<PAGE>   1

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

(Mark One)

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

For the quarterly period ended JUNE 30, 1999
                                       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 10, 1999.

                 Class                       Outstanding at August 10, 1999
                 -----                       ------------------------------

       Common Stock, $1.00 Par Value                51,215,540 Shares




<PAGE>   2

                              BOWATER INCORPORATED

                                    I N D E X


                                                                           Page
                                                                          Number
                                                                          ------

  PART I   FINANCIAL INFORMATION

        1.  Financial Statements:

               Consolidated Balance Sheet at June 30, 1999,
               and December 31, 1998                                          3

               Consolidated Statement of Operations for the Three and Six
               Months Ended June 30, 1999, and June 30, 1998                  4

               Consolidated Statement of Capital Accounts
               for the Six Months Ended June 30, 1999                         5

               Consolidated Statement of Cash Flows for the
               Six Months Ended June 30, 1999, and June 30, 1998              6

               Notes to Consolidated Financial Statements                  7-11

        2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations                12-20


  PART II   OTHER INFORMATION

  Exhibits and Reports on Form 8-K                                        21-22

  SIGNATURES                                                                 23




                                        2
<PAGE>   3

                      BOWATER INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                     (Unaudited, in millions of US dollars)

<TABLE>
<CAPTION>
                                                              June 30,         December 31,
                                                                1999               1998
                                                              --------           --------
<S>                                                           <C>                <C>
                               ASSETS
Current assets:
  Cash and cash equivalents                                   $   36.5           $   58.3
  Marketable securities                                            2.1                1.2
  Accounts receivable, net                                       301.0              372.4
  Inventories                                                    187.4              186.3
  Other current assets                                            71.3               77.2
                                                              --------           --------
    Total current assets                                         598.3              695.4
                                                              --------           --------

Timber and timberlands (Note 2)                                  372.0              472.8
Fixed assets, net (Note 3)                                     2,722.8            2,885.2
Goodwill                                                         889.9              921.7
Other assets                                                     141.5              116.3
                                                              --------           --------
                                                              $4,724.5           $5,091.4
                                                              ========           ========
                       LIABILITIES AND CAPITAL
Current liabilities:
  Current installments of long-term debt (Note 4)             $   20.0           $   86.2
  Short-term bank debt                                            70.5              210.0
  Accounts payable and accrued liabilities                       321.3              464.4
  Income taxes payable (Note 2)                                   57.2               --
  Dividends payable                                               10.9               11.9
                                                              --------           --------
    Total current liabilities                                    479.9              772.5
                                                              --------           --------

Long-term debt, net of current installments (Note 4)           1,463.5            1,534.6
Other long-term liabilities                                      340.2              356.3
Deferred income taxes                                            454.1              522.2
Minority interests in subsidiaries                               128.6              128.8
Commitments and contingencies (Note 6)                            --                 --

Shareholders' equity:
   Series C cumulative preferred stock (Note 7)                   --                 25.5
   Common stock                                                   59.6               59.0
   Exchangeable shares (Note 4)                                  151.2              110.8
   Additional paid-in capital                                  1,260.4            1,230.2
   Retained earnings                                             746.7              657.4
   Accumulated other comprehensive income/(loss)                 (26.2)             (28.9)
   Loan to ESOT                                                   (1.7)              (2.6)
   Treasury stock, at cost (Note 8)                             (331.8)            (274.4)
                                                              --------           --------
    Total shareholders' equity                                 1,858.2            1,777.0
                                                              --------           --------
                                                              $4,724.5           $5,091.4
                                                              ========           ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>   4

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
         (Unaudited, in millions of US dollars except per share amounts)

<TABLE>
<CAPTION>
                                                                 Three Months Ended                Six Months Ended
                                                              -------------------------        ------------------------
                                                               June 30,         June 30,        June 30,        June 30,
                                                                 1999             1998            1999            1998
                                                              ----------        -------        ---------        -------
                                                               (Note 1)                        (Note 1)
<S>                                                           <C>               <C>            <C>              <C>
Sales                                                         $    573.3        $ 423.9        $ 1,193.1        $ 835.6
Distribution costs                                                  45.9           28.2             94.4           56.7
                                                              ----------        -------        ---------        -------
    Net sales                                                      527.4          395.7          1,098.7          778.9
Cost of sales                                                      417.4          280.3            840.8          554.7
Depreciation, amortization and cost of timber harvested             76.0           43.1            151.8           88.3
Impairment of asset (Note 3)                                        92.0           --               92.0           --
                                                              ----------        -------        ---------        -------
    Gross profit/(loss)                                            (58.0)          72.3             14.1          135.9
Selling and administrative expense                                  21.3           13.7             42.6           31.0
                                                              ----------        -------        ---------        -------
    Operating income/(loss)                                        (79.3)          58.6            (28.5)         104.9

Other expense/(income):
  Interest income                                                   (1.3)          (6.2)            (1.8)         (12.7)
  Interest expense, net of capitalized interest                     30.6           16.7             63.0           33.3
  Gain on sale of timberlands (Note 2)                            (108.3)          (0.1)          (253.7)         (21.1)
  Other, net (Note 9)                                              (15.9)          16.8            (28.2)          21.1
                                                              ----------        -------        ---------        -------
                                                                   (94.9)          27.2           (220.7)          20.6
                                                              ----------        -------        ---------        -------

Income before income taxes and minority interests                   15.6           31.4            192.2           84.3

Provision for income taxes (Note 10)                                 7.8           11.9             77.5           32.0
Minority interests in net income of subsidiaries                     2.6            0.6              3.0            8.6
                                                              ----------        -------        ---------        -------

Net income                                                           5.2           18.9            111.7           43.7

Other comprehensive income/(loss), net of tax:
  Foreign currency translation adjustments                           7.0           (1.7)             2.7           (1.7)
                                                              ----------        -------        ---------        -------

Comprehensive income                                          $     12.2        $  17.2        $   114.4        $  42.0
                                                              ==========        =======        =========        =======

Basic earnings per common share (Note 11):                    $     0.10        $  0.45        $    2.03        $  1.05
                                                              ==========        =======        =========        =======


Average common shares outstanding                                   54.3           40.6             54.4           40.5
                                                              ==========        =======        =========        =======

Diluted earnings per common share (Note 11):                  $     0.10        $  0.44        $    2.00        $  1.03
                                                              ==========        =======        =========        =======


Average common and common equivalent shares outstanding             55.0           41.3             55.3           41.2
                                                              ==========        =======        =========        =======
</TABLE>


          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>   5

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
                     For The Six Months Ended June 30, 1999
         (Unaudited, in millions of US dollars except per share amounts)

<TABLE>
<CAPTION>
                                   Series C                                                      Accumulated
                                  Cumulative                            Additional                 Other
                                   Preferred   Common   Exchangeable     Paid-in     Retained   Comprehensive   Loan to   Treasury
                                     Stock     Stock       Shares        Capital     Earnings   Income/(Loss)     ESOT      Stock
                                  ----------   ------   ------------    ----------   --------   -------------  ---------  --------
<S>                                 <C>         <C>         <C>          <C>         <C>          <C>          <C>        <C>
Balance at December 31, 1998        $25.5       $59.0       $110.8       $1,230.2    $  657.4     $  (28.9)    $   (2.6)  $ (274.4)

Net income                           --          --           --             --         111.7         --           --         --

New issuance of stock (Note 4)       --          --           66.2           --          --           --           --         --

Retractions of Exchangeable
     Shares                          --           0.5        (25.8)          25.3        --           --           --         --

Redemption of Series C
     Preferred Stock (Note 7)       (25.5)                                               (0.9)

Dividends ($.40 per share)           --          --           --             --         (21.4)        --           --         --

Dividends on preferred stock:
  Series C ($.14 per share)          --          --           --             --          (0.1)        --           --         --

Stock options exercised              --           0.1         --              3.4        --           --           --         --

Tax benefit on exercise of
     stock options                   --          --           --              1.5        --           --           --         --

Reduction in loan to ESOT            --          --           --             --          --           --            0.9       --

Purchase of common stock (Note 8)    --          --           --             --          --           --           --        (57.4)

Foreign currency translation         --          --           --             --          --            2.7         --         --
                                    -----       -----       ------       --------    --------     --------     --------   --------

Balance at June 30, 1999            $--         $59.6       $151.2       $1,260.4    $  746.7     $  (26.2)    $   (1.7)  $ (331.8)
                                    =====       =====       ======       ========    ========     ========     ========   ========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                        5

<PAGE>   6

                      BOWATER INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                     (Unaudited, in millions of US Dollars)

<TABLE>
<CAPTION>
                                                                          Six Months Ended
                                                                      -----------------------
                                                                     June 30,         June 30,
                                                                       1999             1998
                                                                      ------           ------
<S>                                                                   <C>              <C>
Cash flows from  operating activities:
Net income                                                            $111.7           $ 43.7
Adjustments to reconcile net income to net cash
  provided by operating activities:
Depreciation, amortization and cost of timber harvested                151.8             88.3
Deferred income taxes                                                  (50.6)             3.1
Minority interests                                                       3.0              8.6
Gain from sale of timberlands (Note 2)                                (253.7)           (21.1)
Writedown of Canadian exchange options (Note 9)                         --               22.3
Writedown of asset due to impairment (Note 3)                           92.0             --
Change in working capital:
  Accounts receivable, net                                              70.1            (10.4)
  Inventories                                                           (7.9)             0.6
  Accounts payable and accrued liabilities                            (116.8)             4.5
  Income taxes payable                                                  57.2             (5.9)
Other, net                                                              (9.4)            (1.5)
                                                                      ------           ------
          Net cash from operating activities                            47.4            132.2
                                                                      ------           ------

Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands                  (93.7)           (73.2)
Disposition of fixed assets, timber and timberlands (Note 2)           360.8             31.7
Cash invested in option contracts                                       --              (22.7)
Cash paid on maturity of hedging contracts                             (19.9)            --
Cash invested in marketable securities                                  (2.4)           (40.9)
Cash from maturities of marketable securities                            1.6            192.3
                                                                      ------           ------
          Net cash from investing activities                           246.4             87.2
                                                                      ------           ------

Cash flows from financing activities:
Proceeds from short-term borrowings                                    254.7             --
Payments of short-term borrowings                                     (394.2)            --
Cash dividends, including minority interests (Note 5)                  (28.0)           (34.1)
Purchase of common stock (Note 8)                                      (57.4)            --
Redemption of Convertible Subordinated Debentures (Note 4)             (65.9)            --
Payments of long-term debt                                              (3.0)            (0.9)
Redemption of Series C Preferred Stock (Note 7)                        (26.4)            --
Stock options exercised                                                  3.5              6.5
Other                                                                    1.1              0.9
                                                                      ------           ------
          Net cash used for financing activities                      (315.6)           (27.6)
                                                                      ------           ------

Net increase/(decrease) in cash and cash equivalents                   (21.8)           191.8

Cash and cash equivalents at beginning of year                          58.3            228.7
                                                                      ------           ------
Cash and cash equivalents at end of period                            $ 36.5           $420.5
                                                                      ======           ======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest, net of capitalized interest                               $(63.6)          $(34.1)
  Income taxes                                                        $(59.3)          $(34.7)

Noncash investing and financing activity:
  Conversion of 7.50% Convertible Unsecured
  Subordinated Debentures into
  Exchangeable Shares (Note 4)                                        $ 66.2           $ --
</TABLE>


          See accompanying notes to consolidated financial statements.



                                        6
<PAGE>   7

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   The accompanying consolidated financial statements include the accounts of
     Bowater Incorporated and Subsidiaries (the Company) as of June 30, 1999.
     The acquisition of Avenor Inc. (Avenor) and the South Korean newsprint
     mill, both of which closed in July 1998, are not reflected in the accounts
     for the comparable period ended June 30, 1998. The consolidated balance
     sheets, statements of operations, capital accounts and cash flows are
     unaudited. However, in the opinion of Company 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, 1999, are not necessarily
     indicative of the results to be expected for the full year.

2.   During the second quarter of 1999, the Company completed the sale of
     approximately 650,000 acres of timberlands resulting in a pre-tax gain of
     $108.3 million, or $1.20 per diluted share after tax. As part of the
     timberland sale, approximately $50 million of proceeds were received in the
     form of a long-term note. During the second quarter, this note was
     monetized through a special purpose subsidiary of the Company. The cash
     from the monetization is included in "Disposition of fixed assets, timber,
     and timberlands" in the Statement of Cash Flows. A portion of the debt of
     the special purpose entity of approximately $12.7 million has been
     guaranteed by the Company.

     Since the beginning of 1999, the Company has sold approximately 1,630,000
     acres of timberlands resulting in a pre-tax gain of $253.7 or $2.80 per
     diluted share after tax. In addition, the Company recognized severance
     charges of $2.3 million pre-tax related to the sale during the first
     quarter of 1999.

3.   During the second quarter of 1999, the Company signed an agreement with
     Inexcon Maine, Inc. for the purchase of Great Northern Paper (GNP). This
     agreement prompted a re-evaluation of the assets at GNP in accordance with
     Statement of Financial Accounting Standards No. 121, "Accounting for the
     Impairment of Long-Lived Assets to Be Disposed Of". Accordingly, the
     Company recorded a pre-tax impairment charge to its newsprint segment of
     $92.0 million, or $1.02 per diluted share. This charge is shown as a
     reduction to fixed assets in the Consolidated Balance Sheet. The assets
     were written to fair value, based on the proposed sale to Inexcon Maine,
     Inc. The sale is expected to close in August 1999.

4.   In February 1999, the Company redeemed all of its outstanding 7.50%
     Convertible Unsecured Subordinated Debentures due 2004. In connection with
     the redemption, the Company paid cash of approximately $65.9 million and
     issued 1,359,620 Exchangeable shares.

5.   During the first six months of 1999, the Board of Directors of Calhoun
     Newsprint Company (CNC) declared dividends totaling $10.1 million, of which
     $5.0 million was paid to the minority shareholder. In the first six months
     of 1998, $16.9 million was paid to the minority shareholder. The primary
     source of the 1998 dividends was the proceeds of a sale of approximately
     26,000 acres of timberlands.

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


                                       7
<PAGE>   8

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


7.   In February 1999, the Company redeemed all the remaining shares of its
     8.40% Series C Cumulative Preferred Stock for $26.6 million, including
     accrued dividends.

8.   In May 1999, the Board of Directors authorized the repurchase of up to 5.5
     million shares of Bowater Incorporated common stock (or approximately 10
     percent of the Company's outstanding shares) in the open market. In April
     1999, the Company completed its second stock repurchase program, purchasing
     1.4 million shares of its common stock at a cost of $57.4 million in 1999.
     The Company purchased a total of 4.1 million shares at a cost of $165.2
     million under this program.

9.   During the second quarter and first six months of 1999, "Other, net" in the
     Consolidated Statement of Operations includes $16.6 million and $29.2
     million of foreign exchange gains, respectively. For the same periods in
     1998, the amounts were insignificant.

     During the first quarter of 1998, the Company purchased options on the
     Canadian dollar at a cost of $22.7 million to hedge the acquisition of
     Avenor. During the first six months of 1998, the Company adjusted the cost
     of these options to fair market value resulting in a pre-tax charge of
     $22.3 million. In addition, during the second quarter of 1998, the Company
     closed out Korean won foreign exchange contracts resulting in a pre-tax
     gain of $2.6 million.

10.  The effective tax rates for the second quarter of 1999 and 1998 were 50
     percent and 38 percent, respectively. The majority of the increase in the
     effective tax rate for 1999 reflects the non-deductible amortization of
     goodwill recorded upon the acquisition of Avenor. For the first six months
     of 1999 and 1998, the effective tax rate was 40 percent and 38 percent,
     respectively.

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

<TABLE>
<CAPTION>
     ----------------------------------------- ---------------------------------- -------------------------------
                                                      Three Months Ended                 Six Months Ended
     (In millions, except per share amounts)
     ----------------------------------------- ---------------------------------- -------------------------------
                                                June 30, 1999    June 30, 1998    June 30, 1999   June 30, 1998
                                               ---------------- ----------------- --------------- ---------------
<S>                                                 <C>             <C>              <C>               <C>

     Basic Computation:

     Net income                                     $   5.2         $   18.9         $   111.7         $   43.7
     Less:
         Series C Preferred Stock
               Dividends                               --               (0.6)             (0.1)            (1.1)
         Deferred issuance costs associated
               with Series C Preferred Stock           --               --                (1.0)            --

                                               ---------------- ----------------- --------------- ---------------
     Basic income available to common
     shareholders                                   $   5.2         $   18.3         $   110.6         $   42.6
                                               ---------------- ----------------- --------------- ---------------

     Basic weighted average shares
     outstanding                                       54.3             40.6              54.4             40.5

                                               ---------------- ----------------- --------------- ---------------
     Basic earnings per common share                $  0.10         $   0.45         $    2.03         $   1.05
                                               ---------------- ----------------- --------------- ---------------

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



                                       8
<PAGE>   9

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
--------------------------------------- --------------------------------- ----------------------------------
(In millions, except per share amounts)        Three Months Ended                  Six Months Ended
                                        --------------------------------- ----------------------------------
                                         June 30, 1999    June 30, 1998    June 30, 1999     June 30, 1998
                                        ----------------- --------------- ----------------- ----------------
<S>                                          <C>              <C>            <C>                 <C>

Diluted Computation:

Diluted income available to common
shareholders                                 $   5.2          $   18.3       $   110.6           $   42.6
                                        ----------------- --------------- ----------------- ----------------

Basic weighted average shares
outstanding                                     54.3              40.6            54.4               40.5

Effect of dilutive securities:
    Options                                      0.7               0.7             0.9                0.7
                                        ----------------- --------------- ----------------- ----------------

Diluted weighted average shares
outstanding                                     55.0              41.3            55.3               41.2
                                        ----------------- --------------- ----------------- ----------------

Diluted earnings per common share            $  0.10          $   0.44        $   2.00           $   1.03
                                        ----------------- --------------- ----------------- ----------------

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


12.  Segment Information:

     The Company is organized into four divisions, three of which are: the
     Newsprint & Directory Division, the Coated Paper Division and the Forest
     Products Division.

     *    The Newsprint & Directory Division is responsible for the
          manufacturing operations of nine sites in the United States, Canada
          and South Korea. It is also responsible for the worldwide marketing of
          newsprint, directory paper and uncoated groundwood specialties.
     *    The Coated Paper Division manufactures coated groundwood paper,
          newsprint, market pulp and uncoated groundwood specialties at one
          manufacturing site in the United States. This Division is responsible
          for the worldwide marketing and sales of coated groundwood paper.
     *    The Forest Products Division operates three sawmills and manages 2.4
          million acres of owned and leased timberlands in the United States and
          Canada, as well as 14 million acres of Crown-owned land in Canada on
          which the Company has cutting rights. This Division sells wood fiber
          to the Newsprint & Directory Division and Coated Paper Division, as
          well as markets and sells timber and lumber to third parties in North
          America.

     The Company's Pulp Division has marketing and sales responsibility for all
     of the Company's market pulp sales; however, the financial results from
     these sales are included in both the Newsprint & Directory Division and the
     Coated Paper Division. Accordingly, no results are reported for the Pulp
     Division.

     The following tables summarize information about segment profit and loss
     and segment assets for the three months ended June 30, 1999 and 1998, six
     months ended June 30, 1999 and 1998, and at June 30, 1999 and 1998,
     respectively:


                                       9
<PAGE>   10

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
(In millions of US. dollars)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
                                        Newsprint &       Coated          Forest        Corporate/
         THREE MONTHS ENDED              Directory         Paper         Products          Other
            JUNE 30, 1999                 Division        Division       Division      Eliminations       Total
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
<S>                                          <C>            <C>           <C>              <C>          <C>

Net sales-including internal sales           $  384.4       $  110.7      $  130.5         $   0.1      $  625.7
Elimination of intersegment sales                ---           ---           (98.3)          ---           (98.3)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Net sales - external customers                  384.4          110.7          32.2             0.1         527.4
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Operating income (1)                            (92.7)          15.6          12.3           (14.5)        (79.3)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
</TABLE>



<TABLE>
<CAPTION>
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
                                        Newsprint &       Coated          Forest        Corporate/
         THREE MONTHS ENDED              Directory         Paper         Products          Other
            JUNE 30, 1998                 Division        Division       Division      Eliminations       Total
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
<S>                                          <C>            <C>           <C>            <C>            <C>

Net sales-including internal sales           $  242.9       $  125.9      $  102.5       $   ---        $  471.3
Elimination of intersegment sales                ---           ---           (75.6)          ---           (75.6)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Net sales - external customers                  242.9          125.9          26.9           ---           395.7
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Operating income                                 23.3           33.3           7.9            (5.9)         58.6
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
</TABLE>



<TABLE>
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
                                        Newsprint &       Coated          Forest        Corporate/
          SIX MONTHS ENDED               Directory         Paper         Products          Other
            JUNE 30, 1999                 Division        Division       Division      Eliminations       Total
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
<S>                                          <C>            <C>           <C>             <C>         <C>

Net sales-including internal sales           $  799.1       $  221.7      $  262.0        $    2.4    $  1,285.2
Elimination of intersegment sales                ---           ---          (186.5)          ---          (186.5)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Net sales - external customers                  799.1          221.7          75.5             2.4       1,098.7
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Operating income 1                              (62.2)          32.1          24.8           (23.2)        (28.5)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Total assets at 6/30/99                      $3,564.8       $  476.0      $  498.0         $ 185.7      $4,724.5
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
</TABLE>


<TABLE>

-------------------------------------- --------------- -------------- --------------- ---------------- ------------
                                        Newsprint &       Coated          Forest        Corporate/
          SIX MONTHS ENDED               Directory         Paper         Products          Other
            JUNE 30, 1998                 Division        Division       Division      Eliminations       Total
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
<S>                                          <C>            <C>           <C>            <C>            <C>

Net sales-including internal sales           $  475.1       $  241.5      $  212.6       $   ---        $  929.2
Elimination of intersegment sales                ---           ---          (150.3)          ---          (150.3)
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Net sales - external customers                  475.1          241.5          62.3           ---           778.9
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Operating income                                 36.3           61.6          24.3           (17.3)        104.9
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
Total assets at 6/30/98                      $1,360.0       $  491.5      $  423.0          $497.7      $2,772.2
-------------------------------------- --------------- -------------- --------------- ---------------- ------------
</TABLE>


(1) Operating income for the Newsprint & Directory Division includes the $92.0
million impairment charge recorded in the second quarter of 1999.



                                       10
<PAGE>   11

                      BOWATER INCORPORATED AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


13.  Using Canadian dollar range forward contracts, the Company actively hedges
     against the risk of a rising Canadian dollar. At June 30, 1999, the Company
     had $899.4 million of Canadian dollar contracts. Information regarding the
     carrying value, fair market value, and range of exchange rates of the
     contracts is summarized in the table below:

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------
                                                            Liability
     (In millions of US$)             Notional    ------------------------------    Range of
     Foreign currency exchange        Amount of     Carrying         Fair         Canadian$/US$
     agreements and options          Derivatives     Amount      Market Value    Exchange Rates
     ---------------------------------------------------------------------------------------------
<S>               <C>                 <C>            <C>            <C>          <C>      <C>
     Buy Currency:
        Canadian dollar
           Due in 1999                $   258.6      $   16.2       $    16.2    1.2820 - 1.4531
           Due in 2000                    457.8          24.8            24.8    1.2975 - 1.4853
           Due in 2001                    183.0           2.0             2.0    1.3625 - 1.5083
     ---------------------------------------------------------------------------------------------
                Total                 $   899.4      $   43.0       $    43.0    1.2820 - 1.5083
     ---------------------------------------------------------------------------------------------

</TABLE>

                                       11
<PAGE>   12

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

                                  ORGANIZATION

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

                              RESULTS OF OPERATIONS
                    THREE MONTHS ENDED JUNE 30, 1999, VERSUS
                                  JUNE 30, 1998

For the second quarter of 1999, the Company had an operating loss of $79.3
million, compared to operating income of $58.6 million for the second quarter of
1998. In the second quarter of 1999, the Company recorded a pre-tax impairment
charge of $92.0 million, reducing the book value of assets at its Great Northern
Paper operations. Without the impairment charge, operating income decreased
$45.9 million from the second quarter of 1998. This decrease was due to lower
prices for most of the Company's products and higher operating costs as a result
of market-related downtime, which were partially offset by synergies achieved.
The Company's shipments of newsprint and market pulp increased due to the
acquisition of Avenor Inc. (Avenor) in July 1998.

    Net income for the second quarter of 1999 was $5.2 million, or $0.10 per
diluted share, compared to net income of $18.9 million, or $0.44 per diluted
share for the second quarter of 1998. Included in net income for the second
quarter of 1999 was a pre-tax impairment charge of $92.0 million ($56.1 million
after tax) or $1.02 per diluted share and a pre-tax gain on the sale of
timberlands of $108.3 million ($66.1 million after tax), or $1.20 per diluted
share. In addition, the Company recorded pre-tax foreign currency exchange gains
of $16.6 million, or $0.22 per diluted share during the second quarter of 1999.
Second quarter 1999 net sales were $527.4 million, compared with $395.7 million
for the second quarter of 1998 and $571.3 for the first quarter of 1999.

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

                            PRODUCT LINE INFORMATION

In general, the Company's products are globally traded commodities. Pricing and
the level of shipments of these products will continue to be influenced by the
balance between supply and demand as affected by global economic conditions,
changes in consumption and capacity, the level of customer and producer
inventories and fluctuations in exchange rates.

   The information provided in the following product line discussions concerning
market and industry conditions was obtained from the following sources: the
Newspaper Association of America; the Canadian Pulp and Paper Association; the
American Forest & Paper Association; Resource Information System, Inc. (RISI);
Random Lengths; World Wood Review; and the Media Industry Newsletter. This
information is provided to enhance the reader's understanding of the Company's
financial results and the conditions under which these results were achieved.

NET SALES BY PRODUCT:

<TABLE>
<CAPTION>
  -----------------------------------------------------------------
                                             THREE MONTHS ENDED
                                        ---------------------------
                                           JUNE 30,       JUNE 30,
  (In millions of US dollars)                1999           1998
  -----------------------------------------------------------------
<S>                                         <C>            <C>

  Net sales:
     Newsprint                              $310.8         $197.0
     Coated groundwood paper                  78.1          104.5
     Directory paper                          31.9           42.0
     Market pulp                             106.9           44.7
     Uncoated groundwood specialties          13.3            8.8
     Lumber and other wood products           32.3           26.9
     Distribution costs                      (45.9)         (28.2)
                                            ------         ------
                Total net sales             $527.4         $395.7
  -----------------------------------------------------------------
</TABLE>


                                       12
<PAGE>   13
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Newsprint The Company's average transaction price for newsprint was 17 percent
lower in the second quarter of 1999 compared to the second quarter of 1998, due
to a supply and demand imbalance caused in part by the financial and economic
problems in Asia, lowering demand from this region. During the second quarter of
1999, the Company reduced newsprint production by approximately 100,000 metric
tons to correct an orderbook imbalance. Comparing the same periods, 1999
shipments were significantly higher as a result of the Company's acquisition of
Avenor and the South Korean newsprint mill, both in July 1998. Total U.S.
consumption of newsprint and consumption by U.S. daily newspapers increased in
the second quarter of 1999 compared to the second quarter of 1998. Advertising
lineage for U.S. daily newspapers also increased. At the end of the second
quarter of 1999, newsprint inventory for the U.S. daily newspapers decreased
compared to the same time last year. North American mill inventories decreased
during the second quarter of 1999, but remained 29 percent higher than the
levels at the end of the second quarter of 1998. Comparing the same quarters,
U.S. newsprint imports decreased while North American newsprint exports
decreased slightly. In July 1999, the Company announced a newsprint price
increase for North America of $50 per metric ton effective October 1, 1999.

Coated Groundwood Paper The Company's coated groundwood paper average
transaction price in the second quarter of 1999 was 17 percent lower than in the
second quarter of 1998 and shipments were 10 percent lower than the year ago
quarter. Magazine advertising pages and catalogue mailings, measured by Standard
A mail weight, continued to increase slightly over a strong period a year ago.
These positive indicators of consumption were offset, however, by the available
supply of competing grades of paper and imported paper. U.S. mill inventories of
coated groundwood paper were approximately 20 percent higher in the second
quarter of 1999, compared to the second quarter of 1998; however, June's level
declined compared to the previous months. With improving market conditions, the
Company began implementing some price increases in the third quarter of 1999.

Directory Paper Following the decline in newsprint pricing, the average
transaction price for the Company's directory paper was 7 percent lower for the
second quarter of 1999 compared to the same period last year. Shipments declined
19 percent comparing the same quarter periods, due in part to the market-related
downtime taken during the second quarter of 1999.

Market Pulp The second quarter average transaction price for the Company's
market pulp increased 4 percent compared to the second quarter of 1998. In
addition to improved market conditions, the Company's Avenor acquisition in July
1998 caused a change in the Company's product mix, which now includes northern
bleached softwood and hardwood pulp. This change had a favorable price impact
when comparing the two quarters. Shipments in the second quarter of 1999 were
significantly higher than the year ago period, also due to the inclusion of
market pulp products acquired with the acquisition of Avenor. The world pulp
markets continued to strengthen during the second quarter of 1999. Second
quarter 1999 pulp shipments from NORSCAN (U.S., Canada, Finland, Norway and
Sweden) producing regions, at 5.6 million metric tons, increased 1 percent
compared to the first quarter of 1999 and increased 8 percent compared to the
second quarter of 1998. NORSCAN shipments increased to all major regions of the
world. NORSCAN producer inventories decreased 171,000 metric tons during the
quarter to 1.4 million metric tons, or a 22 days supply. NORSCAN inventories at
June 1999 were 144,000 metric tons lower than June 1998. With these improving
fundamentals, the Company announced and implemented market pulp price increases
during the second quarter of 1999. In August 1999, the Company announced an
additional price increase of $40 per metric ton effective September 1, 1999.

Lumber The average transaction price for the Company's lumber products remained
stable in the second quarter of 1999 compared to the second quarter of 1998.
Industry prices increased; however, a change in the Company's mix resulting from
the inclusion of a sawmill acquired with Avenor in July 1998 offset other price
increases. The Company's lumber shipments for the second quarter of 1999
increased 13 percent from the corresponding period in 1998, reflecting increased
production efficiency and the Avenor acquisition, partially offset by the sale
of Pinkham Lumber Company (sold as part of the timberlands transaction) in March
1999. U.S. demand for lumber was strong through the second quarter of 1999 with
the price for Spruce-Pine-Fir (2 x 4) rising 20 percent from March to June 1999.
Housing starts of 1.6 million units increased 4 percent



                                       13
<PAGE>   14
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

on a seasonally annual adjusted rate (SAAR) when compared to June 1998.

Timber For the second quarter of 1999, shipments of the Company's timber
products increased 78 percent compared to the second quarter of 1998. The
increased shipments were due to the application of intensive forest management
practices in the U.S. south and an increased focus on external sales. The
average transaction price for the Company's timber products decreased 27 percent
in the second quarter compared to the same period in 1998. Prices also decreased
26 percent from the first quarter of 1999. The Company's sale of timberlands in
the state of Maine reduced average transaction prices for the second quarter of
1999. Slight improvements in saw timber prices were offset by continued declines
in both softwood and hardwood pulpwood pricing.

                             DIVISIONAL PERFORMANCE

NET SALES BY DIVISION:
-----------------------------------------------------
                                 THREE MONTHS ENDED
                                      JUNE 30,
                                 --------------------
(In millions of US dollars)        1999       1998
-----------------------------------------------------
DIVISION: (1)
Newsprint & Directory               $384.4    $242.9
Coated Paper                         110.7     125.9
Forest Products                       32.2      26.9
Corporate/Other Eliminations           0.1      -
                                 --------------------
    Total Net Sales                 $527.4    $395.7
-----------------------------------------------------

OPERATING INCOME/(LOSS) BY DIVISION:
-----------------------------------------------------
                                 THREE MONTHS ENDED
                                      JUNE 30,
                                 --------------------
(In millions of US dollars)         1999       1998
-----------------------------------------------------
DIVISION: (1)
Newsprint & Directory             $(92.7)     $23.3
Coated Paper                        15.6       33.3
Forest Products                     12.3        7.9
Corporate/Other Eliminations       (14.5)      (5.9)
                                 --------------------
          Income/(Loss)           $(79.3)     $58.6
-----------------------------------------------------

(1) Financial results for the production and sale of market pulp are included in
    the Newsprint & Directory Division and the Coated Paper Division. The Pulp
    Division is responsible for the marketing and distribution of the product.

Newsprint & Directory Division: In July 1998, this Division added five new
manufacturing sites with the acquisitions of Avenor and the South Korean
newsprint mill. Net sales for the Division increased 58 percent, from $242.9
million for second quarter 1998 to $384.4 million for second quarter 1999,
primarily the result of adding the new sites. This increase was partially offset
by lower average transaction prices for newsprint and directory paper. See the
previous discussion of product line results.

    Operating income decreased $116.0 million, from $23.3 million for second
quarter 1998 to a loss of $92.7 million for the second quarter 1999. The Company
recorded a pre-tax impairment charge of $92.0 million, reducing the book value
of assets at its Great Northern Paper operations. Without the impairment charge,
operating income decreased $24.0 million. This decrease was due to lower
transaction prices for newsprint and directory paper and higher operating costs
as a result of market-related downtime, which were partially offset by synergies
achieved.

Coated Paper Division: Net sales decreased $15.2 million, from $125.9 million
for second quarter 1998 to $110.7 million for second quarter 1999, due to lower
average prices for newsprint and coated groundwood paper, offset partially by
higher shipments. See the previous discussion of product line results.

    Operating income decreased 53 percent, from $33.3 million for second quarter
1998 to $15.6 million for second quarter 1999. This decrease was primarily the
result of lower prices for newsprint and coated groundwood paper.

     In July 1999, the Company acquired a coating facility in Benton Harbor,
Michigan.

Forest Products Division: Net sales for the Division increased 20 percent, from
$26.9 million for second quarter 1998 to $32.2 million for second quarter 1999,
primarily as a result of higher shipments partially offset by lower transaction
prices. See the previous discussion of product line results.

    Operating income for the Division increased $4.4 million or 56 percent for
second quarter of 1999 compared to the second quarter of 1998 as a result of
increased timber shipments and higher profitability from the lumber operations.

    In the second quarter of 1999, the Company completed the sale of
approximately 650,000 acres of timberlands in the state of Maine.



                                       14
<PAGE>   15
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Corporate/Other Eliminations: Included in this category are general and
administrative expenses. For second quarter 1999, this category also includes
administrative expenses of the Pulp Division and market pulp financial activity
from the Gold River pulp mill, which was permanently closed in February 1999.
Comparing the second quarter of 1999 to the second quarter of 1998, operating
expenses increased $8.6 million. This increase was due primarily to the
inclusion of the Pulp Division as well as other general and administrative
expenses resulting from the acquisition of Avenor in July 1998.

INTEREST AND OTHER INCOME AND EXPENSES

Interest expense for the second quarter of 1999 increased $13.9 million over the
same period in 1998. This increase was due to the assumption of Avenor's debt
and higher borrowings on the Company's revolving credit facility for the period.
Interest income decreased compared to the prior year quarter due to lower
average investment balances. In April 1999, the Company completed the sale of
approximately 650,000 acres of timberlands located in the state of Maine. In
connection with this sale, the Company reported a pre-tax gain of $108.3
million. "Other, net" for the second quarter of 1999 was a gain of $15.9
million, compared with a loss of $16.8 million for the same period in 1998. The
Company reported a foreign exchange gain of $16.6 million during the second
quarter of 1999, compared with a loss of $1.4 million during the second quarter
of 1998. The majority of the gains recorded in the second quarter of 1999
resulted from marking to market the Company's $900 million hedging program.
During the second quarter of 1998, the Company recorded a $18.0 million charge
to adjust the cost of the Company's Canadian dollar option contracts to fair
market value.

     The Company's effective tax rate for the second quarter of 1999 was 50
percent versus 38 percent in the prior year period. The increase in 1999 is due
to the non-deductibility of the amortization of goodwill recorded upon the
acquisition of Avenor.

                     SIX MONTHS ENDED JUNE 30, 1999, VERSUS
                                  JUNE 30, 1998

For the first six months of 1999, the Company had an operating loss of $28.5
million compared to operating income of $104.9 for the first six months of 1998.
In the first six months of 1999, the Company recorded a pre-tax impairment
charge of $92.0 million, reducing the book value of assets at its Great Northern
Paper operations. Excluding the impairment charge, operating income was $41.4
million lower than the first six months of 1998. Lower transaction prices
accounted for the majority of this decrease, partially offset by lower costs
due to synergies.

                            PRODUCT LINE INFORMATION

NET SALES BY PRODUCT:

---------------------------------------------------------------
                                           SIX MONTHS ENDED
                                                JUNE 30,
                                       ------------------------
(In millions of US dollars)                1999        1998
---------------------------------------------------------------
NET SALES:
     Newsprint                            $658.2       $380.5
     Coated groundwood paper               158.1        201.8
     Directory paper                        68.2         85.8
     Market pulp                           203.4         87.4
     Uncoated groundwood specialties        29.5         17.8
     Lumber & other wood products           75.7         62.3
     Distribution costs                    (94.4)       (56.7)
                                       ------------------------
               Total net sales          $1,098.7       $778.9
---------------------------------------------------------------

Newsprint For the first six months of 1999, the Company's newsprint average
transaction price decreased 13 percent compared to the same period last year,
due to an imbalance in supply and demand caused in part by the financial and
economic problems in Asia, which lowered demand from this region. During the
second quarter of 1999, the Company reduced newsprint production by
approximately 100,000 metric tons to correct an orderbook imbalance. As a result
of the Avenor and the South Korean newsprint mill acquisitions in July 1998,
shipments of newsprint for the first six months of 1999 increased significantly
compared to the same period last year. Total U.S. consumption and consumption by
U.S. daily newspapers increased during the first six months of 1999 when
compared to the same period 1998. North American mill inventory levels at the
end of June 1999 increased 29 percent compared to June 1998, while newsprint
inventory at the U.S. daily newspapers decreased. North American offshore
exports for the first half of 1999 decreased slightly compared to the first half
of 1998, while U.S. imports of newsprint increased.



                                       15
<PAGE>   16
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In July 1999, the Company announced a newsprint price increase for North America
of $50 per metric ton effective October 1, 1999.

Coated Groundwood Paper The Company's coated groundwood paper average
transaction price decreased 14 percent when compared to the first six months of
1998, while shipments decreased 9 percent. This product line continues to be
influenced by increased coated paper imports and an increased supply of other
printing and writing papers. For the industry, U.S. coated groundwood paper
shipments were down 5 percent compared to the first half of 1998. Coated
groundwood paper inventory held by the U.S. mills at the end of June 1999
increased 20 percent compared to the end of June 1998. Magazine advertising
pages and catalogue mailings, measured by Standard A mail weight, increased for
the first six months of 1999 compared to the same period last year. With
improving market conditions, the Company began implementing some price increases
in the third quarter of 1999.

Directory Paper The Company's average transaction price for directory paper
decreased 5 percent in the first six months of 1999 compared to the first six
months of 1998. Directory paper prices generally trend similarly to newsprint
pricing, but with a lag due to the contract nature of the directory business.
Shipments of the Company's directory paper decreased by 16 percent, primarily as
a result of decreased shipments into the export market.

Market Pulp The average transaction price for the Company's market pulp for the
first six months of 1999 increased slightly when compared to the first six
months of 1998. In addition to market conditions, a change in product mix that
includes northern bleached softwood and hardwood pulp, as a result of the Avenor
acquisition, had a favorable impact on the comparison of first half 1999 market
pulp prices to the same period in 1998. Shipments of the Company's market pulp
products more than doubled as a result of the acquisition of Avenor in July
1998. NORSCAN (U.S., Canada, Finland, Norway and Sweden) pulp shipments
increased 6 percent when compared to the first six months of 1998 while NORSCAN
producer inventories decreased 144,000 metric tons to 1.4 million metric tons
compared to June 1998. The Company announced and implemented market pulp price
increases during the second quarter of 1999. In August 1999, the Company
announced an additional price increase of $40 per metric ton effective September
1, 1999.

Lumber The average transaction price for the Company's lumber products declined
5 percent for the first half of 1999 compared to the first half of 1998.
Industry prices increased for the first six months of 1999 compared to the same
period last year; however, a change in the Company's product mix offset other
price increases. The Company's lumber shipments in the first half of 1999
increased 25 percent over the same period last year, due mainly to the inclusion
of a sawmill, acquired upon the purchase of Avenor. This increase was partially
offset by the sale of Pinkham Lumber Company in March 1999. Housing starts in
the first half of 1999 increased 7 percent on a seasonally adjusted basis, when
compared to the first half of 1998.

Timber For the first six months of 1999, timber shipments increased 49 percent
compared to the first six months of 1998. Application of intensive forest
management practices and development of third party sales opportunities continue
to increase shipments. The average transaction price for the Company's timber
products for the first half of 1999 decreased 16 percent compared to the first
half of 1998, due to lower demand in the southeast United States timber markets
and the Company's sale of timberlands in the state of Maine.

                             DIVISIONAL PERFORMANCE

NET SALES BY DIVISION:
-----------------------------------------------------
                                  SIX MONTHS ENDED
                                      JUNE 30,
                                 --------------------
(In millions of US dollars)        1999       1998
-----------------------------------------------------
DIVISION: (1)
Newsprint & Directory               $799.1    $475.1
Coated Paper                         221.7     241.5
Forest Products                       75.5      62.3
Corporate/Other Eliminations           2.4      -
                                 --------------------
    Total Net Sales               $1,098.7    $778.9
-----------------------------------------------------



                                       16
<PAGE>   17
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OPERATING INCOME/(LOSS) BY DIVISION:
-----------------------------------------------------
                                  SIX MONTHS ENDED
                                      JUNE 30,
                                 --------------------
(In millions of US dollars)         1999      1998
-----------------------------------------------------
DIVISION: (1)
Newsprint & Directory             $(62.2)     $36.3
Coated Paper                        32.1       61.6
Forest Products                     24.8       24.3
Corporate/Other Eliminations       (23.2)     (17.3)
                                 --------------------
    Total Operating
         Income/(Loss)            $(28.5)    $104.9
-----------------------------------------------------

(1) Financial results for the production and sale of market pulp are included in
    the Newsprint & Directory Division and the Coated Paper Division. The Pulp
    Division is responsible for the marketing and distribution of the product.

Newsprint & Directory Division: In July 1998, this Division added five new
manufacturing sites with the acquisitions of Avenor and the South Korean
newsprint mill. Net sales for the Division increased 68 percent, from $475.1
million for the first six months of 1998 to $799.1 million for the first six
months of 1999, primarily the result of adding the new sites, offset partially
by lower average transaction prices for newsprint and directory paper. See the
previous discussion of product line results.

    Operating income decreased $98.5 million, from $36.3 million for the first
half of 1998 to a loss of $62.2 million for the first half of 1999. In the
second quarter of 1999, the Company recorded a pre-tax impairment charge of
$92.0 million, reducing the book value of assets at its Great Northern Paper
operations. Without the impairment charge, operating income decreased $6.5
million. This decrease was due to lower transaction prices for newsprint and
directory paper and higher operating costs as a result of market-related
downtime, which were partially offset by synergies achieved. Shipments increased
for the first half of 1999 compared to the same period last year due to the
acquisitions of Avenor and the South Korean newsprint mill.

Coated Paper Division: Net sales decreased $19.8 million, from $241.5 million
for the first six months of 1998 to $221.7 million for first six months of 1999,
due to lower average prices for newsprint, market pulp and coated groundwood
paper, offset partially by higher shipments. See the previous discussion of
product line results.

    Operating income for the Division decreased $29.5 million, from $61.6
million for the first half of 1998 to $32.1 million for the first half of 1999,
primarily the result of lower transaction prices for newsprint, coated
groundwood paper, and market pulp.

    In July 1999, the Company acquired a coating facility in Benton Harbor,
Michigan.

Forest Products Division: Net sales for the Division increased 21 percent, from
$62.3 million for the first half of 1998 to $75.5 million for first half of
1999, primarily a result of higher shipments partially offset by lower prices.
See the previous discussion of product line results.

    Operating income for the Division increased $0.5 million for the first six
months of 1999 compared to the first six months of 1998, primarily the result of
higher profitability for lumber products.

    In the first six months of 1999, the Company completed the sale of
approximately 1.6 million acres of timberland in the state of Maine and the
Pinkham Lumber Company.

Corporate/Other Eliminations: Included in this category are general and
administrative expenses. For the first six months of 1999, this category also
includes administrative expenses of the Pulp Division and market pulp sales from
the Gold River pulp mill, which was permanently closed in February 1999.
Comparing the first half of 1999 to the first half of 1998, higher general and
administrative expenses are due to the inclusion of the Pulp Division and other
administration expenses resulting from the purchase of Avenor in July 1998.

                     INTEREST AND OTHER INCOME AND EXPENSES

Interest expense for the first six months of 1999 increased $29.7 million over
the same period in 1998 due to the assumption of Avenor's debt, and higher
borrowings on the Company's revolving credit facility in the current period.
Interest income decreased for the first six months of 1999 due to lower average
investment balances. During the first six months of 1999, the Company sold
approximately 1.6 million acres of timberlands located in the state of Maine and
the Pinkham Lumber Company. In connection with these sales, the Company recorded
a pre-tax gain of $253.7 million. "Other, net" for the



                                       17
<PAGE>   18
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

first six months of 1999 was a gain of $28.2 million compared with a loss of
$21.1 million for the first six months of 1998. The Company reported foreign
exchange gains of $29.2 million during the first six months of 1999, compared
with a loss of $1.1 million during the same period in 1998. The majority of the
gains reported in 1999 resulted from marking to market the Company's $900
million hedging program. During the first six months of 1998, the Company
recorded a $22.3 million charge to adjust the cost of the Company's Canadian
dollar option contracts to fair market value.

     The Company's effective tax rate for the first six months of 1999 was 40
percent versus 38 percent in the prior year period. The higher effective tax
rate in 1999 reflects the non-deductibility of the amortization of goodwill
recorded upon the acquisition of Avenor.

                         LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents decreased to $36.5 million at June 30,
1999, from $58.3 million at December 31, 1998. The company generated cash from
operations of $47.4 million and cash from investing activities of $246.4
million, and used $315.6 million for financing activities. In addition to cash
flow from operations, capital expenditures, and changes in investments and
short-term borrowings, the Company had several other significant cash
transactions since December 31, 1998. These transactions include: cash proceeds
of $356.0 million for the sale of approximately 1.6 million acres of
timberlands; cash paid of $65.9 million for the redemption of the Company's
7.50% Convertible Unsecured Subordinated Debentures; cash paid of $26.4 million
for the redemption of the Company's 8.40% Series C Preferred Stock; and common
stock purchases requiring cash of $57.4 million.

CASH FROM OPERATING ACTIVITIES:

During the first six months of 1999, the Company's operations generated $47.4
million of cash compared to $132.2 million of cash during the first six months
of 1998, a decrease of $84.8 million. This was largely attributable to a
decrease in operating income of $41.4 million (excluding an impairment charge of
$92.0 million in 1999), and higher working capital needs. The 1999 operating
cash flow includes the activities of the newly acquired mills.

CASH FROM INVESTING ACTIVITIES:

Cash proceeds from investing activities in the first six months of 1999 totaled
$246.4 million, compared with proceeds of $87.2 million during the first six
months of 1998, an increase of $159.2 million. Comparing the same periods,
capital expenditures were $20.5 million higher, due mainly to the modernization
of the Calhoun, Tennessee, facility. The Company expects total capital
expenditures for 1999 to approximate $220.0 million.

     In March 1999, the company completed the sale of 981,000 acres of Maine
timberlands resulting in net cash proceeds of $211.8 million, after fees and
expenses. In April 1999, the company completed another sale of 650,000 acres of
Maine timberlands resulting in net cash proceeds of $144.2 million, after fees
and expenses. The Company's Forest Products Division periodically reviews
timberland holdings and makes decisions to sell certain non-strategic tracts.

     In the first six months of 1999, the company paid $19.9 million on the
maturity of Canadian dollar hedging contracts and had net cash invested in
marketable securities of $0.8 million, compared with net proceeds from maturity
of securities of $151.4 million for the same period in 1998. During 1998, the
Company invested $22.7 million in Canadian dollar option contracts.

CASH FROM FINANCING ACTIVITIES:

Cash used for financing activities was $315.6 million for the first six months
of 1999 compared to cash used of $27.6 million for the first six months of 1998.
During the first six months of 1999, the company made net payments of $139.5
million on its revolving credit facility and other short term borrowings and
paid $65.9 million for the redemption of it 7.50% Convertible Unsecured
Subordinated Debentures due 2004. In addition to the cash payment, Bowater
Canada Inc. issued 1.4 million Exchangeable shares. Also in 1999, the Company
paid $26.4 million for the redemption of the Company's 8.40% Series C Preferred
Stock. Dividends paid decreased $6.1 million from the prior year period due to
higher dividend payments to the minority shareholder of Calhoun Newsprint
Company and Series C Preferred dividends during the first six months of 1998.

     In November 1997, the Company announced the adoption of a stock repurchase
program, authorizing it to repurchase up to 4.1 million shares of the Company's
outstanding common stock in the open market or in privately-negotiated
transactions subject to normal trading restrictions. In April 1999, the Company
completed its second stock repurchase program, which totaled approximately 4.1
million shares at a cost of $165.2 million. Of this total, 1.4 million shares
were purchased during 1999 at a cost



                                       18
<PAGE>   19
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

of $57.4 million. In May 1999, the Board of Directors authorized a new stock
repurchase program allowing the Company to buy back up to 5.5 million shares.
The Company considers various options for the use of its cash including share
repurchases, internal capital investments, investments to grow the Company's
primary product lines, and additional debt reduction.

     In the second quarter of 1999, the Company's $650 million, 364-day credit
facility expired and was renewed at a reduced level of $150 million. The $350
million, five-year facility was not changed.

     In July 1999, the Company received cash proceeds of $31.7 million (before
fees and expenses) from revenue bonds issued by the Industrial Development Board
of the County of McMinn, Tennessee, which the Company previously applied for in
conjunction with the modernization of its Calhoun, Tennessee, newsprint
facility. The balance of the principal amount of $1.8 million will be received
in the near future. The bonds are variable rate and mature on June 1, 2029.

                                  DISPOSITIONS

In April 1999, the Company completed the sale of approximately 650,000 acres of
timberland in the state of Maine to affiliates of McDonald Investment Company,
Inc. of Birmingham, Alabama, for $150.0 million. As part of the sale, an
agreement with McDonald was made to supply wood fiber from the purchased
timberlands to the Company's paper making operation at Great Northern Paper in
Millinocket and East Millinocket, Maine.

    During the second quarter of 1999, the Company signed an agreement with
Inexcon Maine, Inc. for the purchase of Great Northern Paper. Based on the sale
price, the Company recorded a $92.0 million impairment charge in the second
quarter. The sale is expected to close in August 1999.

                              YEAR 2000 COMPLIANCE

Since 1990, the Company has reengineered its major internally developed software
programs. During this effort, the Company examined potential problems arising
from the inability of certain application software programs to recognize the
year 2000. The Company has separated its compliance analysis into three
categories.

    The first category is business systems. A formal review of all internally
developed software was completed in 1997 and systemwide testing was successfully
completed during 1998. No major problems were encountered. In July 1998, the
Company acquired new operations. To achieve business synergies and year 2000
compliance, the new operations' order fulfillment, order tracking and invoicing
processes were migrated to the Company's internally developed software programs.
In addition, all major third party licensed application software programs have
been reviewed and are either compliant or the licenser released a compliant
version to which the Company migrated. The costs associated with these business
systems projects are currently estimated to be $2.8 million. As of June 30,
1999, approximately $2.5 million has been spent. The readiness percentage for
items in this category is approximately 98 percent as of June 30, 1999, which
assumes no interruption caused by external suppliers.

    The second category includes manufacturing process control, manufacturing
equipment and systems, safety, environmental and other non-traditional
information systems areas. The Company currently estimates cost associated with
this category to be $6.6 million. As of June 30, 1999, approximately $3.8
million has been spent. The readiness percentage for this category is
approximately 98 percent as of June 30, 1999, which assumes no interruption
caused by external suppliers.

    The third category is the Company's business partners, customers and
suppliers. Testing with e-commerce customers is continuing. Briefings have been
conducted for a number of customers at both mill and customer sites. The Company
identified 665 critical suppliers and is continuing to assess their year 2000
readiness. As of June 30, 1999, approximately 84 percent of the critical
suppliers have responded.

    The cost estimates to complete the Company's year 2000 projects do not
include any internal costs incurred such as payroll costs for the Company's
information systems group. Although these costs are not separately tracked, the
Company has devoted a substantial amount of its internal resources to complete
these projects. As of June 30, 1999, the Company has completed 98 percent of all
of its major



                                       19
<PAGE>   20
                      BOWATER INCORPORATED AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

year 2000 compliance work. In the event any aspect of the year 2000 program
proves to be ineffective in resolving year 2000 compliance issues, the Company
is developing a contingency plan covering all significant business functions and
sites. The Company currently expects to complete this plan in October 1999.

    The Company's year 2000 compliance projects were designed and implemented to
prevent an interruption of normal business activities or operations due to a
system's inability to recognize the year 2000. Despite these efforts, if a
material year 2000 problem does occur internally or with any of the Company's
significant suppliers or vendors who cannot be replaced, it could materially
adversely affect the Company's results of operations, liquidity or financial
condition.

    The following is a cautionary statement for the purposes of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. The
Company is including this statement to take advantage of these provisions for
forward looking statements regarding its year 2000 compliance. In its
disclosure, the Company stated estimated completion dates and costs to complete
the project based on assumptions it believes to be reasonable. These estimates
and assumptions almost always vary from actual results and the difference
between the estimate and the actual result may be material, depending on the
circumstances. Although made in good faith, there can be no assurance that the
estimates and assumptions will be the actual result achieved or accomplished.
Factors that could cause results to differ materially from those expressed in
the forward looking statements include (but are not limited to), the ability to
verify year 2000 compliance by third parties including suppliers, the ability to
locate and correct all relevant computer code and the ability to identify all
areas of year 2000 risks.

                              ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard requires a public company to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company is
required to adopt this standard in the first quarter of 2001. The Company has
not yet assessed the impact this standard will have on its financial condition
or results of operations at the time of adoption; however, the impact will
ultimately depend on the amount and type of derivative instruments held at the
time of adoption.



                                       20
<PAGE>   21

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION

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

         On May 12, 1999, at the Company's Annual Meeting of Shareholders, the
following matter was submitted to a vote of the shareholders:

         A resolution electing the following class of directors for a term of
three years: Francis J. Aguilar (46,429,533 votes in favor; 166,362 votes
withheld); John A. Rolls (46,421,907 votes in favor; 173,988 votes withheld);
and Kenneth M. Curtis (46,430,232 votes in favor; 165,663 votes withheld). The
names of each other director whose term of office as a director continued after
the meeting are: Arnold M. Nemirow, H. David Aycock, Richard Barth, Charles J.
Howard, James L. Pate and Arthur R. Sawchuk.


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            Amended and Restated 364-Day Credit Agreement dated
                           as of June 23, 1999, amending and restating 364-Day
                           Credit Agreement dated as of June 24, 1998, between
                           the Company, The Chase Manhattan Bank, as
                           Administrative Agent, and the lenders signatory
                           thereto.

           10.2            Amendment No. 1 dated as of June 23, 1999, to the
                           Five-Year Credit Agreement dated as of June 24, 1998,
                           between the Company, The Chase Manhattan Bank, as
                           Administrative Agent, and the lenders signatory
                           thereto.

           10.3            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of E. Patrick Duffy,
                           David G. Maffucci, Donald G. McNeil, Robert A. Moran,
                           Arnold M. Nemirow and Michael F. Nocito.

           10.4            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of Anthony H. Barash,
                           James H. Dorton, Arthur D. Fuller, Jerry R. Gilmore,
                           Richard K. Hamilton, Steven G. Lanzl, R. Donald
                           Newman and Wendy C. Shiba.

           10.5            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of William G. Harvey and
                           David J. Steuart.

           10.6            Compensatory Benefits Plan of the Company, as amended
                           and restated effective February 26, 1999.

           10.7            Retirement Plan for Outside Directors of the Company,
                           amended and restated as of February 26, 1999.

           10.8            Supplemental Benefit Plan for Designated Employees of
                           Bowater Incorporated and Affiliated Companies, as
                           amended and restated effective February 26, 1999.

           10.9            Equity Participation Rights Plan of the Company,
                           amended and restated as of February 26, 1999.



                                       21
<PAGE>   22

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION


           10.10           Third Amendment, effective February 26, 1999, to the
                           1988 Stock Incentive Plan of the Company.

           10.11           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Benefit Plan Grantor Trust of
                           the Company.

           10.12           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Executive Severance Grantor
                           Trust of the Company.

           10.13           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Outside Directors Benefit Plan
                           Grantor Trust of the Company.

           10.14           Benefits Equalization Plan of the Company, amended
                           and restated as of February 26, 1999.

           10.15           Second Amendment, effective February 26, 1999, to the
                           1992 Stock Incentive Plan of the Company.

           10.16           Second Amendment, effective February 26, 1999, to the
                           1997 Stock Option Plan of the Company, as amended
                           and restated January 1, 1997.

           27.1            Financial Data Schedule (electronic filing only).


           (b) Reports on Form 8-K:

                  On May 19, 1999, the Company filed with the Securities and
                  Exchange Commission a Current Report on Form 8-K dated May 19,
                  1999, reporting under Item 5 (Other Events) the issuance of a
                  press release announcing the signing of an agreement for the
                  sale of Great Northern Paper, Inc.



                                       22
<PAGE>   23

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                   SIGNATURES


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



                                              BOWATER INCORPORATED

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



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



Dated:   August 16, 1999





                                       23


<PAGE>   24
                                INDEX TO EXHIBITS



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

           10.1            Amended and Restated 364-Day Credit Agreement dated
                           as of June 23, 1999, amending and restating 364-Day
                           Credit Agreement dated as of June 24, 1998, between
                           the Company, The Chase Manhattan Bank, as
                           Administrative Agent, and the lenders signatory
                           thereto.

           10.2            Amendment No. 1 dated as of June 23, 1999, to the
                           Five-Year Credit Agreement dated as of June 24, 1998,
                           between the Company, The Chase Manhattan Bank, as
                           Administrative Agent, and the lenders signatory
                           thereto.

           10.3            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of E. Patrick Duffy,
                           David G. Maffucci, Donald G. McNeil, Robert A. Moran,
                           Arnold M. Nemirow and Michael F. Nocito.

           10.4            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of Anthony H. Barash,
                           James H. Dorton, Arthur D. Fuller, Jerry R. Gilmore,
                           Richard K. Hamilton, Steven G. Lanzl, R. Donald
                           Newman and Wendy C. Shiba.

           10.5            Form of First Amendment to Change in Control
                           Agreement dated as of February 26, 1999, by and
                           between the Company and each of William G. Harvey and
                           David J. Steuart.

           10.6            Compensatory Benefits Plan of the Company, as amended
                           and restated effective February 26, 1999.

           10.7            Retirement Plan for Outside Directors of the Company,
                           amended and restated as of February 26, 1999.

           10.8            Supplemental Benefit Plan for Designated Employees of
                           Bowater Incorporated and Affiliated Companies, as
                           amended and restated effective February 26, 1999.

           10.9            Equity Participation Rights Plan of the Company,
                           amended and restated as of February 26, 1999.



                                       10
<PAGE>   25

           10.10           Third Amendment, effective February 26, 1999, to the
                           1988 Stock Incentive Plan of the Company.

           10.11           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Benefit Plan Grantor Trust of
                           the Company.

           10.12           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Executive Severance Grantor
                           Trust of the Company.

           10.13           First Amendment, effective February 26, 1999, to the
                           Amended and Restated Outside Directors Benefit Plan
                           Grantor Trust of the Company.

           10.14           Benefits Equalization Plan of the Company, amended
                           and restated as of February 26, 1999.

           10.15           Second Amendment, effective February 26, 1999, to the
                           1992 Stock Incentive Plan of the Company.

           10.16           Second Amendment, effective February 26, 1999, to the
                           1997 Stock Option Plan of the Company, as amended
                           and restated January 1, 1997.

           27.1            Financial Data Schedule (electronic filing only).