<PAGE>

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

(Mark One)

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

For the quarterly period ended MARCH 31, 2002
                               --------------

                                       OR

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

For the transition period from                to

Commission file number              1-8712

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 7, 2002.

                 Class                      Outstanding at May 7, 2002
                ------                      --------------------------

       Common Stock, $1.00 Par Value             55,173,206 Shares


<PAGE>

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

                                    I N D E X



                                                                           Page
                                                                          Number
                                                                          ------

  PART I   FINANCIAL INFORMATION

         1.  Financial Statements:

                  Consolidated Balance Sheet at March 31, 2002,
                  and December 31, 2001                                      3

                  Consolidated Statement of Operations for the Three
                  Months Ended March 31, 2002, and
                  March 31, 2001                                             4

                  Consolidated Statement of Capital Accounts
                  for the Three Months Ended March 31, 2002                  5

                  Consolidated Statement of Cash Flows for the
                  Three Months Ended March 31, 2002, and
                  March 31, 2001                                             6

                  Notes to Consolidated Financial Statements               7-12

         2.  Management's Discussion and Analysis of
               Financial Condition and Results of Operations              13-18

         3.  Quantitative and Qualitative Disclosures About Market Risk     18


  PART II   OTHER INFORMATION

  Exhibits and Reports on Form                                              19


  SIGNATURES                                                                20



                                       2

<PAGE>

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


                                                       March 31,   December 31,
                                                          2002         2001
                                                      -----------  ------------

                            ASSETS
Current assets:
   Cash and cash equivalents                          $      14.7  $       28.3
   Marketable securities                                      1.8           2.1
   Accounts receivable, net                                 383.8         367.0
   Inventories                                              271.2         250.5
   Other current assets                                      49.6          41.7
                                                      -----------  ------------
      Total current assets                                  721.1         689.6
                                                      -----------  ------------

   Timber and timberlands                                   198.6         227.7
   Fixed assets, net                                      3,772.8       3,818.4
   Goodwill                                                 843.0         843.0
   Other assets                                             188.3         186.7
                                                      -----------  ------------
      Total assets                                    $   5,723.8  $    5,765.4
                                                      ===========  ============

             LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current installments of long-term debt             $      73.0  $       73.0
   Short-term bank debt                                     368.0         341.7
   Accounts payable and accrued liabilities                 363.4         437.9
   Dividends payable                                         11.1          10.9
                                                      -----------  ------------
      Total current liabilities                             815.5         863.5
                                                      -----------  ------------

   Long-term debt, net of current installments            1,823.5       1,828.0
   Other long-term liabilities                              359.9         362.3
   Deferred income taxes                                    611.5         601.7
   Minority interests in subsidiaries                        80.1          85.2
   Commitments and contingencies

Shareholders' equity:

   Common stock, $1 par value.  Authorized
     100,000,000 shares; issued 66,774,407 and
     66,323,992 shares at March 31, 2002 and
     December 31, 2001, respectively                         66.8          66.3
   Exchangeable shares, no par value. Unlimited
     shares authorized; 1,698,523 and 2,008,588
     outstanding at March 31, 2002 and December 31,
     2001, respectively                                      81.0          96.0
   Additional paid-in capital                             1,590.0       1,569.9
   Retained earnings                                        841.4         840.5
   Accumulated other comprehensive income (loss)            (59.5)        (61.6)
   Treasury stock, at cost, 11,619,272 and
     11,619,812 shares at March 31, 2002 and
     December 31, 2001, respectively                       (486.4)       (486.4)
                                                      -----------  ------------
      Total shareholders' equity                          2,033.3       2,024.7
                                                      -----------  ------------
      Total liabilities and shareholders' equity      $   5,723.8  $    5,765.4
                                                      ===========  ============

          See accompanying notes to consolidated financial statements

                                        3

<PAGE>

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

                                                            Three Months Ended
                                                          ---------------------
                                                          March 31,   March 31,
                                                             2002       2001
                                                          ---------   ---------
Sales                                                     $   622.0   $   604.9
Cost of sales, excluding depreciation, amortization
  and cost of timber harvested                                470.6       376.0
Depreciation, amortization and cost of timber harvested        86.3        76.8
Distribution costs                                             54.3        39.9
Selling and administrative expense                             35.5        16.8
Net gain (loss) on sale of assets                              75.0        (5.8)
                                                          ---------   ---------
    Operating income                                           50.3        89.6

Other expense (income):
  Interest income                                              (1.0)       (3.6)
  Interest expense, net of capitalized interest                41.8        35.2
  Other, net                                                   (0.1)       (4.6)
                                                          ---------   ---------
                                                               40.7        27.0
                                                          ---------   ---------

Income before income taxes and minority interests               9.6        62.6

Provision for income tax expense (benefit)                     (1.1)       20.4
Minority interests in net income (loss) of subsidiaries        (1.6)        4.5
                                                          ---------   ---------

Net income                                                     12.3        37.7

Other comprehensive income (loss), net of tax:
  Foreign currency translation adjustments                      0.6        (2.3)
  Unrealized gain (loss) on hedged transactions                 1.5       (15.8)
  Minimum pension liability adjustments                        --          (0.2)
                                                          ---------   ---------

Comprehensive income                                      $    14.4   $    19.4
                                                          =========   =========

Basic earnings per common share*                          $    0.22   $    0.73
                                                          =========   =========

Diluted earnings per common share*                        $    0.22   $    0.72
                                                          =========   =========

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

          See accompanying notes to consolidated financial statements

                                        4
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
                    For The Three Months Ended March 31, 2002
         (Unaudited, in millions of US dollars except per-share amounts)
<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                                                              Additional                   Other
                                                      Common   Exchangeable    Paid-in     Retained    Comprehensive   Treasury
                                                       Stock      Shares       Capital     Earnings    Income (Loss)     Stock
                                                      ------   ------------   ---------   ----------   -------------   --------
<S>                                                   <C>      <C>            <C>         <C>          <C>             <C>
Balance at December 31, 2001                          $ 66.3   $       96.0   $ 1,569.9   $    840.5   $       (61.6)  $ (486.4)

Net income                                                --             --          --         12.3              --         --

Retraction of exchangeable shares (310,065 common
   shares issued and exchangeable shares retracted)      0.3          (15.0)       14.7           --              --         --

Dividends ($0.20 per share)                               --             --          --        (11.4)             --         --

Foreign currency translation                              --             --          --           --             0.6         --

Stock options exercised (140,350 shares)                 0.2             --         4.5           --              --         --

Tax benefit on exercise of stock options                  --             --         0.9           --              --         --

Unrealized gain on hedged transactions                    --             --          --           --             1.5         --
                                                      ------   ------------   ---------   ----------   -------------   --------


Balance at March 31, 2002                             $ 66.8   $       81.0   $ 1,590.0   $    841.4   $       (59.5)  $ (486.4)
                                                      ======   ============   =========   ==========   =============   ========
</TABLE>

          See accompanying notes to consolidated financial statements

                                        5

<PAGE>

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

                                                           Three Months Ended
                                                          ---------------------
                                                          March 31,   March 31,
                                                            2002        2001
                                                          ---------   ---------
CASH FLOWS FROM  OPERATING ACTIVITIES:
Net income                                                $    12.3   $    37.7
Adjustments to reconcile net income to net cash
  provided by operating activities:
Depreciation, amortization and cost of
  timber harvested                                             86.3        76.8
Deferred income taxes                                          (1.9)       (2.1)
Minority interests in net income (loss) of subsidiaries        (1.6)        4.5
Net loss (gain) on sale of assets                             (75.0)        5.8
Payments on maturity of hedging contracts                      (4.0)       (5.1)
Changes in working capital:
  Accounts receivable, net                                    (16.8)       66.1
  Inventories                                                 (20.7)      (15.8)
  Accounts payable and accrued liabilities                    (36.6)      (57.9)
Other, net                                                     (3.5)        1.4
                                                          ---------   ---------
          Net cash from (used for) operating activities       (61.5)      111.4
                                                          ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash invested in fixed assets, timber and timberlands         (70.4)      (68.3)
Disposition of assets, including timber and timberlands        16.1          --
Proceeds from the monetization of notes receivable             88.1          --
Cash invested in marketable securities                         (3.5)         --
Cash from maturity of marketable securities                     3.8          --
                                                          ---------   ---------
          Net cash from (used for) investing activities        34.1       (68.3)
                                                          ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends, including minority interests                  (14.8)      (15.0)
Short-term financing                                          254.3       163.1
Short-term financing repayments                              (228.0)     (195.7)
Purchases/payments of long-term debt                           (2.4)       (0.2)
Stock options exercised                                         4.7         0.2
                                                          ---------   ---------
          Net cash from (used for) financing activities        13.8       (47.6)
                                                          ---------   ---------

Net decrease in cash and cash equivalents                     (13.6)       (4.5)

Cash and cash equivalents at beginning of year                 28.3        20.0
                                                          ---------   ---------
Cash and cash equivalents at end of period                $    14.7   $    15.5
                                                          =========   =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest, including capitalized interest of $1.5
    and $3.0                                              $    22.4   $    35.2
  Income taxes                                            $     1.0   $     6.6



          See accompanying notes to consolidated financial statements

                                        6
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.   BASIS OF PRESENTATION

     The accompanying consolidated financial statements include the accounts of
     Bowater Incorporated and Subsidiaries as of March 31, 2002. The
     consolidated statement of operations for the three-month period ended March
     31, 2001 does not include the impact of the acquisition of Alliance Forest
     Products Inc. (Alliance), which closed in September 2001. The consolidated
     balance sheet as of March 31, 2002 and the related statements of
     operations, capital accounts and cash flows for the three-month period then
     ended are unaudited. In the opinion of our management, all adjustments
     (consisting of normal recurring adjustments) necessary for fair
     presentation of the interim financial statements have been made. The
     results of the interim period ended March 31, 2002 are not necessarily
     indicative of the results to be expected for the full year. Certain
     prior-year amounts in the financial statements and the notes have been
     reclassified to conform to the 2002 presentation.

2.   NET GAIN ON SALE OF ASSETS

     In January 2002, Bowater completed the sale of approximately 116,000 acres
     of timberland for aggregate consideration of $104.2 million. We received
     $5.1 million in cash after expenses, and $99.1 million in notes receivable.
     In March 2002, we monetized the notes receivable of $99.1 million for net
     cash proceeds of $88.1 million. These transactions resulted in a net
     pre-tax gain of $73.9 million.

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

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

     o    Bowater retains an interest in the excess future cash flows of the
          QSPE (cash received from notes receivable vs. cash paid out on the
          senior secured notes). The retained interest of $10.6 million at March
          31, 2002 is included in "Other assets" in the Consolidated Balance
          Sheet. The principal variable in determining the fair value of future
          expected excess cash flows of the retained interest is the discount
          rate, as it consists of a note with a low level of credit risk,
          contractually due in 15 years and not subject to prepayment. The
          discount rate used for the note is 6.91%.

     o    We recorded a $0.4 million loss on the monetization of the notes
          receivable, which was based on the difference in the original carrying
          amount of the notes (allocated between the asset monetized and the
          retained interest) and the fair value at the date of the monetization.

     Also in the first quarter of 2002, Bowater sold approximately 2,700 acres
     of other timberlands and recorded a net pre-tax gain of $1.1 million.

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

3.   ACQUISITION/DIVESTITURE-RELATED LIABILITIES

     In connection with the Alliance acquisition, Bowater recorded employee
     termination costs of approximately $17.0 million, which included
     approximately $13.0 million of employee termination costs recorded in
     connection with the permanent closing of a newsprint machine and other
     assets at the Coosa Pines, Alabama facility. At December 31, 2001, the
     remaining accrual was $15.5 million (net of exchange loss of $0.1).
     Approximately $12.3 million was paid in the first quarter of 2002. The
     remaining accrual, $3.2 million, is expected to be paid during 2002 and is
     included in "Accounts payable and accrued liabilities," in the
     Consolidated Balance Sheet.

                                       7
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


4.   DIVIDENDS TO MINORITY INTEREST SHAREHOLDER

     During the first quarter of 2002, the Board of Directors of Calhoun
     Newsprint Company (CNC) declared a $7.3 million dividend. As a result, $3.6
     million was paid to the minority shareholder of CNC. In the first quarter
     of 2001, the Board of Directors of CNC declared a $9.6 million dividend. As
     a result, $4.7 million was paid to the minority shareholder.

5.   COMMITMENTS AND CONTINGENCIES

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

6.   OTHER EXPENSE (INCOME)

     "Other, net" in the Consolidated Statement of Operations includes the
     following:

     ---------------------------------------------------------------------------
                                                    Three Months Ended March 31
                                                  ------------------------------
     (In millions)                                      2002          2001
     ---------------------------------------------------------------------------
     Foreign exchange (gain) loss                    $   (1.1)     $   (4.8)
     (Income) loss from joint venture                     1.1           0.3
     Miscellaneous items                                 (0.1)         (0.1)
     ---------------------------------------------------------------------------
                                                     $   (0.1)     $   (4.6)
     ---------------------------------------------------------------------------

7.   GOODWILL

     Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on
     January 1, 2002. Under SFAS No. 142, goodwill and intangible assets with
     indefinite useful lives will no longer be amortized, but will be tested for
     impairment at least on an annual basis in accordance with the provisions of
     SFAS No. 142. We are currently evaluating our goodwill in accordance with
     SFAS No. 142 to determine if any transitional impairment losses will be
     required to be recognized as a cumulative effect of a change in accounting
     principle. Because of the extensive effort needed to perform the
     transitional goodwill impairment evaluation, it is not practicable to
     reasonably estimate the impact of adopting SFAS No. 142 on our consolidated
     financial statements. We will complete this assessment by June 30, 2002. As
     of March 31, 2002, we had unamortized goodwill in the amount of $843.0
     million and no intangible assets with indefinite useful lives (pending the
     final valuation of the Alliance acquisition).

                                       8

<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


     The reconciliation of net income and earnings per share, adjusted to
     exclude goodwill amortization expense, net of tax, for the three months
     ended March 31, 2001 is as follows:

     ---------------------------------------------------------------------------
                                                    Three Months Ended March 31
                                                    ----------------------------
     (In millions, except per-share amounts)            2002            2001
     ---------------------------------------------------------------------------
     Net Income:
     Reported net income                              $  12.3        $   37.7
        Goodwill amortization, net of tax                  --             5.7
     ---------------------------------------------------------------------------
     Adjusted net income                              $  12.3        $   43.4
     ---------------------------------------------------------------------------
     Basic earnings per common share:
     Reported basic earnings per common share         $  0.22        $   0.73
        Goodwill amortization, net of tax                  --            0.11
     ---------------------------------------------------------------------------
     Adjusted basic earnings per common share         $  0.22        $   0.84
     ---------------------------------------------------------------------------
     Diluted earnings per common share:
     Reported diluted earnings per common share       $  0.22        $   0.72
        Goodwill amortization, net of tax                  --            0.11
     ---------------------------------------------------------------------------
     Adjusted diluted earnings per common share       $  0.22        $   0.83
     ---------------------------------------------------------------------------

8.   EARNINGS PER SHARE

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

     ---------------------------------------------------------------------------
                                                    THREE MONTHS ENDED MARCH 31
                                                    ----------------------------
     (In millions, except per-share amounts)            2002            2001
     ---------------------------------------------------------------------------
     Basic Computation:
     Basic income available to common shareholders    $  12.3         $  37.7
     ---------------------------------------------------------------------------
     Basic weighted average shares outstanding           56.8            51.6
     ---------------------------------------------------------------------------

     Basic earnings per common share                  $  0.22         $  0.73
     ---------------------------------------------------------------------------

     Diluted Computation:
     Diluted income available to common shareholders  $  12.3         $  37.7
     ---------------------------------------------------------------------------
     Basic weighted average shares outstanding           56.8            51.6
     Effect of dilutive securities:
          Options                                         0.4             0.5
     ---------------------------------------------------------------------------
     Diluted weighted average shares outstanding         57.2            52.1
     ---------------------------------------------------------------------------

     Diluted earnings per common share                $  0.22         $  0.72
     ---------------------------------------------------------------------------

9.   FINANCIAL INSTRUMENTS

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

                                        9

<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


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

     As of March 31, 2002, we recorded the change in value related to cash flow
     hedges amounting to a loss of $25.5 million ($15.8 million, after tax) in
     "Accumulated other comprehensive income (loss)." During the quarter ended
     March 31, 2002, we reclassified $4.7 million ($2.9 million, after tax) from
     "Accumulated other comprehensive income (loss)" to earnings, which was
     offset by net gains on the items being hedged. We expect to reclassify a
     $15.5 million loss ($9.6 million, after-tax) from "Accumulated other
     comprehensive income (loss)" to earnings during the next twelve months as
     the hedged items affect earnings.

     We formally document all relationships between hedging instruments and
     hedged items, as well as our risk-management objectives and strategies for
     undertaking various hedge transactions. We link all hedges that are
     designated as cash flow hedges to forecasted transactions. The maximum time
     period we have hedged transactions is two years. We also assess, both at
     the inception of the hedge and on an on-going basis, whether the
     derivatives that are used in hedging transactions are highly effective in
     offsetting changes in cash flows of hedged items. When it is determined
     that a derivative is not highly effective as a hedge, we discontinue hedge
     accounting prospectively.

     Information regarding our Canadian dollar contracts' notional amount,
     carrying value, fair market value, and range of exchange rates of the
     contracts is summarized in the table below. The notional amount of these
     contracts represents the amount of foreign currencies to be purchased or
     sold at maturity and does not represent our exposure on these contracts.
<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------------
                                                            NET ASSET (LIABILITY)
                                                            ---------------------
                                                                                       RANGE OF
                                              NOTIONAL                     FAIR       U.S.$/CDN$
                                              AMOUNT OF      CARRYING      MARKET      EXCHANGE
     MARCH 31, 2002 (IN MILLIONS)            DERIVATIVES      AMOUNT       VALUI        RATES
     --------------------------------------------------------------------------------------------
<S>                                          <C>             <C>         <C>         <C>
     Foreign Currency  Exchange Agreements
     Buy Currency:
         Canadian dollar
               Due in 2002                     $ 290.4       $  14.4      $  14.4     .6744-.6266
               Due in 2003                       336.6           8.3          8.3     .6560-.6200
               Due in 2004                        85.0           0.4          0.4     .6284-.6204
     --------------------------------------------------------------------------------------------
                                               $ 712.0       $  23.1      $  23.1
     --------------------------------------------------------------------------------------------
</TABLE>

     Approximately $78.3 million of our long-term debt is denominated in
     Canadian dollars. In order to reduce our exposure to exchange rate
     fluctuations, we enter into Canadian dollar forward contracts with notional
     amounts of approximately $100 million. These economic hedge contracts are
     marked to market through earnings. The contracts are settled quarterly, and
     gains or losses are included in "Other, net" in our Consolidated Statement
     of Operations. During the first three months of 2002, we recorded gains of
     approximately $0.1 million in our Consolidated Statement of Operations as a
     result of these economic hedges. At March 31, 2002, our outstanding
     Canadian dollar forward contracts had notional amounts of $100.0 million
     and are due June 27, 2002. The fair value (liability) of the Canadian
     dollar forward contract was less than $0.1 million at March 31, 2002.

     Additionally, Alliance had Canadian dollar range forward contracts in place
     to reduce the exposure to differences in the United States and Canadian
     dollar exchange rate, as the majority of Alliance's sales were sold into
     the United States and denominated in United States dollars. These Canadian
     dollar range forward contracts are not accounted for as accounting hedges
     under SFAS No. 133. Changes in the derivatives fair values are immediately
     recognized in earnings and included in "Other, net" in our Consolidated
     Statement of Operations. At March 31, 2002, these Canadian dollar range
     forward contracts had notional amounts due in 2002 and 2003 of $96.0
     million and $124.0 million, respectively. The fair value (liability) of the
     Canadian dollar range forward contracts at March 31, 2002, was $1.0
     million. We recorded losses of approximately $0.2 million for the three
     months ended March 31, 2002.

                                       10

<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


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

10.  SEGMENT INFORMATION

     On September 24, 2001, Bowater completed the purchase of Alliance. As a
     result of the acquisition, we have four reportable segments: the Newsprint
     Division, the Coated and Specialty Papers Division, the Forest Products
     Division and the Canadian Forest Products Division. Segment information for
     the quarter ending March 31, 2001 has been reclassified to reflect the
     change to four reportable segments.

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

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

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

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

     The Pulp Division markets and distributes market pulp produced at the
     Calhoun, Tennessee; Catawba, South Carolina; Thunder Bay, Ontario; and
     Coosa Pines, Alabama sites. Financial results for the production and sale
     of market pulp are included in the Newsprint Division and the Coated and
     Specialty Papers Division, depending upon which site manufactures the
     product. The Pulp Division's administrative expenses are included in
     "Corporate & other eliminations." Accordingly, no separate results are
     reported for this Division.

     The following tables summarize information about segment profit and loss
     and segment assets for the three months ended March 31, 2002 and 2001:
<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------------------
                                                       Coated
                                                         and                Canadian
     THREE MONTHS ENDED                               Specialty   Forest     Forest               Corporate/
     MARCH 31, 2002                      Newsprint     Papers    Products   Products   Special      Other
     (Unaudited, in millions)             Division    Division   Division   Division    Items    Eliminations    Total
     -------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>        <C>        <C>        <C>       <C>           <C>
     Sales-including internal sales       $  329.7     $115.4     $ 21.9    $  171.2    $  --       $   --     $  638.2
     Elimination of intersegment sales          --         --         --          --       --        (16.2)       (16.2)
     -------------------------------------------------------------------------------------------------------------------
     Sales - external customers              329.7      115.4       21.9       171.2       --        (16.2)       622.0
     -------------------------------------------------------------------------------------------------------------------
     Segment income (loss)                   (5.0)      (5.9)        0.3         8.1     75.0        (22.2)        50.3
     -------------------------------------------------------------------------------------------------------------------
     Total assets at 3/31/02              $3,058.3     $640.4     $245.2    $1,403.3    $  --       $376.6     $5,723.8
     -------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       11
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------------------
                                                       Coated
                                                         and                Canadian
     Three Months Ended                               Specialty   Forest     Forest               Corporate/
     March 31, 2001                      Newsprint     Papers    Products   Products   Special      Other
     (Unaudited, in millions)             Division    Division   Division   Division    Items    Eliminations    Total
     -------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>        <C>        <C>        <C>       <C>           <C>

     Sales-including internal sales       $  366.4     $138.7     $ 16.7     $ 98.8     $  --       $   --    $  687.7
     Elimination of intersegment sales          --         --         --         --        --        (15.7)      (82.8)
     -------------------------------------------------------------------------------------------------------------------
     Sales - external customers              366.4      138.7       16.7       98.8        --        (15.7)      604.9
     -------------------------------------------------------------------------------------------------------------------
     Segment income (loss)                    61.1       18.5      (0.2)       21.0      (5.8)         (5.0)      89.6
     -------------------------------------------------------------------------------------------------------------------
     Total assets at 3/31/01              $2,676.6     $594.6     $396.1     $886.9     $  --       $ 359.8   $4,914.0
     -------------------------------------------------------------------------------------------------------------------
</TABLE>

     In January 2002, Bowater completed the sale of approximately 116,000 acres
     of timberlands for aggregate consideration of $104.2 million, comprised of
     approximately $5.1 million in cash and $99.1 million in a note receivable.
     In March 2002, we monetized the $99.1 million note receivable for net cash
     proceeds of $88.1 million. These transactions resulted in a net pre-tax
     gain of $73.9 million. Also in the first quarter of 2002, we sold
     approximately 2,700 acres of timberlands and recorded a net pre-tax gain of
     $1.1 million.

     In April 2001, Bowater reached a final settlement in connection with the
     sale of GNP to Inexcon. As a result, we recognized a $5.8 million pre-tax
     charge in the first quarter of 2001.

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

11.  ACCUMULATED OTHER COMPREHENSIVE INCOME

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

     ---------------------------------------------------------------------------
     (In millions)                            March 31, 2002   December 31, 2001
     ---------------------------------------------------------------------------

     Pension plan additional minimum
       liabilities                              $   (57.4)       $    (57.4)
     Foreign currency translation                   (10.5)            (11.1)
     Unrealized loss on hedging transactions        (20.8)            (23.2)
     Taxes                                           29.2              30.1
     ---------------------------------------------------------------------------
                                                $   (59.5)       $    (61.6)
     ---------------------------------------------------------------------------

                                       12

<PAGE>

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


                                  ORGANIZATION

Bowater is organized into five divisions: the Newsprint Division, the Coated and
Specialty Papers Division, the Pulp Division, the Forest Products Division and
the Canadian Forest Products Division. Except for the Pulp Division, each
division is responsible for the sales and marketing of distinct product lines
and the operation of certain manufacturing sites. The Pulp Division is primarily
a marketing and distribution division. Therefore, Bowater's financial results
are collected, analyzed and reported through the other four divisions.

                         CAUTIONARY STATEMENT REGARDING
                           FORWARD-LOOKING INFORMATION

Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. They include, for example,
statements about our business outlook, assessment of market conditions,
strategies, future plans, future sales, prices for our major products, inventory
levels, capital spending and tax rates. These forward-looking statements are not
guarantees of future performance. They are based on management's expectations
that involve a number of business risks and uncertainties, any of which could
cause actual results to differ materially from those expressed in or implied by
the forward-looking statements. The risks and uncertainties relating to the
forward-looking statements in this report include those described under the
caption "Cautionary Statement Regarding Forward-Looking Information" in
Bowater's annual report on Form 10-K for the year ended December 31, 2001, and
from time to time, in Bowater's other filings with the Securities and Exchange
Commission.

                        ACCOUNTING POLICIES AND ESTIMATES

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

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

Our judgments are based on management's assessment as to the effect certain
estimates, assumptions, or future trends or events may have on the financial
condition and results of operations reported in our unaudited Consolidated
Financial Statements. It is important that the reader of our unaudited financial
statements understand that actual results could differ from these estimates,
assumptions and judgements.

                              RESULTS OF OPERATIONS
                    THREE MONTHS ENDED MARCH 31, 2002, VERSUS
                                 MARCH 31, 2001

The results of operations for the three-month period ended March 31, 2001 do not
include the impact of the acquisition of Alliance, which closed in September
2001.

For the first quarter of 2002, Bowater had operating income of $50.3 million
compared to $89.6 million for the first quarter of 2001. Operating income for
the first quarter of 2002 includes a gain on the sale of assets of $75.0 million
compared to a net loss on the sale of assets of $5.8 million for the first
quarter of 2001. Excluding these asset sales, operating income decreased $120.1
million. Lower transaction prices for newsprint ($81.7 million), coated and
specialty papers ($17.3 million) and market pulp ($31.3 million) and lower
shipments ($9.8 million). Selling, general and administrative expenses were also
higher in the first quarter of 2002 due to credits recognized for stock-based
compensation ($14.5 million) during the first quarter of 2001. These decreases
were offset partially by higher transaction prices for lumber ($1.5 million) and
timber ($1.9 million) and lower operating costs ($35.2 million), which includes
the amortization of goodwill. Operating costs were lower for the quarter due to
lower wood, fiber, chemical, fuel and maintenance costs.

                                       13
<PAGE>

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


Net income for the first quarter of 2002 was $12.3 million, or $0.22 per diluted
share, compared with net income of $37.7 million, or $0.72 per diluted share, in
the first quarter of 2001. Sales for the first quarter of 2002 were $622.0
million compared with $604.9 million for the first quarter of 2001.

                            PRODUCT LINE INFORMATION

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

 SALES BY PRODUCT
------------------------------------------------------------
                                        THREE MONTHS ENDED
                                             MARCH 31,
                                       ---------------------
(Unaudited, in millions)                 2002         2001
------------------------------------------------------------

Sales:
   Newsprint                           $  290.7    $  379.5
   Market pulp                            118.0       105.7
   Coated and specialty papers            162.9       107.9
   Lumber                                  54.7         8.2
   Other                                   11.9        44.6
   Elimination of intersegment sales      (16.2)      (41.0)
                                       ---------------------
        Total sales                    $  622.0    $  604.9
------------------------------------------------------------


Newsprint: Bowater's average transaction price for newsprint was 24% lower in
the first quarter of 2002 compared to the first quarter of 2001 and 9% lower
compared to the fourth quarter of 2001. Our shipments increased 1% compared to
the first quarter of 2001, due primarily to the acquisition of Alliance. This
increase was partially offset by approximately 70,000 metric tons of market and
maintenance downtime in the first quarter of 2002 compared to approximately
46,000 metric tons of downtime during the first quarter of 2001. We plan to take
23,000 metric tons of maintenance downtime in the second quarter of this year
and we will continue to match our production to our orders. Our newsprint
inventory increased approximately 27,000 metric tons compared to the end of the
first quarter of 2001. Inventories have increased due to the acquisition of
Alliance and in order to service our customers in Europe. Total United States
demand and consumption of newsprint declined in the first quarter of 2002
compared to same period a year ago. Aggregate North American mill and customer
inventories were 11% lower at March 31, 2002 compared to March 31, 2001.

Market Pulp: Bowater's average transaction price for market pulp in the first
quarter of 2002 decreased 23% compared to the first quarter of 2001 and
increased slightly compared to the fourth quarter of 2001. We announced a price
increase of $30 per metric ton, effective May 1, 2002. Our shipments increased
46% compared to the same period last year, primarily as a result of the
acquisition of Alliance and less downtime (approximately 40,000 metric tons)
taken in the first quarter of 2002 compared to the first quarter of 2001. An
additional 18,000 metric tons of maintenance downtime is planned for the second
quarter of 2002. Our market pulp inventories increased over the quarter to end
the quarter with 19 days of supply. NORSCAN producers (United States, Canada,
Finland, and Sweden) took market-related downtime resulting in a 90% operating
rate for the first quarter of 2002. Consequently, NORSCAN inventories decreased
in March by 117,000 metric tons, to end the quarter at 1.7 million metric tons,
or 29 days of supply.

Coated and Specialty Papers: Bowater's average transaction price for coated and
specialty papers was 20% lower in the first quarter of 2002 compared to the
first quarter of 2001 and 7% lower compared to the fourth quarter of 2001. Our
coated and specialty papers shipments increased 84% compared to the same period
last year, due primarily to the acquisition of Alliance. US magazine advertising
pages declined compared to the first quarter of 2001 and catalog mailings
(measured by Standard A mail weight) decreased compared to the same period last
year.

The Division's Nuway coating facility in Covington, Tennessee commenced
operations during the first quarter of 2002. The annual capacity of this
facility is approximately 95,000 short tons of coated paper, which will consume
approximately 70,000 metric tons of newsprint capacity.

Lumber: Bowater's average transaction price for lumber products increased 10% in
the first quarter of 2002 compared to the first quarter of 2001. Our lumber
shipments increased significantly in the first quarter of 2002 compared to the
first quarter of 2001 due to the acquisition of Alliance. US housing starts in
the first quarter were strong, increasing 5% in the first quarter of 2002
compared to the same period last year.

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

On May 2, 2002, the US International Trade Commission (ITC) determined that
Canadian imports of softwood lumber threaten to injure the US softwood lumber
industry. Following the affirmative finding of threat of material injury, we
anticipate that in May 2002 the ITC will issue a notification of its finding to
the US Department of Commerce, and that the Commerce Department will issue
orders applicable to softwood lumber imported into the United States from
Canada, imposing antidumping duties of 8.43% and countervailing duties,
applicable to softwood lumber imported from all provinces except Nova Scotia and
New Brunswick, of 18.79%. These duties will be payable in cash. The final amount
and effective date of countervailing and antidumping duties that may be assessed
on Canadian softwood lumber exports to the U.S. cannot be determined at this
time and will depend on determinations yet to be made by the ITC and any
reviewing courts, North American Free Trade Agreement or World Trade
Organization panels to which those determinations may be appealed. Through the
first quarter of 2002, Bowater had accrued approximately $7.9 million in
anticipation of these duties for periods prior to April 2002 and any adjustments
resulting from a change in the countervailing and antidumping duty rates will be
made prospectively.

                             DIVISIONAL PERFORMANCE

On September 24, 2001, Bowater completed the purchase of Alliance. As a result
of the acquisition, we have four reportable segments: the Newsprint Division,
the Coated and Specialty Papers Division, the Forest Products Division and the
Canadian Forest Products Division. Segment information for the three-month
period ending March 31, 2001, has been reclassified to reflect the change to
four reportable segments.

SALES BY DIVISION (1)
--------------------------------------------------------------
                                          THREE MONTHS ENDED
                                               MARCH 31,
                                        ----------------------
(In millions)                              2002        2001
--------------------------------------------------------------
Newsprint Division                      $  329.7     $  366.4
Coated and Specialty Papers Division       115.4        138.7
Forest Products Division                    21.9         16.7
Canadian Forest Products Division          171.2         98.8
Corporate & eliminations                   (16.2)       (15.7)
                                        ----------------------
    Total sales                         $  622.0     $  604.9
--------------------------------------------------------------

OPERATING INCOME (LOSS) BY DIVISION (1)
--------------------------------------------------------------
                                          THREE MONTHS ENDED
                                               MARCH 31,
                                        ----------------------
(In millions)                              2002        2001
--------------------------------------------------------------
Newsprint Division                      $   (5.0)    $   61.1
Coated and Specialty Papers Division        (5.9)        18.5
Forest Products Division                     0.3         (0.2)
Canadian Forest Products Division            8.1         21.0
Special items                               75.0         (5.8)
Corporate & eliminations                   (22.2)        (5.0)
                                        ----------------------
    Total operating income              $   50.3     $   89.6
--------------------------------------------------------------
(1) Financial results for the production and sale of market pulp are included in
    the Newsprint Division or the Coated and Specialty Papers Division,
    depending upon which site manufactures the product. The Pulp Division is
    responsible for the marketing and distribution of the product, and its
    administrative expenses are included in "Corporate & eliminations."

Newsprint Division: The results for this Division for the first three months of
2002 include the Coosa Pines, Alabama facility, acquired as part of the
acquisition of Alliance. Sales for the Division decreased $36.7 million, from
$366.4 million for the first quarter of 2001 to $329.7 million for the first
quarter of 2002. This decrease is primarily the result of lower shipments of
newsprint ($36.7 million) and lower transaction prices for newsprint ($53.2
million), market pulp ($23.9 million) and uncoated specialty paper ($4.9
million). These decreases were partially offset by the addition of the Coosa
Pines, Alabama facility and higher shipments of uncoated specialty paper ($8.3
million) and market pulp ($6.3 million). See the previous discussion of product
line results.

Operating income for the first quarter of 2002 decreased $66.1 from $61.1
million for the first quarter of 2001 to an operating loss of $5.0 million for
the first quarter of 2002. Lower shipments ($5.3 million, primarily newsprint)
and lower transaction prices for newsprint ($53.2 million), market pulp ($23.9
million) and uncoated specialty paper ($4.9 million) account for the majority of
this decrease. These decreases were partially offset by lower operating costs
($19.3 million) due to lower maintenance, fiber and wood costs, and a favorable
Canadian dollar exchange rate compared to the same period of 2001.

Coated and Specialty Papers Division: Sales for the Division decreased $23.3
million, from $138.7 million
                                       15
<PAGE>

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


for the first quarter of 2001 to $115.4 million for the first quarter of 2002.
This decrease was primarily due to lower transaction prices for coated and
specialty papers ($17.9 million), market pulp ($7.9 million) and newsprint ($6.2
million). Increased shipments ($8.7 million, primarily coated and specialty
papers and market pulp) partially offset this decrease. See the previous
discussion of product line results.

Operating income decreased $24.4 million from $18.5 million for the first
quarter of 2001 to an operating loss of $5.9 million for the first quarter of
2002. This decrease was primarily the result of lower transaction prices for
coated and specialty papers ($17.9 million), market pulp ($7.9 million) and
newsprint ($6.2 million). Lower operating costs ($8.0 million) as a result of
lower fiber and wood costs and lower chemical and fuel costs partially offset
this decrease.

Forest Products Division: Sales for the Division increased $5.2 million, from
$16.7 million for the first quarter of 2001 to $21.9 million for the first
quarter of 2002. This increase is primarily the result of higher lumber
transaction ($1.5 million) and timber transaction prices ($1.9 million) and
higher lumber shipments ($7.0 million). This increase was partially offset by
lower timber shipments ($5.8 million). See the previous discussion of product
line results.

Operating income for the Division increased $0.5 million from an operating loss
of $0.2 million for the first quarter of 2001 to operating income of $0.3
million for the first quarter of 2002. This increase was due primarily to higher
lumber ($1.5 million) and timber ($1.9 million) transaction prices and lower
operating costs ($3.7 million), partially offset by lower timber shipments ($5.8
million). Operating costs for the Division were lower in the first quarter of
2002 compared to the same period last year due to a charge for pine beetle
damage incurred in the first quarter of 2001 and lower labor and silviculture
expenses in the first quarter of 2002.

The continuing drought in the U.S. Southeast is contributing to conditions that
allow the southern pine beetle to flourish and expand the range of its
infestation. For the first quarter of 2002, Bowater did not incur any charges
related to pine beetle damage. If these conditions continue, we may incur
additional charges related to beetle damage. During the first quarter of 2001,
we recorded a charge of $2.1 million for damages.

Canadian Forest Products Division: This Division was formed as a result of the
Alliance acquisition. In addition to the Alliance facilities in Canada, several
existing facilities owned by Bowater were transferred to this Division. Sales
for the Division increased $72.4 million, from $98.8 million for the first
quarter of 2001 to $171.2 million for the first quarter of 2002. This increase
is primarily the result of the acquisition of Alliance in September 2001,
partially offset by lower newsprint transaction prices ($22.3 million).

Operating income decreased $12.9 million, from $21.0 million for the first
quarter of 2001 to $8.1 million for the first quarter of 2002. This decrease was
primarily the result of lower newsprint transaction prices ($22.3 million,
partially offset by lower manufacturing costs ($8.4 million) and the acquisition
of Alliance.

Special Items: In January 2002, Bowater completed the sale of approximately
116,000 acres of timberlands for aggregate consideration of $104.2 million,
comprised of approximately $5.1 million in cash and $99.1 million in notes
receivable. In March 2002, we monetized the $99.1 million notes receivable for
net cash proceeds of $88.1 million. These transactions resulted in a net pre-tax
gain of $73.9 million. Also in the first quarter of 2002, we had other asset
sales resulting in a pre-tax gain of $1.1 million. In April 2001, Bowater
reached a final settlement in connection with the sale of GNP to Inexcon. As a
result, we recognized a pre-tax charge of $5.8 million in the first quarter of
2001.

Corporate & Eliminations: The elimination of intersegment sales increased $0.5
million, comparing the first quarter of 2002 to the first quarter of 2001.
Corporate expenses increased $17.2 million due primarily to benefits recognized
for stock-based compensation ($14.5 million) during the first quarter of 2001.

                     INTEREST AND OTHER INCOME AND EXPENSES

Interest expense increased $6.6 million from $35.2 million for the first quarter
of 2001 to $41.8 million for the first quarter of 2002. This increase was
attributable to an increase in debt associated with the acquisition of Alliance.
Interest income decreased $2.6 million from $3.6 million for the first quarter
of 2001 to $1.0 million for the first quarter of 2002. This decrease is due
primarily to the sale of a note receivable in June 2001.

                                       16

<PAGE>

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


Also in the first quarter of 2002, Bowater recorded a foreign exchange gain of
$1.1 million compared to a gain of $4.8 million in the first quarter of 2001.
The majority of our exchange gain (loss) amounts is attributable to the
revaluation of unhedged foreign denominated liabilities into United States
dollars.

Bowater's effective tax rate for the first quarter of 2002 was (11.4)% versus
32.6% for the prior year's first quarter. The lower rate in 2002 was primarily
the result of a one-time tax benefit arising from an IRS settlement ($2.8
million) and an on-going tax benefit ($3.8 million) related to our $600 million
notes financing transaction completed in the fourth quarter of 2001.

                         LIQUIDITY AND CAPITAL RESOURCES

Bowater's cash and cash equivalents decreased to $14.7 million at March 31,
2002, from $28.3 million at December 31, 2001. We used cash from operations of
$61.5 million, generated $34.1 million of cash from investing activities, and
generated $13.8 million of cash from financing activities.

CASH FROM OPERATING ACTIVITIES:
During the first three months of 2002, Bowater's operations used $61.5 million
of cash compared to the generation of $111.4 million of cash during the first
three months of 2001, a decrease of $172.9 million. Lower operating income
($120.1 million, excluding gain on asset sales) and higher working capital needs
($66.4 million) accounted for the majority of the decrease in 2002. Operating
cash flows for the first quarter of 2002 include the activity of the Alliance
operations.

CASH FROM INVESTING ACTIVITIES:
Cash generated from investing activities during the first three months of 2002
totaled $34.1 million, compared with cash used of $68.3 million during the first
three months of 2001. The first quarter of 2002 includes the net cash proceeds
of $88.1 million from the monetization of a note receivable and $16.1 million
from the sale of assets. Capital expenditures increased $2.1 million for the
first quarter of 2002 compared to the first quarter of 2001.

CASH FROM FINANCING ACTIVITIES:
Cash generated from financing activities was $13.8 million for the first three
months of 2002 compared to $47.6 million of cash used during the first three
months of 2001. During the first three months of 2002, Bowater received proceeds
of $26.4 million (net of payments of $228.0 million) from its short-term credit
facilities. In the first three months of 2001, we paid $32.6 million (net of
proceeds of $163.1 million) under our short-term credit facilities. Also in the
first three months of 2002, we made payments on long-term borrowings amounting
to $2.4 million compared with payments of $0.2 million during the first three
months of 2001.

Cash dividends paid in the first three months of 2002 decreased $0.2 million
from the prior year period.

CREDIT ARRANGEMENTS:
Bowater has available credit facilities with various banks that provide for
borrowings up to $900.0 million. The credit facilities consist of a $450.0
million 364-day credit facility, a $350.0 million five-year facility and a
$100.0 million 364-day credit facility of a wholly-owned subsidiary, Bowater
Canadian Forest Products Inc. At March 31, 2002, $368.0 million was outstanding
under these facilities and approximately $67.3 million outstanding letter of
credit agreements, of which $21.0 million was committed against our credit
facilities.

In April 2002, Bowater entered into a commitment for a $300.0 million three-year
term loan and a $500.0 million three-year revolving credit facility. Bowater
expects to close on these commitments in May 2002. The new three-year term loan
and credit facility will be used to refinance the current $350.0 million
five-year facility and the $450.0 million 364-day credit facility. The $300.0
million three-year term loan requires annual repayments of $60.0 million at the
end of year one, $60.0 million at the end of year two and $180.0 million at the
end of year three. The $500.0 million revolving credit facility is due three
years from the effective date of the agreement.

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

                         OFF-BALANCE SHEET ARRANGEMENTS

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

                                       17

<PAGE>

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


In January 2002, Bowater sold approximately 116,000 acres of timberlands for
aggregate consideration of $104.2 million, comprised of approximately $5.1
million in cash and $99.1 million in notes receivable. In March 2002, we
monetized the notes receivable using a qualified special purpose entity (QSPE)
set up in accordance with the Financial Accounting Standards Board's SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and received net cash proceeds of $88.1 million.
These transactions resulted in a net pre-tax gain of $73.9 million. The QSPE is
not consolidated with Bowater in Bowater's financial statements. The business
purpose of the QSPE is to hold the notes receivable and issue debt securities to
third parties. The value of these debt securities is equal to approximately 90%
of the value of the notes receivable. The full principal amount of the notes
receivable is backed by a letter of credit issued by a third party financial
institution. As of March 31, 2002, Bowater's retained interest in the QSPE is
$10.6 million. As of March 31, 2002, the QSPE had total assets of $100.1 million
and total obligations of $89.2 million.

                              ACCOUNTING STANDARDS

Bowater adopted SFAS No. 142, "Goodwill and Other Intangible Assets," on January
1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite
useful lives will no longer be amortized, but will be tested for impairment at
least on an annual basis in accordance with the provisions of SFAS No. 142. In
connection with SFAS No. 142's transitional goodwill impairment evaluation,
Bowater is required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. We are currently
evaluating our goodwill and, in accordance with SFAS No. 142, have six months to
determine if any transitional impairment losses will be required to be
recognized as a cumulative effect of a change in accounting principle. Because
of the extensive effort needed to perform the transitional goodwill impairment
evaluation, it is not practicable to reasonably estimate the impact of adopting
SFAS No. 142 on our consolidated financial statements. We will complete this
assessment by June 30, 2002. As of March 31, 2002, we had unamortized goodwill
in the amount of $843.0 million and no intangible assets with indefinite useful
lives (pending the final valuation of the Alliance acquisition).

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

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

ITEM 3.  MARKET RISK

Bowater's market risk disclosure included in its 2001 Form 10-K, Part II, Item
7A, is still applicable as of March 31, 2002. We have updated the disclosure
concerning our Canadian dollar forward and range forward contracts, which is
included in Footnote 9 in this Form 10-Q.

                                       18
<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                     PART II

                                OTHER INFORMATION



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

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

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

         10.1          Amendment No. 1 dated December 12, 2001 to the Bowater
                       Incorporated Equalization Benefits Plan effective
                       February 26, 1999.

         10.2          Amendment No. 2 dated May 3, 2002 to the Bowater
                       Incorporated Retirement Plan for Outside Directors as
                       Amended and Restated February 26, 1999.

         10.3          Amendment No. 1 dated November 1, 2001 to the Bowater
                       Incorporated Deferred Compensation Plan for Outside
                       Directors.

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



         (b)      Reports on Form 8-K:

                  None


                                   19

<PAGE>

                      BOWATER INCORPORATED AND SUBSIDIARIES

                                   SIGNATURES


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



                                               BOWATER INCORPORATED

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



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





Dated:   May 14, 2002


                                       20

<PAGE>


                                INDEX TO EXHIBITS



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

    10.1          Amendment No. 1 dated December 12, 2001 to the Bowater
                  Incorporated Equalization Benefits Plan effective
                  February 26, 1999.

    10.2          Amendment No. 2 dated May 3, 2002 to the Bowater Incorporated
                  Retirement Plan for Outside Directors as Amended and Restated
                  February 26, 1999.

    10.3          Amendment No. 1 dated November 1, 2001 to the Bowater
                  Incorporated Deferred Compensation Plan for Outside Directors.

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