##### 



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 September 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 November 3, 2003.

| |  |                               |  |                                 |  |  |  | 
| |  | ----------------------------- |  | ------------------------------- |  |  |  | 
| |  | Class                         |  | Outstanding at November 3, 2003
| |  |                               |  |                                
| |  | Common Stock, $1.00 Par Value |  | 55,398,088 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
Nine months Ended September 30, 2003, and 2002 |    |        | 3    | 
|                             |                                                                                          | Consolidated Balance Sheet at September 30, 2003,
and December 31, 2002                               |    |        | 4    | 
|                             |                                                                                          | Consolidated Statement of Capital Accounts
for the Nine months Ended September 30, 2003               |    |        | 5    | 
|                             |                                                                                          | Consolidated Statement of Cash Flows for the
Nine months Ended September 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 |                                                                                                       |    | 19-33  |     
|                             | 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                       |    | 34     |     
|                             | 4. Controls and Procedures                                                               |                                                                                                       |    | 34     |     
|PART II OTHER INFORMATION    |                                                                                          |                                                                                                       |    |       
|                             | Item 1. Legal Proceedings                                                                |                                                                                                       |    | 35     |     
|                             | Item 6. Exhibits and Reports on Form 8-K                                                 |                                                                                                       |    | 36     |     
|SIGNATURES                   |                                                                                          |                                                                                                       | 37 |       





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##### 



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

|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |       |       |  
|---------------------------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ----- | ----------------- | ----- | ------------- | ----- | ------------- | ------- | ----- | ----- | - | ------- | ----- | ----- | -
|                                                                                         |                                               |                                                     |       | Three Months Ended |       | Nine Months Ended
|                                                                                         |                                               |                                                     |       |                    |       |                  
|                                                                                         |                                               |                                                     |       | September 30,      |       | September 30,     |       | September 30, |       | September 30,
|                                                                                         |                                               |                                                     |       | 2003               |       | 2002              |       | 2003          |       | 2002         
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |              
|Sales                                                                                    |                                               | $                                                   | 690.9 |                    |       | $                 | 643.8 |               |       | $             | 1,985.5 |       |       | $ | 1,914.8 |      
|Cost of sales, excluding depreciation, amortization
and cost of timber harvested         |                                               |                                                     | 556.3 |                    |       |                   | 516.4 |               |       |               | 1,626.9 |       |       |   | 1,495.5 |      
|Depreciation, amortization and cost of timber harvested                                  |                                               |                                                     | 84.5  |                    |       |                   | 84.4  |               |       |               | 253.0   |       |       |   | 256.8   |      
|Distribution costs                                                                       |                                               |                                                     | 69.2  |                    |       |                   | 61.2  |               |       |               | 193.7   |       |       |   | 168.4   |      
|Selling and administrative expense                                                       |                                               |                                                     | 36.9  |                    |       |                   | 23.3  |               |       |               | 107.7   |       |       |   | 99.2    |      
|Net gain on sale of assets                                                               |                                               |                                                     | 4.1   |                    |       |                   | 4.8   |               |       |               | 119.2   |       |       |   | 79.8    |      
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Operating loss                                                                           |                                               |                                                     | (51.9 | )                  |       |                   | (36.7 | )             |       |               | (76.6   | )     |       |   | (25.3   | )    
|                                                                                        
|Other expense (income)                                                                   |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         | Interest income                               |                                                     |       | (1.1               | )     |                   |       | (1.0          | )     |               |         | (3.5  | )     |   |         | (3.2  | )    
|                                                                                         | Interest expense, net of capitalized interest |                                                     |       | 45.8               |       |                   |       | 39.7          |       |               |         | 127.9 |       |   |         | 122.8 |      
|                                                                                         | Other, net                                    |                                                     |       | (0.3               | )     |                   |       | (8.5          | )     |               |         | 10.5  |       |   |         | (3.4  | )    
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         |                                               |                                                     | 44.4  |                    |       |                   | 30.2  |               |       |               | 134.9   |       |       |   | 116.2   |      
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Loss before income taxes, minority interests
and cumulative effect of accounting changes |                                               |                                                     | (96.3 | )                  |       |                   | (66.9 | )             |       |               | (211.5  | )     |       |   | (141.5  | )    
|Provision for income tax expense (benefit)                                               |                                               |                                                     | (39.7 | )                  |       |                   | (34.8 | )             |       |               | (52.4   | )     |       |   | (60.1   | )    
|Minority interests in net income (loss) of subsidiaries                                  |                                               |                                                     | (2.3  | )                  |       |                   | 0.2   |               |       |               | (9.5    | )     |       |   | (5.6    | )    
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Loss before cumulative effect of accounting changes                                      |                                               |                                                     | (54.3 | )                  |       |                   | (32.3 | )             |       |               | (149.6  | )     |       |   | (75.8   | )    
|Cumulative effect of accounting changes                                                  |                                               |                                                     | (2.4  | )                  |       |                   |      |               |       |               | (4.5    | )     |       |   |        |      
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Net loss                                                                                 |                                               |                                                     | (56.7 | )                  |       |                   | (32.3 | )             |       |               | (154.1  | )     |       |   | (75.8   | )    
|Other comprehensive loss, net of tax                                                     |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         | Foreign currency translation adjustments      |                                                     |       | (0.8               | )     |                   |       | (1.7          | )     |               |         | 9.6   |       |   |         | 1.2   |      
|                                                                                         | Unrealized gain (loss) on hedged transactions |                                                     |       | (4.9               | )     |                   |       | (17.7         | )     |               |         | 93.8  |       |   |         | 7.2   |      
|                                                                                         | Minimum pension liability adjustments         |                                                     |       | 0.5                |       |                   |       |              |       |               |         | (6.8  | )     |   |         |      |      
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Comprehensive loss                                                                       |                                               | $                                                   | (61.9 | )                  |       | $                 | (51.7 | )             |       | $             | (57.5   | )     |       | $ | (67.4   | )    
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Basic loss per common share                                                              |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         |                                               | Loss before cumulative effect of accounting changes |       |                    | (0.96 | )                 |       |               | (0.57 | )             |         |       | (2.63 | ) |         |       | (1.33 | )
|                                                                                         |                                               | Cumulative effect of accounting changes             |       |                    | (0.04 | )                 |       |               |      |               |         |       | (0.08 | ) |         |       |      |  
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         |                                               | Net loss                                            |       | $                  | (1.00 | )                 |       | $             | (0.57 | )             |         | $     | (2.71 | ) |         | $     | (1.33 | )
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Diluted loss per common share                                                            |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         |                                               | Loss before cumulative effect of accounting changes |       |                    | (0.96 | )                 |       |               | (0.57 | )             |         |       | (2.63 | ) |         |       | (1.33 | )
|                                                                                         |                                               | Cumulative effect of accounting changes             |       |                    | (0.04 | )                 |       |               |      |               |         |       | (0.08 | ) |         |       |      |  
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|                                                                                         |                                               | Net loss                                            |       | $                  | (1.00 | )                 |       | $             | (0.57 | )             |         | $     | (2.71 | ) |         | $     | (1.33 | )
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      
|Dividends declared per common share                                                      |                                               | $                                                   | 0.20  |                    |       | $                 | 0.20  |               |       | $             | 0.60    |       |       | $ | 0.60    |      
|                                                                                         |                                               |                                                     |       |                    |       |                   |       |               |       |               |         |       |       |   |         |      

See accompanying notes to consolidated financial statements

3



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##### 



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

|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |         |         |  | 
|--------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------------- |  | ------------ | ------- | ------- |  | 
|                      |                                                                                                                                                               |                                            |                                      |         | September 30, |  | December 31,
|                      |                                                                                                                                                               |                                            |                                      |         | 2003          |  | 2002        
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |             
|ASSETS                |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|Current assets:       |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|                      | Cash and cash equivalents                                                                                                                                     |                                            | $                                    | 18.1    |               |  | $            | 35.9    |        
|                      | Accounts receivable, net                                                                                                                                      |                                            |                                      | 359.6   |               |  |              | 330.6   |        
|                      | Inventories                                                                                                                                                   |                                            |                                      | 288.4   |               |  |              | 257.2   |        
|                      | Income taxes receivable                                                                                                                                       |                                            |                                      |        |               |  |              | 75.6    |        
|                      | Other current assets                                                                                                                                          |                                            |                                      | 129.2   |               |  |              | 35.9    |        
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |         |        
|                      |                                                                                                                                                               | Total current assets                       |                                      |         | 795.3         |  |              |         | 735.2   | 
|                     
|                      | Timber and timberlands                                                                                                                                        |                                            |                                      | 184.4   |               |  |              | 212.0   |        
|                      | Fixed assets, net                                                                                                                                             |                                            |                                      | 3,603.9 |               |  |              | 3,645.6 |        
|                      | Goodwill                                                                                                                                                      |                                            |                                      | 828.2   |               |  |              | 839.9   |        
|                      | Other assets                                                                                                                                                  |                                            |                                      | 212.1   |               |  |              | 157.6   |        
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |         |        
|                      |                                                                                                                                                               | Total assets                               |                                      | $       | 5,623.9       |  |              | $       | 5,590.3 | 
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|                      |                                                                                                                                                               |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |               |  |              |         |         |  | 
|Current liabilities:  |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|                      | Current installments of long-term debt                                                                                                                        |                                            | $                                    | 17.5    |               |  | $            | 84.3    |        
|                      | Short-term bank debt                                                                                                                                          |                                            |                                      | 158.0   |               |  |              | 249.0   |        
|                      | Accounts payable and accrued liabilities                                                                                                                      |                                            |                                      | 413.5   |               |  |              | 411.9   |        
|                      | Dividends payable                                                                                                                                             |                                            |                                      | 11.6    |               |  |              | 11.2    |        
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |         |        
|                      |                                                                                                                                                               | Total current liabilities                  |                                      |         | 600.6         |  |              |         | 756.4   | 
|                      | Long-term debt, net of current installments                                                                                                                   |                                            |                                      | 2,290.6 |               |  |              | 2,037.4 |        
|                      | Other long-term liabilities                                                                                                                                   |                                            |                                      | 472.3   |               |  |              | 450.7   |        
|                      | Deferred income taxes                                                                                                                                         |                                            |                                      | 524.7   |               |  |              | 518.2   |        
|                      | Minority interests in subsidiaries                                                                                                                            |                                            |                                      | 68.8    |               |  |              | 72.1    |        
|                      | Commitments and contingencies                                                                                                                                 |                                            |                                      |        |               |  |              |        |        
|Shareholders equity: |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|                      | Common stock, $1 par value. Authorized 100,000,000 shares;
issued
66,928,794 and 66,897,158 shares at September 30, 2003 and
December 31, 2002, respectively  |                                            |                                      | 66.9    |               |  |              | 66.9    |        
|                      | Exchangeable shares, no par value. Unlimited shares authorized;
1,641,312 and 1,643,248 outstanding at September 30, 2003 and
December 31, 2002, respectively |                                            |                                      | 78.2    |               |  |              | 78.3    |        
|                      | Additional paid-in capital                                                                                                                                    |                                            |                                      | 1,598.1 |               |  |              | 1,596.8 |        
|                      | Retained earnings                                                                                                                                             |                                            |                                      | 461.6   |               |  |              | 649.9   |        
|                      | Unearned compensation                                                                                                                                         |                                            |                                      | (1.7    | )             |  |              |        |        
|                      | Accumulated other comprehensive loss                                                                                                                          |                                            |                                      | (53.5   | )             |  |              | (150.1  | )      
|                      | Treasury stock, at cost, 11,529,252 and 11,617,494 shares at
September 30, 2003 and December 31, 2002, respectively                                           |                                            |                                      | (482.7  | )             |  |              | (486.3  | )      
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |        
|                      |                                                                                                                                                               | Total shareholders equity                 |                                      |         | 1,666.9       |  |              |         | 1,755.5 | 
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |         |        
|                      |                                                                                                                                                               | Total liabilities and shareholders equity |                                      | $       | 5,623.9       |  |              | $       | 5,590.3 | 
|                      |                                                                                                                                                               |                                            |                                      |         |               |  |              |        

See accompanying notes to consolidated financial statements

4



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##### 



BOWATER INCORPORATED
CONSOLIDATED STATEMENT OF CAPITAL ACCOUNTS
For The Nine Months Ended September 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                                                                                                     |  |        |     |              |  |         |     |          |  |              |        |               |  |          | (154.1 | ) |  |   |     |       |  |             |       |   |  |   |       |  
|Retraction of exchangeable shares (1,936 common shares
issued and exchangeable shares retracted)             |  |        |      |              |  |         | (0.1 | )        |  |              | 0.1     |               |  |          |        |   |  |   |      |       |  |             |        |   |  |   |        |  
|Dividends ($0.60 per share)                                                                                  |  |        |     |              |  |         |     |          |  |              |        |               |  |          | (34.2  | ) |  |   |     |       |  |             |       |   |  |   |       |  
|Foreign currency translation                                                                                 |  |        |     |              |  |         |     |          |  |              |        |               |  |          |       |   |  |   |     |       |  |             | 9.6    |   |  |   |       |  
|Stock options exercised (29,700 shares)                                                                      |  |        |     |              |  |         |     |          |  |              | 0.7     |               |  |          |       |   |  |   |     |       |  |             |       |   |  |   |       |  
|Tax benefit on exercise of stock options                                                                     |  |        |     |              |  |         |     |          |  |              | 0.2     |               |  |          |       |   |  |   |     |       |  |             |       |   |  |   |       |  
|Stock option compensation                                                                                    |  |        |     |              |  |         |     |          |  |              | 0.4     |               |  |          |       |   |  |   |     |       |  |             |       |   |  |   |       |  
|Translation of pension plan additional minimum liability,
net of $4.0 translation of related tax provision   |  |        |     |              |  |         |     |          |  |              |        |               |  |          |       |   |  |   |     |       |  |             | (6.8   | ) |  |   |       |  
|Treasury stock used for dividend reinvestment plans and
to pay employee and director benefits (5,732 shares) |  |        |     |              |  |         |     |          |  |              |        |               |  |          |       |   |  |   |     |       |  |             |       |   |  |   | 0.2    |  
|Restricted stock grant (82,510 shares from treasury stock)                                                   |  |        |     |              |  |         |     |          |  |              | (0.1    | )             |  |          |       |   |  |   | (3.3 | )     |  |             |       |   |  |   | 3.4    |  
|Amortization of unearned compensation                                                                        |  |        |     |              |  |         |     |          |  |              |        |               |  |          |        |   |  |   | 1.6  |       |  |             |       |   |  |   |        |  
|Unrealized gain on hedged transactions,
net of tax provision of $57.6                                        |  |        |     |              |  |         |     |          |  |              |        |               |  |          |       |   |  |   |     |       |  |             | 93.8   |   |  |   |       |  
|                                                                                                             |  |        |      |              |  |         |      |          |  |              |         |               |  |          |        |   |  |   |      |       |  |             |        |   |  |   |        |  
|Balance at September 30, 2003                                                                                |  | $      | 66.9 |              |  | $       | 78.2 |          |  | $            | 1,598.1 |               |  | $        | 461.6  |   |  | $ | (1.7 | )     |  | $           | (53.5  | ) |  | $ | (482.7 | )
|                                                                                                             |  |        |      |              |  |         |      |          |  |              |         |               |  |          |        |   |  |   |      |       |  |             |        |   |  |   |        |  

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)

|                                                                                |                                                           |                                               |        |                   |       |               |        |       |       |  
|------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------- | ------ | ----------------- | ----- | ------------- | ------ | ----- | ----- | -
|                                                                                |                                                           |                                               |        | Nine Months Ended
|                                                                                |                                                           |                                               |        |                  
|                                                                                |                                                           |                                               |        | September 30,     |       | September 30,
|                                                                                |                                                           |                                               |        | 2003              |       | 2002         
|                                                                                |                                                           |                                               |        |                   |       |              
|Cash flows from operating activities:                                           |                                                           |                                               |        |                   |       |               |        |      
|Net loss                                                                        |                                                           | $                                             | (154.1 | )                 |       | $             | (75.8  | )    
|Cumulative effect of accounting changes                                         |                                                           |                                               | 4.5    |                   |       |               |       |      
|Adjustments to reconcile net loss to net cash
provided by operating activities: |                                                           |                                               |        |                   |       |               |        |      
|Depreciation, amortization and cost of
timber harvested                         |                                                           |                                               | 253.0  |                   |       |               | 256.8  |      
|Deferred income taxes                                                           |                                                           |                                               | (57.5  | )                 |       |               | (60.2  | )    
|Amortization of unearned compensation                                           |                                                           |                                               | 1.6    |                   |       |               |       |      
|Minority interests in net loss of subsidiaries                                  |                                                           |                                               | (9.5   | )                 |       |               | (5.6   | )    
|Net gain on sale of assets                                                      |                                                           |                                               | (119.2 | )                 |       |               | (79.8  | )    
|Changes in working capital:                                                     |                                                           |                                               |        |                   |       |               |        |      
|                                                                                | Accounts receivable, net                                  |                                               |        | (29.1             | )     |               |        | 23.7  |      
|                                                                                | Inventories                                               |                                               |        | (31.2             | )     |               |        | (5.0  | )    
|                                                                                | Income taxes receivable                                   |                                               |        | 75.6              |       |               |        |      |      
|                                                                                | Accounts payable and accrued liabilities                  |                                               |        | 41.8              |       |               |        | (42.9 | )    
|                                                                                | Income taxes payable                                      |                                               |        | 25.9              |       |               |        | 40.0  |      
|Receipts (payments) on maturity of hedging contracts                            |                                                           |                                               | 25.4   |                   |       |               | (10.0  | )    
|Other, net                                                                      |                                                           |                                               | (2.7   | )                 |       |               | 0.5    |      
|                                                                                |                                                           |                                               |        |                   |       |               |        |      
|                                                                                |                                                           | Net cash from operating activities            |        |                   | 24.5  |               |        |       | 41.7  |  
|                                                                               
|Cash flows from investing activities:                                           |                                                           |                                               |        |                   |       |               |        |      
|Cash invested in fixed assets, timber and timberlands                           |                                                           |                                               | (186.5 | )                 |       |               | (190.2 | )    
|Disposition of assets, including timber and timberlands                         |                                                           |                                               | 146.1  |                   |       |               | 24.7   |      
|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        |        |                   | (40.4 | )             |        |       | (75.7 | )
|                                                                               
|Cash flows from financing activities:                                           |                                                           |                                               |        |                   |       |               |        |      
|Cash dividends, including minority interests                                    |                                                           |                                               | (33.8  | )                 |       |               | (38.4  | )    
|Short-term financing                                                            |                                                           |                                               | 693.1  |                   |       |               | 765.4  |      
|Short-term financing repayments                                                 |                                                           |                                               | (784.1 | )                 |       |               | (929.7 | )    
|Net borrowings of long-term debt                                                |                                                           |                                               | 122.2  |                   |       |               | 228.3  |      
|Stock options exercised                                                         |                                                           |                                               | 0.7    |                   |       |               | 6.8    |      
|                                                                                |                                                           |                                               |        |                   |       |               |        |      
|                                                                                |                                                           | Net cash from (used for) financing activities |        |                   | (1.9  | )             |        |       | 32.4  |  
|                                                                                |                                                           |                                               |        |                   |       |               |        |      
|Net decrease in cash and cash equivalents                                       |                                                           |                                               | (17.8  | )                 |       |               | (1.6   | )    
|Cash and cash equivalents at beginning of year                                  |                                                           |                                               | 35.9   |                   |       |               | 28.3   |      
|                                                                                |                                                           |                                               |        |                   |       |               |        |      
|Cash and cash equivalents at end of period                                      |                                                           | $                                             | 18.1   |                   |       | $             | 26.7   |      
|                                                                                |                                                           |                                               |        |                   |       |               |        |      
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |                                                           |                                               |        |                   |       |               |        |      
|Cash paid during the period for:                                                |                                                           |                                               |        |                   |       |               |        |      
|                                                                                | Interest, including capitalized interest of $7.5 and $5.8 |                                               | $      | 114.8             |       |               | $      | 109.0 |      
|                                                                                | Income taxes                                              |                                               | $      | 3.0               |       |               | $      | 23.0  |      

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 September 30, 2003 and the related statement of operations,
capital accounts and cash flows for the periods ended September 30, 2003 and
2002 are unaudited. In our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for the fair presentation of the interim
financial statements have been made. The results of the interim period ended
September 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: $42.4 million related to Ponderay Newsprint Company,
an unconsolidated partnership in which we have a 40% interest, and $10.5
million representing 25% of the outstanding investor notes principal balance
of Timber Note Holdings LLC, one of our qualified special purpose entities.
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. 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. Bowater adopted
the recognition requirements of FIN 45 on January 1, 2003. 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 tax assets 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

7



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | 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 |       | Nine Months Ended
|                                                                                       |  | September 30,      |       | September 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                                                                               |  | $                  | (56.7 | )                 |  | $    | (32.4 | )    |  | $ | (151.9 | ) |  | $ | (76.2 | )
|                                                                                       |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|Net loss per diluted share                                                             |  | $                  | (1.00 | )                 |  | $    | (0.57 | )    |  | $ | (2.67  | ) |  | $ | (1.34 | )
|                                                                                       |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  



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

|                                                         |  |               |     |               |  |   |     | 
|-------------------------------------------------------- |  | ------------- | --- | ------------- |  | - | --- | 
|                                                         |  | Three Months  |     | Nine Months  
|                                                         |  | Ended         |     | Ended        
|                                                         |  | September 30, |     | September 30,
|(Unaudited, in millions)                                 |  | 2003          |     | 2003         
|                                                         |  |               |     |              
|Asset retirement obligation at the beginning of period   |  | $             | 4.5 |               |  | $ |    | 
|Cumulative effect adjustment of adoption of SFAS No. 143 |  |               |    |               |  |   | 4.3 | 
|Accretion expense                                        |  |               | 0.1 |               |  |   | 0.3 | 
|                                                         |  |               |     |               |  |   |     | 
|Asset retirement obligation at the end of period         |  | $             | 4.6 |               |  | $ | 4.6 | 
|                                                         |  |               |     |               |  |   |     | 



|4. |  | Off-Balance Sheet Arrangement - FIN 46, Consolidation of Variable
Interest Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. Many variable interest entities
(VIE) have commonly been referred to as special-purpose entities or
off-balance sheet structures. In general, a VIE 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 VIE to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the VIEs activities or entitled to receive a majority of the
entitys residual returns or both. A company that consolidates a VIE is
called the primary beneficiary of that entity. The consolidation requirements
of FIN 46 apply immediately to VIEs 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 VIE was established. In October 2003, the FASB
deferred the implementation of FIN 46 for VIEs created before January 31,
2003, for periods ending after December 15, 2003. Early adoption and partial
adoption is allowed under FIN 46 for VIEs created before January 31, 2003.
Effective July 1, 2003, Bowater adopted FIN 46 on a partial basis.
|  
|   |  | 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, had 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 were not consolidated in Bowaters financial statements prior to July
1, 2003. The lease was classified as an operating lease and the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

8



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|   |  | payments
expensed in accordance with SFAS No. 13, Accounting for Leases. The base
lease term for the facility was scheduled to expire on April 30, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective July 1, 2003, Bowater early adopted FIN 46 specific to the Covington
coating facility under the operating lease with the SPE. This special purpose
entity was determined to be a VIE and required to be consolidated by Bowater
in accordance with FIN 46. Bowater consolidated assets and debt of
approximately $51.8 million and recorded a non-cash, after tax cumulative
effect charge of $2.4 million, or $0.04 per diluted share in the third quarter
of 2003. On August 11, 2003, Bowater terminated the lease agreement with the
SPE and paid approximately $51.8 million to pay off the debt. Bowater is
currently evaluating other potential VIEs in accordance with FIN 46 and will
finalize its adoption of FIN 46 in the fourth quarter of 2003. We do not
expect the finalization of adoption of FIN 46 to have a material impact on our
consolidated financial statements.
|  
|5. |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                                                                                               |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|-------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                               |  | Three Months Ended |       | Nine Months Ended
|                                                                                                               |  | September 30,      |       | September 30,    
|(Unaudited, in millions, except per-share amounts)                                                             |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                                                                                               |  |                    |       |                   |  |      |       |     
|Net loss as reported:                                                                                          |  | $                  | (56.7 | )                 |  | $    | (32.3 | )    |  | $ | (154.1 | ) |  | $ | (75.8 | )
|Add: Stock-based compensation expense included in
net loss, net of related tax effects                         |  |                    | 0.4   |                   |  |      | 0.6   |      |  |   | 1.3    |   |  |   | 0.6   |  
|Deduct: Stock-based compensation expense
determined under fair value based methods, net of
related tax effects |  |                    | 1.8   |                   |  |      | 2.3   |      |  |   | 5.6    |   |  |   | 6.5   |  
|                                                                                                               |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|Pro forma net loss                                                                                             |  | $                  | (58.1 | )                 |  | $    | (34.0 | )    |  | $ | (158.4 | ) |  | $ | (81.7 | )
|                                                                                                               |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|Loss per share:                                                                                                |  |                    |       |                   |  |      |       |      |  |   |        |   |  |   |       |  
|Basic, as reported                                                                                             |  | $                  | (1.00 | )                 |  | $    | (0.57 | )    |  | $ | (2.71  | ) |  | $ | (1.33 | )
|Basic, pro forma                                                                                               |  |                    | (1.02 | )                 |  |      | (0.60 | )    |  |   | (2.78  | ) |  |   | (1.44 | )
|                                                                                                              
|Diluted, as reported                                                                                           |  | $                  | (1.00 | )                 |  | $    | (0.57 | )    |  | $ | (2.71  | ) |  | $ | (1.33 | )
|Diluted, pro forma                                                                                             |  |                    | (1.02 | )                 |  |      | (0.60 | )    |  |   | (2.78  | ) |  |   | (1.44 | )

9



---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | The fair value of options granted in the three and nine months ended September
30, 2003 and 2002, was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions. (No
options were granted during the three months ended September 30, 2003):
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |                                |   |                    |   |                   |   |       |       |      |   |       |       |   |   |       |       |  
|------------------------------------------ | ------------------------------ | - | ------------------ | - | ----------------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                           |                                |   | Three Months Ended |   | Nine Months Ended
|                                           |                                |   | September 30,      |   | September 30,    
|                                           |                                |   | 2003               |   | 2002              |   | 2003  |       | 2002
|                                           |                                |   |                    |   |                   |   |       |       |      |   |       |       |   |   |       |       |  
|Assumptions:                               |                                |   |                    |   |                   |   |       |       |      |   |       |       |   |   |       |      
|                                           | Dividend yield                 |   |                    |  | %                 |   |       | 1.75  | %    |   |       | 1.96  | % |   |       | 1.64  | %
|                                           | Expected volatility            |   |                    |  | %                 |   |       | 30.12 | %    |   |       | 31.77 | % |   |       | 30.29 | %
|                                           | Risk-free interest rate        |   |                    |  | %                 |   |       | 3.86  | %    |   |       | 3.35  | % |   |       | 4.67  | %
|                                           | Expected option lives in years |   |                    |  |                   |   |       | 6.28  |      |   |       | 6.24  |   |   |       | 6.28  |  
|                                           |                                |   |                    |   |                   |   |       |       |      |   |       |       |   |   |       |       |  
|Weighted average fair value of each option |                                | $ |                   |   |                   | $ | 13.98 |       |      | $ | 12.19 |       |   | $ | 16.62 |      
|                                           |                                |   |                    |   |                   |   |       |       |      |   |       |       |   |   |       |       |  



|   |  | 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 are recognizing 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 $1.6 million related to the amortization of
unearned compensation for the three and nine-month periods ended September 30,
2003.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Net Gain on Sale of Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | In the third quarter of 2003 and 2002, Bowater sold fixed assets and land
resulting in pre-tax gains of $4.1 million and $4.8 million, respectively. In
the nine months ended September 30, 2003 and 2002, we sold fixed assets and
land resulting in pre-tax gains of $119.2 million and $79.8 million,
respectively, primarily from the transactions described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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 Statement of Financial Accounting
Standards (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). Bowater retained an interest in the QSPE of $7.1 million. The
principal variable in determining the fair value of future expected
excess cash flows of the retained                                                        

10



---



##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |   |  | interest is the discount rate, as it
consists of a note with a low level of credit risk, contractually due in
15 years and not subject to prepayment. The discount rate used for the
note is 6.91%.                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We recorded a $3.9 million loss on the monetization of the notes
receivable, which was based on the difference in the original carrying
amount of the notes (allocated between the asset monetized and the
retained interest) and the fair value at the date of the monetization.



|7. |  | Other Expense (Income)                                                          
|-- |  | --------------------------------------------------------------------------------
|  
|   |  | Other, net in the Consolidated Statement of Operations includes the
following:

|                                 |  |                    |      |                   |  |      |      |      |  |   |      |   |  |   |      |  
|-------------------------------- |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                 |  | Three Months Ended |      | Nine Months Ended
|                                 |  | September 30,      |      | September 30,    
|(Unaudited, in millions)         |  | 2003               |      | 2002              |  | 2003 |      | 2002
|                                 |  |                    |      |                   |  |      |      |     
|Foreign exchange loss (gain)     |  | $                  | 2.1  |                   |  | $    | (8.9 | )    |  | $ | 15.9 |   |  | $ | (5.4 | )
|(Income) loss from joint venture |  |                    | (1.0 | )                 |  |      | 1.0  |      |  |   | (0.8 | ) |  |   | 2.9  |  
|Miscellaneous income             |  |                    | (1.4 | )                 |  |      | (0.6 | )    |  |   | (4.6 | ) |  |   | (0.9 | )
|                                 |  |                    |      |                   |  |      |      |      |  |   |      |   |  |   |      |  
|                                 |  | $                  | (0.3 | )                 |  | $    | (8.5 | )    |  | $ | 10.5 |   |  | $ | (3.4 | )
|                                 |  |                    |      |                   |  |      |      |      |  |   |      |   |  |   |      |  



|8. |  | Accumulated Other Comprehensive Income (Loss)                                                             
|-- |  | ----------------------------------------------------------------------------------------------------------
|  
|   |  | The components of Accumulated other comprehensive loss in the Consolidated
Balance Sheet are as follows:

|                                                  |  |               |        |              |  |   |        |  
|------------------------------------------------- |  | ------------- | ------ | ------------ |  | - | ------ | -
|                                                  |  | September 30, |        | December 31,
|(Unaudited, in millions)                          |  | 2003          |        | 2002        
|                                                  |  |               |        |             
|Pension plan additional minimum liabilities (1)   |  | $             | (142.0 | )            |  | $ | (135.2 | )
|Foreign currency translation                      |  |               | (0.3   | )            |  |   | (9.9   | )
|Unrealized gain (loss) on hedging transactions(2) |  |               | 88.8   |              |  |   | (5.0   | )
|                                                  |  |               |        |              |  |   |        |  
|                                                  |  | $             | (53.5  | )            |  | $ | (150.1 | )
|                                                  |  |               |        |              |  |   |        |  



|(1) Net of deferred tax benefit of $80.7 million and $76.7 million,
respectively          
|------------------------------------------------------------------------------------------
|                                                                                          
|(2)Net of deferred tax (expense) benefit of $(54.6) million and $3.0
million, respectively



|9. |  | 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 changes is as
follows:

11



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited

|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |   | 
|-------------------------------------------------- | ------- | ---- | ------------------ | ---- | ----------------- | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | - | 
|                                                   |         |      | Three
Months Ended |      | Nine
Months Ended
|                                                   |         |      | September
30,      |      | September
30,    
|(Unaudited,
in millions, except per-share amounts) |         | 2003 |                    | 2002 |                   | 2003 |       | 2002
|                                                   |         |      |                    |      |                   |      |       |     
|Basic computation:                                 |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Basic loss available to common shareholders        |         | $    | (56.7              | )    |                   | $    | (32.3 | )    |  | $ | (154.1 | ) |  | $ | (75.8 | )
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Basic weighted average shares outstanding          |         |      | 56.9               |      |                   |      | 56.9  |      |  |   | 56.9   |   |  |   | 56.9  |  
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Basic loss per common share                        |         | $    | (1.00              | )    |                   | $    | (0.57 | )    |  | $ | (2.71  | ) |  | $ | (1.33 | )
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Diluted computation:                               |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Diluted loss available to common shareholders      |         | $    | (56.7              | )    |                   | $    | (32.3 | )    |  | $ | (154.1 | ) |  | $ | (75.8 | )
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Basic weighted average shares outstanding          |         |      | 56.9               |      |                   |      | 56.9  |      |  |   | 56.9   |   |  |   | 56.9  |  
|Effect of dilutive securities:                     |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|                                                   | Options |      |                    |     |                   |      |       |     |  |   |        |  |  |   |       |  | 
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Diluted weighted average shares outstanding        |         |      | 56.9               |      |                   |      | 56.9  |      |  |   | 56.9   |   |  |   | 56.9  |  
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  
|Diluted loss per common share                      |         | $    | (1.00              | )    |                   | $    | (0.57 | )    |  | $ | (2.71  | ) |  | $ | (1.33 | )
|                                                   |         |      |                    |      |                   |      |       |      |  |   |        |   |  |   |       |  



|    |  | The dilutive effect of options outstanding is calculated using the treasury
stock method. Options outstanding at September 30, 2003 and 2002, for
approximately 4.1 million and 3.5 million shares, respectively, were excluded
from the calculation of diluted loss per share as the impact would have been
antidilutive.                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | As of September 30, 2003 and December 31, 2002, we had unamortized goodwill in
the amount of $828.2 million and $839.9 million, respectively. As of
September 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 $11.7 million in the first nine
months of 2003 as a result of the reduction of certain tax reserves in
connection with the resolution of certain tax matters on prior acquisitions.
|   
|11. |  | Acquisition/Divestiture and Severance Related Liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | WORKFORCE REDUCTIONS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The following table summarizes the activity of our workforce reductions in
2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                           |                            |                    |                    |                    |                   |   |      |      | 
|-------------------------- | -------------------------- | ------------------ | ------------------ | ------------------ | ----------------- | - | ---- | ---- | 
|                           |                            |                    | Three Months Ended |                    | Nine Months Ended
|(Unaudited, in millions)   |                            | September 30, 2003 |                    | September 30, 2003
|                           |                            |                    |                    |                   
|Employee termination costs |                            | $                  | 4.7                |                    |                   | $ | 29.6 |     
|Classified as:             |                            |                    |                    |                    |                   |   |      |     
|                           | Cost of sales              |                    |                    | 4.7                |                   |   |      | 28.6 | 
|                           | Selling and administrative |                    |                    |                   |                   |   |      | 1.0  | 
|Cash payments              |                            |                    | 6.1                |                    |                   |   | 18.7 |     



| |  | In the third quarter of 2003, Bowater recorded approximately $4.7 million for
employee termination costs, including severance, pension, medical and other
benefits for involuntary workforce reductions that were finalized in the third
quarter of 2003 and for prior quarter terminations for certain employees
required to render service until their final termination date. Included in
the employee termination costs of $4.7 million are pension plan benefits of
approximately $1.1 million.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | In the second and first quarter of 2003, Bowater reduced its workforce by
approximately 255 and 79 people and recorded approximately $18.2 million and
$6.7 million, respectively for employee termination costs, including
severance, pension, medical and other benefits. These terminations were part
of either a voluntary or involuntary workforce reduction that was finalized in
the respective quarter. Included in the employee termination costs of $18.2
million for the second quarter 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.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 $1.2 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 September 30, 2003, of $15.6 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                       |                             |             |             |      |               |      |               |          |             |   |            |      |  |   |      |      | 
|-------------------------------------- | --------------------------- | ----------- | ----------- | ---- | ------------- | ---- | ------------- | -------- | ----------- | - | ---------- | ---- |  | - | ---- | ---- | 
|                                       |                             |             |             |      |               |      | Three Months  |          | Nine Months |   |            |      | 
|                                       |                             |             |             |      |               |      | Ended         |          | Ended       |   | Cumulative
|                                       |                             |             | Expected to |      | September 30, |      | September 30, |          | Expense    
|(Unaudited, in millions)               |                             | be Incurred |             | 2003 |               | 2003 |               | Incurred
|                                       |                             |             |             |      |               |      |               |         
|Employee termination costs
by segment: |                             |             |             |      |               |      |               |          |             |   |            |      |  |   |      |     
|                                       | Newsprint                   |             | $           | 26.7 |               |      | $             | 3.2      |             |   | $          | 20.5 |  |   | $    | 26.4 | 
|                                       | Coated and Specialty Papers |             |             | 11.9 |               |      |               | 1.3      |             |   |            | 5.6  |  |   |      | 11.1 | 
|                                       | Canadian Forest Products    |             |             | 2.5  |               |      |               | 0.1      |             |   |            | 2.4  |  |   |      | 2.4  | 
|                                       | Forest Products             |             |             | 1.5  |               |      |               | 0.1      |             |   |            | 1.1  |  |   |      | 1.5  | 
|                                       | Corporate/Other             |             |             | 1.7  |               |      |               |         |             |   |            |     |  |   |      | 1.6  | 
|                                       |                             |             |             |      |               |      |               |          |             |   |            |      |  |   |      |     
|                                       |                             | $           | 44.3        |      |               | $    | 4.7           |          |             | $ | 29.6       |      |  | $ | 43.0 |     
|                                       |                             |             |             |      |               |      |               |          |             |   |            |      |  |   |      |      | 



| |  | 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 $0.4 million) was paid through December 31, 2002.
Approximately $0.1 million was paid in the third quarter and $1.3 million in
the first nine months of 2003. The remaining accrual at September 30, 2003,
of $0.2 million is expected to be paid during the fourth quarter of 2003, and
is included in Accounts payable and accrued liabilities in the Consolidated
Balance Sheet.

13



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table summarizes the activity for the liabilities related to the
workforce reductions (excluding the pension related charges) and the Alliance
acquisition liabilities described above for the nine months ended September
30, 2003:

|                           |  |          |      |         |  |            |      |           |         |          |      |         |  |   |     |  |  |   |      | 
|-------------------------- |  | -------- | ---- | ------- |  | ---------- | ---- | --------- | ------- | -------- | ---- | ------- |  | - | --- |  |  | - | ---- | 
|                           |  |          |      |         |  | Write-offs |      |           |         |          |      |         |  |   |     |  |  |  
|                           |  |          |      |         |  | &          |      |           |         |          |      |         |  |   |     |  |  |  
|                           |  |          |      |         |  | Payments   |      |           |         |          |      | Foreign |  |   |     | 
|                           |  | Balance, |      | Against |  | Increase   |      | Exchange/ |         | Balance,
|(Unaudited, in millions)   |  | 12/31/02 |      | Reserve |  | Reserve    |      | Other     | 9/30/03
|                           |  |          |      |         |  |            |      |           |        
|Employee termination costs |  | $        | 14.2 |         |  | $          | 20.0 |           |         | $        | 21.3 |         |  | $ | 0.3 |  |  | $ | 15.8 | 



|12. |  | 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). In August 2003, we
used the $11.8 million balance of the net proceeds, plus new borrowings under
our accounts receivable securitization program, to pay off the debt
related to our lease agreement at Covington, Tennessee (See Note 4). In November 2003, Bowater completed a registered
offering to exchange the notes issued in the private placement for new,
freely-tradeable notes with substantially identical terms.
|   
|13. |  | Dividends to Minority Interest Shareholder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | During the first nine 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 nine months of 2002, the Board of Directors
of CNC declared dividends of $8.9 million. As a result, $4.4 million was paid
to the minority shareholder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|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 874 claimants who sought monetary
damages in civil actions pending in state courts in Illinois, Mississippi,
Missouri, New York and Texas. Approximately 731 of these claims have been
dismissed, either voluntarily or by summary judgment, and approximately 143
claims remain. All claims in Missouri have been dismissed, and plaintiffs
counsel in Illinois and Missouri have agreed not to file similar cases. About
nineteen new cases have been filed since June 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                                                                                                                                                                                                                                                                                                                                                                                                                                                  

14



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



|    |  | 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, and is 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 nine months of
2003, we recorded a net gain of $151.4 million
($93.8 million, after tax) in Accumulated other comprehensive loss related
to our cash flow hedges. The net gain results from a reclassification of
$25.8 million ($16.0 million, after tax) of gains from Accumulated other
comprehensive loss to earnings and $177.2 million ($109.9 million, after tax)
of unrealized gains recorded for the change in value related to our cash flow
hedges. We expect to reclassify a $98.0 million gain ($60.8 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

15



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



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

|                                     |                 |             |         |           |       |              |       |                       |      |            |       |  |      |          |  |  |             | 
|------------------------------------ | --------------- | ----------- | ------- | --------- | ----- | ------------ | ----- | --------------------- | ---- | ---------- | ----- |  | ---- | -------- |  |  | ----------- | 
|                                     |                 |             |         |           |       |              |       | Net Asset (Liability) |      |            |       | 
|                                     |                 |             |         |           |       |              |       |                       |      |            |       | 
|                                     |                 |             |         | Notional  |       |              |       |                       |      |            |       |  |      | Range Of
|                                     |                 |             |         | Amount of |       | Carrying     |       | Fair                  |      | U.S.$/CDN$
|September 30, 2003 (in millions)     |                 | Derivatives |         | Amount    |       | Market Value |       | Exchange Rates       
|                                     |                 |             |         |           |       |              |       |                      
|Foreign Currency Exchange Agreements |                 |             |         |           |       |              |       |                       |      |            |       |  |      |          |  | 
|Buy Currency:                        |                 |             |         |           |       |              |       |                       |      |            |       |  |      |          |  | 
|                                     | Canadian dollar |             |         |           |       |              |       |                       |      |            |       |  |      |          |  |  |            
|                                     |                 | Due in 2003 |         | $         | 121.8 |              |       |                       | 21.8 |            |       |  | 21.8 |          |  |  | .6199-.6370 | 
|                                     |                 | Due in 2004 |         |           | 572.5 |              |       |                       | 97.4 |            |       |  | 97.4 |          |  |  | .6124-.6476 | 
|                                     |                 | Due in 2005 |         |           | 395.0 |              |       |                       | 24.2 |            |       |  | 24.2 |          |  |  | 6316-.7225  | 
|                                     |                 |             |         |           |       |              |       |                       |      |            |       |  |      |          |  | 
|                                     |                 | $           | 1,089.3 |           |       |              | 143.4 |                       |      |            | 143.4 |  |      |          |  | 
|                                     |                 |             |         |           |       |              |       |                       |      |            |       |  |      |          |  | 



|    |  | 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 September 30, 2003, our outstanding
Canadian dollar forward contracts had notional amounts of $100 million due on
December 30, 2003. The fair value of the Canadian dollar forward contracts
outstanding at September 30, 2003 was $0.4 million. The gain recorded for the
three months ended September 30, 2003 was less than $0.1 million. We recorded
a gain of approximately $17.2 million for the nine months ended September 30,
2003, and a loss of $3.7 million and gain of $1.6 million for the three and
nine months ended September 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 September 30, 2003, we had Canadian
dollar range forward contracts with notional amounts due in the fourth quarter
of 2003 of $21.0 million. The fair value of the Canadian dollar forward
contracts at September 30, 2003 was zero. The loss recorded for the three and
nine 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

16



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##### 



BOWATER INCORPORATED
Notes to Consolidated Financial Statements - Unaudited



| |  | are our reportable
segments. Certain segment information for the three and nine month periods
ended September 30, 2002 has been reclassified to conform to the September 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 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 coated and uncoated 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 certain of 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 Canadian 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. The line entitled Sales includes internal sales at each of the
business segments. The total column represents third party sales.

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 nine month periods ended September 30, 2003 and 2002 and segment
assets as of September 30, 2003 and 2002:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |     |  |  |   |       |   |  |   |         |  
|------------------------ |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------- | ----- | ------------ |  | ---------- | ------- | - |  | - | --- |  |  | - | ----- | - |  | - | ------- | -
|                         |  |           |         |          |  | Coated    |       |          |  |         |       |              |  |            |         |   |  |   |     |  |  |   |       |   |  |  
|                         |  |           |         |          |  | and       |       |          |  |         |       | Canadian     |  | Net        |         |   |  |   |     |  |  |  
|Three Months Ended       |  |           |         |          |  | Specialty |       | Forest   |  | Forest  |       | Gain on      |  | Corporate/ |         |   |  |  
|September 30, 2003       |  | Newsprint |         | Papers   |  | Products  |       | Products |  | Sale of |       | Other        |  |            |         |  
|(Unaudited, in millions) |  | Division  |         | Division |  | Division  |       | Division |  | Assets  |       | Eliminations |  | Total     
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |           
|Sales                    |  | $         | 368.1   |          |  | $         | 140.4 |          |  | $       | 34.2  |              |  | $          | 196.3   |   |  | $ |    |  |  | $ | (48.1 | ) |  | $ | 690.9   |  
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |     |  |  |   |       |   |  |   |         |  
|Segment income (loss)    |  | $         | (21.7   | )        |  | $         | (14.5 | )        |  | $       | (0.7  | )            |  | $          | (7.5    | ) |  | $ | 4.1 |  |  | $ | (11.6 | ) |  | $ | (51.9   | )
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |     |  |  |   |       |   |  |   |         |  
|Total assets at 9/30/03  |  | $         | 2,805.3 |          |  | $         | 768.1 |          |  | $       | 253.1 |              |  | $          | 1,204.2 |   |  | $ |    |  |  | $ | 593.2 |   |  | $ | 5,623.9 |  
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |   |  |   |     |  |  |   |       |   |  |   |         |  

|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|------------------------ |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------- | ----- | ------------ |  | ---------- | ------- |  |  | - | --- |  |  | - | ----- | - |  | - | ------- | -
|                         |  |           |         |          |  | Coated    |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |  
|                         |  |           |         |          |  | and       |       |          |  |         |       | Canadian     |  | Net        |         |  |  |   |     |  |  |  
|Three Months Ended       |  |           |         |          |  | Specialty |       | Forest   |  | Forest  |       | Gain on      |  | Corporate/ |         |  |  |  
|September 30, 2002       |  | Newsprint |         | Papers   |  | Products  |       | Products |  | Sale of |       | Other        |  |            |         | 
|(Unaudited, in millions) |  | Division  |         | Division |  | Division  |       | Division |  | Assets  |       | Eliminations |  | Total     
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |           
|Sales                    |  | $         | 328.4   |          |  | $         | 118.7 |          |  | $       | 25.9  |              |  | $          | 184.1   |  |  | $ |    |  |  | $ | (13.3 | ) |  | $ | 643.8   |  
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|Segment income (loss)    |  | $         | (23.4   | )        |  | $         | (10.1 | )        |  | $       | (2.4  | )            |  | $          | 3.7     |  |  | $ | 4.8 |  |  | $ | (9.3  | ) |  | $ | (36.7   | )
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  
|Total assets at 9/30/02  |  | $         | 2,947.3 |          |  | $         | 671.9 |          |  | $       | 247.3 |              |  | $          | 1,330.9 |  |  | $ |    |  |  | $ | 385.8 |   |  | $ | 5,583.2 |  
|                         |  |           |         |          |  |           |       |          |  |         |       |              |  |            |         |  |  |   |     |  |  |   |       |   |  |   |         |  

|                         |  |           |         |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  
|------------------------ |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------- | ---- | ------------ |  | ---------- | ----- | - |  | - | ----- |  |  | - | ----- | - |  | - | ------- | -
|                         |  |           |         |          |  | Coated    |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |  
|                         |  |           |         |          |  | and       |       |          |  |         |      | Canadian     |  | Net        |       |   |  |   |       |  |  |  
|Nine Months Ended        |  |           |         |          |  | Specialty |       | Forest   |  | Forest  |      | Gain on      |  | Corporate/ |       |   |  |  
|September 30, 2003       |  | Newsprint |         | Papers   |  | Products  |       | Products |  | Sale of |      | Other        |  |            |       |  
|(Unaudited, in millions) |  | Division  |         | Division |  | Division  |       | Division |  | Assets  |      | Eliminations |  | Total     
|                         |  |           |         |          |  |           |       |          |  |         |      |              |  |           
|Sales                    |  | $         | 1,078.5 |          |  | $         | 363.9 |          |  | $       | 80.8 |              |  | $          | 551.3 |   |  | $ |      |  |  | $ | (89.0 | ) |  | $ | 1,985.5 |  
|                         |  |           |         |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  
|Segment income (loss)    |  | $         | (73.5   | )        |  | $         | (48.5 | )        |  | $       | (5.7 | )            |  | $          | (34.6 | ) |  | $ | 119.2 |  |  | $ | (33.5 | ) |  | $ | (76.6   | )
|                         |  |           |         |          |  |           |       |          |  |         |      |              |  |            |       |   |  |   |       |  |  |   |       |   |  |   |         |  

|                         |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  
|------------------------ |  | --------- | ----- | -------- |  | --------- | ----- | -------- |  | ------- | ---- | ------------ |  | ---------- | ----- |  |  | - | ---- |  |  | - | ----- | - |  | - | ------- | -
|                         |  |           |       |          |  | Coated    |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |  
|                         |  |           |       |          |  | and       |       |          |  |         |      | Canadian     |  | Net        |       |  |  |   |      |  |  |  
|Nine Months Ended        |  |           |       |          |  | Specialty |       | Forest   |  | Forest  |      | Gain on      |  | Corporate/ |       |  |  |  
|September 30, 2002       |  | Newsprint |       | Papers   |  | Products  |       | Products |  | Sale of |      | Other        |  |            |       | 
|(Unaudited, in millions) |  | Division  |       | Division |  | Division  |       | Division |  | Assets  |      | Eliminations |  | Total     
|                         |  |           |       |          |  |           |       |          |  |         |      |              |  |           
|Sales                    |  | $         | 974.1 |          |  | $         | 355.0 |          |  | $       | 72.5 |              |  | $          | 555.6 |  |  | $ |     |  |  | $ | (42.4 | ) |  | $ | 1,914.8 |  
|                         |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  
|Segment income (loss)    |  | $         | (56.9 | )        |  | $         | (21.2 | )        |  | $       | (0.3 | )            |  | $          | 31.9  |  |  | $ | 79.8 |  |  | $ | (58.6 | ) |  | $ | (25.3   | )
|                         |  |           |       |          |  |           |       |          |  |         |      |              |  |            |       |  |  |   |      |  |  |   |       |   |  |   |         |  

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 described under the
caption Cautionary Statement Regarding Forward-Looking Information in
Bowaters quarterly report on Form 10-Q for the quarter ended June 30, 2003,
and 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.

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 September 30, 2003, versus September 30, 2002

For the third quarter of 2003, we had an operating loss of $51.9 million
compared to operating loss of $36.7 million for the third quarter of 2002.
Operating loss for the third quarter of 2003 includes a gain on the sale of
assets of $4.1 million compared to a gain on the sale of assets of $4.8 million
for the third quarter of 2002. Excluding these asset

19



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##### 



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

sales, operating loss
increased $14.5 million compared to the third quarter of 2002. This increase
is primarily attributable to higher costs ($51.5 million), higher severance
related charges for the third quarter of 2003 ($4.7 million) compared to the
third quarter of 2002 ($0.3 million). These increases were offset partially by
higher transaction prices for newsprint ($22.7 million), coated and specialty
papers ($7.5 million), pulp ($1.3 million), lumber ($2.6 million) and timber
($4.5 million), offset by higher shipments ($2.8 million), primarily newsprint
and coated and specialty papers. Costs were higher for the third quarter of
2003 compared to the third quarter of 2002 due to higher wood, fiber and
chemical costs, distribution and selling and administrative costs, and a
stronger Canadian dollar. Wood costs increased as a result of Canadian sawmill
production curtailments, which reduced available chip supply, and from
weather related problems in the U. S. Southeast in the first six
months of 2003, which continued to affect wood supply in the third
quarter of 2003. Fiber costs increased due to wood supply shortages and the
startup of the recycle facility and an idled newsprint machine at our Calhoun
mill (which had been temporarily shut since mid-2002 pending improving market
conditions). Chemical costs increased primarily due to product mix and the
introduction of new coated products at our Catawba mill. Distribution costs
increased primarily from higher Canadian lumber duties and the conversion of a
paper machine from newsprint to coated groundwood paper at our Catawba mill.
Newsprint customers located closer to the mill were replaced with coated
customers located farther from the mill site. Selling and administrative
expenses increased primarily from stock based compensation credits of $12.3
million recognized in the third quarter of 2002 compared to charges of $1.1
million in the third quarter of 2003. Losses caused by the changes in the
Canadian dollar exchange rates ($33.6 million) were partially offset by gains
from our Canadian dollar hedging program ($14.3 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.

Net loss for the third quarter of 2003 was $56.7 million, or $1.00 per diluted
share, compared with net loss of $32.3 million, or $0.57 per diluted share, in
the third quarter of 2002. Sales for the third quarter of 2003 were $690.9
million compared with $643.8 million for the third quarter of 2002. Net loss
for the third quarter of 2003 includes an after tax charge of $2.4 million, or
$.04 per diluted share, for a cumulative effect adjustment from the partial
adoption of Financial Accounting Standards Board (FASB) Financial Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest
Entities.

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 September 30,
|(Unaudited, in millions) |                             | 2003 |                                  | 2002 
|                         |                             |      |                                  |      
|Sales:                   |                             |      |                                  |       |  |   |       |      
|                         | Newsprint                   |      | $                                | 302.0 |  |   | $     | 289.8 | 
|                         | Market Pulp                 |      |                                  | 120.8 |  |   |       | 133.5 | 
|                         | Coated and Specialty Papers |      |                                  | 192.7 |  |   |       | 153.3 | 
|                         | Lumber                      |      |                                  | 64.0  |  |   |       | 59.8  | 
|                         | Other                       |      |                                  | 11.4  |  |   |       | 7.4   | 
|                         |                             |      |                                  |       |  |   |       |      
|Total sales              |                             | $    | 690.9                            |       |  | $ | 643.8 |      
|                         |                             |      |                                  |       |  |   |       |      

20



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##### 



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

Newsprint:Our average newsprint transaction price was 8.0% higher in the third
quarter of 2003 compared to the third quarter of 2002 and 1.5% higher compared
to the second quarter of 2003. The latter increase reflects the partial
realization of an announced price increase for domestic newsprint, effective
August 1, 2003 and higher transaction prices in the international market.
Newsprint shipments decreased by 3.5% compared to the third quarter of 2002,
primarily due to the permanent removal of 240,000 metric tons of annual
newsprint production capacity related to the machine conversion at our Catawba
mill. The decrease in production was partially offset by less downtime and
other shifts in production. There was approximately 60,000 metric tons of
market and maintenance downtime in the third quarter of 2003 compared to
approximately 123,000 metric tons of downtime in the third quarter of 2002.
Our #3 newsprint machine at our Calhoun mill started back up in July of this
year after being down since January of 2002, in conjunction with the idling of
a paper machine at our Thunder Bay, Ontario mill (since late June 2003). We
expect this downtime to continue until market conditions improve. We plan to
take approximately 41,000 metric tons of market and maintenance downtime in the
fourth quarter of this year. We will continue to match our production to our
orders.

Newsprint Third Party Data:In the third quarter of 2003, total United States
demand and consumption of newsprint decreased 2.1% and 2.0%, respectively,
compared to the same period a year ago. North American net exports of newsprint
increased 1.0% from the third quarter 2002 level. Newspaper advertising linage
declined 0.4% in
September of 2003 compared to September 2002. Total inventories (North
American mills and users) at September 30, 2003 were 1.49 million metric tons,
approximately 12% below historical levels, based on an average total ending
inventory for the last ten calendar years.

Market Pulp:Our average transaction price for market pulp in the third
quarter of 2003 increased 2.9% compared to the third quarter of 2002 and
decreased 6.0% compared to the second quarter of 2003. Our shipments increased
15.4% in the third quarter of 2003 compared to the second quarter of 2003
mainly as a result of increased demand from the export market and reduced
production curtailments at our Thunder Bay mill. However, our shipments
decreased 12.2% in the third quarter of 2003 compared to the same period last
year, primarily as a result of reduced production at our Catawba facility due
to the startup of a replacement fiber line. Our market pulp inventories
decreased over the quarter to end the quarter at 20 days supply, 7 days below
the industry average.

Market Pulp Third Party Data:Demand for market pulp increased by 5.3% for the
three months ending September 30, 2003, compared to the same period of 2002.
North America and Nordic (United States, Canada, Finland and Sweden) shipments
were up 11.2% in the third quarter of 2003 compared to the second quarter of
2003. During the quarter, North American and Nordic producers operated and
shipped at 93% of capacity. Inventories decreased slightly over the second
quarter of 2003 by 30,000 metric tons, to end the quarter at 1.683 million
metric tons, or 27 days supply.

Coated and Specialty Papers:Our average transaction price for coated paper was
3.6% higher in the third quarter of 2003 compared to the third quarter of 2002
and 0.9 % higher compared to the second quarter of 2003. Our coated paper
shipments increased 33.3 % compared to the same period last year, due to the
conversion of the paper machine at Catawba from newsprint to coated paper.

Our average transaction price for specialty paper was flat in the third quarter
of 2003 compared to the third quarter of 2002 and 1.2% lower compared to the
second quarter of 2003. Our specialty paper shipments increased 14.1% compared
to the same period last year, due to the book market down grading from
traditional freesheet grades of groundwood specialties and retailers upgrading
from newsprint to groundwood specialties.

Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages
increased 0.1% compared to the third quarter of 2002 and catalog mailings
(measured by Standard A mail pieces) are estimated to increase 1.7% compared to
the same period last year. North American demand for coated groundwood papers
is up 2.1% compared to the third quarter of 2002. North American coated
groundwood mill inventories are at 15 days supply at September 30, 2003,
compared to 13 days supply at September 30, 2002. North American demand for
supercalendered high gloss paper and other uncoated groundwood papers are up
4.9% and down 0.1%, respectively,
compared to the third quarter of 2002. North American uncoated groundwood
inventories are at 16 days supply at September 30, 2003, compared to 17 days
supply at September 30, 2002.

21



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

Lumber:Bowaters average transaction price for lumber products increased 7.4%
in the third quarter of 2003 compared to the third quarter of 2002 and
increased 11.2% compared to the second quarter of 2003. Our lumber shipments
decreased 0.4% in the third quarter of 2003 compared to the third quarter of
2002 and increased 0.2% in the third quarter of 2003 compared to the second
quarter of 2003. U.S. housing starts in the third quarter were strong,
increasing 4.3% in the third 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. Lumber duties are included as a component of distribution costs on our
consolidated statement of operations. The Canadian government has appealed the
duties and until the dispute about the duties is resolved, we will continue to
pay the duties as assessed by the Commerce Department.

Divisional Performance

|                            |  |                                  |       |                                  |  |      |       |      |  |   |       |   |  |   |       |  
|--------------------------- |  | -------------------------------- | ----- | -------------------------------- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                            |  | Sales(1)                         |       | Segment Income (Loss)(1)        
|                            |  |                                  |       |                                 
|                            |  | Three Months Ended September 30, |       | Three Months Ended September 30,
|(In millions)               |  | 2003                             |       | 2002                             |  | 2003 |       | 2002
|                            |  |                                  |       |                                  |  |      |       |     
|Newsprint                   |  | $                                | 368.1 |                                  |  | $    | 328.4 |      |  | $ | (21.7 | ) |  | $ | (23.4 | )
|Coated and Specialty Papers |  |                                  | 140.4 |                                  |  |      | 118.7 |      |  |   | (14.5 | ) |  |   | (10.1 | )
|Forest Products             |  |                                  | 34.2  |                                  |  |      | 25.9  |      |  |   | (0.7  | ) |  |   | (2.4  | )
|Canadian Forest Products    |  |                                  | 196.3 |                                  |  |      | 184.1 |      |  |   | (7.5  | ) |  |   | 3.7   |  
|Net gain on sale of assets  |  |                                  |      |                                  |  |      |      |      |  |   | 4.1   |   |  |   | 4.8   |  
|Corporate & eliminations    |  |                                  | (48.1 | )                                |  |      | (13.3 | )    |  |   | (11.6 | ) |  |   | (9.3  | )
|                            |  |                                  |       |                                  |  |      |       |      |  |   |       |   |  |   |       |  
|Total                       |  | $                                | 690.9 |                                  |  | $    | 643.8 |      |  | $ | (51.9 | ) |  | $ | (36.7 | )
|                            |  |                                  |       |                                  |  |      |       |      |  |   |       |   |  |   |       |  



|(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. Sales
includes internal sales at each of the business segments. Total sales
represents third party sales.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $39.7 million, from $328.4
million for the third quarter of 2002 to $368.1 million for the third quarter
of 2003. This increase is the result of higher shipments of newsprint ($7.1
million) and specialties ($15.8 million) and higher transaction prices for
newsprint ($18.3 million), market pulp ($1.3 million) and uncoated specialty
paper ($4.4 million). These increases were partially offset by lower shipments
of market pulp ($7.2 million). See the previous discussion of product line
results.

Operating loss for the third quarter of 2003 decreased $1.7 million from an
operating loss of $23.4 million for the third quarter of 2002 to an operating
loss of $21.7 million for the third quarter of 2003. The decrease is primarily
due to higher transaction prices for newsprint ($18.3 million), market pulp
($1.3 million) and uncoated specialty paper ($4.4 million). These decreases
were partially offset by lower shipments ($2.8 million), higher costs ($16.7
million) and higher severance related charges for the third quarter of 2003
($3.2 million) compared to the third quarter of 2002 ($0.3 million). Costs
increased due to higher fiber and wood, chemical and fuel costs, and a stronger
Canadian dollar ($14.6 million).

Coated and Specialty Papers Division:Sales for the division increased $21.7
million, from $118.7 million for the third quarter of 2002 to $140.4 million
for the third quarter of 2003. This increase was primarily due to higher

22



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

transaction prices for coated and specialty papers ($3.6 million), and
increased shipments ($18.1 million). See the previous discussion of product
line results.

Operating loss increased $4.4 million from an operating loss of $10.1 million
for the third quarter of 2002 to an operating loss of $14.5 million for the
third quarter of 2003. This increase was primarily the result of higher costs
($10.7 million) and higher severance charges ($1.3 million). Costs increased
as a result of higher fiber, wood, fuel, electricity and distribution costs,
partially offset by lower selling and administrative expense. Distribution
costs increased due to the conversion of the paper machine at our Catawba mill.
Newsprint customers closer to the mill were replaced with coated customers
located further from the mill site. Higher depreciation associated with the
new fiberline and machine conversion costs at Catawba also contributed to the
increase in operating loss. Higher transaction prices for coated and specialty
papers ($3.6 million) and higher shipments ($3.8 million) partially offset this
increase.

Nuway prices are based on coated groundwood 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 increased $8.3 million, from
$25.9 million for the third quarter of 2002 to $34.2 million for the third
quarter of 2003. This increase is primarily the result of higher lumber
shipments ($4.9 million) and higher transaction prices for lumber ($2.1
million) and timber ($1.9 million). See the previous discussion of product
line results.

Operating loss for the division decreased $1.7 million from an operating loss
of $2.4 million for the third quarter of 2002 to an operating loss of $0.7
million for the third quarter of 2003. This decrease was due primarily to
higher lumber ($2.1 million) and timber ($1.9 million) transaction prices and
higher lumber shipments ($0.5 million), partially offset by higher costs ($2.6
million). Costs for the Division were higher in the third quarter of 2003
compared to the same period last year primarily as the result of a stronger
Canadian dollar ($1.6 million) and start-up costs associated with the new
sawmill in Thunder Bay Ontario ($1.5 million).

Canadian Forest Products Division:Sales for the division increased $12.2
million, from $184.1 million for the third quarter of 2002 to $196.3 million
for the third quarter of 2003. This increase is primarily the result of higher
shipments ($6.9 million), primarily newsprint and higher transaction prices for
newsprint ($4.3 million), lumber ($0.5 million) and timber ($1.0 million),
partially offset by lower transaction prices for specialties ($0.5 million).

Operating income decreased $11.2 million, from income of $3.7 million for the
third quarter of 2002 to a loss of $7.5 million for the third quarter of 2003.
This decrease was primarily the result of lower transaction prices for
specialties ($0.5 million), higher costs ($17.5 million) primarily from higher
distribution costs ($3.4 million), higher lumber duties ($0.9 million),
additional closure and demolition costs related to the shutdown of a specialty
paper machine at Donnacona ($1.8 million) and a stronger Canadian dollar ($17.5
million), offset by lower fiber and fuel costs and depreciation. These
decreases were partially offset by higher shipments ($1.3 million) and higher
transaction prices for newsprint ($4.3 million), lumber ($0.5 million) and
timber ($1.0 million).

Net Gain on Sale of Assets:In the third quarter of 2003, we sold fixed assets
and land resulting in a pre-tax gain of $4.1 million, or $0.04 per diluted
share after tax. In the third quarter of 2002, we sold fixed assets and land
resulting in a pre-tax gain of $4.8 million, or $0.05 per diluted share after
tax.

Corporate & Eliminations:The elimination of intersegment sales increased $34.8
million, from $13.3 million for the third quarter of 2002 to $48.1 million for
the third quarter of 2003. Corporate expenses increased $2.3 million from $9.3
million for the third quarter of 2002 to $11.6 million for the third quarter of
2003. The increase was primarily
from higher selling and administrative expenses from stock based compensation,
partially offset by the effects of hedging.

23



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

Interest and Other Income and Expenses

Interest expense increased $6.1 million from $39.7 million for the third
quarter of 2002 to $45.8 million for the third quarter of 2003. This increase
was primarily attributable to higher interest rates in connection with a $400
million notes issuance in June 2003 (See section under Liquidity and Capital
Resources entitled Credit Arrangements.) and less capitalized interest. The
June 2003 $400 million notes issue will increase interest expense by approximately $3.0
million per quarter. Other income decreased $8.2 million in the third quarter
of 2003, from income of $0.3 million in the third quarter of 2003 compared to
$8.5 million for the same period in 2002. The decrease in other income is
primarily due to an increase in foreign exchange loss. We recorded a foreign
exchange loss of $2.1 million in the third quarter of 2003 compared to a gain
of $8.9 million in the third quarter of 2002. The majority of our exchange
gains and losses in Other, net in our Consolidated Statement of Operations
are attributable to the revaluation of unhedged foreign denominated liabilities
into U.S. dollars.

Income Taxes

Our effective tax rate for the third quarter of 2003 was 41.2% compared to
52.0% for the third 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%.

Nine months ended September 30, 2003, versus September 30, 2002

For the first nine months of 2003, we had an operating loss of $76.6 million
compared to $25.3 million for the first nine months of 2002. The operating
loss for the first nine months of 2003 includes a gain on the sale of assets of
$119.2 million compared to a gain on the sale of assets of $79.8 million for
the first nine months of 2002. Excluding these asset sales, operating loss
increased $90.7 million. This increase is attributable to higher costs ($143.7
million), higher severance related charges ($30.2 million), and lower lumber
transaction prices ($6.9 million). These increases were offset partially by
higher transaction prices for newsprint ($46.8 million), coated and specialty
papers ($4.7 million), market pulp ($24.3 million) and timber ($8.0 million)
and higher shipments ($6.2 million) of newsprint and coated and specialty
papers. Costs were higher for the period due to higher wood, fiber, energy and
repair costs, higher distribution and selling and administrative costs, and the
strengthening of the Canadian dollar. Energy costs were higher as a result of
increased prices and severe winter weather in the first quarter of 2003. 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 timber harvesting. Fiber costs increased due to higher
consumption resulting from wood shortages and the startup of the recycle
facility at our Calhoun mill. Chemical costs increased primarily due to grade
mix and the introduction of new coated grades at our Catawba mill.
Distribution costs increased from higher lumber duties and expanded delivery
areas for coated and specialty paper shipments from our Catawba mill. Selling
and administrative expenses increased primarily from stock based compensation
credits of $4.2 million recognized in the first nine months of 2002 compared to
expense of $0.2 million in the first nine months of 2003. Losses due to the
effect of changes in the Canadian dollar exchange rates ($83.9 million) were
partially offset by gains from our Canadian dollar hedging program ($35.7
million).

Net loss for the first nine months of 2003 was $154.1 million, or $2.71 per
diluted share, compared with net loss of $75.8 million, or $1.33 per diluted
share, in the first nine months of 2002. Sales for the first nine months of
2003 were $1,985.5 million compared with $1,914.8 million for the first nine
months of 2002. Net loss for the first nine months of 2003 includes an after
tax charge of $4.5 million, or $0.08 per diluted share, for cumulative effect
adjustments from the adoption of Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement
Obligations and the partial adoption of FIN 46,
Consolidation of Variable Interest Entities.

24



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

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:

|                         |                             |      |                                 |       |  |   |         |       | 
|------------------------ | --------------------------- | ---- | ------------------------------- | ----- |  | - | ------- | ----- | 
|                         |                             |      | Nine Months Ended September 30,
|(Unaudited, in millions) |                             | 2003 |                                 | 2002 
|                         |                             |      |                                 |      
|Sales:                   |                             |      |                                 |       |  |   |         |      
|                         | Newsprint                   |      | $                               | 900.0 |  |   | $       | 871.4 | 
|                         | Market Pulp                 |      |                                 | 360.9 |  |   |         | 375.6 | 
|                         | Coated and Specialty Papers |      |                                 | 530.7 |  |   |         | 459.4 | 
|                         | Lumber                      |      |                                 | 170.8 |  |   |         | 189.1 | 
|                         | Other                       |      |                                 | 23.1  |  |   |         | 19.3  | 
|                         |                             |      |                                 |       |  |   |         |      
|Total sales              |                             | $    | 1,985.5                         |       |  | $ | 1,914.8 |      
|                         |                             |      |                                 |       |  |   |         |      

Newsprint: Bowaters average newsprint transaction price was 5.4% higher in the
first nine months of 2003 compared to the first nine months of 2002. Newsprint
shipments decreased by 2.0% compared to the first nine months of 2002. This
reduction was primarily due to the permanent removal of 240,000 metric tons of
annual newsprint production capacity related to the conversion of a newsprint
machine at Catawba to coated paper. The decrease in production was partially
offset by less downtime and other shifts in production. There was
approximately 162,000 metric tons of market and maintenance downtime in the
first nine months of 2003 compared to approximately 311,000 metric tons of
downtime during the first nine months of 2002. Our #1 newsprint machine at
Calhoun started back up in January of this year after being down since January
of 2002. 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). Our #3 newsprint machine at Calhoun
started back up in July of this year after being down since January of 2002, in
conjunction with the idling of a paper machine at our Thunder Bay mill (since
late June 2003). We expect this market downtime to continue until market
conditions improve. We plan to take 41,000 metric tons of market and
maintenance downtime in the third quarter of this year and we will continue to
match our production to our orders.

Newsprint Third Party Data: In the first nine months of 2003, total United
States demand and consumption of newsprint decreased 0.7% and 0.5%,
respectively, when compared to the same period a year ago. North American net
exports of newsprint increased 1.9% from the first nine months 2002 level.
Newspaper advertising linage
declined 0.4% in September 2003 compared to September 2002, but has improved
0.8% year to date. Total inventories (North American mills and users) at
September 30, 2003 were 1.49 million metric tons, approximately 12% below
historical levels, based on an average total ending inventory for the last ten
calendar years.

Market Pulp:Our average transaction price for market pulp in the first nine
months of 2003 increased 8.5% compared to the first nine months of 2002. Our
shipments decreased 11.1% compared to the same period last year, primarily as a
result of production curtailments at our Thunder Bay facility due to temporary
wood shortages and our Catawba facility due to the startup of a replacement
fiber line.

Market Pulp Third Party Data:Demand for market pulp increased in the first
nine months of 2003 compared to the same period last year. North America and
Nordic (United States, Canada, Finland and Sweden) shipments were up 1% over
the first nine months of 2002. North American and Nordic producers (United
States, Canada, Finland, and
Sweden) operated at 91% of capacity for the first 9 months of the year but have
shipped at 92% of capacity. Consequently, days supply of inventories have
decreased from 28 days to 27 days supply.

25



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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
1.7 % lower in the first nine months of 2003 compared to the first nine months
of 2002. Our coated groundwood papers shipments increased 24.2% compared to
the same period last year, due to the conversion of a paper machine at Catawba
from newsprint to coated paper.

Our average transaction price for specialty paper was 2.2 % lower in the first
nine months of 2003 compared to the first nine months of 2002. Our specialty
papers shipments increased 11.8 % compared to the same period last year, due to
book market customers down grading from traditional freesheet grades to
groundwood specialties and retailer circular customers upgrading from newsprint
to groundwood specialties.

Coated and Specialty Papers Third Party Data:U.S. magazine advertising pages
increased 5.7% compared to the first nine months of 2002 and catalog mailings
(measured by Standard A mail pieces) are estimated to increase 2.9% compared to
the same period last year. North American demand for coated groundwood papers
is up 6.8% year-to-date compared to 2002. Demand for supercalendered high
gloss papers and other uncoated groundwood papers are up 6.4% and down 1.0%,
respectively, year-to-date.

Lumber:Our average transaction price for lumber decreased 4.2% in the first
nine months of 2003 compared to the first nine months of 2002. Our lumber
shipments decreased 5.7% in the first nine months of 2003 compared to the first
nine 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 nine
months were strong, increasing 5.4% in the first nine months of 2003 compared
to the same period last year.

Divisional Performance

|                            |  |                                 |         |                                 |  |      |         |      |  |   |       |   |  |   |       |  
|--------------------------- |  | ------------------------------- | ------- | ------------------------------- |  | ---- | ------- | ---- |  | - | ----- | - |  | - | ----- | -
|                            |  | Sales(1)                        |         | Segment Income (Loss)(1)       
|                            |  |                                 |         |                                
|                            |  | Nine Months Ended September 30, |         | Nine Months Ended September 30,
|(In millions)               |  | 2003                            |         | 2002                            |  | 2003 |         | 2002
|                            |  |                                 |         |                                 |  |      |         |     
|Newsprint                   |  | $                               | 1,078.5 |                                 |  | $    | 974.1   |      |  | $ | (73.5 | ) |  | $ | (56.9 | )
|Coated and Specialty Papers |  |                                 | 363.9   |                                 |  |      | 355.0   |      |  |   | (48.5 | ) |  |   | (21.2 | )
|Forest Products             |  |                                 | 80.8    |                                 |  |      | 72.5    |      |  |   | (5.7  | ) |  |   | (0.3  | )
|Canadian Forest Products    |  |                                 | 551.3   |                                 |  |      | 555.6   |      |  |   | (34.6 | ) |  |   | 31.9  |  
|Net gain on sale of assets  |  |                                 |        |                                 |  |      |        |      |  |   | 119.2 |   |  |   | 79.8  |  
|Corporate & eliminations    |  |                                 | (89.0   | )                               |  |      | (42.4   | )    |  |   | (33.5 | ) |  |   | (58.6 | )
|                            |  |                                 |         |                                 |  |      |         |      |  |   |       |   |  |   |       |  
|Total                       |  | $                               | 1,985.5 |                                 |  | $    | 1,914.8 |      |  | $ | (76.6 | ) |  | $ | (25.3 | )
|                            |  |                                 |         |                                 |  |      |         |      |  |   |       |   |  |   |       |  



|(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. Sales
includes internal sales at each of the business segments. Total sales
represents third party sales.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $104.4 million, from
$974.1 million for the first nine months of 2002 to $1,078.5 million for the
first nine months of 2003. This increase is primarily the result of higher
shipments of newsprint ($30.3 million) and uncoated specialty paper ($32.0
million) and higher transaction prices for newsprint ($37.0 million), market
pulp ($17.7 million) and uncoated specialty paper ($10.6 million). These
increases were partially offset by lower shipments of market pulp ($23.3
million). See the previous discussion of product line results.

26



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

Operating loss for the first nine months of 2003 increased $16.6 million from
an operating loss of $56.9 million for the first nine months of 2002 to an
operating loss of $73.5 million for the first nine months of 2003. The
increase is primarily from higher costs ($58.8 million) and higher severance
related charges ($20.4 million). Costs increased due to higher fiber, wood and
fuel costs, and a stronger Canadian dollar. These increases were partially
offset by higher selling prices of newsprint ($37.0 million), uncoated
specialty paper ($10.6 million), and market pulp ($17.7 million).

Coated and Specialty Papers Division:Sales for the division increased $8.9
million, from $355.0 million for the first nine months of 2002 to $363.9
million for the first nine months of 2003. This increase was primarily due to
higher transaction prices for market pulp ($6.7 million) and higher shipments
($5.6 million), primarily coated and specialty papers, offset by lower
transaction costs for coated and specialty papers ($3.3 million). See the
previous discussion of product line results.

Operating loss increased $27.3 million from an operating loss of $21.2 million
for the first nine months of 2002 to an operating loss of $48.5 million for the
first nine months of 2003. This increase was primarily the result of lower
transaction prices for coated and specialty papers ($3.3 million), higher costs
($31.4 million) and higher severance related charges ($5.5 million). Costs
increased due primarily to higher fiber, wood, chemicals, fuel and power costs,
lower production volume ($11.1 million) due to the conversion of a newsprint
machine to coated paper, and increased distribution costs ($4.7 million,
primarily from expanded customer locations for coated and specialty papers
shipments), partially offset by declines in selling and administrative costs.
These increases were partially offset by higher coated and specialty papers
shipments ($4.6 million) and higher pulp transaction prices ($6.7 million).

Forest Products Division:Sales for the division increased $8.3 million, from
$72.5 million for the first nine months of 2002 to $80.8 million for the first
nine months of 2003. This increase is primarily the result of higher timber
transaction prices ($4.6 million) and higher lumber shipments ($3.7 million).
See the previous discussion of product line results.

Operating loss for the division increased $5.4 million from an operating loss
of $0.3 million for the first nine months of 2002 to an operating loss of $5.7
million for the first nine months of 2003. This increase was due primarily to
higher costs ($9.2 million) and higher severance related charges ($1.1
million), partially offset by higher timber transaction prices ($4.6 million).
Costs for the division were higher in the first nine months of 2003 compared to
the first nine months of 2002 due to the start-up of the new Thunder Bay
Ontario sawmill ($3.8 million), a stronger Canadian dollar ($2.9 million) and
higher lumber distribution costs ($2.2 million).

Canadian Forest Products Division:Sales for the division decreased $4.3
million, from $555.6 million for the first nine months of 2002 to $551.3
million for the first nine months of 2003. This decrease is primarily the
result of lower shipments ($6.8 million), primarily lumber, and lower
transaction prices in lumber ($6.5 million) and specialty papers ($2.6 million)
partially offset by higher transaction prices for newsprint ($9.9 million) and
higher transaction prices for timber ($1.7 million).

Operating income decreased $66.5 million, from income of $31.9 million for the
first nine months of 2002 to a loss of $34.6 million for the nine months of
2003. This decrease was primarily the result of lower transaction prices for
specialty papers ($2.6 million) and lumber ($6.5 million), lower lumber
shipments ($2.1 million), higher costs ($68.5 million), and higher severance
related charges ($2.3 million). Costs increased primarily due to lower
production volume ($9.8 million), higher lumber duties ($10.2 million) which
were imposed beginning in May of 2002 and a stronger Canadian dollar ($42.6
million). These decreases were partially offset by higher transaction prices
($9.9 million) and shipments ($4.7 million) for newsprint, higher transaction
prices for timber ($1.7 million) and lower fuel costs.

Net Gain on Sale of Assets:In the first nine months of 2003, we sold fixed
assets and land resulting in a pre-tax gain of $119.2 million, or $1.30 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.

27



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

In the first nine months of 2002, we sold fixed assets and land resulting in a
pre-tax gain of $79.8 million, or $0.84 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 $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.

Corporate & Eliminations:The elimination of intersegment sales increased $46.6
million, from $42.4 million for the first nine months of 2002 to $89.0 million
in the first nine months of 2003. Corporate expenses decreased $25.1 million,
from $58.6 million for the first nine months of 2002 to $33.5 million for the
first nine months of 2003, due primarily to hedging gains.

Interest and Other Income and Expenses

Interest expense increased $5.1 million from $122.8 million for the first nine
months of 2002 to $127.9 million for the first nine months of 2003. This
increase was primarily attributable to higher interest rates in
connection with the $400
million notes issuance in June 2003. Other expense increased $13.9 million
from $3.4 million income in the first nine months of 2002 to $10.5 million
expense in the first nine months of 2003. The increase in other expense is
primarily due to foreign exchange losses recorded in the first nine months of
2003. We recorded foreign exchange losses of $15.9 million in the first nine
months of 2003 compared to a gain of $5.4 million in the first nine months of
2002. The majority of our exchange gains and losses recorded in Other, net
in our Consolidated Statement of Operations is attributable to the revaluation
of unhedged foreign denominated liabilities into U.S. dollars.

Income Taxes

Our effective tax rate for the first nine months of 2003 was 24.8% compared to
42.5% for the first nine 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 decreased to $18.1 million at September 30,
2003, from $35.9 million at December 31, 2002. We generated cash from
operations of $24.5 million, used $40.4 million of cash in investing
activities, and used $1.9 million of cash from financing activities.

Cash from Operating Activities:

During the first nine months of 2003, our operations generated $24.5 million of
cash compared to $41.7 million during the first nine months of 2002, a decrease
of $17.2 million. This decrease is primarily due to a higher operating loss in
the first nine months of 2003 of $195.8 million (excluding gain on asset sales)
compared to a loss in the first nine months of 2002 of $105.1 million. This
decrease was partially offset by lower working capital needs in the first nine
months of 2003. During the first nine months of 2003, our operations generated
cash of $83.0 million from changes in working capital components compared to
$15.8 million generated during the first nine months of 2002. During the first
nine months of 2003, we received tax refunds of approximately $75 million,
which are included in cash generated from operating activities.

Cash from Investing Activities:

Cash used for investing activities during the first nine months of 2003 totaled
$40.4 million, compared to $75.7 million during the first nine months of 2002.
Proceeds from the disposition of assets, including timber and timberlands,
increased $121.4 million during the first nine months of 2003 compared to the
first nine months of 2002, primarily from the sale of timberlands. The first
nine 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 decreased $3.7 million for the first nine months of 2003 compared
to the first nine 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 used for financing activities was $1.9 million for the first nine months
of 2003 compared to cash from financing activities of $32.4 million during the
first nine months of 2002. During this period we also made payments of $91.0
million (net of proceeds of $693.1 million) under our short-term credit
facilities compared to payments made in the first nine months of 2002 of $164.3
million (net of proceeds received of $765.4 million). Also in the first nine
months of 2003, we received net proceeds on long-term borrowings amounting to
$122.2 million compared with net proceeds received of $228.3 million during the
first nine months of 2002.

During the first nine 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.
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). In August 2003, we used the $11.8 million balance of the net
proceeds, plus new borrowings under our accounts receivable securitization
program, to pay off the debt related to our lease agreement at Covington (see
below). In November 2003, Bowater completed a registered offering to exchange
the notes issued in the private placement for new, freely-tradeable notes with
substantially identical terms.

On July 1, 2003, Bowater consolidated assets and debt of approximately $51.8
million related to an operating lease at its Covington facility with a special
purpose entity. See Note 4 to the Notes to Consolidated Financial Statements
included in this quarterly report. On August 11, 2003, Bowater terminated the
lease agreement with the SPE and paid approximately $51.8 million to pay off
the debt.

Cash dividends paid in the first nine months of 2003 decreased $4.6 million
from the prior year period as no dividends were declared or paid in the first
nine months of 2003 to the minority shareholder of CNC.

Sources of Long and Short Term Liquidity:

For the third 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 fourth quarter of 2003.

We believe that cash generated from operations, proceeds from asset sales, 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 $100 million to
$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. (BCFPI). At September 30, 2003, approximately
$158 million was outstanding under our credit facilities and letters of credit
of approximately $74 million were reserved against our credit facilities. In
October of 2003, the 364-day $100 million BCFPI credit facility was extended to
October 2004.

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. In the third quarter, an
amendment was obtained which excludes the impact of adjustments for additional
minimum pension liability amounts from the current calculations. Currently,
these covenants require us to maintain a minimum consolidated

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

net worth (generally defined in the credit facilities as common shareholders
equity plus any outstanding preferred stock plus additional minimum pension
liability amounts) of $1.625 billion as of September 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 plus additional minimum pension liability amounts).
At September 30, 2003, our consolidated net worth was approximately $1.808
billion, and our ratio of total debt to total capital was 55.9%, 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.

In October, the S&P changed Bowaters credit rating outlook from a BB+ with a
stable outlook to a BB+ with a negative outlook. This action by the S&P will
not have an impact on our interest rates. Our current credit rating with
Moodys is Ba1 with a stable outlook. In October, Bowater was placed on review
for possible downgrade. There is no way to predict with certainty any future
rating actions by these two agencies. The interest rates associated with the
bank lines of credit described above are based on Bowaters highest credit
rating. Any reduction in the highest rating will increase our cost of
borrowing. In addition to higher interest rates, although further downgrades
would have no material impact on availability under our present debt and credit
agreements, it could impact our access to and cost of capital and financial
flexibility in the future.

Off-Balance Sheet Arrangements

Effective July 1, 2003, Bowater early adopted, on a partial basis, Financial
Accounting Standards Boards Financial Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest
Entities. 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. FIN 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. Many variable interest entities have commonly been referred
to as special-purpose entities (SPE) or off-balance sheet structures. Bowater
operated the Covington coating facility under an operating lease with a special
purpose entity. This special purpose entity was determined to be a VIE and
required to be consolidated by Bowater in accordance with FIN 46. Bowater
early adopted FIN 46 for the Covington SPE effective July 1, 2003 and
consolidated assets and debt of approximately $51.8 million and recorded a
non-cash, after tax cumulative effect charge of $2.4 million, or $0.04 per
diluted share in the third quarter of 2003. On August 11, 2003, Bowater
terminated the lease agreement with the SPE and paid approximately $51.8
million to pay off the debt. Bowater is currently evaluating other potential
VIEs in accordance with FIN 46 and will finalize its adoption of FIN 46
in the fourth quarter of 2003. We do not expect the finalization of adoption
of FIN 46 to have a material impact on our consolidated financial
statements. See Note 4 to the Notes to Consolidated Financial Statements
included in this quarterly report.

Our remaining significant off-balance sheet arrangements include a $42.4
million debt guarantee related to Ponderay Newsprint Company, an unconsolidated
partnership in which we have a 40% interest and a $10.5 million debt guarantee,
representing 25% of the outstanding investor notes principal balance of Timber
Note Holdings LLC, one of our qualified special purpose entities. A detailed
discussion of these 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.

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

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

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.

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
September 30, 2003, for every one-cent change in the Canadian-U.S. dollar
exchange rate, our operating income, net of hedging, for the third 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 September 30, 2003 we had approximately $143.4 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 September 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 September 30, 2003,
approximately 530
positions were eliminated with the anticipated balance of the 600 positions to
come in the fourth quarter of 2003. The expense of the 530 workforce
reductions since inception to September 30, 2003 was $43.0 million (of which
$13.4 million was expensed in 2002). Of this expense, $8.4 million was
recorded as an increase in pension accruals from a pension plan curtailment and
other pension plan benefits and $19.0 million has been paid in cash. The
remaining accrual of approximately $15.6 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 consists of workforce reductions, lowering of manufacturing costs and
rationalization of production. Estimated, annualized cost savings related to
the cost reduction initiatives are expected to be approximately $80 million,
pre-tax, by the end of 2003.

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
Financial 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

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

include: $42.4 million related to Ponderay Newsprint Company, an unconsolidated
partnership in which we have a 40% interest, and $10.5 million representing 25%
of the outstanding investor notes principal balance of Timber Note Holdings
LLC, one of our qualified special purpose entities. In August 2003, we used the
approximately $11.8 million balance of the remaining net proceeds of the $400
million notes issuance (See Note 12), plus new borrowings under our accounts
receivable securitization program, to terminate our $43.5 million synthetic
lease for our Covington, Tennessee, Nuway facility and purchase the facility
from the special purpose entity; all at a total cost of approximately $51.8
million. (See Notes 4 and 12 to the Notes to Consolidated Financial
Statements included in this quarterly report). The disclosure requirements of
FIN 45 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. 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. Bowater adopted the recognition
requirements of FIN 45 on January 1, 2003. The adoption did not have an impact
on our 2003 financial statements.

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 No. 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
Financial 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. In October 2003, the FASB deferred the
implementation of FIN 46 for variable interest entities created before January
31, 2003, for periods ending after December 15, 2003. Early adoption and
partial adoption is allowed under FIN 46 for variable interest entities created
before January 31, 2003. Effective July 1, 2003, Bowater adopted FIN 46 on a
partial basis.

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, had 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 were not consolidated in
Bowaters financial statements prior to July 1, 2003. The lease was classified
as an operating lease and the payments expensed in accordance with SFAS No. 13,
Accounting for Leases. The base lease term for the facility was scheduled to
expire on April 30, 2006.

Effective July 1, 2003, Bowater early adopted FIN 46 specific to the Covington
coating facility under the operating lease with the SPE. This special purpose
entity was determined to be a VIE and required to be consolidated by Bowater in
accordance with FIN 46. Bowater consolidated assets and debt of approximately $51.8 million and

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

recorded a
non-cash, after tax cumulative effect charge of $2.4 million, or $0.04 per
diluted share in the third quarter of 2003. On August 11, 2003, Bowater
terminated the lease agreement with the SPE and paid approximately $51.8
million to pay off the debt. Bowater is currently evaluating other potential
VIEs in accordance with FIN 46 and will finalize its adoption of FIN 46 in the
fourth quarter of 2003. We do not expect the finalization of adoption of FIN
46 to have a material impact on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 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 did not impact 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
No. 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 did not impact our
Consolidated Financial Statements.

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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 15 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.

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. In November 2003, Bowater completed a
registered offering to exchange the notes issued in the private placement for
new, freely-tradeable notes with substantially identical terms. As a result,
at September 30, 2003 we had $2,174.6 million of fixed rate long-term debt and
$291.5 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 and long-term variable bank debt at September 30, 2003 of
$291.5 million, 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 September 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.

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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 874 claimants who sought
monetary damages in civil actions pending in state courts in Illinois,
Mississippi, Missouri, New York and Texas. Approximately 731 of these
claims have been dismissed, either voluntarily or by summary judgment, and
approximately 143 claims remain. All claims in Missouri have been
dismissed, and plaintiffs counsel in Illinois and Missouri have agreed not
to file similar cases. About nineteen new cases have been filed since June
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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BOWATER INCORPORATED AND SUBSIDIARIES

PART II

OTHER INFORMATION

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

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

|            |  |                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                         
|10.1        |  | Second Amending Agreement dated October 7, 2003, to the
Credit Agreement dated as of October 26, 2001, between Bowater Pulp
and Paper Canada Inc. (as Borrower) (now known as Bowater Canadian
Forest Products Inc.), Bowater Incorporated, the Bank of Nova Scotia
and certain lenders.
|            |  |                                                                                                                                                                                                                                                                                         
|10.2        |  | Amendment No. 1 dated September 12, 2003, to the Credit
Agreement dated as of May 22, 2002, between Bowater Incorporated,
each of its subsidiaries, JP Morgan Chase Bank, and certain lenders.                                                                                          
|            |  |                                                                                                                                                                                                                                                                                         
|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 July 24, 2003, the Company filed a report on Form 8-K
announcing its earnings for the second quarter of 2003 under
Items 7 and 9.                                                                                                                                                    

36



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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. Maffucci        
| |  |  |                      |    |  |                              
| |  |  |                      |    |  | David G. Maffucci            
| |  |  |                      |    |  | Executive Vice President and 
| |  |  |                      |    |  | Chief Financial Officer      
| |  |  |                      |    |  |                              
| |  |  |                      | By |  | /s/ Michael F. Nocito        
| |  |  |                      |    |  |                              
| |  |  |                      |    |  | Michael F. Nocito            
| |  |  |                      |    |  | Vice President and Controller

Dated: November 12, 2003

37



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##### 



INDEX TO EXHIBITS

|            |  |                                                                                                                                                                                                                                                                                         
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                                                         
|10.1        |  | Second Amending Agreement dated October 7, 2003, to the
Credit Agreement dated as of October 26, 2001, between Bowater Pulp
and Paper Canada Inc. (as Borrower) (now known as Bowater Canadian
Forest Products Inc.), Bowater Incorporated, the Bank of Nova Scotia
and certain lenders.
|            |  |                                                                                                                                                                                                                                                                                         
|10.2        |  | Amendment No. 1 dated September 12, 2003, to the Credit
Agreement dated as of May 22, 2002, between Bowater Incorporated,
each of its subsidiaries, JP Morgan Chase Bank, and certain lenders.                                                                                          
|            |  |                                                                                                                                                                                                                                                                                         
|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