##### 



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, 2003

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
incorporation or organization) |  | (I.R.S. Employer
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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 8, 2003.

|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at August 8, 2003
|                              |  |                              
|Common Stock, $1.00 Par Value |  | 55,376,993 Shares            





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##### 



BOWATER INCORPORATED
I N D E X

|                             |  |                                                                                                 |  |       
|---------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------
|                             |  |                                                                                                 |  | Page  
|                             |  |                                                                                                 |  | Number
|                             |  |                                                                                                 |  |       
|PART I FINANCIAL INFORMATION |  |                                                                                                
|                             |  | 1. Financial Statements:                                                                        |  |       
|                             |  | Consolidated Statement of Operations for the Three and
Six Months Ended June 30, 2003, and 2002 |  | 3     
|                             |  | Consolidated Balance Sheet at June 30, 2003,
and December 31, 2002                              |  | 4     
|                             |  | Consolidated Statement of Capital Accounts
for the Six Months Ended June 30, 2003               |  | 5     
|                             |  | Consolidated Statement of Cash Flows for the
Six Months Ended June 30, 2003 and 2002            |  | 6     
|                             |  | Notes to Consolidated Financial Statements                                                      |  | 7-18  
|                             |  | 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations        |  | 19-35 
|                             |  | 3. Quantitative and Qualitative Disclosures About Market Risk                                   |  | 36    
|                             |  | 4. Controls and Procedures                                                                      |  | 36    
|PART II OTHER INFORMATION    |  |                                                                                                
|                             |  | Item 1. Legal Proceedings                                                                       |  | 37    
|                             |  | Item 4. Submission of Matter to a Vote of Security Holders                                      |  | 38    
|                             |  | Item 6. Exhibits and Reports on Form 8-K                                                        |  | 38    
|SIGNATURES                   |  | 39                                                                                             





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##### 



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

|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |      |       |  
|--------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------------- | ----- | ------------------ | ----- | ---------------- | ----- | -------- | ----- | -------- | ------- | ---- | ----- | - | ------- | ---- | ----- | -
|                                                                                        |                                               |                                                    |       | Three Months Ended |       | Six Months Ended
|                                                                                        |                                               |                                                    |       |                    |       |                 
|                                                                                        |                                               |                                                    |       | June 30,           |       | June 30,         |       | June 30, |       | June 30,
|                                                                                        |                                               |                                                    |       | 2003               |       | 2002             |       | 2003     |       | 2002    
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |         
|Sales                                                                                   |                                               | $                                                  | 664.1 |                    |       | $                | 646.8 |          |       | $        | 1,294.6 |      |       | $ | 1,271.0 |     
|Cost of sales, excluding depreciation, amortization
and cost of timber harvested        |                                               |                                                    | 554.1 |                    |       |                  | 508.5 |          |       |          | 1,070.6 |      |       |   | 979.1   |     
|Depreciation, amortization and cost of timber harvested                                 |                                               |                                                    | 86.0  |                    |       |                  | 86.1  |          |       |          | 168.5   |      |       |   | 172.4   |     
|Distribution costs                                                                      |                                               |                                                    | 62.4  |                    |       |                  | 50.7  |          |       |          | 124.5   |      |       |   | 107.2   |     
|Selling and administrative expense                                                      |                                               |                                                    | 34.0  |                    |       |                  | 40.4  |          |       |          | 70.8    |      |       |   | 75.9    |     
|Net gain on sale of assets                                                              |                                               |                                                    | 104.0 |                    |       |                  | 3.5   |          |       |          | 115.1   |      |       |   | 75.0    |     
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Operating income (loss)                                                                 |                                               |                                                    | 31.6  |                    |       |                  | (35.4 | )        |       |          | (24.7   | )    |       |   | 11.4    |     
|Other expense (income)                                                                  |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        | Interest income                               |                                                    |       | (1.4               | )     |                  |       | (1.2     | )     |          |         | (2.4 | )     |   |         | (2.2 | )    
|                                                                                        | Interest expense, net of capitalized interest |                                                    |       | 42.2               |       |                  |       | 41.3     |       |          |         | 82.1 |       |   |         | 83.1 |      
|                                                                                        | Other, net                                    |                                                    |       | 2.5                |       |                  |       | 5.2      |       |          |         | 10.8 |       |   |         | 5.1  |      
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        |                                               |                                                    | 43.3  |                    |       |                  | 45.3  |          |       |          | 90.5    |      |       |   | 86.0    |     
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Loss before income taxes, minority interests
and cumulative effect of accounting change |                                               |                                                    | (11.7 | )                  |       |                  | (80.7 | )        |       |          | (115.2  | )    |       |   | (74.6   | )   
|Provision for income tax expense (benefit)                                              |                                               |                                                    | 17.6  |                    |       |                  | (22.8 | )        |       |          | (12.7   | )    |       |   | (25.3   | )   
|Minority interests in net loss of subsidiaries                                          |                                               |                                                    | (3.6  | )                  |       |                  | (4.2  | )        |       |          | (7.2    | )    |       |   | (5.8    | )   
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Loss before cumulative effect of accounting change                                      |                                               |                                                    | (25.7 | )                  |       |                  | (53.7 | )        |       |          | (95.3   | )    |       |   | (43.5   | )   
|Cumulative effect of accounting change                                                  |                                               |                                                    |      |                    |       |                  |      |          |       |          | (2.1    | )    |       |   |        |     
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Net loss                                                                                |                                               |                                                    | (25.7 | )                  |       |                  | (53.7 | )        |       |          | (97.4   | )    |       |   | (43.5   | )   
|Other comprehensive income (loss), net of tax                                           |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        | Foreign currency translation adjustments      |                                                    |       | 5.7                |       |                  |       | 2.3      |       |          |         | 10.4 |       |   |         | 2.9  |      
|                                                                                        | Unrealized gain on hedged transactions        |                                                    |       | 58.8               |       |                  |       | 23.4     |       |          |         | 98.7 |       |   |         | 24.9 |      
|                                                                                        | Minimum pension liability adjustments         |                                                    |       | (4.8               | )     |                  |       |         |       |          |         | (7.3 | )     |   |         |     |      
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Comprehensive income (loss)                                                             |                                               | $                                                  | 34.0  |                    |       | $                | (28.0 | )        |       | $        | 4.4     |      |       | $ | (15.7   | )   
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Basic loss per common share                                                             |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        |                                               | Loss before cumulative effect of accounting change |       |                    | (0.45 | )                |       |          | (0.95 | )        |         |      | (1.67 | ) |         |      | (0.77 | )
|                                                                                        |                                               | Cumulative effect of accounting change             |       |                    |      |                  |       |          |      |          |         |      | (0.04 | ) |         |      |      |  
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        |                                               | Net loss                                           |       | $                  | (0.45 | )                |       | $        | (0.95 | )        |         | $    | (1.71 | ) |         | $    | (0.77 | )
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Diluted loss per common share                                                           |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        |                                               | Loss before cumulative effect of accounting change |       |                    | (0.45 | )                |       |          | (0.95 | )        |         |      | (1.67 | ) |         |      | (0.77 | )
|                                                                                        |                                               | Cumulative effect of accounting change             |       |                    |      |                  |       |          |      |          |         |      | (0.04 | ) |         |      |      |  
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|                                                                                        |                                               | Net loss                                           |       | $                  | (0.45 | )                |       | $        | (0.95 | )        |         | $    | (1.71 | ) |         | $    | (0.77 | )
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     
|Dividends declared per common share                                                     |                                               | $                                                  | 0.20  |                    |       | $                | 0.20  |          |       | $        | 0.40    |      |       | $ | 0.40    |     
|                                                                                        |                                               |                                                    |       |                    |       |                  |       |          |       |          |         |      |       |   |         |     

See accompanying notes to consolidated financial statements

3



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##### 



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

|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |         |  |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------- | ------- | -------- | - | ------------ | ------- |  |  | 
|                                     |                                                                                                                                                         |                                            |   |         |         | June 30, |   | December 31,
|                                     |                                                                                                                                                         |                                            |   |         |         | 2003     |   | 2002        
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |             
|ASSETS                               |                                                                                                                                                         |                                            |   |         |         |          |   |             
|Current assets:                      |                                                                                                                                                         |                                            |   |         |         |          |   |             
|                                     | Cash and cash equivalents                                                                                                                               |                                            | $ | 82.7    |         |          | $ | 35.9         |        
|                                     | Accounts receivable, net                                                                                                                                |                                            |   | 338.4   |         |          |   | 330.6        |        
|                                     | Inventories                                                                                                                                             |                                            |   | 290.6   |         |          |   | 257.2        |        
|                                     | Income taxes receivable                                                                                                                                 |                                            |   |        |         |          |   | 75.6         |        
|                                     | Other current assets                                                                                                                                    |                                            |   | 120.4   |         |          |   | 35.9         |        
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|                                     |                                                                                                                                                         | Total current assets                       |   |         | 832.1   |          |   |              | 735.2   | 
|                                     | Timber and timberlands                                                                                                                                  |                                            |   | 188.2   |         |          |   | 212.0        |        
|                                     | Fixed assets, net                                                                                                                                       |                                            |   | 3,603.1 |         |          |   | 3,645.6      |        
|                                     | Goodwill                                                                                                                                                |                                            |   | 828.2   |         |          |   | 839.9        |        
|                                     | Other assets                                                                                                                                            |                                            |   | 218.9   |         |          |   | 157.6        |        
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|                                     |                                                                                                                                                         | Total assets                               |   | $       | 5,670.5 |          |   | $            | 5,590.3 | 
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                         |                                            |   |         |         |          |   |             
|Current liabilities:                 |                                                                                                                                                         |                                            |   |         |         |          |   |             
|                                     | Current installments of long-term debt                                                                                                                  |                                            | $ | 17.6    |         |          | $ | 84.3         |        
|                                     | Short-term bank debt                                                                                                                                    |                                            |   | 111.8   |         |          |   | 249.0        |        
|                                     | Accounts payable and accrued liabilities                                                                                                                |                                            |   | 389.4   |         |          |   | 411.9        |        
|                                     | Dividends payable                                                                                                                                       |                                            |   | 11.3    |         |          |   | 11.2         |        
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|                                     |                                                                                                                                                         | Total current liabilities                  |   |         | 530.1   |          |   |              | 756.4   | 
|                                     | Long-term debt, net of current installments                                                                                                             |                                            |   | 2,293.1 |         |          |   | 2,037.4      |        
|                                     | Other long-term liabilities                                                                                                                             |                                            |   | 470.2   |         |          |   | 450.7        |        
|                                     | Deferred income taxes                                                                                                                                   |                                            |   | 567.0   |         |          |   | 518.2        |        
|                                     | Minority interests in subsidiaries                                                                                                                      |                                            |   | 71.3    |         |          |   | 72.1         |        
|                                     | Commitments and contingencies                                                                                                                           |                                            |   |        |         |          |   |             |        
|Shareholders equity:                |                                                                                                                                                         |                                            |   |         |         |          |   |             
|                                     | Common stock, $1 par value. Authorized 100,000,000 shares;
issued
66,908,158 and 66,897,158 shares at June 30, 2003 and December 31, 2002,
respectively |                                            |   | 66.9    |         |          |   | 66.9         |        
|                                     | Exchangeable shares, no par value. Unlimited shares authorized;
1,643,248 outstanding at June 30, 2003 and December 31, 2002,
respectively              |                                            |   | 78.3    |         |          |   | 78.3         |        
|                                     | Additional paid-in capital                                                                                                                              |                                            |   | 1,597.4 |         |          |   | 1,596.8      |        
|                                     | Retained earnings                                                                                                                                       |                                            |   | 529.6   |         |          |   | 649.9        |        
|                                     | Unearned compensation                                                                                                                                   |                                            |   | (2.3    | )       |          |   |             |        
|                                     | Accumulated other comprehensive loss                                                                                                                    |                                            |   | (48.3   | )       |          |   | (150.1       | )      
|                                     | Treasury stock, at cost, 11,529,897 and 11,617,494 shares at
June 30, 2003
and December 31, 2002, respectively                                          |                                            |   | (482.8  | )       |          |   | (486.3       | )      
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|                                     |                                                                                                                                                         | Total shareholders equity                 |   |         | 1,738.8 |          |   |              | 1,755.5 | 
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        
|                                     |                                                                                                                                                         | Total liabilities and shareholders equity |   | $       | 5,670.5 |          |   | $            | 5,590.3 | 
|                                     |                                                                                                                                                         |                                            |   |         |         |          |   |              |        

See accompanying notes to consolidated financial statements

4



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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Six Months Ended June 30, 2003
(Unaudited, in millions of US dollars except per-share amounts)

|                                                                                                             |  |   |        |  |              |   |         |  |          |   |              |   |               |   |          |   |  |   |      |   |       |   |             |   |  |   |        |   | 
|------------------------------------------------------------------------------------------------------------ |  | - | ------ |  | ------------ | - | ------- |  | -------- | - | ------------ | - | ------------- | - | -------- | - |  | - | ---- | - | ----- | - | ----------- | - |  | - | ------ | - | 
|                                                                                                             |  |   |        |  |              |   |         |  |          |   |              |   |               |   |          |   |  |   |      |   |       |   | Accumulated |   |  |   |       
|                                                                                                             |  |   |        |  |              |   |         |  |          |   | Additional   |   |               |   |          |   |  |   |      |   | Other |   |             |   | 
|                                                                                                             |  |   | Common |  | Exchangeable |   | Paid-in |  | Retained |   | Unearned     |   | Comprehensive |   | Treasury
|                                                                                                             |  |   | Stock  |  | Shares       |   | Capital |  | Earnings |   | Compensation |   | Loss          |   | Stock   
|                                                                                                             |  |   |        |  |              |   |         |  |          |   |              |   |               |   |         
|Balance at December 31, 2002                                                                                 |  | $ | 66.9   |  |              | $ | 78.3    |  |          | $ | 1,596.8      |   |               | $ | 649.9    |   |  | $ |     |   |       | $ | (150.1      | ) |  | $ | (486.3 | )
|Net loss                                                                                                     |  |   |       |  |              |   |        |  |          |   |             |   |               |   | (97.4    | ) |  |   |     |   |       |   |            |   |  |   |       |  
|Dividends ($0.40 per share)                                                                                  |  |   |       |  |              |   |        |  |          |   |             |   |               |   | (22.9    | ) |  |   |     |   |       |   |            |   |  |   |       |  
|Foreign currency translation                                                                                 |  |   |       |  |              |   |        |  |          |   |             |   |               |   |         |   |  |   |     |   |       |   | 10.4        |   |  |   |       |  
|Stock options exercised (11,000 shares)                                                                      |  |   |       |  |              |   |        |  |          |   | 0.2          |   |               |   |         |   |  |   |     |   |       |   |            |   |  |   |       |  
|Tax benefit on exercise of stock options                                                                     |  |   |       |  |              |   |        |  |          |   | 0.1          |   |               |   |         |   |  |   |     |   |       |   |            |   |  |   |       |  
|Stock option compensation                                                                                    |  |   |       |  |              |   |        |  |          |   | 0.4          |   |               |   |         |   |  |   |     |   |       |   |            |   |  |   |       |  
|Translation of pension plan additional minimum liability, net of $4.1 translation of related tax benefit     |  |   |       |  |              |   |        |  |          |   |             |   |               |   |         |   |  |   |     |   |       |   | (7.3        | ) |  |   |       |  
|Treasury stock used for dividend reinvestment plans and to pay employee and director benefits (5,087 shares) |  |   |       |  |              |   |        |  |          |   |             |   |               |   |         |   |  |   |     |   |       |   |            |   |  |   | 0.1    |  
|Restricted stock grant (82,510 shares from treasury stock)                                                   |  |   |       |  |              |   |        |  |          |   | (0.1         | ) |               |   |         |   |  |   | (3.3 | ) |       |   |            |   |  |   | 3.4    |  
|Amortization of unearned compensation                                                                        |  |   |       |  |              |   |        |  |          |   |             |   |               |   |         |   |  |   | 1.0  |   |       |   |            |   |  |   |       |  
|Unrealized gain on hedged transactions,
net of tax provision of $60.5                                        |  |   |       |  |              |   |        |  |          |   |             |   |               |   |         |   |  |   |     |   |       |   | 98.7        |   |  |   |       |  
|                                                                                                             |  |   |        |  |              |   |         |  |          |   |              |   |               |   |          |   |  |   |      |   |       |   |             |   |  |   |        |  
|Balance at June 30, 2003                                                                                     |  | $ | 66.9   |  |              | $ | 78.3    |  |          | $ | 1,597.4      |   |               | $ | 529.6    |   |  | $ | (2.3 | ) |       | $ | (48.3       | ) |  | $ | (482.8 | )
|                                                                                                             |  |   |        |  |              |   |         |  |          |   |              |   |               |   |          |   |  |   |      |   |       |   |             |   |  |   |        |  

See accompanying notes to consolidated financial statements

5



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##### 



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

|                                                                                |                                                           |                                               |        |                  |      |          |        |       |       |  
|------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------- | ------ | ---------------- | ---- | -------- | ------ | ----- | ----- | -
|                                                                                |                                                           |                                               |        | Six Months Ended
|                                                                                |                                                           |                                               |        |                 
|                                                                                |                                                           |                                               |        | June 30,         |      | June 30,
|                                                                                |                                                           |                                               |        | 2003             |      | 2002    
|                                                                                |                                                           |                                               |        |                  |      |         
|Cash flows from operating activities:                                           |                                                           |                                               |        |                  |      |          |        |      
|Net loss                                                                        |                                                           | $                                             | (97.4  | )                |      | $        | (43.5  | )    
|Cumulative effect of accounting change                                          |                                                           |                                               | 2.1    |                  |      |          |       |      
|Adjustments to reconcile net loss to net cash
provided by operating activities: |                                                           |                                               |        |                  |      |          |        |      
|Depreciation, amortization and cost of
timber harvested                         |                                                           |                                               | 168.5  |                  |      |          | 172.4  |      
|Deferred income taxes                                                           |                                                           |                                               | (16.8  | )                |      |          | (35.5  | )    
|Amortization of unearned compensation                                           |                                                           |                                               | 1.0    |                  |      |          |       |      
|Minority interests in net loss of subsidiaries                                  |                                                           |                                               | (7.2   | )                |      |          | (5.8   | )    
|Net gain on sale of assets                                                      |                                                           |                                               | (115.1 | )                |      |          | (75.0  | )    
|Changes in working capital:                                                     |                                                           |                                               |        |                  |      |          |        |      
|                                                                                | Accounts receivable, net                                  |                                               |        | (7.8             | )    |          |        | 9.5   |      
|                                                                                | Inventories                                               |                                               |        | (33.4            | )    |          |        | (6.9  | )    
|                                                                                | Income taxes receivable                                   |                                               |        | 75.6             |      |          |        |      |      
|                                                                                | Accounts payable and accrued liabilities                  |                                               |        | 11.8             |      |          |        | (45.5 | )    
|                                                                                | Income taxes payable                                      |                                               |        | 29.6             |      |          |        | 6.8   |      
|Receipts (payments) on maturity of hedging contracts                            |                                                           |                                               | 13.3   |                  |      |          | (7.1   | )    
|Other, net                                                                      |                                                           |                                               | 16.9   |                  |      |          | 6.8    |      
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|                                                                                |                                                           | Net cash from (used for) operating activities |        |                  | 41.1 |          |        |       | (23.8 | )
|Cash flows from investing activities:                                           |                                                           |                                               |        |                  |      |          |        |      
|Cash invested in fixed assets, timber and timberlands                           |                                                           |                                               | (150.0 | )                |      |          | (125.0 | )    
|Disposition of assets, including timber and timberlands                         |                                                           |                                               | 140.3  |                  |      |          | 19.9   |      
|Proceeds from the monetization of notes receivable                              |                                                           |                                               |       |                  |      |          | 88.1   |      
|Cash invested in marketable securities                                          |                                                           |                                               |       |                  |      |          | (1.5   | )    
|Cash from maturity of marketable securities                                     |                                                           |                                               |       |                  |      |          | 3.2    |      
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|                                                                                |                                                           | Net cash used for investing activities        |        |                  | (9.7 | )        |        |       | (15.3 | )
|Cash flows from financing activities:                                           |                                                           |                                               |        |                  |      |          |        |      
|Cash dividends, including minority interests                                    |                                                           |                                               | (22.8  | )                |      |          | (26.6  | )    
|Short-term financing                                                            |                                                           |                                               | 558.2  |                  |      |          | 588.3  |      
|Short-term financing repayments                                                 |                                                           |                                               | (695.4 | )                |      |          | (755.5 | )    
|Net borrowings of long-term debt                                                |                                                           |                                               | 174.8  |                  |      |          | 228.3  |      
|Stock options exercised                                                         |                                                           |                                               | 0.2    |                  |      |          | 6.0    |      
|Other                                                                           |                                                           |                                               | 0.4    |                  |      |          |       |      
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|                                                                                |                                                           | Net cash from financing activities            |        |                  | 15.4 |          |        |       | 40.5  |  
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|Net increase in cash and cash equivalents                                       |                                                           |                                               | 46.8   |                  |      |          | 1.4    |      
|Cash and cash equivalents at beginning of year                                  |                                                           |                                               | 35.9   |                  |      |          | 28.3   |      
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|Cash and cash equivalents at end of period                                      |                                                           | $                                             | 82.7   |                  |      | $        | 29.7   |      
|                                                                                |                                                           |                                               |        |                  |      |          |        |      
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |                                                           |                                               |        |                  |      |          |        |      
|Cash paid during the period for:                                                |                                                           |                                               |        |                  |      |          |        |      
|                                                                                | Interest, including capitalized interest of $5.7 and $3.4 |                                               | $      | 91.5             |      |          | $      | 87.0  |      
|                                                                                | Income taxes                                              |                                               | $      | 2.4              |      |          | $      | 16.6  |      

See accompanying notes to consolidated financial statements

6



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying consolidated financial statements include the accounts of
Bowater Incorporated and Subsidiaries (Bowater). The consolidated balance
sheet as of June 30, 2003 and the related statement of operations, capital
accounts and cash flows for the periods ended June 30, 2003 and 2002 are
unaudited. In our opinion, 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,
2003 are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
consolidated financial statements, critical accounting policies, significant
accounting policies and the notes to the consolidated financial statements
included in our most recent Annual Report on Form 10-K. Certain prior-year
amounts in the financial statements and the notes have been reclassified to
conform to the 2003 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|2. |  | Guarantors Accounting and Disclosure Requirements for Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. FIN 45 requires a guarantor to include disclosure of certain
obligations, and if applicable, at the inception of the guarantee, recognize
a liability for the fair value of other certain obligations undertaken in
issuing a guarantee. The recognition requirement is effective for
guarantees issued or modified after December 31, 2002. Our significant
off-balance sheet debt guarantees include: $45.2 million related to Ponderay
Newsprint Company, an unconsolidated partnership in which we have a 40%
interest, $10.5 million, representing 25% of the outstanding investor notes
principal balance of Timber Note Holdings LLC, one of our qualified special
purpose entities and $43.5 million related to our synthetic lease for our
Covington Tennessee Nuway facility (which was terminated after June 30, 2003
- See Note 13). The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002.
Bowater adopted the disclosure requirements of FIN 45 effective with our
Annual Report on Form 10-K for the year ending December 31, 2002. Bowater
adopted the recognition requirements of FIN 45 on January 1, 2003. These
off-balance sheet guarantees, are disclosed in our Annual Report on Form
10-K for the year ending December 31, 2002, and were entered into prior to
December 31, 2002, therefore the adoption did not have an impact on our 2003
financial statements.
|  
|3. |  | Asset Retirement Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations. 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 and in
which a reasonable estimate of a fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
related long-lived asset. Subsequently, the asset retirement cost should be
allocated to expense using a systematic and rational method and the
liability should be accreted to its face amount. Prior to SFAS No. 143,
Bowater had not recorded an obligation for these asset retirement
obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Bowater adopted SFAS No. 143 on January 1, 2003 and recorded a cumulative
effect adjustment of $2.1 million, net of taxes ($0.04 per share) to our
consolidated statement of operations for the first quarter of 2003. The
adoption adjustment also included increases to fixed assets, net, of $0.9
million, long-term obligations of $4.3 million and deferred taxes of $1.3
million. Asset retirement obligations were recorded for those obligations
where a legally enforceable obligation exists, the life is determinable and
a reasonable estimate of fair value can be made. Asset retirement
obligations recorded in connection with the adoption of SFAS No. 143 were
primarily for industrial waste landfills, bark piles and sludge basins where
we have a legally enforceable obligation to perform capping and post closure monitoring procedures upon
closing of these assets. The capitalized cost recorded is depreciated over
its estimated useful life on a straight-line basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

7



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | Additionally, we have certain asset retirement obligations that have
indeterminate useful lives and therefore have an indeterminate settlement
date for the related asset retirement obligation. As a result, no asset
retirement obligation was recorded for these assets. These assets include,
for example, wastewater and effluent ponds that will be required to be
drained once the related operating facility is closed, and storage sites or
owned facilities for which removal of chemicals and other related materials
will be required once the related operating facility is closed. Once the
life of these assets becomes determinable and an estimate of fair value can
be made, an asset retirement obligation will be recorded.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The pro forma effects of the application of SFAS No. 143 as if the statement
had been adopted on January 1, 2002 (rather than January 1, 2003) are
presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                                                                       |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                       |  | Three Months Ended |       | Six Months Ended
|                                                                                       |  | June 30,           |       | June 30,        
|(Unaudited, in millions, except per-share amounts)                                     |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                                                       |  |                    |       |                  |  |      |       |     
|Pro forma amounts
assuming the accounting
change is applied
retroactively, net of
tax: |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Net loss                                                                               |  | $                  | (25.7 | )                |  | $    | (53.9 | )    |  | $ | (95.2 | ) |  | $ | (43.8 | )
|                                                                                       |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  
|Net loss per diluted share                                                             |  | $                  | (0.45 | )                |  | $    | (0.95 | )    |  | $ | (1.67 | ) |  | $ | (0.77 | )
|                                                                                       |  |                    |       |                  |  |      |       |      |  |   |       |   |  |   |       |  



| |  | The following tables describes changes to Bowaters asset retirement
obligation liability for the three and six months ended June 30, 2003:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

|                                                         |  |               |     |               |  |   |     | 
|-------------------------------------------------------- |  | ------------- | --- | ------------- |  | - | --- | 
|                                                         |  | Three months  |     | Six months   
|                                                         |  | ended         |     | ended        
|(Unaudited, in millions)                                 |  | June 30, 2003 |     | June 30, 2003
|                                                         |  |               |     |              
|Asset retirement obligation at the
beginning of period   |  | $             | 4.4 |               |  | $ |    | 
|Cumulative effect adjustment of
adoption of SFAS No. 143 |  |               |    |               |  |   | 4.3 | 
|Accretion expense                                        |  |               | 0.1 |               |  |   | 0.2 | 
|                                                         |  |               |     |               |  |   |     | 
|Asset retirement obligation at the
end of period         |  | $             | 4.5 |               |  | $ | 4.5 | 
|                                                         |  |               |     |               |  |   |     | 



|4. |  | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Bowater accounts for stock-based compensation utilizing the intrinsic value
method in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Compensation expense for
employee stock options is generally not recognized if the exercise price of
the option equals or exceeds the fair value of the stock on the date of
grant.
|  
|   |  | The following table represents the pro forma effect on net loss and loss per
share if we had applied the fair value-based method and recognition
provisions of SFAS No. 123 Accounting for Stock-Based Compensation. The
estimated fair value of the option is amortized to expense over the vesting
period of the option award, in accordance with the provisions of SFAS No.
123.  

8



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited

|                                                                                                               |  |                    |       |                  |  |      |       |      |  |   |        |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                               |  | Three months ended |       | Six months ended
|                                                                                                               |  | June 30,           |       | June 30,        
|(Unaudited, in millions, except per-share amounts)                                                             |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                                                                               |  |                    |       |                  |  |      |       |     
|Net loss as reported:                                                                                          |  | $                  | (25.7 | )                |  | $    | (53.7 | )    |  | $ | (97.4  | ) |  | $ | (43.5 | )
|Add: Stock-based
compensation expense
included in net
loss, net of related
tax effects                         |  |                    | 0.4   |                  |  |      |      |      |  |   | 0.8    |   |  |   |      |  
|Deduct: Stock-based
compensation expense
determined under
fair value based
methods, net of
related tax effects |  |                    | (1.8  | )                |  |      | (2.1  | )    |  |   | (3.7   | ) |  |   | (4.3  | )
|                                                                                                               |  |                    |       |                  |  |      |       |      |  |   |        |   |  |   |       |  
|Pro forma net loss                                                                                             |  | $                  | (27.1 | )                |  | $    | (55.8 | )    |  | $ | (100.3 | ) |  | $ | (47.8 | )
|                                                                                                               |  |                    |       |                  |  |      |       |      |  |   |        |   |  |   |       |  
|Loss per share:                                                                                                |  |                    |       |                  |  |      |       |      |  |   |        |   |  |   |       |  
|Basic, as reported                                                                                             |  | $                  | (0.45 | )                |  | $    | (0.95 | )    |  | $ | (1.71  | ) |  | $ | (0.77 | )
|Basic, pro forma                                                                                               |  |                    | (0.48 | )                |  |      | (0.98 | )    |  |   | (1.76  | ) |  |   | (0.84 | )
|Diluted, as reported                                                                                           |  | $                  | (0.45 | )                |  | $    | (0.95 | )    |  | $ | (1.71  | ) |  | $ | (0.77 | )
|Diluted, pro forma                                                                                             |  |                    | (0.48 | )                |  |      | (0.98 | )    |  |   | (1.76  | ) |  |   | (0.84 | )
|                                                                                                               |  |                    |       |                  |  |      |       |      |  |   |        |   |  |   |       |  



| |  | The fair value of each option granted in the three and six months ended June
30, 2003 and 2002, was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |                                |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |       |  
|------------------------------------------ | ------------------------------ | - | ------------------ | ----- | ---------------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                           |                                |   | Three Months Ended |       | Six Months Ended
|                                           |                                |   | June 30,           |       | June 30,        
|                                           |                                |   | 2003               |       | 2002             |   | 2003  |       | 2002
|                                           |                                |   |                    |       |                  |   |       |       |     
|Assumptions:                               |                                |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |      
|                                           | Dividend yield                 |   |                    | 2.10  | %                |   |       | 1.57  | %    |   |       | 1.96  | % |   |       | 1.64  | %
|                                           | Expected volatility            |   |                    | 31.39 | %                |   |       | 30.43 | %    |   |       | 31.77 | % |   |       | 30.29 | %
|                                           | Risk-free interest rate        |   |                    | 2.96  | %                |   |       | 4.85  | %    |   |       | 3.35  | % |   |       | 4.69  | %
|                                           | Expected option lives in years |   |                    | 6.23  |                  |   |       | 6.28  |      |   |       | 6.24  |   |   |       | 6.28  |  
|                                           |                                |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |       |  
|Weighted average fair value of each option |                                | $ | 10.80              |       |                  | $ | 17.12 |       |      | $ | 12.19 |       |   | $ | 16.69 |      
|                                           |                                |   |                    |       |                  |   |       |       |      |   |       |       |   |   |       |       |  



|   |  | On January 28, 2003, Bowater granted 82,510 shares of restricted stock to
certain officers under the 2002 stock
option plan. The 82,510 shares of restricted stock were issued from our
treasury stock. In accordance with APB 25, we will recognize a compensation
charge over the vesting periods equal to the fair market value of these
shares on the date of the grant. The expense measured under SFAS No. 123
does not differ from that under APB 25. Shares of restricted stock awarded
under the 2002 plan vest at the rate of 50% of each award on the first
anniversary of the award date and the remaining 50% on the second
anniversary of the award date. Restricted shares awarded under the 2002
stock option plan are subject to forfeiture in the event of termination of
employment prior to the vesting dates. Prior to vesting, the participants
may vote and receive dividends. The market value of the restricted shares
granted on January 28, 2003 was approximately $3.3 million and was recorded
as unearned compensation, which is a separate component of shareholders
equity, in the first quarter of 2003. We recorded compensation expense of
approximately $0.6 million and $1.0 million related to the amortization of
unearned compensation for the three and six-month periods ended June 30,
2003.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Net Gain on Sale of Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | In the second quarter of 2003, Bowater sold fixed assets and land resulting
in a pre-tax gain of $104.0 million, or $1.13 per diluted share after tax.
In the second quarter of 2002, Bowater sold fixed assets and land resulting
in a pre-tax gain of $3.5 million, or $0.04 per diluted share after tax.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

9



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | In the second quarter of 2003, Bowater completed the sale of approximately
82,000 acres of owned and leased timberlands for cash consideration of
approximately $122 million. This transaction resulted in a pre-tax gain of
approximately $97.5 million.                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In January 2002, we completed the sale of approximately 116,000 acres of
timberland for aggregate consideration of $104.2 million. We received $5.1
million in cash after expenses, and $99.1 million in notes receivable. In
March 2002, we monetized the notes receivable of $99.1 million for net cash
proceeds of $88.1 million. These transactions resulted in a net pre-tax
gain of $70.4 million.



| |  |  | The notes receivable were monetized through a bankruptcy-remote
limited liability company. The bankruptcy-remote subsidiary is a
qualified special purpose entity (QSPE) under SFAS No. 140, and is not
consolidated in our financial statements.                                                                                                                                                                                                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | This QSPE has issued fixed rate senior secured notes totaling $89.2
million, which are secured by the notes receivable held by the QSPE.
The value of these senior secured notes 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.                                                                                                                                                          
|
| |  |  | We retain an interest in the excess future cash flows of the QSPE
(cash received from notes receivable versus cash paid out on the senior
secured notes). We retained an interest in the QSPE of $7.1 million.
The principal variable in determining the fair value of future expected excess cash
flows of the retained interest is the discount rate, as our retained
interest consists of a note with a low level of credit risk,
contractually due in 15 years and not subject to prepayment. The
discount rate used for the note is 6.91%.
|
| |  |  | We recorded a $3.9 million loss on the monetization of the notes
receivable, which was based on the difference in the original carrying
amount of the notes (allocated between the asset monetized and the
retained interest) and the fair value at the date of the monetization.                                                                                                                                                                                                                                                              



|   |  | Also in the first six months of 2003, Bowater sold approximately 5,900 acres
of other timberlands and recorded a net pre-tax gain of $17.6 million, of
which approximately $6.5 million was recorded in the second quarter from the
sales of approximately 2,800 acres. In the first six months of 2002, we
sold approximately 4,600 acres of other timberlands and recorded a net
pre-tax gain of $4.6 million, of which approximately $3.5 million was
recorded in the second quarter from the sales of approximately 1,900 acres.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Other Expense (Income)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Other, net in the Consolidated Statement of Operations includes the
following:                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                 |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  
|-------------------------------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                 |  | Three Months Ended |      | Six Months Ended
|                                 |  | June 30,           |      | June 30,        
|(Unaudited, in millions)         |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                                 |  |                    |      |                  |  |      |      |     
|Foreign exchange loss            |  | $                  | 5.6  |                  |  | $    | 4.6  |      |  | $ | 13.8 |   |  | $ | 3.5  |  
|(Income) loss from
joint venture |  |                    | (0.6 | )                |  |      | 0.8  |      |  |   | 0.2  |   |  |   | 1.9  |  
|Miscellaneous income             |  |                    | (2.5 | )                |  |      | (0.2 | )    |  |   | (3.2 | ) |  |   | (0.3 | )
|                                 |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  
|                                 |  | $                  | 2.5  |                  |  | $    | 5.2  |      |  | $ | 10.8 |   |  | $ | 5.1  |  
|                                 |  |                    |      |                  |  |      |      |      |  |   |      |   |  |   |      |  

10



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|7. |  | Accumulated Other Comprehensive Income (Loss)                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------
|  
|   |  | The components of Accumulated other comprehensive loss in the Consolidated
Balance Sheet are as follows:

|                                               |  |          |        |              |  |   |        |  
|---------------------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                               |  | June 30, |        | December 31,
|(Unaudited, in millions)                       |  | 2003     |        | 2002        
|                                               |  |          |        |             
|Pension plan additional minimum liabilities    |  | $        | (223.3 | )            |  | $ | (211.9 | )
|Foreign currency translation                   |  |          | 0.5    |              |  |   | (9.9   | )
|Unrealized gain (loss) on hedging
transactions |  |          | 151.2  |              |  |   | (8.0   | )
|Taxes                                          |  |          | 23.3   |              |  |   | 79.7   |  
|                                               |  |          |        |              |  |   |        |  
|                                               |  | $        | (48.3  | )            |  | $ | (150.1 | )
|                                               |  |          |        |              |  |   |        |  



|8. |  | Loss Per Share                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basic and diluted loss per share are based on net loss and do not include
any impact from Other comprehensive income (loss). The calculation of
basic and diluted loss per share after cumulative effect of accounting
change is as follows:

|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |   | 
|-------------------------------------------------- | ------- | ---- | ------------------ | ---- | ---------------- | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | - | 
|                                                   |         |      | Three months ended |      | Six months ended
|                                                   |         |      | June 30,           |      | June 30,        
|(Unaudited, in millions, except per-share amounts) |         | 2003 |                    | 2002 |                  | 2003 |       | 2002
|                                                   |         |      |                    |      |                  |      |       |     
|Basic computation:                                 |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Basic loss available to common shareholders        |         | $    | (25.7              | )    |                  | $    | (53.7 | )    |  | $ | (97.4 | ) |  | $ | (43.5 | )
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Basic weighted average shares outstanding          |         |      | 56.9               |      |                  |      | 56.9  |      |  |   | 56.9  |   |  |   | 56.8  |  
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Basic loss per common share                        |         | $    | (0.45              | )    |                  | $    | (0.95 | )    |  | $ | (1.71 | ) |  | $ | (0.77 | )
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Diluted computation:                               |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Diluted loss available to common shareholders      |         | $    | (25.7              | )    |                  | $    | (53.7 | )    |  | $ | (97.4 | ) |  | $ | (43.5 | )
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Basic weighted average shares outstanding          |         |      | 56.9               |      |                  |      | 56.9  |      |  |   | 56.9  |   |  |   | 56.8  |  
|Effect of dilutive securities:                     |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|                                                   | Options |      |                    |     |                  |      |       |     |  |   |       |  |  |   |       |  | 
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Diluted weighted average shares outstanding        |         |      | 56.9               |      |                  |      | 56.9  |      |  |   | 56.9  |   |  |   | 56.8  |  
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  
|Diluted loss per common share                      |         | $    | (0.45              | )    |                  | $    | (0.95 | )    |  | $ | (1.71 | ) |  | $ | (0.77 | )
|                                                   |         |      |                    |      |                  |      |       |      |  |   |       |   |  |   |       |  



|   |  | The dilutive effect of options outstanding is calculated using the treasury
stock method. Options outstanding at June 30, 2003 and 2002, for
approximately 4.2 million and 3.5 million shares, respectively, were
excluded from the calculation of diluted loss per share as the impact would
have been antidilutive.                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | As of June 30, 2003 and December 31, 2002, we had unamortized goodwill in
the amount of $828.2 million and $839.9 million, respectively. As of June
30, 2003, and for our annual impairment testing purposes, goodwill of $530.4
million and $297.8 million (including allocated corporate goodwill of $185.6
million and $107.8 million, respectively) is included in the Newsprint
Division and the Canadian Forest Products Division reportable segments,
respectively. Goodwill decreased by $2.9 million in the second quarter of
2003 and by $11.7 million for the first six months of 2003 as a result of
the reduction of certain tax reserves in connection with the resolution of
certain Avenor acquisition tax matters.

11



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|10. |  | Acquisition/Divestiture and Severance Related Liabilities               
|--- |  | ------------------------------------------------------------------------
|   
|    |  | WORKFORCE REDUCTIONS:                                                   
|   
|    |  | The following table summarizes the activity of our workforce reductions:

|                           |                            |               |                |               |                |   |      |      | 
|-------------------------- | -------------------------- | ------------- | -------------- | ------------- | -------------- | - | ---- | ---- | 
|                           |                            |               | 3 Months Ended |               | 6 Months Ended
|(Unaudited, in millions)   |                            | June 30, 2003 |                | June 30, 2003
|                           |                            |               |                |              
|Workforce reductions       |                            |               | 255            |               |                |   | 334  |     
|Employee termination costs |                            | $             | 18.2           |               |                | $ | 24.9 |     
|Classified as:             |                            |               |                |               |                |   |      |     
|                           | Cost of sales              |               |                | 18.2          |                |   |      | 23.9 | 
|                           | Selling and administrative |               |                |              |                |   |      | 1.0  | 
|Cash payments              |                            |               | 7.6            |               |                |   | 12.6 |     
|                           |                            |               |                |               |                |   |      |     



| |  | In the second quarter of 2003, Bowater reduced its workforce by
approximately 255 people and recorded approximately $18.2 million for
employee termination costs, including severance, pension, medical and other
benefits. These terminations were part of voluntary workforce reductions
that were finalized in the second quarter of 2003. Included in the employee
termination costs of $18.2 million are pension related charges for a pension
plan curtailment of approximately $2.7 million and other pension plan
benefits of approximately $4.6 million related to accelerated pension years
of service in connection with certain voluntary programs. A third party
actuarial firm assisted Bowater in determining the pension plan curtailment
loss.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In the first quarter of 2003, Bowater reduced its workforce by approximately
79 people and recorded approximately $6.7 million for employee termination
costs, including severance, medical and other benefits. These terminations
were part of either a voluntary or involuntary workforce reduction that was
finalized in the first quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | These work force reductions were part of a multifaceted cost reduction
initiative announced in the fourth quarter of 2002. Related to the total
workforce reductions to date, we expect to expense additional employee
termination costs of approximately $3.2 million throughout the remainder of
2003 and approximately $0.1 million in 2004 for arrangements with certain
employees who will render service until their final termination date. The
remaining severance related accrual at June 30, 2003, of $17.9 million,
which excludes the pension related charges, is expected to be paid during
2003 and the first half of 2004, and is included in Accounts payable and
accrued liabilities in the Consolidated Balance Sheet.                     
|
| |  | The following tables summarizes the activity of our workforce reductions, by
reportable segment expensed to our Consolidated Statement of Operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                       |                             |             |             |               |                |               |                |         |            |   |      |      |  |   |      |      | 
|-------------------------------------- | --------------------------- | ----------- | ----------- | ------------- | -------------- | ------------- | -------------- | ------- | ---------- | - | ---- | ---- |  | - | ---- | ---- | 
|                                       |                             |             | Expected to |               | 3 Months Ended |               | 6 Months Ended |         | Cumulative
|(Unaudited, in millions)               |                             | be Incurred |             | June 30, 2003 |                | June 30, 2003 |                | Expense
|                                       |                             |             |             |               |                |               |                |        
|Employee
termination costs
by segment: |                             |             |             |               |                |               |                |         |            |   |      |      |  |   |      |     
|                                       | Newsprint                   |             | $           | 24.1          |                |               | $              | 12.6    |            |   | $    | 17.3 |  |   | $    | 23.2 | 
|                                       | Coated and
Specialty Papers |             |             | 11.9          |                |               |                | 3.7     |            |   |      | 4.3  |  |   |      | 9.8  | 
|                                       | Canadian Forest
Products    |             |             | 2.4           |                |               |                | 1.9     |            |   |      | 2.3  |  |   |      | 2.3  | 
|                                       | Forest Products             |             |             | 1.4           |                |               |                |        |            |   |      | 1.0  |  |   |      | 1.4  | 
|                                       | Corporate/Other             |             |             | 1.8           |                |               |                |        |            |   |      |     |  |   |      | 1.6  | 
|                                       |                             |             |             |               |                |               |                |         |            |   |      |      |  |   |      |      | 
|                                       |                             | $           | 41.6        |               |                | $             | 18.2           |         |            | $ | 24.9 |      |  | $ | 38.3 |     
|                                       |                             |             |             |               |                |               |                |         |            |   |      |      |  |   |      |      | 

12



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | ALLIANCE ACQUISITION:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In connection with the September 24, 2001, Alliance acquisition, Bowater
recorded employee termination costs of approximately $20.6 million, which
included approximately $16.9 million in connection with the permanent
closing of a newsprint machine and other assets at the Coosa Pines, Alabama,
facility. Of the $20.6 million, approximately $19.5 million (exclusive of
the effect of foreign exchange rates of $0.3 million) was paid through
December 31, 2002. Approximately $0.4 million was paid in the second
quarter and $1.2 million in the first six months of 2003. The remaining
accrual at June 30, 2003, of $0.2 million is expected to be paid during the
remainder of 2003, and is included in Accounts payable and accrued
liabilities in the Consolidated Balance Sheet.
|
| |  | The following table summarizes the activity for the workforce reductions
(excluding the pension related charges) and the Alliance acquisition
liabilities described above for the six months ended June 30, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                           |  |          |      |         |  |            |      |           |  |          |      |         |  |   |     |  |  |   |      | 
|-------------------------- |  | -------- | ---- | ------- |  | ---------- | ---- | --------- |  | -------- | ---- | ------- |  | - | --- |  |  | - | ---- | 
|                           |  |          |      |         |  | Write-offs |      |           |  |          |      |         |  |   |     |  |  |  
|                           |  |          |      |         |  | &          |      |           |  |          |      |         |  |   |     |  |  |  
|                           |  |          |      |         |  | Payments   |      |           |  |          |      | Foreign |  |   |     | 
|                           |  | Balance, |      | Against |  | Increase   |      | Exchange/ |  | Balance,
|(Unaudited, in millions)   |  | 12/31/02 |      | Reserve |  | Reserve    |      | Other     |  | 6/30/03 
|                           |  |          |      |         |  |            |      |           |  |         
|Employee
termination costs |  | $        | 14.2 |         |  | $          | 13.8 |           |  | $        | 17.6 |         |  | $ | 0.1 |  |  | $ | 18.1 | 
|                           |  |          |      |         |  |            |      |           |  |          |      |         |  |   |     |  |  |   |      | 



|11. |  | Long-Term and Short-Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On June 19, 2003, we sold, in a private placement, with registration rights,
$400 million notes due 2013. Interest on the notes accrues at the annual
rate of 6.5% and is payable on June 15 and December 15 of each year,
beginning on December 15, 2003. We received net proceeds from the sale of
the notes of approximately $392.8 million, which were net of the discount of
$1.6 million and financing fees of $5.6 million. The discount and financing
fees are being amortized over the life of the notes. The proceeds were used
to pay amounts outstanding under short-term bank debt credit facilities
($241.0 million) and a portion of the three-year term loan ($140.0 million).
We used the balance ($11.8 million) for general corporate purposes. In
August 2003, we used the $11.8 million balance of the net proceeds, plus new
borrowings under our accounts receivable securitization program, to
terminate the lease and purchase the Covington, Tennessee paper coating
facility for approximately $51.8 million (See Note 13).
|   
|12. |  | Dividends to Minority Interest Shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | During the first six months of 2003, the Board of Directors of Calhoun
Newsprint Company (CNC), a 51%-owned indirect subsidiary of Bowater, did not
declare a dividend. In the first six months of 2002, the Board of Directors
of CNC declared dividends of $8.3 million. As a result, $4.1 million was
paid to the minority shareholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|13. |  | Operating Lease  Special Purpose Entity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | A paper coating facility (referred to as Nuway) located in Covington,
Tennessee was constructed for Bowater in 2002. Construction of the facility
was financed through a special purpose entity (SPE). Bowater has no
ownership interest in the SPE. Bowater Nuway Inc., a wholly-owned
subsidiary of Bowater, has entered into a lease commitment with the SPE, the
lessor in the transaction, for this facility. The Covington, Tennessee
facility commenced operations in March of 2002. Total costs incurred by the
SPE for the construction of the Covington facility was approximately $52.3
million. The assets and debt associated with this facility are not
consolidated in Bowaters financial statements as of June 30, 2003. The
lease is classified as operating lease and the payments expensed in
accordance with SFAS No. 13, Accounting for Leases. This arrangement
provided                                                                                                                                                 

13



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|    |  | favorable cost financing. The future minimum lease payments are
approximately $2.2 million per year. The base lease term for the facility
was scheduled to expire on April 30, 2006 but was terminated early in August
2003, as described below. We have options at the end of the base lease term
to (1) extend the lease term annually for an additional five years, (2)
purchase the leased property or (3) terminate the lease agreement. In the
event that the lease agreement was terminated, Bowater Nuway Inc. (as
lessee) would have been required to cause the facility to be sold and the
lessor to be paid a residual value guarantee of approximately 83% of the
lessors investment in the facility. The present value of rental payments,
estimated termination costs and the residual value guarantee at the
inception of the lease did not exceed in the aggregate 89.5% of the lessors
investment in the facility. Upon consummation of the sale, the lessor would
have been entitled to retain an amount equal to its remaining investment in
the facility, and any balance of the sale proceeds is to be paid to the
lessee. Bowater has guaranteed its subsidiary lessees obligations under
this arrangement.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. Many variable interest
entities have commonly been referred to as special-purpose entities or
off-balance sheet structures. Under the new guidance in FIN 46, we would be
required to consolidate the SPE and include the SPEs total assets and debt
on our Consolidated Balance Sheet effective July 1, 2003. Total assets and
debt of the SPE are approximately $51.8 million and $49.0 million,
respectively. Effective July 1, 2003, in accordance with FIN 46, Bowater
will consolidate the SPE and initially measure the assets, liabilities and
noncontrolling interests of the SPE at their carrying amounts as though the
SPE had always been consolidated (since March 2002). Any difference between
the net amounts added to our balance sheet as a result of consolidating the
SPE will be recognized as a cumulative effect of an accounting change.                                                                                                                                                                                                                                                  
|   
|    |  | In August 2003, we used the approximate $11.8 million balance of the
remaining net proceeds of the $400 million notes issuance (See Note 11),
plus new borrowings under our accounts receivable securitization program, to
terminate the lease and purchase the Nuway facility from the SPE; all at a
total cost of approximately $51.8 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|14. |  | Commitments and Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



| | a. |  | We are 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.
We believe that the ultimate disposition of these matters will not have
a material adverse effect on our financial condition, but it could have
a material adverse effect on the results of operations in a given
quarter or year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | In late 2001, Bowater, several other paper companies, and 120 other
companies were named as defendants in asbestos personal injury actions
based on product liability claims. These actions generally allege
occupational exposure to
numerous products. Bowater has denied the allegations and no specific
product of Bowater has been identified by the plaintiffs in any of the
actions as having caused or contributed to any individual plaintiffs
alleged asbestos-related injury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    |  | These suits have been filed by approximately 855 claimants who sought
monetary damages in civil actions pending in state courts in Illinois,
Mississippi, Missouri, New York and Texas. Approximately 715 of these
claims have been dismissed, either voluntarily or by summary judgment,
and approximately 140 claims remain. All claims in Missouri have been
dismissed, and plaintiffs counsel in Illinois and Missouri have agreed
not to file similar cases. About fifteen new cases have been filed since
April 2003. Insurers are defending these claims and we have not settled
or paid any of these claims. We believe that all of these
asbestos-related claims are covered by insurance, subject to any
applicable deductibles and our insurers rights to dispute coverage.
While it is not possible to predict with certainty the outcome of these
matters, based upon the advice of special counsel, at this time we do not
expect these claims to have a material adverse impact on Bowaters
business, financial position or results of operations.
|
| | c. |  | Bowater may be a potentially responsible party (PRP) with
respect to four hazardous waste sites which are being addressed
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

14



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |    |  | Act of 1980, as amended (CERCLA or Superfund) or the
Resource Conservation and Recovery Act (RCRA) corrective action
authority. The first two sites are on CNC timberland tracts in South
Carolina. One was contaminated when acquired, and subsequently, the
prior owner remediated the site and continues to monitor the
groundwater. On the second site, several hundred steel drums
containing textile chemical residue were discarded by unknown persons.
The EPA, based on the remoteness of the site, listed it as No Further
Action Status in September 2002. The third site, at our mill in Coosa
Pines, Alabama, contained buried drums and has been remediated pursuant
to RCRA. We continue to monitor the groundwater. The fourth site is a
drum recycling plant in South Carolina. We were one of numerous
parties that shipped empty drums. The U.S. EPA has remediated the site
pursuant to Superfund at a cost of $6.2 million. Bowater has been
designated by the EPA as a de minimis PRP, which means that we will be
required to pay a
small percentage (estimated at 1-2%) of the cleanup cost based on the
number of drums involved. We believe we will not be liable for any
significant amounts at any of these sites.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | d. |  | On December 28, 2001, we filed a lawsuit against the Tennessee
Valley Authority (TVA) alleging that TVA overcharged us for electricity
it supplied to our Calhoun, Tennessee and Grenada, Mississippi
facilities. We are seeking over $40 million in damages, and TVA has
not filed any counterclaims. The case is still in the discovery stage
in federal court in Knoxville, Tennessee, scheduled for trial on April
19, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|15. |  | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | We utilize certain derivative instruments to enhance our 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, from time to time
enter into commodity and currency option contracts that are not accounted
for as accounting hedges. At the time we enter into the derivative contract
we designate the derivative as a cash flow hedge.                                                                                                     
|   
|    |  | We pay a significant portion of the operating expenses of our Canadian mill
sites in Canadian dollars. To reduce our exposure to U.S. and Canadian
dollar exchange rate fluctuations, we enter into and designate Canadian
dollar forward contracts to hedge certain of our forecasted Canadian dollar
cash outflows at the Canadian mill operations.                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | During the first six months of 2003, we recorded a net gain of $159.2
million ($98.7 million, after tax) in Accumulated other comprehensive loss
related to our cash flow hedges. The net gain results from a
reclassification of $3.6 million ($2.2 million, after tax) gains from
Accumulated other comprehensive loss to earnings and $162.8 million
($100.9 million, after tax) unrealized gain recorded for the change in value
related to our cash flow hedges. We expect to reclassify a $86.7 million
gain ($53.8 million, after-tax) from Accumulated other comprehensive 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.                                                                                                                                                                                                                                                                                                                            

15



---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited

|                                     |                 |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |             |             | 
|------------------------------------ | --------------- | ----------- | ------- | --------- | ----- | ------------ | ----- | --------------------- | ---- | ---------- | ----- | ---- | ---- |  |  | ----------- | ----------- | 
|                                     |                 |             |         |           |       |              |       | Net Asset (Liability) |      |            |       |     
|                                     |                 |             |         | Notional  |       |              |       | Range Of             
|                                     |                 |             |         | Amount of |       | Carrying     |       | Fair                  |      | U.S.$/CDN$
|June 30, 2003 (in millions)          |                 | Derivatives |         | Amount    |       | Market Value |       | Exchange Rates       
|                                     |                 |             |         |           |       |              |       |                      
|Foreign Currency Exchange
Agreements |                 |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |            
|Buy Currency:                        |                 |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |            
|                                     | Canadian dollar |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |             |            
|                                     |                 | Due in 2003 | $       | 211.6     |       |              | $     | 36.0                  |      |            | $     | 36.0 |      |  |  | .6199-.6467 |            
|                                     |                 | Due in 2004 |         |           | 572.5 |              |       |                       | 95.2 |            |       |      | 95.2 |  |  |             | .6124-.6476 | 
|                                     |                 | Due in 2005 |         |           | 262.0 |              |       |                       | 20.1 |            |       |      | 20.1 |  |  |             | .6316-.7179 | 
|                                     |                 |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |             |            
|                                     |                 | $           | 1,046.1 |           |       | $            | 151.3 |                       |      | $          | 151.3 |      |      |  |  |            
|                                     |                 |             |         |           |       |              |       |                       |      |            |       |      |      |  |  |             |            



|    |  | In order to reduce our exposure to exchange rate fluctuations on our
Canadian dollar denominated long-term debt, 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. At June 30, 2003, our
outstanding Canadian dollar forward contracts had notional amounts of $100
million due on September 29, 2003. The fair value of the Canadian dollar
forward contracts outstanding at June 30, 2003 was $0.4 million. We
recorded gains of approximately $9.3 million and $17.2 million for the three
and six months ended June 30, 2003 and $5.9 million and $5.3 million for the
three and six months ended June 30, 2002 in the Consolidated Statement of
Operations as a result of these economic hedge contracts.                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Additionally, in connection with the Alliance acquisition, Alliance had
Canadian dollar range forward contracts in place to reduce its exposure to
U.S. and Canadian dollar exchange rate fluctuations as the majority of
Alliances sales were sold into the U.S. and denominated in U.S. dollars.
These Canadian dollar range forward contracts are not accounted for as
accounting hedges under SFAS No. 133. Changes in the derivatives fair
values are immediately recognized in earnings and included in Other, net
in our Consolidated Statement of Operations. At June 30, 2003, we had
Canadian dollar range forward contracts with notional amounts due in 2003 of
$55.0 million. The fair value of the Canadian dollar forward contracts at
June 30, 2003 was zero. The loss recorded for the three and six months of
2003 and 2002 in the Consolidated Statement of Operations as a result of
these Canadian dollar forward contracts was less than $1.0 million. As
these contracts expire, we are not replacing them.
|   
|    |  | The counterparties to our derivative financial instruments are substantial
and creditworthy financial institutions. Therefore, the risk of
counterparty nonperformance is considered to be remote.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|16. |  | Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Below is a description of the types of products and services from which each
reportable segment derives its revenues:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | 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 whose
administrative expenses are included in Corporate & other eliminations.
Therefore, the other four divisions are our reportable segments. Certain
segment information for the three and six month periods ended June 30, 2002
has been reclassified to conform to the June 30, 2003 presentation.                                                                                                                                                                                                                                                                              
|   
|    |  | NEWSPRINT DIVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | The Newsprint Division operates seven manufacturing sites, (including
Ponderay Newsprint Company, an unconsolidated partnership), 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

16



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | papers. This division has primary responsibility for the domestic and
international marketing and sale of newsprint.                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | COATED AND SPECIALTY PAPERS DIVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Coated and Specialty Papers Division operates a manufacturing site that
produces coated paper, market pulp and uncoated specialty papers, and two
Nuway coating facilities, all located in the United States. This division
is responsible for the marketing and sale of the full spectrum of coated and
uncoated groundwood specialty papers manufactured by Bowater.                                                                                                                                          
|
| |  | PULP DIVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The Pulp Division markets and distributes market pulp produced by other
divisions. 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s selling and administrative expenses are included in Corporate
and other eliminations. Accordingly, no separate results are reported for
this division.                                                
|
| |  | FOREST PRODUCTS DIVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The Forest Products Division manages 1.0 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 we have cutting rights. The division also operates four
softwood sawmills, supplies wood fiber to our pulp and paper production
sites and markets and sells timber and southern yellow pine lumber in North
America.                                             
|
| |  | CANADIAN FOREST PRODUCTS DIVISION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Canadian Forest Products Division operates four paper manufacturing
sites in Canada. The division manages 0.4 million acres of owned or leased
timberland and over 23.4 million acres of Crown-owned land in the Canadian
provinces of Quebec and New Brunswick on which we have cutting rights. The
division also operates nine sawmills and one wood treatment plant, supplies
wood to four paper mills and nine sawmills, and is responsible for the
marketing and sales of its timber and lumber production.
|
| |  | Factors management used to identify our segments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Bowaters reportable segments are business units responsible for the
marketing and sales of different products. They are managed separately
because of the different products they are responsible for manufacturing and
distributing.                                                                                                                                                                                                                                                                              
|
| |  | The line entitled Segment income (loss) in the following tables is equal
to Operating income (loss) as presented in our Consolidated Statement of
Operations. In addition, none of the income or loss items following
Operating income (loss) in our Consolidated Statement of Operations are
allocated to our segments, since they are reviewed separately by Bowaters
management.                                                                                                                          

17



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | The following tables summarize information about segment profit and loss for
the three and six month periods ended June 30, 2003 and 2002 and segment
assets as of June 30, 2003 and 2002:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |   |         |  
|--------------------------------- |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------- | ----- | ------------ |  | ---------- | ------- | - |  | - | ----- |  |  | - | ----- | - |  | - | ------- | -
|                                  |  |           |         |          |  | Coated    |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |  
|                                  |  |           |         |          |  | and       |       |          |  |         |       | Canadian     |  | Net        |         |   |  |   |       |  |  |  
|Three Months Ended                |  |           |         |          |  | Specialty |       | Forest   |  | Forest  |       | Gain on      |  | Corporate/ |         |   |  |  
|June 30, 2003                     |  | Newsprint |         | Papers   |  | Products  |       | Products |  | Sale of |       | Other        |  |            |         |  
|(Unaudited, in millions)          |  | Division  |         | Division |  | Division  |       | Division |  | Assets  |       | Eliminations |  | Total     
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |           
|Sales-including
internal sales    |  | $         | 359.6   |          |  | $         | 117.3 |          |  | $       | 24.3  |              |  | $          | 183.7   |   |  | $ |      |  |  | $ |      |   |  | $ | 684.9   |  
|Elimination of
intersegment sales |  |           |        |          |  |           |      |          |  |         |      |              |  |            |        |   |  |   |      |  |  |   | (20.8 | ) |  |   | (20.8   | )
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |   |         |  
|Sales  external
customers        |  |           | 359.6   |          |  |           | 117.3 |          |  |         | 24.3  |              |  |            | 183.7   |   |  |   |      |  |  |   | (20.8 | ) |  |   | 664.1   |  
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |   |         |  
|Segment income (loss)             |  |           | (30.8   | )        |  |           | (13.8 | )        |  |         | (3.1  | )            |  |            | (15.1   | ) |  |   | 104.0 |  |  |   | (9.6  | ) |  |   | 31.6    |  
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |   |         |  
|Total assets at 6/30/03           |  | $         | 2,872.7 |          |  | $         | 792.3 |          |  | $       | 251.2 |              |  | $          | 1,233.7 |   |  | $ |      |  |  | $ | 520.6 |   |  | $ | 5,670.5 |  
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |       |  |  |   |       |   |  |   |         |  

|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|--------------------------------- |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------- | ----- | ------------ |  | ---------- | ------- |  |  | - | --- |  |  | - | ----- | - |  | - | ------- | -
|                                  |  |           |         |          |  | Coated    |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |  
|                                  |  |           |         |          |  | and       |       |          |  |         |       | Canadian     |  | Net        |         |  |  |   |     |  |  |  
|Three Months Ended                |  |           |         |          |  | Specialty |       | Forest   |  | Forest  |       | Gain on      |  | Corporate/ |         |  |  |  
|June 30, 2002                     |  | Newsprint |         | Papers   |  | Products  |       | Products |  | Sale of |       | Other        |  |            |         | 
|(Unaudited, in millions)          |  | Division  |         | Division |  | Division  |       | Division |  | Assets  |       | Eliminations |  | Total     
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |           
|Sales-including
internal sales    |  | $         | 316.0   |          |  | $         | 121.0 |          |  | $       | 25.3  |              |  | $          | 198.1   |  |  | $ |    |  |  | $ |      |   |  | $ | 660.4   |  
|Elimination of
intersegment sales |  |           |        |          |  |           |      |          |  |         |      |              |  |            |        |  |  |   |    |  |  |   | (13.6 | ) |  |   | (13.6   | )
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|Sales  external
customers        |  |           | 316.0   |          |  |           | 121.0 |          |  |         | 25.3  |              |  |            | 198.1   |  |  |   |    |  |  |   | (13.6 | ) |  |   | 646.8   |  
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|Segment income (loss)             |  |           | (28.5   | )        |  |           | (5.2  | )        |  |         | 1.8   |              |  |            | 20.1    |  |  |   | 3.5 |  |  |   | (27.1 | ) |  |   | (35.4   | )
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|Total assets at 6/30/02           |  | $         | 3,017.9 |          |  | $         | 653.6 |          |  | $       | 237.0 |              |  | $          | 1,336.4 |  |  | $ |    |  |  | $ | 432.2 |   |  | $ | 5,677.1 |  
|                                  |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  

|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  
|--------------------------------- |  | --------- | ----- | -------- |  | --------- | ----- | -------- |  | ------- | ---- | ------------ |  | ---------- | ----- | - |  | - | ----- |  |  | - | ----- | - |  | - | ------- | -
|                                  |  |           |       |          |  | Coated    |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |  
|                                  |  |           |       |          |  | and       |       |          |  |         |      | Canadian     |  | Net        |       |   |  |   |       |  |  |  
|Six Months Ended                  |  |           |       |          |  | Specialty |       | Forest   |  | Forest  |      | Gain on      |  | Corporate/ |       |   |  |  
|June 30, 2003                     |  | Newsprint |       | Papers   |  | Products  |       | Products |  | Sale of |      | Other        |  |            |       |  
|(Unaudited, in millions)          |  | Division  |       | Division |  | Division  |       | Division |  | Assets  |      | Eliminations |  | Total     
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |           
|Sales-including
internal sales    |  | $         | 710.4 |          |  | $         | 223.5 |          |  | $       | 46.6 |              |  | $          | 355.0 |   |  | $ |      |  |  | $ |      |   |  | $ | 1,335.5 |  
|Elimination of
intersegment sales |  |           |      |          |  |           |      |          |  |         |     |              |  |            |      |   |  |   |      |  |  |   | (40.9 | ) |  |   | (40.9   | )
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  
|Sales  external
customers        |  |           | 710.4 |          |  |           | 223.5 |          |  |         | 46.6 |              |  |            | 355.0 |   |  |   |      |  |  |   | (40.9 | ) |  |   | 1,294.6 |  
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  
|Segment income (loss)             |  | $         | (51.8 | )        |  | $         | (34.1 | )        |  | $       | (4.9 | )            |  | $          | (27.1 | ) |  | $ | 115.1 |  |  | $ | (21.9 | ) |  | $ | (24.7   | )
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  

|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  
|--------------------------------- |  | --------- | ----- | -------- |  | --------- | ----- | -------- |  | ------- | ---- | ------------ |  | ---------- | ----- |  |  | - | ---- |  |  | - | ----- | - |  | - | ------- | -
|                                  |  |           |       |          |  | Coated    |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |  
|                                  |  |           |       |          |  | and       |       |          |  |         |      | Canadian     |  | Net        |       |  |  |   |      |  |  |  
|Six Months Ended                  |  |           |       |          |  | Specialty |       | Forest   |  | Forest  |      | Gain on      |  | Corporate/ |       |  |  |  
|June 30, 2002                     |  | Newsprint |       | Papers   |  | Products  |       | Products |  | Sale of |      | Other        |  |            |       | 
|(Unaudited, in millions)          |  | Division  |       | Division |  | Division  |       | Division |  | Assets  |      | Eliminations |  | Total     
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |           
|Sales-including
internal sales    |  | $         | 645.7 |          |  | $         | 236.4 |          |  | $       | 46.6 |              |  | $          | 371.5 |  |  | $ |     |  |  | $ |      |   |  | $ | 1,300.2 |  
|Elimination of
intersegment sales |  |           |      |          |  |           |      |          |  |         |     |              |  |            |      |  |  |   |     |  |  |   | (29.2 | ) |  |   | (29.2   | )
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  
|Sales  external
customers        |  |           | 645.7 |          |  |           | 236.4 |          |  |         | 46.6 |              |  |            | 371.5 |  |  |   |     |  |  |   | (29.2 | ) |  |   | 1,271.0 |  
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  
|Segment income (loss)             |  | $         | (33.5 | )        |  | $         | (11.1 | )        |  | $       | 2.1  |              |  | $          | 28.2  |  |  | $ | 75.0 |  |  | $ | (49.3 | ) |  | $ | 11.4    |  
|                                  |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  

18



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##### 



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 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. Forward-looking statements 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 and exchange rates. These
forward-looking statements are not guarantees of future performance. These
statements 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. In addition to specific factors described in connection with any
particular forward-looking statement, factors that could cause actual results
to differ materially include, but are not limited to, those set forth below and
those described from time to time in Bowaters other filings with the
Securities and Exchange Commission. In addition, other risks besides those
could adversely affect us. We disclaim any obligation to publicly update or
revise any forward-looking statements.

Risks Related to Our Business

Industry conditions may adversely affect our results of operations and
financial condition

Our operating results reflect the cyclical pattern of the forest products
industry. Most of our products are world-traded commodity products. Prices for
our products have been historically volatile, and we, like other participants
in the forest products industry, have limited direct influence over the timing
and extent of price changes for our products. Instead, these price changes
depend primarily on industry supply and customer demand. Industry supply
depends primarily on available manufacturing capacity, and customer demand
depends on a variety of factors, including the health of the economy in general
and the strength of both print media advertising and new home construction. The
United States and global economy and the market for our products have weakened
significantly over the past several years and market conditions continue to be
challenging. In addition, the long-term demand for newsprint in the United
States is not expected to grow appreciably.

Intense competition in the forest products industry could adversely affect our
operating results and financial condition

The markets for our products are all highly competitive. Actions by competitors
can affect our ability to sell our products and can affect the prices at which
our products are sold. Our industry is capital intensive, which leads to high
fixed costs. Some of our competitors may be lower-cost producers in some of the
businesses in which we operate, and accordingly these competitors may be less
adversely affected than us by price declines.

Developments in electronic data transmission and storage could adversely affect
the demand for our products

Our newspaper, magazine and catalog publishing customers increasingly may use,
and compete with businesses that use, electronic data transmission and storage
instead of newsprint, coated paper, uncoated specialty papers or other products
made by us. We cannot predict the timing or extent of this trend.

19



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##### 



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

Changes in laws and regulations could require substantial additional
expenditures by us to comply with these laws and regulations

We are subject to a variety of foreign, federal, state and local laws and
regulations dealing with trade, transportation, currency controls and the
environment. Changes in, or more stringent enforcement of, these laws or
regulations have required in the past, and could require in the future,
substantial expenditures by us. For example, changes in environmental laws and
regulations could require us to spend substantial amounts to comply with
restrictions on air emissions, wastewater discharge, waste management and
landfill sites, including remediation costs. Environmental laws are becoming
increasingly more stringent. Consequently, our compliance and remediation costs
could increase materially. For example, in April 1998, the Environmental
Protection Agency promulgated new air and water quality standards for the paper
industry, known as the Cluster Rule, aimed at further reductions of pollutants.
We anticipate spending approximately $175 million by the end of 2003, of which
approximately $152 million had been spent as of June 30, 2003, to enable our
Catawba, South Carolina facility to comply with the Cluster Rule. Another
example is duties imposed on lumber shipments from Canada into the United
States as discussed in the section under Results of Operations  Three Months
Ended June 30, 2003, versus June 30, 2002 entitled Product Line Information,
subsection Lumber in this quarterly report.

We may be subject to unforeseen environmental liabilities

As an owner and operator of real estate and manufacturing and processing
facilities, we may be liable under environmental laws for cleanup and other
costs and damages, including tort liability and damages to natural resources,
resulting from past or present spills or releases of hazardous or toxic
substances on or from our current or former properties. We may incur liability
under these laws without regard to whether we knew of, were responsible for or
owned the property at the time of any spill or release of hazardous or toxic
substances on or from our property, or at properties where we arranged for the
disposal of regulated materials. Claims may arise out of currently unknown
environmental conditions or aggressive enforcement efforts by governmental or
private parties.

We are exposed to currency fluctuations

Changes in foreign currency exchange rates can affect our selling prices and
manufacturing costs.

We compete with North American, European and Asian producers in most of our
product lines. Our products are sold and denominated in both U.S. dollars and
selected foreign currencies. In addition to the impact of product supply and
demand, changes in the relative strength or weakness of the U.S. dollar may
also affect international trade flows of these products. A stronger U.S. dollar
may attract imports from producers outside North America, while a weaker U.S.
dollar will encourage North American exports. A stronger dollar, increasing
supply, can have a downward effect on pricing in North America, while a weaker
dollar can have a positive impact on our prices in export markets. Variations
in the exchange rates between the U.S. dollar and other currencies,
particularly the Euro and the currencies of Canada, Sweden, Finland and certain
Asian countries, significantly affect our competitive position compared to many
of our competitors.

Nearly half of our manufacturing costs and certain financial liabilities are
denominated in Canadian dollars. Increases in the value of the Canadian dollar
versus the U.S. dollar can significantly increase our costs and thus reduce our
earnings, which are reported in U.S. dollar terms. The rate of fluctuation in
exchange rates in any given quarter may vary significantly. For example in
some quarters exchange rates may change less than one cent, while in others the
change may be several cents or more.

The impact of the changes in the Canadian-U.S. dollar exchange rate on us
primarily depends on our production and sales volume, the proportion of our
production and sales that occur in Canada, the proportion of our tax and other
financial liabilities denominated in Canadian dollars, our hedging levels, and
the magnitude, direction and duration of changes in the exchange rate. Under
the exchange rates, hedging levels and operating conditions that
existed for us during the quarter ended June 30, 2003, for every one-cent
change in the Canadian-U.S. dollar exchange rate, our operating income, net of hedging, for the second quarter of
2003 would have been reduced by approximately $2.25 million, or approximately
$9 million on an annualized basis.

20



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##### 



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

We expect exchange rate fluctuations to continue to impact our costs and
revenues; however, we cannot predict the magnitude or direction of this effect
for any quarter, and there can be no assurance that the future effect will be
similar to that set forth above.

We are exposed to changes in banking and capital markets and changes in
interest rates

We require both short-term and long-term financing to fund our operations,
including capital expenditures. Changes in banking, capital markets and/or our
credit rating could affect the cost or availability of financing. In addition,
we are exposed to changes in interest rates with respect to floating rate debt
and in determining the interest rate of any new debt issues. Changes in the
capital markets or prevailing interest rates can increase or decrease the cost
or availability of financing.

Changes in the political or economic conditions in the United States or other
countries in which our products are manufactured or sold can adversely affect
our results of operations

We manufacture our products in the United States, Canada and South Korea, and
sell our products throughout the world. The economic and political climate of
each region has a significant impact on costs, prices of and demand for our
products. Changes in regional economies or political stability, including acts
of war or terrorist activities, can affect the cost of manufacturing and
distributing our products, pricing and sales volume, directly affecting our
results of operations. Such changes could also affect the availability or cost
of insurance.

Raw material and energy prices are volatile, and shortages or price increases
could adversely affect our operating results

We buy energy, chemicals, wood fiber, recovered paper and other raw materials
on the open market. The prices for raw materials and energy are volatile and may
change rapidly, directly affecting our results of operations. The availability
of raw materials and energy may also be disrupted by many factors outside our control,
adversely affecting our operations. We are a major user of renewable natural
resources, specifically water and wood fiber. Accordingly, significant changes
in climate and agricultural diseases or infestation could affect our financial
condition and results of operations. The volume and value of timber that can be
harvested may be limited by natural disasters such as fire, insect infestation,
disease, ice storms, wind storms, flooding and other weather conditions and
other causes. As is typical in the industry, we do not maintain insurance for
any loss to our standing timber from natural disasters or other causes. Our
supply of wood fiber is also affected by factors that impact production levels
within the lumber industry such as currency fluctuations, duties, harvesting
restrictions and finished lumber prices. See the section entitled Results of
Operations.

There can be no assurance that we will return to profitability

We reported a net loss of $142.4 million for the 2002 fiscal year and a net
loss of $97.4 million for the first six months of 2003. In response to these
results, we have adopted an ongoing program that involves: (i) seeking ways to
increase operating efficiencies and productivity to reduce costs; (ii) a
workforce reduction; (iii) reducing non-essential capital spending; (iv)
selling non-strategic assets; and (v) machine closures and conversions. There
can be no assurance that these steps will enable us to return to profitability.

Our substantial indebtedness could adversely affect our financial health

We have a significant amount of indebtedness. As of June 30, 2003, we had
outstanding total debt of $2,422.5 million, a deficit of earnings to fixed
charges of $120.9 million and shareholders equity of $1,738.8 million. Our
substantial amount of debt could have important consequences. For example, it
could:



| |  |  | limit our ability to obtain additional financing, if needed, for
working capital, capital expenditures, acquisitions, debt service
requirements or other purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increase our vulnerability to adverse economic and industry
conditions;                                                                                           

21



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



| |  |  | require us to dedicate a substantial portion of our cash flow from
operations to make payments on our debt, thereby reducing funds
available for operations, future business opportunities or other
purposes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and our industry; and                                                                                                         
|
| |  |  | place us at a competitive disadvantage compared to our competitors that have less debt.                                                                                                                      

Our credit facilities contain various covenants including requirements to
maintain adequate net worth and compliance with a specified ratio of total debt
to total capital as defined in the credit facilities. Currently, these
covenants require us to maintain a minimum consolidated net worth (generally
defined in the credit facilities as common shareholders equity plus any
outstanding preferred stock) of $1.625 billion. In addition, these agreements
impose a maximum 60% ratio of total debt (generally defined in the agreements
as total debt less revaluation of debt assumed through acquisitions) to total
capital (generally defined in the agreements as total debt less revaluation of
debt assumed through acquisitions plus net worth including minority interest).
Our continued compliance is dependent on a number of factors, many of which are
outside of our control. Should events occur that would result in
noncompliance, we believe that a number of acceptable options would be
available to us including, but not limited to, amending the credit
facilities, obtaining a waiver or pursuing additional or alternative financing arrangements, but we cannot
assure that these options would be available on attractive terms or at all.

Accounting Policies and Estimates

The following discussion and analysis provides information that we believe is
useful in understanding our operating results, cash flows and financial
condition shown on our unaudited Consolidated Financial Statements included in
this quarterly report. Our significant accounting policies are described in
Note 1 to the Notes to Consolidated Financial Statements in our annual report
on Form 10-K for the year ended December 31, 2002. Our critical accounting
policies are described under the caption Critical Accounting Policies and
Estimates in Item 7 of our annual report on Form 10-K for the year ended
December 31, 2002.

The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates, assumptions and judgments
and rely on future projections of results of operations and cash flows. We
base our estimates and assumptions on historical data and other assumptions
that we believe are reasonable under the circumstances. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities in our financial statements.
In addition, they affect the reported amounts of revenues and expenses during
the reporting period.

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

Results of Operations

Three Months Ended June 30, 2003, versus June 30, 2002

For the second quarter of 2003, we had operating income of $31.6 million
compared to operating loss of $35.4 million for the second quarter of 2002.
Operating income for the second quarter of 2003 includes a gain on the sale of
assets of $104.0 million compared to a gain on the sale of assets of $3.5
million for the second quarter of 2002. Excluding these asset sales, operating
income decreased $33.5 million compared to the second quarter of 2002. This
decrease is attributable to higher severance related charges for the second
quarter of 2003 ($18.2 million) compared to the second quarter of 2002 ($0.3
million), lower transaction prices for lumber ($8.2 million),
higher lumber duties ($8.3 million) and higher overall
operating costs ($37.3 million). These decreases were offset partially by
higher transaction prices for newsprint ($21.9 million), and market pulp ($13.9 million).
Operating costs were higher for

22



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

the quarter due to the strengthening of the Canadian dollar
($31.3 million) and higher wood, energy and chemical costs. Wood costs
increased as a result of Canadian sawmill production curtailments, which
reduced available chip supply, and from unusually wet weather in the U.S.
South, which hampered harvesting. Energy costs were higher as a result of
increased prices. Chemical costs increased primarily due to grade mix and the
introduction of new coated grades at Catawba. Losses caused by the changes in
the Canadian dollar exchange rates were partially offset by gains from our
Canadian dollar hedging program ($13.8 million). We expect the relative
exchange rate between the U.S. and Canadian dollar to continue to affect our
results of operations. See the section entitled
Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on
Earnings and under Risks Related to Our Business
the subsection entitled We are exposed to currency
fluctuations.

Net loss for the second quarter of 2003 was $25.7 million, or $0.45 per diluted
share, compared with net loss of $53.7 million, or $0.95 per diluted share, in
the second quarter of 2002. Sales for the second quarter of 2003 were $664.1
million compared with $646.8 million for the second quarter of 2002.

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.

In general, Bowater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.

Sales by Product:

|                         |                             |      |                             |       |  |   |       |       | 
|------------------------ | --------------------------- | ---- | --------------------------- | ----- |  | - | ----- | ----- | 
|                         |                             |      | Three Months Ended June 30,
|(Unaudited, in millions) |                             | 2003 |                             | 2002 
|                         |                             |      |                             |      
|Sales:                   |                             |      |                             |       |  |   |       |      
|                         | Newsprint                   |      | $                           | 307.2 |  |   | $     | 290.9 | 
|                         | Market Pulp                 |      |                             | 111.2 |  |   |       | 125.8 | 
|                         | Coated and Specialty Papers |      |                             | 184.3 |  |   |       | 153.3 | 
|                         | Lumber                      |      |                             | 57.5  |  |   |       | 72.4  | 
|                         | Other                       |      |                             | 3.9   |  |   |       | 4.4   | 
|                         |                             |      |                             |       |  |   |       |       | 
|Total sales              |                             | $    | 664.1                       |       |  | $ | 646.8 |      
|                         |                             |      |                             |       |  |   |       |       | 

Newsprint:Our average transaction price for newsprint was 7.9% higher in the
second quarter of 2003 compared to the second quarter of 2002 and 3.9% higher
compared to the first quarter of 2003. This latter increase reflects the
partial realization of an announced $50 per metric ton price increase in the
second quarter for domestic newsprint, effective March 1, 2003. Newsprint
shipments decreased compared to the second quarter of 2002, primarily due to
the removal of 240,000 metric tons of annual newsprint production capacity
related to the conversion of a newsprint machine at Catawba to coated paper.
This decrease was partially offset by less downtime and other shifts in
production. We took approximately 54,000 metric tons of market and maintenance
downtime in the second quarter of 2003 compared to approximately 119,000 metric
tons of downtime during the second quarter of 2002. The second quarter of 2002
downtime included 27,000 metric tons related to a strike at our Mokpo, South
Korea, mill. One of two idled newsprint machines at Calhoun started back up in
January 2003 after being down since January of 2002 due to newsprint market
conditions. This startup was in conjunction with the shutdown of a specialty
paper machine at Donnacona and a transfer of those specialty orders to Calhoun
(100,000 metric tons of annual capacity). The second idled machine at Calhoun
was started back up in July 2003 (after being down since January of 2002) in
conjunction with the idling of a paper machine at the Thunder Bay mill. This
market downtime will continue until market conditions improve. We plan to take
approximately 53,000 metric tons of market and maintenance downtime in the
third quarter of this year. We will continue to match our production to our
orders. We informed our North

23



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

American customers of a $50 per metric ton newsprint price increase
effective August 1, 2003. Depending on industry conditions, prices can be
phased in for several months following their effective date.

Newsprint Third Party Data:In the second quarter of 2003, total U.S. newsprint
demand decreased 2.6% while consumption increased 0.2% compared to the same
period a year ago. North American net exports of newsprint decreased 1.2% from
the second quarter 2002 level. Newspaper advertising linage improved 1.3% in
June 2003 compared to June 2002. Total inventories (North American mills and
users) at June 30, 2003 were 1.4 million metric tons, approximately 16% below
historical levels, based on average total ending inventory for the last ten
calendar years.

Market Pulp:Our average transaction price for market pulp in the second
quarter of 2003 increased 16.4% compared to the second quarter of 2002 and was
up 10.3% compared to the first quarter of 2003. This increase is predominantly
due to a price increase of $40 per metric ton, effective April 1, 2003 for our
paper grade market pulps. Our shipments decreased 24.1% compared to the same
period last year, primarily due to weaker export markets and a nine-day shut
due to temporary wood shortages at our Thunder Bay facilities. The combination
of depressed lumber prices, countervailing and anti-dumping duties imposed by
the U.S. government and a stronger Canadian dollar caused production
curtailments at several sawmills, thereby creating a shortage of wood chips for
the Thunder Bay mill. The company is taking actions to mitigate the potential
for future disruptions and has experienced relatively normal wood fiber flows
following the curtailment. Market pulp inventory ended the second quarter of
2003 at 22 days, increasing 9 days over the comparable period of the prior
year, but 8 days below industry levels in the North American and Nordic region.
We expect market pulp production will be curtailed by approximately 30,000
metric tons in the third quarter primarily due to the replacement of the fiber
line at the Catawba mill and the temporary shut of the Thunder Bay mill (See
Newsprintabove).

Market Pulp Third Party Data:Demand for market pulp decreased for the three
months ending June 30, 2003, compared to the same period of 2002. North
America and Nordic (United States, Canada, Finland and Sweden) shipments were
down 11.3% in the second quarter compared to the first quarter 2003 and 9.2%
compared to the same period in 2002. During the quarter, North American and
Nordic producers operated at 89% of capacity but shipped at only 85% of
capacity. Consequently, inventories increased over the prior quarter by
237,000 metric tons, to end the quarter at 1.7 million metric tons, or 30 days
supply. North American and Nordic inventories were 374,000 metric tons or 8
days supply higher than the corresponding period of 2002.

Coated and Specialty Papers:Our average transaction price for coated paper was
1.1% lower in the second quarter of 2003 compared to the second quarter of 2002
and 3.2% higher compared to the first quarter of 2003. Our coated paper
shipments increased 26.0% compared to the same period last year, due to
additional production from the conversion of a paper machine at Catawba from
newsprint to coated paper and additional tons in 2003 from the Nuway Covington
facility that started up in the first quarter of 2002. We expect this
converted machine
to increase Catawbas production by approximately 20,000 tons in the third
quarter of 2003 as compared to the second quarter of 2003.

Our average transaction price for specialty paper was 0.7% lower in the second
quarter of 2003 compared to the second quarter of 2002 and 2.2% higher compared
to the first quarter of 2003. Our specialty paper shipments increased 16.6%
compared to the same period last year, due to the book market downgrading from
traditional freesheet grades to groundwood specialties and retailers upgrading
from newsprint to groundwood specialties.

Coated and Specialty Papers Third Party Data:US magazine advertising pages
increased 6% compared to the second quarter of 2002 and catalog mailings
(measured by Standard A mail pieces) increased 4% compared to the same period
last year. North American demand for coated groundwood papers was up 4%
compared to the second quarter of 2002. North American coated groundwood mill
inventories were at 19 days supply at June 30, 2003 compared to 17 days supply
at June 30, 2002. North American demand for supercalendered A/B papers and
other uncoated groundwood papers was down 3% and up 7%, respectively, compared
to the second quarter of 2002. North American uncoated groundwood inventories
were at 21 days supply at June 30, 2003 compared to 17 days supply at June 30,
2002.

24



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

Lumber:Our average transaction price for lumber products decreased 11.4% in
the second quarter of 2003 compared to the second quarter of 2002 and increased
4.7% compared to the first quarter of 2003. Our lumber shipments decreased
10.3% in the second quarter of 2003 compared to the second quarter of 2002,
primarily due to the temporary closure of certain sawmills as a result of the
duties imposed on lumber shipments and the sale of our Riviere Bleue sawmill in
the first quarter of 2003. U.S. housing starts in the second quarter were
strong, increasing 4.1% in the second quarter of 2003 compared to the same
period last year.

The U.S. Commerce Department has imposed antidumping duties of 8.43% on all of
Bowaters Canadian softwood lumber imports and countervailing duties of 18.79%
on softwood lumber imported from all provinces except New Brunswick and Nova
Scotia. The duties, which became effective for lumber shipments beginning May
22, 2002, are payable in cash. Lumber duties are included as a component of
distribution costs on our consolidated statement of operations.

The Canadian government has appealed the duties to the World Trade Organization
(WTO) and under the terms of the North American Free Trade Agreement (NAFTA)
and requested that the duties be refunded. Although interim decisions have
been rendered, the dispute is not yet resolved. The final amount of
countervailing and antidumping duties that may be assessed on Canadian softwood
lumber imports into the U.S. will depend upon negotiations among the
governments involved in the dispute or upon determinations made by the NAFTA,
WTO or other adjudicatory panels to which the duties may be appealed.

Divisional Performance

|                            |  |                             |       |                             |  |      |       |      |  |   |       |   |  |   |       |  
|--------------------------- |  | --------------------------- | ----- | --------------------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                            |  | Sales(1)                    |       | Segment Income (Loss) (1)  
|                            |  |                             |       |                            
|                            |  | Three Months Ended June 30, |       | Three Months Ended June 30,
|(In millions)               |  | 2003                        |       | 2002                        |  | 2003 |       | 2002
|                            |  |                             |       |                             |  |      |       |     
|Newsprint                   |  | $                           | 359.6 |                             |  | $    | 316.0 |      |  | $ | (30.8 | ) |  | $ | (28.5 | )
|Coated and Specialty Papers |  |                             | 117.3 |                             |  |      | 121.0 |      |  |   | (13.8 | ) |  |   | (5.2  | )
|Forest Products             |  |                             | 24.3  |                             |  |      | 25.3  |      |  |   | (3.1  | ) |  |   | 1.8   |  
|Canadian Forest Products    |  |                             | 183.7 |                             |  |      | 198.1 |      |  |   | (15.1 | ) |  |   | 20.1  |  
|Net gain on sale of assets  |  |                             |      |                             |  |      |      |      |  |   | 104.0 |   |  |   | 3.5   |  
|Corporate & eliminations    |  |                             | (20.8 | )                           |  |      | (13.6 | )    |  |   | (9.6  | ) |  |   | (27.1 | )
|                            |  |                             |       |                             |  |      |       |      |  |   |       |   |  |   |       |  
|Total                       |  | $                           | 664.1 |                             |  | $    | 646.8 |      |  | $ | 31.6  |   |  | $ | (35.4 | )
|                            |  |                             |       |                             |  |      |       |      |  |   |       |   |  |   |       |  



|(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.                                                                                                                                                                                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Total segment income (loss) in the preceding table is equal to Operating
income (loss) as presented in our Consolidated Statement of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Newsprint Division:Sales for the division increased $43.6 million, from $316.0
million for the second quarter of 2002 to $359.6 million for the second quarter
of 2003. This increase is primarily the result of higher transaction prices
for newsprint ($18.1 million), market pulp ($11.3 million) and uncoated
specialty paper ($5.0 million) and higher shipments of newsprint ($14.4
million) and uncoated specialty paper ($12.5 million). These increases were
partially offset by lower shipments of market pulp ($17.7 million). See the
previous discussion of product line results.
|   
|    |  | Operating loss increased $2.3 million from an operating loss of $28.5 million
for the second quarter of 2002 to an operating loss of $30.8 million for the
second quarter of 2003. The increase is primarily due to higher severance
related charges, which were $12.5 million higher in the second quarter of 2003
compared to the second quarter of                                                                                                                                                                                                                                          

25



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

2002 and higher costs ($24.4 million) due to
higher fiber and wood, maintenance, and fuel costs and a stronger
Canadian dollar ($15.0 million). These increases in cost were partially offset
by higher transaction prices for newsprint ($18.1 million), market pulp ($11.3
million) and uncoated specialty paper ($5.0 million).

Coated and Specialty Papers Division:Sales for the division decreased $3.7
million, from $121.0 million for the second quarter of 2002 to $117.3 million
for the second quarter of 2003. This decrease was primarily due to lower
transaction prices for coated papers ($0.8 million) and lower shipments of
market pulp ($10.7 million) and newsprint ($17.7 million). Increased shipments
of coated and specialty papers ($22.4 million) and an increase in market pulp
pricing ($2.6 million) partially offset this decrease. See the previous
discussion of product line results.

Operating loss increased $8.6 million from an operating loss of $5.2 million
for the second quarter of 2002 to an operating loss of $13.8 million for the
second quarter of 2003. This increase was primarily the result of higher
operating costs ($7.8 million) as a result of higher
wood costs due to weather conditions, higher chemical costs due to changes in
grade mix and higher base stock costs. Higher severance charges
($3.7 million) and lower transaction prices for coated papers
($0.8 million) also contributed to the increase in operating
loss. These increases were partially offset
by higher transaction prices for market pulp ($2.6 million) and a reduction in
selling and administrative expense ($1.1 million).

Nuway prices are based on coated paper
prices, which remained near ten-year lows. Transaction prices for
our Nuway product continued to be insufficient to cover costs. The
effects of significant improvements in our productivity and quality
were more than offset by higher base stock costs. Due to these
factors, we are operating our Nuway facilities at about half their
capacity. As market conditions improve, we expect to increase our
production, eventually returning to a full production schedule.
However, there is no assurance as to whether Nuway product pricing and
costs will improve.

Forest Products Division:Sales for the division decreased $1.0 million, from
$25.3 million for the second quarter of 2002 to $24.3 million for the second
quarter of 2003. This decrease was due primarily to lower lumber transaction
prices ($2.2 million), lower lumber shipments ($0.3 million) and lower timber
shipments ($0.4 million). This decrease was partially offset by higher timber
transaction prices ($1.9 million). See the previous discussion of product line
results.

Operating income decreased $4.9 million from $1.8 million for the second
quarter of 2002 to an operating loss of $3.1 million for the second quarter of
2003. This decrease was due primarily to higher lumber manufacturing costs
($3.4 million), lower lumber transaction prices ($2.2 million), higher timber
manufacturing costs ($0.5 million) and higher lumber distribution costs ($0.5
million). Higher timber transaction prices ($1.9 million) partially offset
these decreases. Lumber costs were higher in the second quarter of 2003
compared to the same period last year due to the start-up of the new Thunder
Bay Ontario sawmill in May 2003, a stronger Canadian dollar ($0.9 million),
sawmill market downtime, and higher wood costs.

Canadian Forest Products Division:Sales for the division decreased $14.4
million, from $198.1 million for the second quarter of 2002 to $183.7 million
for the second quarter of 2003. This decrease is primarily the result of lower
shipments ($9.7 million), primarily lumber, and lower transaction prices for
lumber ($6.0 million) and specialty papers ($2.8 million), partially offset by
higher transaction prices for newsprint ($3.8 million). Lumber shipments were
lower primarily due to the temporary closure of certain sawmills as a result of
the duties imposed on lumber shipments and the sale of our Riviere Bleue
sawmill in the first quarter of 2003.

Operating income decreased $35.2 million, from $20.1 million for the second
quarter of 2002 to a loss of $15.1 million for the second quarter of 2003.
This decrease was primarily the result of lower transaction prices for
specialty papers ($2.8 million) and lumber ($6.0 million),
lower lumber shipments ($2.4 million), higher lumber duties ($8.2 million)
and higher costs ($20.4 million) primarily from lower production
volume ($7.4 million), higher
severance charges ($1.9 million) and a stronger Canadian dollar ($15.5
million).These decreases were partially offset by higher transaction
prices for newsprint ($3.8 million).

26



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##### 



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

Net Gain on Sale of Assets:In the second quarter of 2003, we sold fixed assets
and land resulting in a pre-tax gain of $104.0 million, or $1.13 per diluted
share after tax. This gain was primarily due to the sale of approximately
82,000 acres of owned and leased timberlands for cash consideration of
approximately $122 million, which resulted in a pre-tax gain of approximately
$97.5 million. Also in the second quarter of 2003, we had other asset sales
resulting in a pre-tax gain of approximately $6.5 million.

In the second quarter of 2002, we sold fixed assets and land resulting in a
pre-tax gain of $3.5 million, or $0.04 per diluted share after tax.

Corporate & Eliminations:The elimination of intersegment sales increased $7.2
million, from $13.6 million for the second quarter of 2002 to $20.8 million for
the second quarter of 2003. Corporate expenses decreased $17.5
million from $27.1 million for the second quarter of 2002 to $9.6 million for
the second quarter of 2003, due primarily to hedging gains.

Interest and Other Income and Expenses

Interest expense increased $0.9 million from $41.3 million for the second
quarter of 2002 to $42.2 million for the second quarter of 2003. This increase
was primarily attributable to higher interest rates in connection with a $400
million debt offering in June 2003. (See section under Liquidity and Capital
Resources entitled Credit Arrangements.) The debt will increase interest
expense by approximately $3 million per quarter. Other expense decreased $2.7
million in the second quarter of 2003, with expense of $2.5 million compared to
expense of $5.2 million for the same period in 2002. The decrease in other
expense is primarily due to an increase in income from joint venture and
miscellaneous income, partially offset by an increase in foreign exchange loss.
We recorded a foreign exchange loss of $5.6 million in the second quarter of
2003 compared to a loss of $4.6 million in the second quarter of 2002. The
majority of our exchange gains and losses in Other, net is attributable to the
revaluation of unhedged foreign denominated liabilities into U.S. dollars.

Our effective tax rate for the second quarter of 2003 was (149.4)% compared to
28.3% for the second quarter of 2002. The rates in both 2003 and 2002 were
primarily impacted by certain losses from changes in foreign currency exchange
rates for which the company received no tax benefit.

Our effective tax rate varies frequently and substantially from the
weighted-average effect of both domestic and foreign statutory tax rates
primarily as a result of special tax treatment on foreign currency gains and
losses. Due to the variability and volatility of foreign exchange rates we are
unable to estimate the impact of future changes in exchange rates on our
effective tax rate. Excluding the impact from foreign exchange currency gains
and losses, we currently estimate our annual effective tax rate for 2003 to be
approximately 40%.

Six Months Ended June 30, 2003, versus June 30, 2002

For the first six months of 2003, we had an operating loss of $24.7 million
compared to operating income of $11.4 million for the first six months of 2002.
Operating loss for the first six months of 2003 includes a gain on the sale of
assets of $115.1 million compared to a gain on the sale of assets of $75.0
million for the first six months of 2002. Excluding these asset sales,
operating loss increased $76.2 million. This increase is attributable to
higher severance related charges ($24.6 million), higher lumber duties ($9.2
million), lower transaction prices for coated and specialty papers ($5.8
million) and lumber ($11.0 million) and higher operating costs
($77.9 million).
These increases were offset partially by higher transaction prices for
newsprint ($23.0 million), market pulp ($22.7 million) and timber ($4.4
million). Operating costs were higher for the period due to higher wood,
energy and repair costs and the strengthening of the Canadian dollar ($47.4
million). Energy costs were higher as a result of increased prices and severe
weather. Wood costs increased as a result of Canadian sawmill production
curtailments, which reduced available chip supply, and from unusually wet
weather in the U.S. South. Losses due to the effect of changes in the Canadian
dollar exchange rates were partially offset by gains from our Canadian dollar
hedging program ($21.4 million).

27



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

Net loss for the first six months of 2003 was $97.4 million, or $1.71 per
diluted share, compared with net loss of $43.5 million, or $0.77 per diluted
share, in the first six months of 2002. Sales for the first six months of 2003
were $1,294.6 million compared with $1,271.0 million for the first six months
of 2002. Net loss for the first six months of 2003 includes an after tax
charge of $2.1 million, or $0.04 per diluted share, for a cumulative effect
adjustment from the adoption of SFAS No. 143, Accounting for Asset Retirement
Obligations.

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:

|                         |                             |      |                           |       |  |   |         |       | 
|------------------------ | --------------------------- | ---- | ------------------------- | ----- |  | - | ------- | ----- | 
|                         |                             |      | Six Months Ended June 30,
|(Unaudited, in millions) |                             | 2003 |                           | 2002 
|                         |                             |      |                           |      
|Sales:                   |                             |      |                           |       |  |   |         |      
|                         | Newsprint                   |      | $                         | 598.0 |  |   | $       | 581.6 | 
|                         | Market Pulp                 |      |                           | 240.1 |  |   |         | 242.1 | 
|                         | Coated and Specialty Papers |      |                           | 338.0 |  |   |         | 306.1 | 
|                         | Lumber                      |      |                           | 106.8 |  |   |         | 129.3 | 
|                         | Other                       |      |                           | 11.7  |  |   |         | 11.9  | 
|                         |                             |      |                           |       |  |   |         |       | 
|Total sales              |                             | $    | 1,294.6                   |       |  | $ | 1,271.0 |      
|                         |                             |      |                           |       |  |   |         |       | 

Newsprint:Our average transaction price for newsprint was 4.2% higher in the
first six months of 2003 compared to the first six months of 2002. Newsprint
shipments decreased 1.3% compared to the first six months of 2002, primarily
due to the removal of 240,000 metric tons of annual newsprint production
capacity related to the conversion of a newsprint machine at Catawba to coated
paper. This decrease was partially offset with less downtime and other shifts
in production. There was approximately 103,000 metric tons of market and
maintenance downtime in the first six months of 2003 compared to approximately
189,000 metric tons of downtime during the first six months of 2002. The first
six months of 2002 downtime included 27,000 metric tons related to a strike at
our Mokpo, South Korea, mill. One of two idled newsprint machines at Calhoun,
started back up in January 2003 after being down since January of 2002 due to
newsprint market conditions. This startup was in conjunction with the shutdown
of a specialty paper machine at Donnacona and a transfer of those specialty
orders to Calhoun (100,000 metric tons of annual capacity). The second idled
machine at Calhoun started back up in July 2003 (after being down since January
2002) in conjunction with the idling of a paper machine at the Thunder Bay
mill. This market downtime will continue until market conditions improve. We
plan to take approximately 53,000 metric tons of market and maintenance
downtime in the third quarter of this year. We will continue to match our
production to our orders.

Newsprint Third Party Data:In the first six months of 2003, total United
States demand and consumption of newsprint increased 0.6% compared to the same
period a year ago. North American net exports of newsprint increased 2.2% from
the first six months 2002 level. Newspaper advertising linage improved 1.3% in
June compared to June 2002 and improved 1.0% year to date.

Market Pulp: Our average transaction price for market pulp in the first six
months of 2003 increased 10.9% compared to the first six months of 2002. Our
shipments decreased 10.6% compared to the same period last year, primarily due
to weaker export markets and a nine-day shut at Thunder Bay
due to temporary wood shortages.

Market Pulp Third Party Data:Demand for market pulp decreased over the first
six months of 2003. North American and Nordic (United States, Canada, Finland
and Sweden) shipments were down 1% compared to the first 6 months of 2002.
Consequently inventories increased slightly from 1.64 to 1.71 million metric
tons to end at 30 days supply at the end of June 2003.

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

Coated and Specialty Papers:Our average transaction price for coated paper was
4.5% lower in the first six months of 2003 compared to the first six months of
2002. Our coated paper shipments increased 19.5% compared to the same period
of the prior year, due to the conversion of a paper machine at Catawba from
newsprint to coated papers and the addition of the Nuway Covington facility in
March 2002.

Our average transaction price for specialty paper was 3.3% lower in the first
six months of 2003 compared to the first six months of 2002. Our specialty
paper shipments increased 10.5% compared to the same period last year, due to
the book market downgrading from traditional freesheet grades to groundwood
specialties and retailers upgrading from newsprint to groundwood specialties.

Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages
increased 8% compared to the same period last year. Catalog mailings (measured
by Standard A mail pieces) increased 3% compared to the same period last year.
Overall North American demand for coated groundwood increased 9% year-to-date.
Demand for supercalendered A/B papers decreased 4%.

Lumber:Our average transaction price for lumber products decreased 10.0% in
the first six months of 2003 compared to the first six months of 2002. Our
lumber shipments decreased 8.3% in the first six months of 2003 compared to the
first six months of 2002 due to the temporary closure of certain of our
sawmills and the sale of our Riviere Bleue sawmill. U.S. housing starts in the
first six months were strong increasing 4.9% in the first six months of 2003
compared to the same period last year.

Divisional Performance

|                            |  |                           |         |                           |  |      |         |      |  |   |       |   |  |   |       |  
|--------------------------- |  | ------------------------- | ------- | ------------------------- |  | ---- | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                            |  | Sales(1)                  |         | Segment Income (Loss)(1) 
|                            |  |                           |         |                          
|                            |  | Six Months Ended June 30, |         | Six Months Ended June 30,
|(In millions)               |  | 2003                      |         | 2002                      |  | 2003 |         | 2002
|                            |  |                           |         |                           |  |      |         |     
|Newsprint                   |  | $                         | 710.4   |                           |  | $    | 645.7   |      |  | $ | (51.8 | ) |  | $ | (33.5 | )
|Coated and Specialty Papers |  |                           | 223.5   |                           |  |      | 236.4   |      |  |   | (34.1 | ) |  |   | (11.1 | )
|Forest Products             |  |                           | 46.6    |                           |  |      | 46.6    |      |  |   | (4.9  | ) |  |   | 2.1   |  
|Canadian Forest Products    |  |                           | 355.0   |                           |  |      | 371.5   |      |  |   | (27.1 | ) |  |   | 28.2  |  
|Net gain on sale of assets  |  |                           |        |                           |  |      |        |      |  |   | 115.1 |   |  |   | 75.0  |  
|Corporate & eliminations    |  |                           | (40.9   | )                         |  |      | (29.2   | )    |  |   | (21.9 | ) |  |   | (49.3 | )
|                            |  |                           |         |                           |  |      |         |      |  |   |       |   |  |   |       |  
|Total                       |  | $                         | 1,294.6 |                           |  | $    | 1,271.0 |      |  | $ | (24.7 | ) |  | $ | 11.4  |  
|                            |  |                           |         |                           |  |      |         |      |  |   |       |   |  |   |       |  



|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total segment income in the preceding table is equal to Operating income
(loss) as presented in our Consolidated Statement of Operations.

Newsprint Division:Sales for the division increased $64.7 million, from $645.7
million for the first six months of 2002 to $710.4 million for the first six
months of 2003. This increase is primarily the result of higher shipments of
newsprint ($23.4 million) and uncoated specialty paper ($16.3 million), and
higher transaction prices for newsprint ($18.5 million), market pulp ($16.7
million) and uncoated specialty paper ($6.1 million). These increases were
partially offset by lower shipments of market pulp ($16.3 million).

Operating loss increased $18.3 million from an operating loss of $33.5 million
for the first six months of 2002 to an operating loss of $51.8 million for the
first six months of 2003. This increase is primarily from higher severance
related charges in the first six months of 2003 compared to the first six
months of 2002 ($17.0 million), higher costs ($34.7 million) due to higher
fiber and wood, maintenance, and fuel costs, and a stronger Canadian dollar
($23.2

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

million). These increases were partially offset by higher transaction
prices for newsprint ($18.5 million), market pulp ($16.7 million) and uncoated
specialty paper ($6.1 million).

Coated and Specialty Papers Division:Sales for the division decreased $12.9
million, from $236.4 million for the first six months of 2002 to $223.5 million
for the first six months of 2003. This decrease was primarily due to
lower shipments of market pulp ($10.0 million) and newsprint ($32.7 million)
and lower transaction prices for coated and specialty papers ($5.6 million).
Increased shipments of coated and specialty papers ($29.5 million) and higher
transaction prices for market pulp ($6.0 million) partially offset this
decrease. During the first quarter, the conversion of a paper machine at
Catawba from newsprint to coated paper production resulted in a loss of
approximately 49,000 tons of production. See the previous discussion of
product line results.

Operating loss increased $23.0 million from an operating loss of $11.1 million
for the first six months of 2002 to an operating loss of $34.1 million for the
first six months of 2003. This increase was primarily the result of lower
transaction prices for coated and specialty papers ($5.6 million), higher
operating costs ($23.8 million) as a result of lower production volume at
Catawba due to the paper machine conversion ($8.7 million), severance ($4.3
million), and higher wood costs due to weather conditions, higher chemical
costs due to changes in grade mix and higher power, fuel and base stock costs.
These increases were partially offset by lower selling and administrative
expenses ($1.9 million) and higher transaction prices for market pulp ($6.0
million).

Forest Products Division:Sales for the division remained flat at $46.6 million
for the first six months of 2003 and 2002. The division experienced lower
lumber transaction prices ($2.8 million) and lower lumber shipments ($0.7
million). These decreases were offset by higher timber transaction prices ($3.4
million). See the previous discussion of product line results.

Operating income decreased $7.0 million from $2.1 million for the first six
months of 2002 to an operating loss of $4.9 million for the first six months of
2003. This decrease was due primarily to higher lumber manufacturing costs
($4.7 million), lower lumber transaction prices ($2.8 million), higher lumber
distribution costs ($1.4 million), higher timber manufacturing costs ($0.8
million), and higher general and administrative costs ($0.7 million). These
decreases were partially offset by higher timber transaction prices ($3.4
million). Lumber costs were higher in the first six months of 2003 compared to
the same period last year due to the start-up of the new Thunder Bay Ontario
sawmill, a stronger Canadian dollar ($1.0 million), sawmill market downtime,
and higher wood costs.

Canadian Forest Products Division:Sales for the division decreased $16.5
million, from $371.5 million for the first six months of 2002 to $355.0 million
for the first six months of 2003. This decrease is primarily the result of
lower transaction prices for specialty papers ($6.3 million) and lumber ($8.2
million) and lower shipments ($7.7 million), primarily lumber, partially offset
by higher transaction prices for newsprint ($4.7 million).

Operating income decreased $55.3 million, from $28.2 million for the first six
months of 2002 to a loss of $27.1 million for the first six months of 2003.
This decrease was primarily the result of lower transaction prices
for specialty papers ($6.3 million) and lumber ($8.2 million), higher lumber
duties ($8.8 million) and higher costs ($41.2 million), primarily due to lower
production volume ($12.8 million), severance charges ($2.3 million) and a
stronger Canadian dollar ($24.1 million). These decreases were
partially offset by higher transaction prices for newsprint ($4.7
million).

Net Gain on Sale of Assets:In the first six months of 2003, we sold fixed
assets and land resulting in a pre-tax gain of $115.1 million, or $1.25 per
diluted share after tax. This gain was primarily due to the sale of
approximately 82,000 acres of owned and leased timberlands for cash
consideration of approximately $122 million, which resulted in a pre-tax gain
of approximately $97.5 million. Also in the first six months of 2003, we sold
approximately 5,900 acres of other timberlands and recorded a net pre-tax gain
of $17.6 million, of which approximately $6.5 million was recorded in the
second quarter from the sales of approximately 2,800 acres.

In the first six months of 2002, we sold fixed assets and land resulting in a
pre-tax gain of $75.0 million, or $0.79 per diluted share after tax. This gain
was primarily due to the sale in January 2002 of approximately 116,000 acres of
timberlands for aggregate consideration of $104.2 million, comprised of
approximately $5.1 million in cash and

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

$99.1 million in notes receivable. In
March 2002, we monetized the $99.1 million notes receivable for
net cash proceeds of $88.1 million. These transactions resulted in a net pre-tax gain
of $70.4 million. In the first six months of 2002, we also sold approximately
4,600 acres of other timberlands and recorded a pre-tax gain of $4.6 million,
of which approximately $3.5 million was recorded in the second quarter from the
sales of approximately 1,900 acres.

Corporate & Eliminations:The elimination of intersegment sales increased $11.7
million, from $29.2 million for the first six months of 2002 to $40.9 million
in the first six months of 2003. Corporate expenses decreased $27.4 million,
from $49.3 million for the first six months of 2002 to $21.9 million for the
first six months of 2003, due primarily to hedging gains.

Interest and Other Income and Expenses

Interest expense decreased $1.0 million from $83.1 million for the first six
months of 2002 to $82.1 million for the first six months of 2003. This
decrease was attributable to higher capitalized interest on our construction in
progress, offsetting interest expense. Other expense increased $5.7 million
from $5.1 million in the first six months of 2002 to $10.8 million in the first
six months of 2003. The increase in other expense is primarily due to foreign
exchange loss recorded in the first six months of 2003. We recorded a foreign
exchange loss of $13.8 million in the first six months of 2003 compared to a
loss of $3.5 million in the first six months of 2002. The majority of our
exchange gains and losses recorded in Other, net is attributable to the
revaluation of unhedged foreign denominated liabilities into U.S. dollars.

Our effective tax rate for the first six months of 2003 was 11.0% compared to
33.9% for the first six months of 2002.
The rates in both 2003 and 2002 were primarily impacted by certain losses from
changes in foreign currency exchange rates for which the company received no
tax benefit.

Liquidity and Capital Resources

Bowaters cash and cash equivalents increased to $82.7 million at June 30,
2003, from $35.9 million at December 31, 2002. We generated cash from
operations of $41.1 million, used $9.7 million of cash in investing activities,
and generated $15.4 million of cash from financing activities.

Cash from Operating Activities:

During the first six months of 2003, our operations generated $41.1 million of
cash compared to the use of $23.8 million of cash during the first six months
of 2002, an increase of $64.9 million. This increase is primarily due to lower
working capital needs in the first six months of 2003. During the first six
months of 2003, our operations generated cash of $75.8 million compared to
using cash of $36.1 million for working capital needs during the first six
months of 2002. During the first six months of 2003, we received tax refunds
of approximately $75 million, which are included in cash generated from
operating activities. This increase was offset by a higher operating loss in
the first six months of 2003 of $139.8 million (excluding gain on asset sales)
compared to a loss in the first six months of 2002 of $63.6 million.

Cash from Investing Activities:

Cash used for investing activities during the first six months of 2003 totaled
$9.7 million, compared to $15.3 million during the first six months of 2002.
The proceeds from the disposition of assets, including timber and
timberlands, increased $120.4 million during the first six months of 2003
compared to the first six months of 2002, primarily from the sale of
timberlands. The first six months of 2002
included net cash proceeds of $88.1 million from the monetization of a note
receivable. Cash invested in fixed assets, timber and timberlands increased
$25.0 million for the first six months of 2003 compared to the first six months
of 2002.

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

Cash from Financing Activities:

Cash generated from financing activities was $15.4 million for the first six
months of 2003 compared to $40.5 million during the first six months of 2002.
During the first six months of 2003, we sold, in a private placement with
registration rights, $400 million of our 6.5% notes due 2013. We received net
proceeds from the sale of the notes of approximately $392.8 million, which were
net of an issuance discount of $1.6 million and financing fees of $5.6 million.
During this period we also made payments of $137.2 million (net of proceeds of
$558.2 million) under our short-term credit facilities compared to payments
made in the first six months of 2002 of $167.2 million (net of proceeds
received of $588.3 million). Also in the first six months of 2003, we received
net proceeds on long-term borrowings amounting to $174.8 million compared with
net proceeds received of $228.3 million during the first six months of 2002.

Cash dividends paid in the first six months of 2003 decreased $3.8 million from
the prior year period as no dividends were declared or paid in the first six
months of 2003 to the minority shareholder of CNC.

Sources of Long and Short Term Liquidity:

For the second quarter of 2003, compared to the same period of 2002, pricing
improved in all of our grades. However, these gains were offset by increased
costs, some or all of which may not quickly abate, including increases in raw
material and energy costs, weather related issues, the strengthening of the
Canadian dollar, and unplanned reductions in volume as a result of temporary
wood fiber supply issues. Accordingly, we do not expect to be cash flow
positive in the third quarter of 2003. While we expect to return to cash-flow
positive results as early as December 2003 due to anticipated price
improvements and the abatement of cost pressures, we can provide no assurance
of these results.

We believe that cash generated from operations, proceeds from the sale of
additional timberlands and other assets, 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 and approved capital projects extending beyond 12 months.

We expect to make $230 million of capital expenditures in 2003, a reduction of
$20 million as compared to our initial plan, and approximately $150 million in
capital expenditures in 2004.

Credit Arrangements:

We have facilities with various banks that provide for borrowings up to $800.0
million. The facilities consist of a $500.0 million revolving credit facility,
a $200.0 million 364-day accounts receivable securitization arrangement and a
$100.0 million 364-day credit facility of a wholly-owned subsidiary, Bowater
Canadian Forest Products Inc. At June 30, 2003, approximately $112 million was
outstanding under our credit facilities and letters of credit of approximately
$73 million were reserved against our credit facilities.

Our credit facilities contain various covenants including requirements to
maintain adequate net worth and compliance with a specified ratio of total debt
to total capital as defined in the credit facilities. Currently, these
covenants require us to maintain a minimum consolidated net worth (generally
defined in the credit facilities as common shareholders equity plus any
outstanding preferred stock) of $1.625 billion as of June 30, 2003. In
addition, these agreements impose a maximum 60% ratio of total debt (generally
defined in the agreements as total debt less revaluation of debt assumed
through acquisitions) to total capital (generally defined in the agreements as
total debt less revaluation of debt assumed through acquisitions plus net worth
including minority interest). At June 30, 2003, our consolidated net worth was
approximately $1.739 billion, and our ratio of total debt to total capital was
56.3%, calculated according to our credit facilities guidelines. Our continued
compliance is dependent on a number of factors, many of which are outside of
our control. Should events occur that would result in noncompliance, we believe
that a number of acceptable options would be available to us including, but not
limited to, amending the credit facilities, obtaining a waiver or
pursuing additional or alternative financing arrangements, but we
cannot assure that these options would be available on attractive terms or
at all.

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

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, 2002 and in Note 13 to the Notes to
Consolidated Financial Statements included in this quarterly report related to
an operating lease with a special purpose entity.

Canadian-U.S. Dollar Exchange Rate Fluctuation Effect on Earnings

Nearly half of our manufacturing costs and certain financial liabilities are
denominated in Canadian dollars. Sales are denominated in the currency of the
country in which they occur. Accordingly, changes in the Canadian-U.S. dollar
exchange rate may significantly impact our revenues and costs. The magnitude
and direction of this impact primarily depends on our production and sales
volume, the proportion of our production and sales that occur in Canada, the
proportion of our tax and other financial liabilities denominated in Canadian
dollars, our hedging levels, and the magnitude, direction and duration of
changes in the Canadian-U.S. dollar exchange rate. Increases in the value of
the Canadian dollar versus the U.S. dollar reduce our earnings, which are
reported in U.S. dollar terms. See the subsection under Risks Related to Our
Business entitled We are exposed to currency fluctuations.

We attempt to partially limit our exposure to Canadian-U.S. dollar exchange
rate fluctuations through hedging transactions. Under the exchange
rates, hedging levels and operating conditions that existed during
the quarter ended June 30, 2003, for every one-cent change in the Canadian-U.S. dollar exchange rate, our
operating income, net of hedging, for the second quarter of 2003 would have been
reduced by approximately $2.25 million, or approximately $9 million on an
annualized basis. For a description of our hedging activities, see Note 15 to
the Notes to Consolidated Financial Statements included in this quarterly
report.

Canadian Dollar Hedging Program

At June 30, 2003 we had approximately $151.2 million of unrealized gains
recorded on our Canadian dollar hedging program compared to an approximately
$8.0 million unrealized loss at December 31, 2002. These unrealized gains are
classified in Other current assets or Other assets in our consolidated
balance sheet depending on the maturity date of the hedging contract. These
unrealized hedging gains account for the majority of the change in these
balance sheet classifications from December 31, 2002 to June 30, 2003.

Cost Reduction Initiatives

In April 2003, Bowater announced that it would increase its workforce
reductions to 600 positions from the 500 positions announced in the fourth
quarter of 2002. The workforce reductions are expected to affect approximately
7% of our total workforce. Through June 30, 2003, approximately 520 positions
were eliminated with the anticipated balance of the 600 positions to come
throughout 2003. The expense of the 520 workforce reductions since inception to
June 30, 2003 was $38.3 million (of which $13.4 million was expensed in 2002).
Of this expense, $7.3 million was recorded as an increase in pension accruals
from a pension plan curtailment and other pension plan benefits and $13.1
million has been paid in cash. The remaining accrual of approximately $17.9
million is expected to be paid in 2003 and the first half of 2004. These
workforce reductions were part of a multifaceted cost reduction initiative
announced in the fourth quarter of 2002 that will consist of workforce
reductions, lowering of manufacturing costs and rationalization of production.
Estimated annual cost savings related to the cost reduction initiatives are
expected to be in excess of $75 million, pre-tax, by the end of 2003. By the
end of the second quarter of 2003, we had implemented plans to attain over half
of these savings.

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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
September 15, 2002. We adopted SFAS No. 143 on January 1, 2003 and recorded a
cumulative effect adjustment of $2.1 million, net of taxes ($0.04 per share).

On July 30, 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated or modified after December 31, 2002. We adopted SFAS
No. 146 on January 1, 2003 and account for applicable exit or disposal
activities in accordance with the provisions of SFAS No. 146, which impact the
timing of exit or disposal activities reported by us.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to include
disclosure of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other certain
obligations undertaken in issuing a guarantee. The recognition requirement is
effective for guarantees issued or modified after December 31, 2002. Our
off-balance sheet debt guarantees include: $45.2 million related to Ponderay
Newsprint Company, an unconsolidated partnership in which we have a 40%
interest, $10.5 million, representing 25% of the outstanding investor notes
principal balance of Timber Note Holdings LLC, one of our QSPEs and $43.5
million on our synthetic lease for our Covington Tennessee Nuway facility.
These off-balance sheet arrangements were entered into prior to December 31,
2002. We adopted the provisions of FIN 45 on January 1, 2003 and will follow
FIN 45 guidance for any guarantees that are issued or modified. In August 2003,
we used the approximate $11.8 million balance of the remaining net proceeds of
the $400 million notes issuance (See Note 11), plus new borrowings under our
accounts receivable securitization program, to terminate the lease and purchase
the Nuway facility from the SPE; all at a total cost of approximately $51.8
million. (See Notes 11 and 13 to the Notes to Consolidated Financial
Statements included in this quarterly report).

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation (SFAS No. 148). This Statement
amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
SFAS No. 148 is effective for annual periods ending after December 15, 2002 and
interim periods beginning after December 15, 2002. We have adopted the
provision of SFAS 148 on January 1, 2003 and have provided SFAS No. 148s
interim disclosures requirements in the Notes to Consolidated Financial
Statements included in this quarterly report.

In January 2003, The FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities. Many variable interest entities have commonly
been referred to as special-purpose entities or off-balance sheet structures.
In general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. A company that consolidates
a variable interest entity is called the primary beneficiary of that entity.
The consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. Bowater operates the Covington coating
facility under an operating lease with a special purpose entity. Under the new guidance
in FIN 46, we would be required to

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

consolidate the special purpose entity and
include the SPEs total assets and debt on our Consolidated Balance Sheet
effective July 1, 2003. Total assets and debt of the SPE were approximately
$51.8 million and $49.0 million, respectively. Management is currently
assessing the impact of FIN 46 to the Covington SPE and applicability of FIN 46
to other arrangements covered by FIN 46 and the impact on our financial
statements. In August 2003, we used the approximate $11.8 million balance of
the remaining net proceeds of the $400 million notes issuance (See Note 11 to
the Notes to Consolidated Financial Statements included in this quarterly
report) plus new borrowings under our accounts receivable securitization
program to terminate the lease and purchase the Nuway facility from the SPE;
all at a total cost of approximately $51.8 million (See Note 13 to the Notes to
Consolidated Financial Statements included in this quarterly report).

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies financial reporting for derivative instruments and for hedging
activities accounted for under SFAS No. 133 and is effective for contracts
entered into or modified, and for hedges designated, after June 30, 2003.
Adoption of the standard is not expected to have a material impact on our
Consolidated Financial Statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150
establishes how an issuer classifies and measures certain freestanding
financial instruments with characteristics of liabilities and equity and
requires that such instruments be classified as liabilities. The standard is
effective for financial instruments entered into or modified after May 31, 2003
and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. Adoption of the standard is not expected to
have a material impact on our Consolidated Financial Statements.

35



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##### 



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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Risk

We have updated the disclosure concerning our Canadian dollar forward
contracts, which is included in Note 10 to the Notes to Consolidated Financial
Statements included in this quarterly report. For information about the effect
of Canadian-U.S. dollar exchange rate fluctuations on our manufacturing costs
and Canadian dollar denominated liabilities, see the section entitled Canadian-U.S. Dollar
Exchange Rate Fluctuation Effect on Earnings and under Risks
Related to Our Business, the subsection entitled We are exposed to currency
fluctuations.

Interest Rate Risk

We are exposed to interest rate risk on our fixed-rate long-term debt and our
short-term variable rate bank debt. Our objective is to manage the impact of
interest rate changes on earnings and cash flows and on the market value of our
borrowings. We maintain a mix of fixed rate and variable rate borrowings. On
June 19, 2003, we sold, in a private placement, with registration rights, $400
million of our notes due 2013 with a fixed rate of 6.5%. These new fixed rate
notes replaced variable rate debt. As a result, at June 30, 2003 we had
$2,143.0 million of fixed rate long-term debt and $279.5 million of short and
long-term variable rate bank debt. The fixed rate long-term debt is exposed to
fluctuations in fair value resulting from changes in market interest rates, but
not earnings or cash flows. Our short-term bank debt approximates fair value
as it bears interest rates that approximate market, but changes in interest
rates do affect future earnings and cash flows. Based on our short-term
variable bank debt at June 30, 2003 of $279.5, a 100 basis point increase in
interest rates would increase our quarterly interest expense by $0.7 million.

Commodity Price Risk

We purchase significant amounts of energy, chemicals, wood fiber and recovered
paper to supply our manufacturing facilities. These raw materials are
market-priced commodities and, as such, are subject to fluctuations in market
prices. Increases in the prices of these commodities will tend to reduce our
reported earnings and decreases will tend to increase our reported earnings.
From time to time, we may enter into contracts aimed at securing a stable
source of supply for commodities such as timber, wood fiber, energy, chemicals
and recovered paper. These contracts typically require us to pay the market
price at the time of purchase. Thus under these contracts we generally remain
subject to market fluctuations in commodity prices.

Item 4. Controls and Procedures.



|(a) |  | Evaluation of Disclosure Controls and Procedures:
|--- |  | -------------------------------------------------

We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2003. Based on that
evaluation, the Chairman, President and Chief Executive Officer and the Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in recording, processing, summarizing, and timely reporting
information required to be disclosed in our reports to the Securities and
Exchange Commission.



|(b) |  | Changes in Internal Controls:
|--- |  | -----------------------------

There were no significant changes in our internal controls or in other factors
that could significantly affect those controls subsequent to the date of their
evaluation.

36



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##### 



BOWATER INCORPORATED AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.



|a. |  | We are 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. We believe
that the ultimate disposition of these matters will not have a material
adverse effect on our financial condition, but it could have a material
adverse effect on the results of operations in a given quarter or year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b. |  | In late 2001, Bowater, several other paper companies, and 120 other
companies were named as defendants in asbestos personal injury actions
based on product liability claims. These actions generally allege
occupational exposure to numerous products. Bowater has denied the
allegations and no specific product of Bowater has been identified by the
plaintiffs in any of the actions as having caused or contributed to any
individual plaintiffs alleged asbestos-related injury.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | These suits have been filed by approximately 855 claimants who sought
monetary damages in civil actions pending in state courts in Illinois,
Mississippi, Missouri, New York and Texas. Approximately 715 of these
claims have been dismissed, either voluntarily or by summary judgment, and
approximately 140 claims remain. All claims in Missouri have been
dismissed, and plaintiffs counsel in Illinois and Missouri have agreed not
to file similar cases. About fifteen new cases have been filed since April
2003. Insurers are defending these claims and we have not settled or paid
any of these claims. We believe that all of these asbestos-related claims
are covered by insurance, subject to any applicable deductibles and our
insurers rights to dispute coverage. While it is not possible to predict
with certainty the outcome of these matters, based upon the advice of
special counsel, at this time we do not expect these claims to have a
material adverse impact on Bowaters business, financial position or results
of operations.                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|c. |  | Bowater may be a potentially responsible party (PRP) with respect to
four hazardous waste sites which are being addressed pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (CERCLA or Superfund) or the Resource Conservation
and Recovery Act (RCRA) corrective action authority. The first two
sites are on CNC timberland tracts in South Carolina. One was
contaminated when acquired, and subsequently, the prior owner remediated
the site and continues to monitor the groundwater. On the second site,
several hundred steel drums containing textile chemical residue were
discarded by unknown persons. The EPA, based on the remoteness of the
site, listed it as No Further Action Status in September 2002. The
third site, at our mill in Coosa Pines, Alabama, contained buried drums
and has been remediated pursuant to RCRA. We continue to monitor the
groundwater. The fourth site is a drum recycling plant in South Carolina.
We were one of numerous parties that shipped empty drums. The U.S. EPA
has remediated the site pursuant to Superfund at a cost of $6.2 million.
Bowater has been designated by the EPA as a de minimis PRP, which means
that we will be required to pay a small percentage (estimated at 1-2%) of
the cleanup cost based on the number of drums involved. We believe we
will not be liable for any significant amounts at any of these sites.
|  
|d. |  | On December 28, 2001, we filed a lawsuit against the Tennessee Valley
Authority (TVA) alleging that TVA overcharged us for electricity it
supplied to our Calhoun, Tennessee and Grenada, Mississippi facilities.
We are seeking over $40 million in damages, and TVA has not filed any
counterclaims. The case is still in the discovery stage in federal court
in Knoxville, Tennessee, scheduled for trial on April 19, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

37



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##### 



BOWATER INCORPORATED AND SUBSIDIARIES

PART II

OTHER INFORMATION

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

On May 7, 2003, at the Companys Annual Meeting of Shareholders, the following
matters were submitted to a vote of the shareholders:

A resolution electing the following class of directors for a term of three
year: Richard Barth (50,315,055 votes in favor; 487,177 votes withheld);
Charles J. Howard (50,324,788 votes in favor; 477,444 votes withheld); Togo D.
West, Jr. (50,318,928 votes in favor; 483,304 votes withheld). The names of
each other director whose term of office as a director continued after the
meeting are: Francis J. Aguilar, Gordon D. Giffin, L. Jacques Ménard, Arnold M.
Nemirow, John A. Rolls 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
| |  |             |      |            
| |  |             | 4.1  |             |  | Purchase Agreement dated June 16, 2003, by and between
Bowater Incorporated and UBS Securities, LLC as Representative of
the Several Initial Purchasers named in Schedule I thereto.                                                                                                                                                                                               
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 4.2  |             |  | Indenture dated June 19, 2003, by and between Bowater
Incorporated, as Issuer, and The Bank of New York, as Trustee.                                                                                                                                                                                                                                                               
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 4.3  |             |  | Registration Rights Agreement dated June 19, 2003, by and
among Bowater Incorporated, as Issuer, and UBS Securities LLC, J.P.
Morgan Securities Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns
Corp., Wachovia Securities, Inc., SunTrust Capital Markets, Inc., TD
Securities (USA) Inc., BNY Capital Markets, Inc. and Banc of America
Securities LLC, as Initial Purchasers.
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 12.1 |             |  | Statement regarding Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                             
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 31.1 |             |  | Certification of CEO Pursuant to Section 302                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 31.2 |             |  | Certification of CFO Pursuant to Section 302                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 32.1 |             |  | Certification of CEO Pursuant to Section 906                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 32.2 |             |  | Certification of CFO Pursuant to Section 906                                                                                                                                                                                                                                                                                                                                       



| | (b) |  | Reports on Form 8-K:                                                                                                                                                                             
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On April 29, 2003, we filed a
report on Form 8-K announcing our
earnings for the first quarter of 2003 under Item 7.                                                                             
|
| |     |  | On June 12, 2003, we filed a report on Form 8-K announcing the
temporary shutdown of our Thunder Bay Ontario mill under Item 5.                                                                  
|
| |     |  | On June 17, 2003, we filed a report on Form 8-K announcing a
definitive agreement to issue $400 million in aggregate principal
amount of 6.5% notes due 2013 in a private placement under Item
5.

38



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##### 



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. MaffucciDavid G. MaffucciExecutive Vice President andChief Financial Officer


By
    
    /s/ Michael F. NocitoMichael F. NocitoVice President and Controller


Dated: August 13, 2003

39



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##### 



INDEX TO EXHIBITS

| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ----------- | ---- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exhibit No. |      | Description
| |  |             |      |            
| |  |             | 4.1  |             |  | Purchase Agreement dated June 16, 2003, by and between
Bowater Incorporated and UBS Securities, LLC as Representative of
the Several Initial Purchasers named in Schedule I thereto.                                                                                                                                                                                               
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 4.2  |             |  | Indenture dated June 19, 2003, by and between Bowater
Incorporated, as Issuer, and The Bank of New York, as Trustee.                                                                                                                                                                                                                                                               
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 4.3  |             |  | Registration Rights Agreement dated June 19, 2003, by and
among Bowater Incorporated, as Issuer, and UBS Securities LLC, J.P.
Morgan Securities Inc., Scotia Capital (USA) Inc., BMO Nesbitt Burns
Corp., Wachovia Securities, Inc., SunTrust Capital Markets, Inc., TD
Securities (USA) Inc., BNY Capital Markets, Inc. and Banc of America
Securities LLC, as Initial Purchasers.
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 12.1 |             |  | Statement regarding Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                                             
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 31.1 |             |  | Certification of CEO Pursuant to Section 302                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 31.2 |             |  | Certification of CFO Pursuant to Section 302                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 32.1 |             |  | Certification of CEO Pursuant to Section 906                                                                                                                                                                                                                                                                                                                                       
| |  |             |      |             |  |                                                                                                                                                                                                                                                                                                                                                                                    
| |  |             | 32.2 |             |  | Certification of CFO Pursuant to Section 906