.3

Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustments                           2.3           2.0             2.9          (0.3)
  Unrealized gain (loss) on hedged transactions                     23.4          14.7            24.9          (1.0)
  Minimum pension liability adjustments                               --            --              --          (0.2)
                                                                 -------       -------       ---------     ---------

Comprehensive income (loss)                                      $ (28.0)      $  35.3       $   (15.7)    $    54.8
                                                                 =======       =======       =========     =========

Basic earnings (loss) per common share*                          $ (0.95)      $  0.36       $   (0.77)    $    1.09
                                                                 =======       =======       =========     =========

Diluted earnings (loss) per common share*                        $ (0.95)      $  0.36       $   (0.77)    $    1.08
                                                                 =======       =======       =========     =========
</TABLE>

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

           See accompanying notes to consolidated financial statements


                                        4
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2002
         (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, 2001                                 $66.3      $96.0       $1,569.9      $837.8       $(61.6)     $(486.4)
Net income (loss)                                               --         --             --       (43.5)         --           --
Retraction of exchangeable shares (325,525 common
   shares issued and exchangeable shares retracted)            0.3      (15.8)          15.5          --          --           --
Dividends on common stock ($0.40 per share)                     --         --             --       (22.8)         --           --
Foreign currency translation                                    --         --             --          --         2.9           --
Stock options exercised (182,350 shares)                       0.2         --            5.8          --          --           --
Tax benefit on exercise of stock options                        --         --            1.4          --          --           --
Unrealized gain on hedged transactions, net of tax
   expense of $15.2 million                                     --         --             --          --        24.9           --
Treasury stock used for dividend reinvestment plans
   and to pay employee and director benefits
   (1,134 shares)                                               --         --             --          --          --          0.1
                                                             -----      -----       --------      ------       -----       ------
Balance at June 30, 2002                                     $66.8      $80.2       $1,592.6      $771.5       $(33.8)     $(486.3)
                                                             =====      =====       ========      ======       =====       ======
</TABLE>

           See accompanying notes to consolidated financial statements


                                        5
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                     (UNAUDITED, IN MILLIONS OF US DOLLARS)
<TABLE>
<CAPTION>
                                                                         Six Months Ended
                                                                       --------------------
                                                                       June 30,     June 30,
                                                                         2002         2001
                                                                       --------     --------
<S>                                                                    <C>          <C>
Cash flows from  operating activities:
Net income (loss)                                                       $(43.5)      $ 56.3
Adjustments to reconcile net income (loss) to net cash
  provided by (used for) operating activities:
Depreciation, amortization and cost of
   timber harvested                                                      172.4        151.6
Deferred income taxes                                                    (35.5)        29.8
Minority interests in net income (loss) of subsidiaries                   (5.8)        34.3
Net gain on sale of assets                                               (75.0)       (79.2)
Payments on maturity of hedging contracts                                 (7.1)        (9.3)
Changes in working capital:
  Accounts receivable, net                                                 9.5         44.7
  Inventories                                                             (6.9)        (9.3)
  Accounts payable and accrued liabilities                               (45.5)       (47.9)
  Income taxes payable                                                     6.8         19.8
Other, net                                                                 6.8        (14.7)
                                                                        ------       ------
          Net cash from (used for) operating activities                  (23.8)       176.1
                                                                        ------       ------

Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands                   (125.0)      (115.0)
Disposition of assets, including timber and timberlands                   19.9          4.2
Proceeds from the monetization of notes receivable                        88.1        122.6
Cash invested in marketable securities                                    (1.5)          --
Cash from maturity of marketable securities                                3.2           --
                                                                        ------       ------
          Net cash from (used for) investing activities                  (15.3)        11.8
                                                                        ------       ------

Cash flows from financing activities:
Cash dividends, including minority interests                             (26.6)       (85.6)
Short-term financing                                                     588.3        459.2
Short-term financing repayments                                         (755.5)      (454.6)
Proceeds from / payments of long-term debt                               228.3       (107.4)
Stock options exercised                                                    6.0          0.2
                                                                        ------       ------
          Net cash from (used for) financing activities                   40.5       (188.2)
                                                                        ------       ------

Net increase (decrease) in cash and cash equivalents                       1.4         (0.3)

Cash and cash equivalents at beginning of year                            28.3         20.0
                                                                        ------       ------
Cash and cash equivalents at end of period                              $ 29.7       $ 19.7
                                                                        ======       ======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest, including capitalized interest of $3.4 and $5.8             $ 87.0       $ 89.9
  Income taxes                                                          $ 16.6       $ 13.1
</TABLE>

         See accompanying notes to consolidated statements


                                        6
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

1.       Basis of Presentation

         The accompanying consolidated financial statements include the accounts
         of Bowater Incorporated and Subsidiaries as of June 30, 2002. The
         consolidated statement of operations for the six-month period ended
         June 30, 2001 does not include the impact of the acquisition of
         Alliance Forest Products Inc. (Alliance), which closed during September
         2001. The consolidated balance sheet as of June 30, 2002, and the
         related statements of operations, capital accounts and cash flows for
         the six-month period then ended are unaudited. 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, 2002, are not necessarily indicative of the results to be expected
         for the full year. These financial statements should be read in
         conjunction with the consolidated financial statements, critical
         accounting policies, significant accounting policies and the notes to
         the consolidated financial statements included in the Company's most
         recent Annual Report on Form 10-K/A. Certain prior year amounts in the
         financial statements and the notes have been reclassified to conform to
         the 2002 presentation.

2.       Net Gain on Sale of Assets

         In January 2002, Bowater completed the sale of approximately 116,000
         acres of timberland for aggregate consideration of $104.2 million. We
         received $5.1 million in cash after expenses and $99.1 million in notes
         receivable. In March 2002, we monetized the notes receivable of $99.1
         million for net cash proceeds of $88.1 million. These transactions
         resulted in a net pre-tax gain of $70.4 million.

         -        The notes receivable were monetized through a
                  bankruptcy-remote limited liability company. The
                  bankruptcy-remote subsidiary is a qualified special purpose
                  entity (QSPE) under Statement of Financial Accounting
                  Standards (SFAS) No. 140 and is not consolidated in Bowater's
                  financial statements.

         -        This QSPE has issued fixed rate senior secured notes totaling
                  $89.2 million, which are secured by the notes receivable held
                  by the QSPE. The value of these senior secured notes are equal
                  to approximately 90% of the value of the notes receivable. The
                  full principal amount of the notes receivable is backed by a
                  letter of credit issued by a third party financial
                  institution.

         -        Bowater retains an interest in the excess future cash flows of
                  the QSPE (cash received from notes receivable vs. cash paid
                  out on the senior secured notes). Bowater retained an interest
                  in the QSPE of $7.1 million. The principal variable in
                  determining the fair value of future expected excess cash
                  flows of the retained interest is the discount rate, as it
                  consists of a note with a low level of credit risk,
                  contractually due in 15 years and not subject to prepayment.
                  The discount rate used for the note is 6.91%.

         -        We recorded a $3.9 million loss on the monetization of the
                  notes receivable, which was based on the difference in the
                  original carrying amount of the notes (allocated between the
                  asset monetized and the retained interest) and the fair value
                  at the date of the monetization.

         Also in the first six months of 2002, Bowater sold approximately 4,600
         acres of other timberlands and recorded a net pre-tax gain of $4.6
         million.

         In the second quarter of 2001, we monetized the notes receivable in
         connection with a 1999 land sale and recognized a net pre-tax gain of
         $84.5 million. In 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 consisting of two notes receivable.
         We recorded the transaction as an installment sale, and as of December
         31, 1999, recorded a pre-tax gain of $17.4 million and had remaining
         deferred pre-tax gains of approximately $95.0 million.

         CNC monetized the $145.9 million notes receivable through a
         bankruptcy-remote limited liability company, which is a QSPE under SFAS
         No. 140, 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
         $84.5 million net pre-tax gain was comprised of the deferred pre-tax
         gain on the 1999 timberland sale of $95.0 million offset by a loss on
         the 2001 monetization of the notes receivable of $10.5 million. Bowater
         retained an interest in the QSPE of $12.5 million. As a result of the
         monetization, a dividend of $60.1 million was paid to the minority
         shareholder of CNC during the second quarter of 2001.


                                        7
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

         Other net gains on asset sales of $0.5 million were recorded in the
         second quarter of 2001. 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 $5.8 million pre-tax charge, or $0.07 per diluted share,
         after tax.

3.       Acquisition/Divestiture-Related Liabilities

         In connection with the Alliance acquisition, Bowater recorded employee
         termination costs of approximately $17.0 million, which included
         approximately $13.0 million of employee termination costs recorded in
         connection with the permanent closing of a newsprint machine and other
         assets at the Coosa Pines, Alabama, facility. At December 31, 2001, the
         remaining accrual was $15.5 million (net of exchange loss of $0.1
         million). Approximately $13.9 million was paid during the first six
         months of 2002. The remaining accrual, $1.7 million (including exchange
         gain of $0.1 million), is expected to be paid during the second half of
         2002 and is included in "Accounts payable and accrued liabilities," in
         the Consolidated Balance Sheet.

4.       Dividends to Minority Interest Shareholder

         During the first six months of 2002, the Board of Directors of CNC
         declared dividends of $8.3 million. As a result, $4.1 million was paid
         to the minority shareholder of CNC. 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.

5.       Commitments and Contingencies

         a)       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.

         b)       Bowater, several other paper companies, and 120 other
                  companies have been named as defendants in asbestos personal
                  injury actions based on product liability claims. Bowater has
                  denied the allegations and no specific product of Bowater has
                  been identified by the plaintiffs in any of the actions as
                  having caused or contributed to any individual plaintiff's
                  alleged asbestos related injury.

                  These suits have been filed by approximately 570 claimants who
                  sought monetary damages in civil actions pending in state
                  courts in Missouri, Illinois, New York, Mississippi and Texas.
                  Approximately 60 of these actions have been dismissed already,
                  either voluntarily or by summary judgment. We believe that all
                  of these asbestos-related claims are covered by insurance,
                  subject to any applicable deductibles and our insurers' rights
                  to dispute coverage.

                  While it is not possible to predict with certainty the outcome
                  of these matters, based upon the advice of special counsel, at
                  this time we do not expect these claims to have a material
                  adverse impact on Bowater's business, financial position or
                  results of operations.

6.       Other (Income) Expense

         "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,
                                               2002        2001        2002       2001
(Unaudited, in millions)                     -------------------------------------------
<S>                                           <C>         <C>         <C>        <C>
Foreign exchange (gain) loss                  $ 4.6       $11.4       $3.5       $6.6
(Income) loss from joint venture                0.8        (1.3)       1.9       (1.1)
Miscellaneous (income) expense                 (0.2)        0.4       (0.3)       0.4
                                              -----       -----       ----       ----
                                              $ 5.2       $10.5       $5.1       $5.9
                                              -----       -----       ----       ----
</TABLE>


                                        8
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

7.       Goodwill

         Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
         on January 1, 2002. Under SFAS No. 142, goodwill and intangible assets
         with indefinite useful lives will no longer be amortized but will be
         tested for impairment at least on an annual basis in accordance with
         the provisions of SFAS No. 142. As of June 30, 2002, we had unamortized
         goodwill in the amount of $843.0 million and no intangible assets with
         indefinite useful lives (pending the final valuation of the Alliance
         acquisition). For segment reporting purposes, goodwill of $540 million
         and $303 million is included in the Newsprint Division and the Canadian
         Forest Products Division reportable segments, respectively and
         includes five pulp and paper mills.

         During the second quarter of 2002, Bowater completed the transitional
         goodwill impairment test prescribed in SFAS No. 142 with respect to
         existing goodwill. The transitional goodwill impairment test involved a
         comparison of the fair value of each of the Company's reporting units,
         as defined under SFAS No. 142, with its carrying amount. Fair value was
         determined based on a valuation study performed by an independent third
         party. In making its recommendation of fair value the independent
         valuation firm relied primarily on the discounted cash flow method.
         This method uses future projections of cash flows from each of the
         reporting units and includes, among other estimates, projection of
         future product pricing, product costs, capital spending and an
         assumption of the company's weighted average cost of capital. Changes
         in any of these estimates could have a material effect on the fair
         value of these assets in future measurement periods. On an ongoing
         basis the Company expects to perform its impairment tests during the
         fourth quarter.

         As a result of the transitional impairment tests performed as of
         January 1, 2002, there was no indicator of goodwill impairment,
         however, the amount by which fair value exceeded book value for certain
         of the reporting units was not significant. Therefore, in future
         measurements of fair value, adverse changes in discounted cash flow
         assumptions could result in an impairment of goodwill that would
         require a non-cash charge to the income statement and may have a
         material effect on the financial condition or operating results of the
         company.

         The reconciliation of net income and earnings per share, adjusted to
         exclude goodwill amortization expense, net of tax, is as follows:

<TABLE>
<CAPTION>
                                                                   --------------------------------------------
                                                                    THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                   --------------------------------------------
                                                                   JUNE 30,     JUNE 30,    JUNE 30,    JUNE 30,
                                                                    2002         2001        2002        2001
(Unaudited, in millions, except per-share amounts)                 --------------------------------------------
<S>                                                                <C>          <C>         <C>          <C>
Net income (loss):
       Reported net income (loss)                                  $(53.7)      $ 18.6      $(43.5)      $ 56.3
       Goodwill amortization, net of tax                               --          6.2          --         11.9
                                                                   ------       ------      ------       ------
Adjusted net income (loss)                                         $(53.7)      $ 24.8      $(43.5)      $ 68.2
                                                                   ------       ------      ------       ------
Basic earnings (loss) per common share:
       Reported basic earnings (loss) per common share             $(0.95)      $ 0.36      $(0.77)      $ 1.09
       Goodwill amortization, net of tax                               --         0.12          --         0.23
                                                                   ------       ------      ------       ------
Adjusted basic earnings (loss) per common share                    $(0.95)      $ 0.48      $(0.77)      $ 1.32
                                                                   ------       ------      ------       ------
Diluted earnings (loss) per common share:
       Reported diluted earnings (loss) per common share           $(0.95)      $ 0.36      $(0.77)      $ 1.08
       Goodwill amortization, net of tax                               --         0.12          --         0.23
                                                                   ------       ------      ------       ------
Adjusted diluted earnings (loss) per common share                  $(0.95)      $ 0.48      $(0.77)      $ 1.31
                                                                   ------       ------      ------       ------
</TABLE>


                                        9
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED


8.       Earnings Per Share

         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,
(Unaudited, in millions, except per-share amounts)                 2002         2001        2002         2001
                                                                 ----------------------------------------------
<S>                                                               <C>          <C>         <C>          <C>
Basic Computation:
Basic income (loss) available to common shareholders              $(53.7)      $ 18.6      $(43.5)      $ 56.3
                                                                 --------     --------    --------     --------
Basic weighted average shares outstanding                           56.9         51.6        56.8         51.6
                                                                 --------     --------    --------     --------
Basic earnings (loss) per common share                            $(0.95)      $ 0.36      $(0.77)      $ 1.09
                                                                 --------     --------    --------     --------
Diluted Computation:
Diluted income (loss) available to common shareholders            $(53.7)      $ 18.6      $(43.5)      $ 56.3
                                                                 --------     --------    --------     --------
Basic weighted average shares outstanding                           56.9         51.6        56.8         51.6
Effect of dilutive securities:
     Options                                                          --          0.3          --          0.4
                                                                 --------     --------    --------     --------
Diluted weighted average shares outstanding                         56.9         51.9        56.8         52.0
                                                                 --------     --------    --------     --------
Diluted earnings (loss) per common share                          $(0.95)      $ 0.36      $(0.77)      $ 1.08
                                                                  ------       ------      ------       ------
</TABLE>

         The dilutive effect of options outstanding is computed using the
         treasury stock method. Options for approximately 0.4 million shares
         were outstanding for the three months and six months ended June 30,
         2002, respectively, but were excluded from the calculation of diluted
         earnings per share as the impact would have been antidilutive.

9.       Financial Instruments

         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 currency option contracts that are not accounted for as accounting
         hedges.

         A significant portion of our operating expenses are paid in Canadian
         dollars at our Canadian mill sites. To reduce our exposure to
         differences in the United States and Canadian dollar exchange rate
         fluctuations, we enter into and designate Canadian dollar forward
         contracts to hedge our forecasted Canadian dollar cash outflows at
         certain of our Canadian mill operations. On the date into which the
         derivative contract is entered, we designate the derivative as a cash
         flow hedge.

         During the first six months, we recorded a net change in fair value
         related to cash flow hedges amounting to a gain of $30.4 million ($18.9
         million, after tax) in "Accumulated other comprehensive income (loss)."
         We also reclassified a loss of $9.7 million ($6.0 million, after tax)
         from "Accumulated other comprehensive income (loss)" to earnings, which
         was offset by net gains on the items being hedged. We expect to
         reclassify a $6.1 million gain ($3.8 million, after-tax) from
         "Accumulated other comprehensive income (loss)" to earnings during the
         next 12 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 ongoing basis, whether the
         derivatives that are used in hedging transactions are highly effective
         in offsetting changes in cash flows of hedged items. When it is
         determined that a derivative is not highly effective as a hedge, we
         discontinue hedge accounting prospectively.


                                       10
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

         Information regarding our Canadian dollar contracts' notional amount,
         carrying value, fair market value and range of exchange rates of the
         contracts is summarized in the table below. The notional amount of
         these contracts represents the amount of foreign currencies to be
         purchased or sold at maturity and does not represent our exposure on
         these contracts.

<TABLE>
<CAPTION>
                                                                      NET (ASSET) LIABILITY
                                                                      ---------------------         RANGE OF
                                                        NOTIONAL                      FAIR         U.S.$/CDN$
                                                        AMOUNT OF     CARRYING       MARKET         EXCHANGE
                                                       DERIVATIVES     AMOUNT         VALUE          RATES
         JUNE 30, 2002 (UNAUDITED, IN MILLIONS)        -----------    --------       ------        -----------
         <S>                                           <C>            <C>            <C>           <C>
         Foreign Currency Exchange Agreements
         Buy Currency:
             Canadian dollar
                   Due in 2002                           $192.4        $ (1.1)       $ (1.1)       .6722-.6266
                   Due in 2003                            351.6          (8.6)         (8.6)       .6560-.6200
                   Due in 2004                            161.0          (5.6)         (5.6)       .6448-.6205
                                                         ------        ------        ------        -----------
                                                         $705.0        $(15.3)       $(15.3)
</TABLE>

         Approximately $82.7 million of our long-term debt is denominated in
         Canadian dollars. In order to reduce our exposure to exchange rate
         fluctuations, we enter into Canadian dollar forward contracts with
         notional amounts of approximately $100.0 million. These economic hedge
         contracts are marked to market through earnings. The contracts are
         settled quarterly, and gains or losses are included in "Other, net" in
         our Consolidated Statement of Operations. During the first six months
         of 2002, we recorded gains of approximately $5.3 million in our
         Consolidated Statement of Operations as a result of these economic
         hedges. At June 30, 2002, our outstanding Canadian dollar forward
         contracts had notional amounts of $100.0 million and are due September
         27, 2002. The fair value (asset) of the Canadian dollar forward
         contract was $0.3 million at June 30, 2002.

         Additionally, Alliance had Canadian dollar range forward contracts in
         place to reduce the exposure to differences in the United States and
         Canadian dollar exchange rate, as the majority of Alliance's sales were
         sold into the United States and denominated in United States dollars.
         These Canadian dollar range forward contracts are not accounted for as
         accounting hedges under SFAS No. 133. Changes in the derivatives fair
         values are immediately recognized in earnings and included in "Other,
         net" in our Consolidated Statement of Operations. At June 30, 2002,
         these Canadian dollar range forward contracts had notional amounts due
         in 2002 and 2003 of $61.0 million and $124.0 million, respectively. We
         recorded a gain of approximately $0.6 million for the six months ended
         June 30, 2002 as a result of these Canadian dollar range forward
         contracts. As these contracts expire, we are not replacing them. The
         fair market value of the Canadian dollar range forward contracts was
         zero at June 30, 2002.

         The counterparties to our derivative financial instruments are
         substantial and creditworthy multi-national financial institutions.
         Therefore, the risk of counterparty nonperformance is considered to be
         remote.

10.      Credit Arrangements

         In May 2002, Bowater closed on its new credit facilities, a $300.0
         million three-year term loan and a $500.0 million three-year revolving
         credit facility. The new three-year term loan and revolving credit
         facility were used to refinance the previous $350.0 million five-year
         facility and the $450.0 million, 364-day credit facility. The $300.0
         million three-year term loan requires repayments of $60.0 million each
         in May 2003 and 2004 and $180.0 million in May 2005. The $500.0 million
         revolving credit facility is due May 2005. Borrowings under these
         credit facilities incur interest based, at our option, on specified
         market interest rates plus a margin tied to the credit rating of our
         long-term debt. At June 30, 2002, $178.0 million was outstanding under
         $500.0 million revolving credit facility and $300 million outstanding
         under the three-year term loan.

         These credit facilities contain various covenants including
         requirements to maintain a minimum consolidated net worth (generally
         defined in the credit facilities as common shareholders' equity plus
         any outstanding preferred stock) and imposes a maximum 60% ratio of
         total debt to total capital (defined in the credit facilities as total
         debt plus net worth and minority interest).


                                       11
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED


11.      Segment Information

         On September 24, 2001, Bowater completed the purchase of Alliance. As a
         result of the acquisition, we have four reportable segments: the
         Newsprint Division, the Coated and Specialty Papers Division, the
         Forest Products Division and the Canadian Forest Products Division.
         Segment information for the quarter ending June 30, 2001, has been
         reclassified to reflect the change to four reportable segments.

         The Newsprint Division operates seven manufacturing sites in the United
         States, Canada and South Korea. The principal product at these
         manufacturing sites is newsprint, but several of the sites also produce
         market pulp and uncoated specialty papers. This Division is responsible
         for the marketing and sales of newsprint and selected uncoated
         specialty papers.

         The Coated and Specialty Papers Division operates a manufacturing site
         that produces coated groundwood paper, newsprint, market pulp and
         uncoated specialty papers and two coating facilities, all located in
         the United States. This Division is responsible for the marketing and
         sales of the full spectrum of coated and uncoated specialty papers
         manufactured by Bowater.

         The Forest Products Division manages 1.1 million acres of timberland
         owned or leased in the United States and the Canadian provinces of
         Ontario and Nova Scotia and over 8.3 million acres of Crown-owned land
         in the province of Ontario on which Bowater has cutting rights. The
         Division also operates three softwood sawmills and supplies wood fiber
         to Bowater's pulp and paper production sites and markets and sells
         lumber and timber in North America.

         The Canadian Forest Products Division operates four paper manufacturing
         sites in Canada. The Division manages 0.4 million acres of owned or
         leased timberlands and over 24.4 million acres of Crown-owned land in
         the Canadian provinces of Quebec and New Brunswick on which Bowater has
         cutting rights. The Division also operates 10 sawmills and one wood
         treatment plant, supplies wood to four paper mills and 10 sawmills and
         is responsible for the marketing and sales of Bowater's timber and
         lumber production.

         The Pulp Division markets and distributes market pulp produced at the
         Calhoun, Tennessee; Catawba, South Carolina; Thunder Bay, Ontario; and
         Coosa Pines, Alabama sites. Financial results for the production and
         sale of market pulp are included in the Newsprint Division and the
         Coated and Specialty Papers 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,
         2002 and 2001:

<TABLE>
<CAPTION>
                                                       Coated and                Canadian
THREE MONTHS ENDED                                     Specialty     Forest       Forest                Corporate/
JUNE 30, 2002                              Newsprint     Papers     Products     Products    Special      Other
(Unaudited, in millions)                   Division     Division    Division     Division     Items    Eliminations     Total
                                           --------    ----------   --------     --------    -------   ------------   --------
<S>                                        <C>         <C>          <C>          <C>         <C>       <C>            <C>
Sales - including internal sales           $  316.0      $121.0      $ 25.3      $  198.1     $  --      $   --       $  660.4
Elimination of intersegment sales                --          --          --            --        --       (13.6)         (13.6)
                                           --------      ------      ------      --------     -----      ------       --------
Sales - external customers                    316.0       121.0        25.3         198.1        --       (13.6)         646.8
                                           --------      ------      ------      --------     -----      ------       --------
Segment income (loss)                         (28.5)       (5.2)        1.8          20.1       3.5       (27.1)         (35.4)
                                           --------      ------      ------      --------     -----      ------       --------
Total assets at 6/30/02                    $3,217.7      $653.5      $246.9      $1,481.1     $  --      $ 77.9       $5,677.1
                                           --------      ------      ------      --------     -----      ------       --------
</TABLE>


                                       12
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

<TABLE>
<CAPTION>
                                                       Coated and                Canadian
THREE MONTHS ENDED                                     Specialty     Forest       Forest                Corporate/
JUNE 30, 2001                              Newsprint     Papers     Products     Products    Special      Other
(Unaudited, in millions)                   Division     Division    Division     Division     Items    Eliminations     Total
                                           --------    ----------   --------     --------    -------   ------------   --------
<S>                                        <C>         <C>          <C>          <C>         <C>       <C>            <C>
Sales - including internal sales           $  367.2      $116.4      $ 16.2       $101.5      $  --      $   --       $  601.3
Elimination of intersegment sales                --          --          --           --         --       (16.1)         (16.1)
                                           --------      ------      ------       ------      -----      ------       --------
Sales - external customers                    367.2       116.4        16.2        101.5         --       (16.1)         585.2
                                           --------      ------      ------       ------      -----      ------       --------
Segment income (loss)                          49.0         4.3        (3.7)        22.1       85.0       (17.0)         139.7
                                           --------      ------      ------       ------      -----      ------       --------
Total assets at 6/30/01                    $2,661.9      $608.1      $264.4       $891.1      $  --      $364.4       $4,789.9
                                           --------      ------      ------       ------      -----      ------       --------
</TABLE>

<TABLE>
<CAPTION>
                                                       Coated and                Canadian
SIX MONTHS ENDED                                       Specialty     Forest       Forest                Corporate/
JUNE 30, 2002                              Newsprint     Papers     Products     Products    Special      Other
(Unaudited, in millions)                   Division     Division    Division     Division     Items    Eliminations     Total
                                           --------    ----------   --------     --------    -------   ------------   --------
<S>                                        <C>         <C>          <C>          <C>         <C>       <C>            <C>
Sales - including internal sales           $  645.7      $236.4      $ 47.2       $371.5      $  --      $   --       $1,300.8
Elimination of intersegment sales                --          --          --           --         --       (29.8)         (29.8)
                                           --------      ------      ------       ------      -----      ------       --------
Sales - external customers                    645.7       236.4        47.2        371.5         --       (29.8)       1,271.0
                                           --------      ------      ------       ------      -----      ------       --------
Segment income (loss)                      $  (33.5)     $(11.1)     $  2.1       $ 28.2      $75.0      $(49.3)      $   11.4
                                           --------      ------      ------       ------      -----      ------       --------
</TABLE>

<TABLE>
<CAPTION>
                                                       Coated and                Canadian
SIX MONTHS ENDED                                       Specialty     Forest       Forest                Corporate/
JUNE 30, 2001                              Newsprint     Papers     Products     Products    Special      Other
(Unaudited, in millions)                   Division     Division    Division     Division     Items    Eliminations     Total
                                           --------    ----------   --------     --------    -------   ------------   --------
<S>                                        <C>         <C>          <C>          <C>         <C>       <C>            <C>
Sales - including internal sales           $  733.6      $255.1      $ 32.9       $200.3      $  --      $   --       $1,221.9
Elimination of intersegment sales                --          --          --           --         --       (31.8)         (31.8)
                                           --------      ------      ------       ------      -----      ------       --------
Sales - external customers                    733.6       255.1        32.9        200.3         --       (31.8)       1,190.1
                                           --------      ------      ------       ------      -----      ------       --------
Segment income (loss)                      $  110.1      $ 22.8      $ (3.9)      $ 43.1      $79.2      $(22.0)      $  229.3
                                           --------      ------      ------       ------      -----      ------       --------
</TABLE>

         In the second quarter of 2002, Bowater recognized a net pre-tax gain on
         the sale of assets of $3.5 million. During the first six months of
         2002, Bowater sold fixed assets and land resulting in a pre-tax gain of
         $75.0 million.

         In January 2002, Bowater completed the sale of approximately 116,000
         acres of timberlands for aggregate consideration of $104.2 million,
         comprised of approximately $5.1 million in cash and $99.1 million in
         notes receivable. In March 2002, we monetized the $99.1 million note
         receivable for net cash proceeds of $88.1 million. These transactions
         resulted in a net pre-tax gain of $70.4 million. Also in the first
         quarter of 2002, we sold approximately 2,700 acres of timberlands and
         recorded a net pre-tax gain of $1.1 million.

         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.

         The line entitled "Segment income (loss)" in the preceding tables is
         equal to "Operating income (loss)" as presented in our Consolidated
         Statement of Operations. In addition, none of the income/loss items
         following "Operating income (loss)" 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.


                                       13
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

12.      Accumulated Other Comprehensive Income

         The components of "Accumulated Other Comprehensive Income (Loss)" in
         the Consolidated Balance Sheet at June 30, 2002, and December 31, 2001,
         are as follows:

<TABLE>
<CAPTION>
                                                                 June 30,     December 31,
         (Unaudited, in millions)                                  2002           2001
                                                                 --------     ------------
         <S>                                                     <C>          <C>
         Pension plan additional minimum liabilities              $(57.4)        $(57.4)
         Foreign currency translation                               (8.2)         (11.1)
         Unrealized gain/(loss) on hedging transactions             16.9          (23.2)
         Taxes                                                      14.9           30.1
                                                                  ------         ------
                                                                  $(33.8)        $(61.6)
                                                                  ------         ------
</TABLE>


                                       14
<PAGE>
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                  ORGANIZATION

Bowater is organized into five divisions: the Newsprint Division, the Coated and
Specialty Papers Division, the Pulp Division, the Forest Products Division and
the Canadian Forest Products Division. Except for the Pulp Division, each
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 other four 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/A for the year ended December 31, 2001, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.

                        ACCOUNTING POLICIES AND ESTIMATES

The following discussion and analysis of financial condition and results of
operations are based on our unaudited Consolidated Financial Statements included
herein. Our significant accounting policies are described in Note 1 to the
Consolidated Financial Statements in Bowater's annual report on Form 10-K/A for
the year ended December 31, 2001. Bowater's critical accounting policies are
described under the caption "Critical Accounting Policies and Estimates" in Item
7 of Bowater's annual report on Form 10-K/A for the year ended December 31, 2001
and below for goodwill.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates, assumptions,
judgments and reliance on future projections of results of operations and cash
flow. Our estimates and assumptions are based on historical data and other
assumptions that we believe are reasonable in the circumstances. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements. In addition, they affect the reported amounts of revenues and
expenses during the reporting period.

Our judgments are based on management's assessment as to the effect certain
estimates, assumptions or future trends or events may have on the financial
condition and results of operations reported in our unaudited Consolidated
Financial Statements. Projections of future results of operations and cash
flows, as provided by management, are utilized by an independent valuation firm
to determine fair value for selected assets. It is important that the reader of
our unaudited financial statements understand that actual results could differ
materially from these estimates, assumptions, projections and judgments.

                                    GOODWILL

Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but will be tested for impairment at
least on an annual basis in accordance with the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation,
Bowater is required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption.

During the second quarter of 2002, Bowater completed the transitional goodwill
impairment test prescribed in SFAS No. 142 with respect to existing goodwill.
The transitional goodwill impairment test involved a comparison of the fair
value of each of the Company's reporting units, as defined under SFAS No. 142,
with its carrying amount. Fair value was determined based on a valuation study
performed by an independent third party. In making its recommendation of fair
value, the independent valuation firm relied primarily on the discounted cash
flow method. This method uses future projections of cash flows from each of the
reporting units and includes, among other estimates, projection of future
product pricing, product costs, capital spending and an assumption of the
company's weighted average cost of capital. Changes in any of these estimates
could have a material effect on the fair value of these assets in future
measurement periods. On an ongoing basis the Company expects to perform its
impairment tests during the fourth quarter.


                                       15
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As a result of the transitional impairment tests performed as of January 1,
2002, there was no indicator of goodwill impairment, however, the amount by
which fair value exceeded book value for certain of the reporting units was not
significant. Therefore, in future measurements of fair value, adverse changes in
discounted cash flow assumptions could result in an impairment of goodwill that
would require a non-cash charge to the income statement and may have a material
effect on the financial condition or operating results of the company.

                              RESULTS OF OPERATIONS
                    THREE MONTHS ENDED JUNE 30, 2002, VERSUS
                                  JUNE 30, 2001

The results of operations for the three-month period ended June 30, 2001, do not
include the impact of the acquisition of Alliance, which closed in September
2001.

For the second quarter of 2002, Bowater had an operating loss of $35.4 million
compared to operating income of $139.7 million for the second quarter of 2001.
The operating loss for the second quarter of 2002 includes a gain on the sale of
assets of $3.5 million compared to a net gain on the sale of assets of $85.0
million for the second quarter of 2001. Excluding these asset sales, operating
income decreased $93.6 million, primarily due to lower transaction prices for
newsprint ($91.6 million), coated and specialty papers ($19.9 million), market
pulp ($5.3 million) and lumber ($1.2 million) and lower shipments ($5.3
million). Selling, general and administrative expenses were also higher
primarily due to stock-based compensation expenses recognized in the second
quarter of 2002 ($5.5 million) compared to credits recognized for stock-based
compensation ($2.0 million) during the second quarter of 2001. These decreases
in operating income were offset partially by lower operating costs ($24.6
million), which includes the amortization of goodwill. Operating costs were
lower for the quarter due to lower wood, fiber, chemical, fuel and maintenance
costs.

Net loss for the second quarter of 2002 was $53.7 million, or $0.95 per diluted
share, compared with net income of $18.6 million, or $0.36 per diluted share, in
the second quarter of 2001. Sales for the second quarter of 2002 were $646.8
million compared with $585.2 million for the second quarter of 2001.

                            PRODUCT LINE INFORMATION

Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions.

SALES BY PRODUCT

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                     ----------------------
(Unaudited, in millions)                              2002            2001
                                                     ------          ------
<S>                                                  <C>             <C>
Sales:
   Newsprint                                         $290.9          $366.7
   Market pulp                                        127.2           100.7
   Coated and specialty papers                        162.3           106.4
   Lumber (1)                                          72.4            14.4
   Other                                                7.6            21.7
   Elimination of intersegment sales                  (13.6)          (24.7)
                                                     ------          ------
        Total sales                                  $646.8          $585.2
                                                     ------          ------
</TABLE>

         (1)      Countervailing and antidumping duties of approximately $2.0
                  million for the three months ended June 30, 2002 are included
                  as a component of distribution costs and are not presented as
                  a separate component against sales.

Newsprint Bowater's average transaction price for newsprint was 27% lower in the
second quarter of 2002 compared to the second quarter of 2001 and 3% lower
compared to the first quarter of 2002. Our shipments increased 8% compared to
the second quarter of 2001, due to the acquisition of Alliance. During the
second quarter of 2002, we took approximately 119,000 metric tons of downtime,
of which 23,000 metric tons related to maintenance, and 27,000 metric tons
related to a strike at our Mokpo, South Korea, mill that began May 27, 2002.
Production at the mill resumed on July 29, 2002, following settlement of the
strike. We plan to take approximately 110,000 metric tons of downtime in the
third quarter of this year and we will continue to match our production to our
orders. Our newsprint inventory increased approximately 10,700 metric tons
compared to the end of the second quarter of 2001. Inventories have increased
due to the acquisition of Alliance and in order to service our customers in
Europe. Total United States demand was up slightly while consumption of
newsprint declined in the second quarter of 2002 compared to the same period a
year ago. North American net exports for the second quarter declined slightly
from the second quarter 2001 levels while the month of June showed exports up
10% over June of 2001. Aggregate North American mill and customer inventories
were 18% lower at June 30, 2002 compared to June 30, 2001. Newspaper advertising
lineage in June 2002 improved 2.1% over June 2001. In July 2002, we informed our
domestic customers that we would be raising prices $50 per metric ton effective
August 1, 2002. It is typical in our industry that prices are not fully realized
in the first month following the effective date.

Market Pulp Bowater's average transaction price for market pulp in the second
quarter of 2002 increased slightly compared to the second quarter of 2001 and to


                                       16
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

the first quarter of 2002. Our shipments increased 26% compared to the same
period last year, primarily as a result of the acquisition of Alliance and less
downtime taken in the second quarter of 2002 compared to the second quarter of
2001. An additional 17,000 metric tons of maintenance downtime is planned for
the third quarter of 2002. Our market pulp inventories decreased over the
quarter to end the quarter with 13 days of supply. We announced price increases
of $40 to $50 per metric ton during the quarter and $10 to $20 per metric ton
effective July 1, 2002, on our paper grade pulp. NORSCAN inventories decreased
during the second quarter by 351 metric tons, to end the quarter at 1.3 million
metric tons, or 22 days of supply.

Coated and Specialty Papers Bowater's average transaction price for coated and
specialty papers decreased 15% in the second quarter of 2002 compared to the
second quarter of 2001 and was 3% lower compared to the first quarter of 2002
due primarily to the additional specialty paper capacity acquired with Alliance.
Our coated and specialty papers shipments increased approximately 129,000 short
tons compared to the same period last year, due primarily to the acquisition of
Alliance. Catalog mailings (measured by Standard A mail pieces) decreased 4.4%
compared to the same period last year. Magazine and advertisement pages
increased 2% when compared to the same period last year. Overall demand for
coated groundwood and supercalendared papers increased 6.7% and 8%,
respectively, when compared to the same period last year.

Lumber Bowater's average transaction price for lumber products decreased
slightly in the second quarter of 2002 compared to the second quarter of 2001
and improved 10% compared to the first quarter of 2002. Our lumber shipments
increased significantly in the second quarter of 2002 compared to the second
quarter of 2001 due to the acquisition of Alliance. US housing starts in the
second quarter were strong, increasing 2% in the second quarter of 2002 compared
to the same period last year.

On May 22, 2002, the Commerce Department imposed antidumping duties of 8.43% on
all of Bowater's Canadian softwood lumber imports and countervailing duties of
18.79% on softwood lumber imported from all provinces except New Brunswick and
Nova Scotia. The duties, which are effective for lumber shipments beginning May
22, 2002, are payable in cash. The duties have been appealed to the World Trade
Organization (WTO) and under the terms of the North American Free Trade
Agreement (NAFTA). The final amount of countervailing and antidumping duties
that may be assessed on Canadian softwood lumber imports into the U.S. will
depend upon negotiations among the governments involved in the dispute or upon
determinations made by the NAFTA, WTO or other adjudicatory panels to which the
duties may be appealed. Until the dispute about the duties is resolved, we will
continue to pay the duties as assessed by the Commerce Department. During the
second quarter of 2002, Bowater reversed approximately $7.3 million for
previously recorded lumber duties for periods prior to the effective date of May
22, 2002. Bowater accrued lumber duties based upon the Commerce Department's
preliminarily imposed effective dates of August 16, 2001, for countervailing
duties and November 6, 2001 for antidumping duties. Bowater was required to post
bonds to cover the preliminary duties. The $7.3 million reversal is recorded as
a reduction to distribution costs.

                             DIVISIONAL PERFORMANCE

On September 24, 2001, Bowater completed the purchase of Alliance. As a result
of the acquisition, we have four reportable segments: the Newsprint Division,
the Coated and Specialty Papers Division, the Forest Products Division and the
Canadian Forest Products Division. Segment information for the three-month
period ending June 30, 2001, has been reclassified to reflect the change to four
reportable segments.

SALES BY DIVISION (1)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                     ----------------------
(Unaudited, in millions)                              2002            2001
                                                     ------          ------
<S>                                                  <C>             <C>
Newsprint Division                                   $316.0          $367.2
Coated and Specialty Papers
     Division                                         121.0           116.4
Forest Products Division                               25.3            16.2
Canadian Forest Products
     Division(2)                                      198.1           101.5
Corporate & eliminations                              (13.6)          (16.1)
                                                     ------          ------
    Total sales                                      $646.8          $585.2
                                                     ------          ------
</TABLE>

OPERATING INCOME (LOSS) BY DIVISION (1)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                     ----------------------
(Unaudited, in millions)                              2002            2001
                                                     ------          ------
<S>                                                  <C>             <C>
Newsprint Division                                   $(28.5)         $ 49.0
Coated and Specialty Papers
     Division                                          (5.2)            4.3
Forest Products Division                                1.8            (3.7)
Canadian Forest Products Division                      20.1            22.1
Special items                                           3.5            85.0
Corporate & eliminations                              (27.1)          (17.0)
                                                     ------          ------
    Total operating income                           $(35.4)         $139.7
                                                     ------          ------
</TABLE>

(1)      Financial  results  for the  production  and  sale of  market  pulp are
         included in the Newsprint  Division or the Coated and Specialty  Papers
         Division,


                                       17
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         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."

(2)      Countervailing and antidumping duties of approximately $2.0 million for
         the three months ended June 30, 2002 are included as a component of
         distribution costs and are not presented as a separate component
         against sales.

Newsprint Division: The results for this Division for the second quarter of 2002
include the Coosa Pines, Alabama, facility, acquired as part of the acquisition
of Alliance. Sales for the Division decreased $51.2 million, from $367.2 million
for the second quarter of 2001 to $316.0 million for the second quarter of 2002.
This decrease is primarily the result of lower shipments of newsprint ($44.8
million) and market pulp ($3.2 million) and lower transaction prices for
newsprint ($58.1 million), market pulp ($4.9 million) and uncoated specialty
paper ($5.1 million). These decreases were partially offset by the addition of
the Coosa Pines, Alabama, facility and higher shipments of uncoated specialty
paper ($1.2 million). See the previous discussion of product line results.

Operating income for the second quarter of 2002 decreased $77.5 million from
$49.0 million for the second quarter of 2001 to an operating loss of $28.5
million for the second quarter of 2002. Lower shipments ($9.5 million, primarily
newsprint), lower transaction prices for newsprint ($58.1 million), market pulp
($4.9 million) and uncoated specialty paper ($5.1 million) account for the
majority of this decrease. Operating costs increased for the second quarter of
2002 ($3.0 million) due to more production curtailments, partially offset by
lower maintenance, fiber, chemical and labor expenses.

The collective bargaining agreement with the unionized employees of the Calhoun
mill expired on July 3, 2002. Negotiations are underway and there can be no
assurance that these negotiations will conclude without a work stoppage.

Coated and Specialty Papers Division: Sales for the Division increased $4.6
million, from $116.4 million for the second quarter of 2001 to $121.0 million
for the second quarter of 2002. This increase was primarily due to increased
shipments ($32.1 million, primarily coated and specialty papers and newsprint).
Lower transaction prices for coated and specialty papers ($19.5 million) and
newsprint ($7.2 million) partially offset this increase. See the previous
discussion of product line results.

Operating income decreased $9.5 million from $4.3 million for the second quarter
of 2001 to an operating loss of $5.2 million for the second quarter of 2002.
This decrease was primarily the result of lower transaction prices for coated
and specialty papers ($19.5 million) and newsprint ($7.2 million). Lower
operating costs ($17.8 million) as a result of a 2001 second quarter biannual
maintenance shut and lower costs for fiber, wood, chemical and fuel partially
offset this decrease.

Forest Products Division: Sales for the Division increased $9.1 million, from
$16.2 million for the second quarter of 2001 to $25.3 million for the second
quarter of 2002. This increase is primarily the result of higher lumber
transaction prices ($1.0 million) and timber transaction prices ($2.5 million)
and higher lumber shipments ($8.5 million). This increase was partially offset
by lower timber shipments ($2.8 million). See the previous discussion of product
line results.

Operating income for the Division increased $5.5 million from an operating loss
of $3.7 million for the second quarter of 2001 to operating income of $1.8
million for the second quarter of 2002. This increase was due primarily to
higher lumber ($1.0 million) and timber ($2.5 million) transaction prices and
lower operating costs ($3.2 million), partially offset by lower timber shipments
($2.8 million). Operating costs for the Division were lower in the second
quarter of 2002 compared to the same period last year due to a charge for pine
beetle damage incurred in the second quarter of 2001 and lower labor,
silviculture and maintenance expenses in the second quarter of 2002.

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. If these conditions continue, we may incur additional charges
related to beetle damage. For the second quarter of 2002, Bowater did not incur
any charges related to pine beetle damage. During the second quarter of 2001, we
recorded a charge of $3.4 million for damages.

Canadian Forest Products Division: This Division was formed as a result of the
Alliance acquisition. In addition to the Alliance facilities in Canada, several
existing facilities owned by Bowater were transferred to this Division. Sales
for the Division increased $96.6 million, from $101.5 million for the second
quarter of 2001 to $198.1 million for the second quarter of 2002. This increase
is primarily the result of the acquisition of Alliance in September 2001
partially offset by lower newsprint transaction prices ($25.7 million).


                                       18
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operating income decreased $2.0 million, from $22.1 million for the second
quarter of 2001 to $20.1 million for the second quarter of 2002. This decrease
was primarily the result of lower newsprint transaction prices ($25.7 million),
partially offset by lower manufacturing costs ($1.6 million), higher shipments
($6.5 million) and the acquisition of Alliance.

Special Items: In the second quarter of 2002, Bowater sold fixed assets and land
resulting in a pre-tax gain of $3.5 million, or $.04 per diluted share, after
tax.

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
monetization of a note receivable and recognition of deferred income (previously
in Other Long-term Liabilities) related to a 1999 sale of timberlands. The
pre-tax gain was $84.5 million ($19.2 million, after tax and minority interest).
A portion of the proceeds was dividended to the minority shareholder ($60.1
million).

Corporate & Eliminations: The elimination of intersegment sales decreased $2.5
million, comparing the second quarter of 2002 to the second quarter of 2001.
Corporate expenses increased $10.1 million due primarily to stock-based
compensation expenses ($5.5 million) recognized in the second quarter of 2002
compared to credits recognized for stock-based compensation ($2.0 million)
during the second quarter of 2001.

                     INTEREST AND OTHER INCOME AND EXPENSES

Interest expense increased $7.5 million from $33.8 million for the second
quarter of 2001 to $41.3 million for the second quarter of 2002. This increase
was attributable to an increase in debt associated with the acquisition of
Alliance. Interest income decreased $1.8 million from $3.0 million for the
second quarter of 2001 to $1.2 million for the second quarter of 2002. This
decrease is due primarily to the sale of a note receivable in June 2001.

Also in the second quarter of 2002, Bowater recorded a foreign exchange loss of
$4.6 million compared to a loss of $11.4 million in the second quarter of 2001.
The majority of our exchange loss is attributable to the revaluation of unhedged
foreign denominated liabilities into United States dollars.

Bowater's effective tax rate for the second quarter of 2002 was 28.3% versus
50.8% for the prior year's second quarter. The second quarter 2002 tax rate was
lower compared to the second quarter of 2001 primarily as a result of
non-deductible foreign currency losses offset by an ongoing tax benefit ($3.8
million) related to our $600.0 million notes financing transaction completed in
the fourth quarter of 2001. The higher 2001 tax rate includes non-deductible
foreign exchange losses and a partially taxable dividend that resulted from the
sale of a note receivable.

                              RESULTS OF OPERATIONS
                     SIX MONTHS ENDED JUNE 30, 2002, VERSUS
                                  JUNE 30, 2001

The results of operations for the six-month period ended June 30, 2001, do not
include the impact of the acquisition of Alliance, which closed in September
2001.

For the first six months of 2002, Bowater had operating income of $11.4 million
compared to $229.3 million for the first six months of 2001. Operating income
for the first half of 2002 includes a gain on the sale of assets of $75.0
million compared to a net gain on the sale of assets of $79.2 million for the
first six months of 2001. Excluding these asset sales, operating income
decreased $213.7 million, primarily due to lower transaction prices for
newsprint ($173.3 million), coated and specialty papers ($37.2 million) and
market pulp ($36.6 million) and lower shipments ($15.1 million). Selling,
general and administrative expenses were also higher for the first half of 2002
due to stock-based compensation expenses recognized during the first half of
2002 ($7.6 million) compared to credits recognized for stock-based compensation
($13.7 million) during the first half of 2001. These decreases were offset
partially by higher transaction prices for timber ($1.9 million) and lower
operating costs ($59.8 million), which includes the amortization of goodwill.
Operating costs were lower for the quarter due to lower wood, fiber, chemical,
fuel and maintenance costs.

Net loss for the first half of 2002 was $43.5 million, or $0.77 per diluted
share, compared with net income of $56.3 million, or $1.08 per diluted share,
for the first half of 2001. Sales for the first six months of 2002 were $1,271.0
million compared with $1,190.1 million for the first six months of 2001.

                            PRODUCT LINE INFORMATION

Presented below is a discussion of each significant product line followed by a
discussion of the results of each of the reported divisions.


                                       19
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SALES BY PRODUCT

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                            JUNE 30,
                                                   ------------------------
(Unaudited, in millions)                             2002            2001
                                                   --------        --------
<S>                                                  <C>           <C>
Sales:
   Newsprint                                       $  581.6        $  746.2
   Market pulp                                        245.2           206.4
   Coated and specialty papers                        325.2           214.3
   Lumber (1)                                         129.3            22.6
   Other                                               19.5            54.0
   Elimination of intersegment sales                  (29.8)          (53.4)
                                                   --------        --------
        Total sales                                $1,271.0        $1,190.1
                                                   --------        --------
</TABLE>

(1)      Countervailing and antidumping duties of approximately $4.2 million for
         the six months ended June 30, 2002 are included as a component of
         distribution costs and are not presented as a separate component
         against sales.

Newsprint Bowater's average transaction price for newsprint was 25% lower
compared to the first six months of 2001. Our shipments increased 5% compared to
the first six months of 2001, due to the acquisition of Alliance. During the
first six months of 2002, production was curtailed by a total of 189,000 metric
tons, including 27,000 metric tons related to the strike at our Mokpo, South
Korea, mill. The Mokpo mill halted production, effective May 27, 2002, and
resumed production on July 29, 2002, following settlement of the strike. Our
newsprint inventory increased approximately 10,700 metric tons compared to the
end of the second quarter of 2001. Inventories have increased due to the
acquisition of Alliance and in order to service our customers in Europe. Total
United States demand and consumption of newsprint declined in the first six
months of 2002 compared to the same period a year ago. Aggregate North American
mill and customer inventories were 18% lower at June 30, 2002, compared to June
30, 2001. North American net exports decreased for the first half of 2002
compared to the first half of 2001. Newspaper advertising lineage in June 2002
improved 2.1% over June 2001 and was down 0.3% year over year. In July 2002, we
informed our domestic customers that we would be raising prices $50 per metric
ton effective August 1, 2002. It is typical in our industry that prices are not
fully realized in the first month following the effective date.

Market Pulp Bowater's average transaction price for market pulp in the first six
months of 2002 decreased 12% compared to the first six months of 2001. Our
shipments increased 35% compared to the same period last year, primarily as a
result of the acquisition of Alliance and less downtime taken in the first half
of 2002 compared to the first half of 2001. An additional 17,000 metric tons of
maintenance downtime is planned for the third quarter of 2002. We announced
price increases of $40 to $50 during the quarter and $10 to $20 increase
effective July 1, 2002, on our paper grade pulp. NORSCAN producers (United
States, Canada, Finland and Sweden) market pulp shipments for the first six
months of 2002 increased compared to the first six months of 2001. NORSCAN
producer pulp inventories ended the second quarter at 1.3 million metric tons,
or 22 days supply, 25% lower than at the end of June 2001.

Coated and Specialty Papers Bowater's average transaction price for coated and
specialty papers decreased 15% in the first six months of 2002 compared to the
first six months of 2001 primarily due to the additional specialty paper
capacity acquired with Alliance. Our coated and specialty papers shipments
increased approximately 247,000 short tons compared to the same period last
year, due primarily to the acquisition of Alliance. Catalog mailings (measured
by Standard A mail pieces) decreased 5% compared to the same period last year.
Magazine advertisement pages decreased 7.8% compared to the same period last
year. Overall demand for coated groundwood decreased 2.9% year-to-date. Demand
for supercalendared papers increased 6.8%. Coated groundwood inventories are at
17 days supply compared to 18 days supply at June 30, 2001. Uncoated groundwood
inventories are at 17 days supply compared to 16 days supply at June 30, 2001.

Lumber Bowater's average transaction price for lumber products increased
slightly in the first six months of 2002 compared to the first six months of
2001. Our lumber shipments increased significantly in the first six months of
2002 compared to the first six months of 2001 due to the acquisition of
Alliance. U.S. housing starts in the second quarter were strong, increasing 2%
in the second quarter of 2002 compared to the same period last year.

The Commerce Department has imposed antidumping duties of 8.43% on all of
Bowater's Canadian softwood lumber imports and countervailing duties of 18.79%
on softwood lumber imported from all provinces except New Brunswick and Nova
Scotia. The duties, which are effective for lumber shipments beginning May 22,
2002, are payable in cash. During the second quarter of 2002, Bowater reversed
approximately $7.3 million for previously recorded lumber duties for periods
prior to the effective date of May 22, 2002. Bowater accrued lumber duties based
upon the Commerce Department's preliminarily imposed effective dates of August
16, 2001, for countervailing duties and November 6, 2001 for antidumping duties.
Bowater was required to post bonds to cover the preliminary duties. The $7.3
million reversal is recorded as a reduction to distribution costs. See previous
discussion of product line results for the three months ended June 30, 2002.


                                       20
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                             DIVISIONAL PERFORMANCE

On September 24, 2001, Bowater completed the purchase of Alliance. As a result
of the acquisition, we have four reportable segments: the Newsprint Division,
the Coated and Specialty Papers Division, the Forest Products Division and the
Canadian Forest Products Division. Segment information for the six-month period
ending June 30, 2001, has been reclassified to reflect the change to four
reportable segments.

SALES BY DIVISION (1)

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                            JUNE 30,
                                                   ------------------------
(Unaudited, in millions)                             2002            2001
                                                   --------        --------
<S>                                                <C>             <C>
Newsprint Division                                 $  645.7        $  733.6
Coated and Specialty Papers
     Division                                         236.4           255.1
Forest Products Division                               47.2            32.9
Canadian Forest Products Division
     Division (2)                                     371.5           200.3
Corporate & eliminations                              (29.8)          (31.8)
                                                   --------        --------
    Total sales                                    $1,271.0        $1,190.1
                                                   --------        --------
</TABLE>

OPERATING INCOME (LOSS) BY DIVISION (1)

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED
                                                            JUNE 30,
                                                     ----------------------
(Unaudited, in millions)                              2002            2001
                                                     ------          ------
<S>                                                  <C>             <C>
Newsprint Division                                   $(33.5)         $110.1
Coated and Specialty Papers
    Division                                          (11.1)           22.8
Forest Products Division                                2.1            (3.9)
Canadian Forest Products Division                      28.2            43.1
Special items                                          75.0            79.2
Corporate & eliminations                             $(49.3)          (22.0)
                                                     ------          ------
    Total operating income                           $ 11.4          $229.3
                                                     ------          ------
</TABLE>

(1)      Financial results for the production and sale of market pulp are
         included in the Newsprint Division or the Coated and Specialty Papers
         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."

(2)      Countervailing and antidumping duties of approximately $4.2 million for
         the six months ended June 30, 2002 are included as a component of
         distribution costs and are not presented as a separate component
         against sales.

Newsprint Division: The results for this Division for the first half of 2002
include the Coosa Pines, Alabama, facility, acquired as part of the acquisition
of Alliance. Sales for the Division decreased $87.9 million, from $733.6 million
for the first six months of 2001 to $645.7 million for the first six months of
2002. This decrease is primarily the result of lower shipments of newsprint
($81.5 million) and lower transaction prices for newsprint ($111.3 million),
market pulp ($25.0 million) and uncoated specialty paper ($10.0 million). These
decreases were partially offset by the addition of the Coosa Pines, Alabama,
facility and higher shipments of uncoated specialty paper ($9.5 million). See
the previous discussion of product line results.

Operating income for the first six months of 2002 decreased $143.6 million from
$110.1 million for the first half of 2001 to an operating loss of $33.5 million
for the first half of 2002. Lower shipments ($15.3 million, primarily newsprint)
and lower transaction prices for newsprint ($111.3 million), market pulp ($25.0
million) and uncoated specialty paper ($10.0 million) account for the majority
of this decrease. These decreases were partially offset by lower operating costs
($16.3 million) due to lower maintenance, fiber and labor costs as well as a
favorable Canadian dollar exchange rate compared to the same period of 2001.

The collective bargaining agreement with the unionized employees of the Calhoun
mill expired on July 3, 2002. Negotiations are underway and there can be no
assurance that these negotiations will conclude without a work stoppage.

Coated and Specialty Papers Division: Sales for the Division decreased $18.7
million, from $255.1 million for the first half of 2001 to $236.4 million for
the first half of 2002. This decrease was primarily due to lower transaction
prices for coated and specialty papers ($38.2 million), market pulp ($8.8
million) and newsprint ($13.4 million). Increased shipments ($40.8 million,
coated and specialty papers, newsprint and market pulp) partially offset this
decrease. See the previous discussion of product line results.

Operating income decreased $33.9 million from $22.8 million for the first half
of 2001 to an operating loss of $11.1 million for the second half of 2002. This
decrease was primarily the result of lower transaction prices for coated and
specialty papers ($38.2 million), market pulp ($8.8 million) and newsprint
($13.4 million). Lower operating costs ($25.8 million) as a result of a 2001
biannual maintenance shut and lower fiber, wood, chemical and fuel costs
partially offset this decrease.

Forest Products Division:  Sales for the Division increased $14.3 million,  from
$32.9  million  for the first six months of 2001 to $47.2  million for the first
six months of 2002. This increase is primarily the result of


                                       21
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

higher lumber ($2.5 million) and timber transaction prices ($4.4 million) and
higher lumber shipments ($15.5 million). This increase was partially offset by
lower timber shipments ($8.6 million). See the previous discussion of product
line results.

Operating income for the Division increased $6.0 million from an operating loss
of $3.9 million for the first six months of 2001 to operating income of $2.1
million for the first six months of 2002. This increase was due primarily to
higher transaction prices for lumber ($2.5 million) and timber ($4.4 million)
and lower operating costs ($6.9 million), partially offset by lower timber
shipments ($8.6 million). Operating costs for the Division were lower in the
first half of 2002 compared to the same period last year primarily due to a
charge for pine beetle damage incurred in the first half of 2001 and lower labor
and silviculture expenses in the first half of 2002.

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. If these conditions continue, we may incur additional charges
related to beetle damage. For the first six months of 2002, Bowater did not
incur any charges related to pine beetle damage. During the first six months of
2001, we recorded a charge of $5.5 million for damages.

Canadian Forest Products Division: This Division was formed as a result of the
Alliance acquisition. In addition to the Alliance facilities in Canada, several
existing facilities owned by Bowater were transferred to this Division. Sales
for the Division increased $171.2 million, from $200.3 million for the first
half of 2001 to $371.5 million for the first half of 2002. This increase is
primarily the result of the acquisition of Alliance in September 2001, partially
offset by lower newsprint transaction prices ($48.0 million).

Operating income decreased $14.9 million, from $43.1 million for the first six
months of 2001 to $28.2 million for the first six months of 2002. This decrease
was primarily the result of lower newsprint transaction prices ($48.0 million),
partially offset by lower manufacturing costs ($10.0 million), higher shipments
($7.4 million) and the acquisition of Alliance.

Special Items: During the first six months of 2002, Bowater sold fixed assets
and land resulting in a pre-tax gain of $75.0 million, or $0.79 per diluted
share, after tax.

In January 2002, Bowater completed the sale of approximately 116,000 acres of
timberlands for aggregate consideration of $104.2 million, comprised of
approximately $5.1 million in cash and $99.1 million in notes receivable. In
March 2002, we monetized the $99.1 million notes receivable for net cash
proceeds of $88.1 million. These transactions resulted in a net pre-tax gain of
$70.4 million. Also in the first half of 2002, we had other asset sales
resulting in a pre-tax gain of $4.6 million. In April 2001, Bowater 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
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 monetization
of a note receivable and recognition of deferred income (previously in Other
Long-term Liabilities) related to a 1999 sale of timberlands. The pre-tax gain
was $84.5 million ($19.2 million after tax and minority interest). A portion of
the proceeds was dividended to the minority shareholder ($60.1 million).

Corporate & Eliminations: The elimination of intersegment sales decreased $2.0
million, comparing the first half of 2002 to the first half of 2001. Corporate
expenses increased $27.3 million due primarily to stock-based compensation
expenses recognized during the first half of 2002 ($7.6 million) compared to
credits recognized for stock-based compensation ($13.7 million) during the first
half of 2001.

                     INTEREST AND OTHER INCOME AND EXPENSES

Interest expense increased $14.1 million from $69.0 million for the first six
months of 2001 to $83.1 million for the first six months of 2002. This increase
was attributable to an increase in debt associated with the acquisition of
Alliance. Interest income decreased $4.4 million from $6.6 million for the first
half of 2001 to $2.2 million for the first half of 2002. This decrease is due
primarily to the sale of a note receivable in June 2001.

Also during the first six months of 2002, Bowater recorded a foreign exchange
loss of $3.5 million compared to a loss of $6.6 million during the first six
months of 2001. The majority of our exchange loss amounts are attributable to
the revaluation of unhedged foreign denominated liabilities into United States
dollars.

Bowater's effective tax rate for the first six months of 2002 was 33.9% versus
43.7% for the same period last year. The lower rate in 2002 was primarily the
result of a one-time tax benefit arising from an IRS settlement ($2.8 million)
and an ongoing tax benefit ($7.6 million) related to our $600 million notes
financing transaction completed in the fourth quarter of 2001.


                                       22
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                         LIQUIDITY AND CAPITAL RESOURCES

Bowater's cash and cash equivalents increased to $29.7 million at June 30, 2002,
from $28.3 million at December 31, 2001. Cash used for operations was $23.8
million, cash used for investing activities was $15.3 and we generated cash from
financing activities of $40.5 million.

CASH FROM OPERATING ACTIVITIES:
During the first six months of 2002, Bowater's operations used $23.8 million of
cash compared to the generation of $176.1 million of cash during the first six
months of 2001, a decrease of $199.9 million. Lower operating income ($213.7
million, excluding gain on asset sales) partially offset by lower working
capital needs ($43.4 million) accounted for the majority of the decrease in
2002. Operating cash flows for the first half of 2002 include the activity of
the Alliance operations.

CASH FROM INVESTING ACTIVITIES:
Cash used for investing activities during the first six months of 2002 totaled
$15.3 million, compared with cash generated of $11.8 million during the first
six months of 2001. The first half of 2002 includes $19.9 million from the sale
of assets and net cash proceeds of $88.1 million from the monetization of a note
receivable. The first half of 2001 includes $4.2 million from the sale of assets
and net cash proceeds of $122.6 million from the monetization of a note
receivable. A portion of the proceeds from the note monetization ($60.1 million)
was dividended to the minority shareholder. Capital expenditures increased $10.0
million for the first half of 2002 compared to the first half of 2001.

CASH FROM FINANCING ACTIVITIES:
Cash generated from financing activities was $40.5 million for the first six
months of 2002 compared to $188.2 million of cash used during the first six
months of 2001. During the first six months of 2002, Bowater made net payments
of $167.2 million on its short-term credit facilities. In the first half of
2001, we received $4.6 million (net of payments of $454.6 million) under our
short-term credit facilities. Also in the first six months of 2002, we received
net proceeds on long-term borrowings amounting to $228.3 million (payments of
$71.7 million and proceeds of $300.0 million) compared with payments of $107.4
million during the first six months of 2001.

Cash dividends paid in the first half of 2002 decreased $59.0 million from the
prior year period. This was primarily due to dividends paid to our minority
shareholder Calhoun Newsprint Company related to a timberland transaction.

CREDIT ARRANGEMENTS:
Bowater has available credit facilities with various banks that provide for
borrowings up to $900.0 million. In May 2002, Bowater closed on its new credit
facilities, a $300.0 million three-year term loan and a $500.0 million
three-year revolving credit facility. The new three-year term loan and revolving
credit facility were used to refinance the previous $350.0 million five-year
facility and the $450.0 million, 364-day credit facility. Bowater also has a
$100.0 million, 364-day credit facility of a wholly-owned subsidiary, Bowater
Canadian Forest Products Inc. At June 30, 2002, $478.0 million was outstanding
under these facilities and approximately $68.3 million outstanding letter of
credit agreements, of which $22.0 million was committed against our credit
facilities.

The $300.0 million three-year term loan requires annual repayments of $60.0
million each in May 2003 and 2004 and $180.0 million in May 2005. The $500.0
million revolving credit facility is due May 2005.

Bowater believes that cash generated from operations and access to our credit
facilities will be sufficient to provide for our anticipated requirements for
working capital, contractual obligations and capital expenditures for the next
12 months.

On July 8, 2002 Moody's Investor's Service placed the debt ratings of Bowater
and its subsidiaries under review for possible downgrade. The current debt
rating of Bowater Inc with Moody's is Baa3 and a downgrade would classify the
debt as non-investment grade by Moody's. Although a downgrade will have no
material impact on the company's present debt and credit agreements it could
impact the company's access to, and cost of capital and financial flexibility in
the future.

                         OFF-BALANCE SHEET ARRANGEMENTS

A detailed discussion of our off-balance sheet arrangements is included under
the caption "Off-Balance Sheet Arrangements," in Item 7 of our annual report on
Form 10-K/A for the year ended December 31, 2001.

In January 2002, Bowater sold approximately 116,000 acres of timberlands for
aggregate consideration of $104.2 million, comprised of approximately $5.1
million in cash and $99.1 million in notes receivable. In March 2002, we
monetized the notes receivable using a qualified special purpose entity (QSPE)
set up in accordance with the Financial Accounting Standards Board's SFAS No.
140, "Accounting for Transfers and


                                       23
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Servicing of Financial Assets and Extinguishments of Liabilities," and received
net cash proceeds of $88.1 million. These transactions resulted in a net pre-tax
gain of $70.4 million. The QSPE is not consolidated with Bowater in Bowater's
financial statements. The business purpose of the QSPE is to hold the notes
receivable and issue debt securities to third parties. The value of these debt
securities is equal to approximately 90% of the value of the notes receivable.
The full principal amount of the notes receivable is backed by a letter of
credit issued by a third party financial institution. Bowater retained an
interest in the QSPE of approximately $7.1 million. As of June 30, 2002, the
QSPE had total assets of $101.8 million and total obligations of $89.2 million.

In July 2002, Bowater terminated the lease arrangement related to the planned
construction of a Nuway coating facility in the mid-Atlantic region.
Construction of the mid-Atlantic facility was being financed through a special
purpose entity. The construction of the mid-Atlantic facility has been
indefinitely postponed. As a result of the lease termination, Bowater purchased
the leased equipment for approximately $14 million. Bowater utilized its
existing credit facilities to purchase the leased equipment from the special
purpose entity.

                              ACCOUNTING STANDARDS

Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but will be tested for impairment at
least on an annual basis in accordance with the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation,
Bowater is required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. As of June 30, 2002, we
had unamortized goodwill in the amount of $843.0 million and no intangible
assets with indefinite useful lives (pending the final valuation of the Alliance
acquisition).

During the second quarter of 2002, Bowater completed the transitional goodwill
impairment test prescribed in SFAS No. 142 with respect to existing goodwill.
The transitional goodwill impairment test involved a comparison of the fair
value of each of the Company's reporting units, as defined under SFAS No. 142,
with its carrying amount. As a result of the transitional impairment tests
performed as of January 1, 2002, there was no indicator of goodwill impairment,
however, the amount by which fair value exceeded book value for certain of the
reporting units was not significant. On an ongoing basis the Company expects to
perform its impairment tests during the fourth quarter. See discussion of
critical accounting policy for goodwill under the caption "Accounting Policies
and Estimates" on page 15.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 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. SFAS No. 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
financial statements.

On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," that is applicable to financial statements
issued for fiscal years beginning after December 15, 2001 (January 2002 for
Bowater). The FASB's new rules on asset impairment supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and provide a single accounting model for long-lived assets to
be disposed of. Bowater adopted the Statement effective January 1, 2002, and
does not expect this standard to have a material impact on future financial
statements or results of operations.

On April 30, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds Statement No. 4, which required all gains
and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. Upon
adoption of SFAS No. 145, companies will be required to apply the criteria in
Accounting Principle Board Opinion No. 30, "Reporting the Results of Operations
- reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining the classification of gains and losses resulting from the
extinguishments of debt. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. The Company does not expect this standard to have a material
impact on its financial statements.

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The provisions of
SFAS No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company does not expect this standard to have a
material impact on its financial statements.


                                       24
<PAGE>

ITEM 3.         MARKET RISK


Bowater's market risk disclosure included in its 2001 Form 10-K/A, Part II, Item
7A, is still applicable as of June 30, 2002,except for the updated disclosures
concerning our Canadian dollar forward and range forward contracts, which is
included in Footnote 9 in this Form 10-Q.


                                       25
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION

Item 1. Legal Proceedings.

Bowater, several other paper companies, and 120 other companies have been named
as defendants in asbestos personal injury actions based on product liability
claims. Bowater has denied the allegations and no specific product of Bowater
has been identified by the plaintiffs in any of the actions as having caused or
contributed to any individual plaintiff's alleged asbestos related injury.

These suits have been filed by approximately 570 claimants who sought monetary
damages in civil actions pending in state courts in Missouri, Illinois, New
York, Mississippi and Texas. Approximately 60 of these actions have been
dismissed already, either voluntarily or by summary judgment. We believe that
all of these asbestos-related claims are covered by insurance, subject to any
applicable deductibles and our insurers' rights to dispute coverage.

While it is not possible to predict with certainty the outcome of these matters,
based upon the advice of special counsel, at this time we do not expect these
claims to have a material adverse impact on Bowater's business, financial
position or results of operations.

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

On May 8, 2002, at the Company's Annual Meeting of Shareholders, the following
matters were submitted to a vote of the shareholders:

A resolution electing the following class of directors for a term of three
years: Francis J. Aguilar ( 48,865,322 votes in favor; 216,814 votes withheld);
L. Jacques Menard (48,771,962 votes in favor; 310,174 votes withheld); and
John A. Rolls (48,864,253 votes in favor; 217,883 votes withheld). The names of
each other director whose term of office as a director continued after the
meeting are: Richard Barth, Cinda A. Hallman, Charles J. Howard, Arnold M.
Nemirow, James L. Pate, Arthur R. Sawchuk and Togo D. West, Jr.

A proposal to approve the Bowater Incorporated 2002 Stock Option Plan which
provides for the awards to key employees, officers and nonemployee directors of
stock options, restricted or nonrestricted stock, and stock appreciation rights.
The proposal was approved by a vote of 44,871,127 votes in favor; 4,081,714
votes against; and 129,295 abstentions.

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           Credit Agreement dated May 22, 2002 between Bowater
                        Incorporated, JPMorgan Chase Bank, as Administrative
                        Agent, and the lenders signatory thereto.

         10.2           Modification of Employment Agreement and Cancellation
                        of Change in Control Agreement dated as of June 21,
                        2002, by and between the Company and Anthony H. Barash.

         12.1           Statement regarding Computation of Ratio of Earnings
                        to Fixed Charges.

         (b)            Reports on Form 8-K:

                  On June 13, 2002, the Company filed a report on Form 8-K
                  disclosing a stop in production at its Mokpo, South Korea mill
                  on May 27, 2002 due to a labor union dispute.

                  On July 11, 2002, the Company filed a report on Form 8-K
                  disclosing the revision of reported gains on timberland sales.


                                       26
<PAGE>

                      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
                                    Executive Vice President and
                                    Chief Financial Officer




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

Dated:   August 14, 2002

                                       27
<PAGE>

                                INDEX TO EXHIBITS

      Exhibit No.       Description

         10.1           Credit Agreement dated May 22, 2002 between Bowater
                        Incorporated, JPMorgan Chase Bank, as Administrative
                        Agent, and the lenders signatory thereto.

         10.2           Modification of Employment Agreement and Cancellation
                        of Change in Control Agreement dated as of June 21,
                        2002, by and between the Company and Anthony H. Barash.

         12.1           Statement regarding Computation of Ratio of Earnings
                        to Fixed Charges