UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO

BOWATER INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

Delaware		62-0721803
(State of Incorporation)		(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)

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 the filing requirements for at least the past 90 days.

Yes   þ     No   o

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

Large Accelerated Filer   þ               Accelerated Filer   o               Non-accelerated Filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o     No   þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 1, 2007.

Class		Outstanding at August 1, 2007
Common Stock, $1.00 Par Value		56,250,480 Shares

 

 

BOWATER INCORPORATED
INDEX

					Page Number
PART I		FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006			3
		Consolidated Balance Sheets at June 30, 2007 and December 31, 2006			4
		Consolidated Statements of Capital Accounts for the Six Months Ended June 30, 2007 and 2006			5
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006			6
		Notes to Consolidated Financial Statements			7-18
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19-36
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			37-38
Item 4.		Controls and Procedures			38
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings			38
Item 6.		Exhibits			39
SIGNATURES					40
Exhibit 4.1
Exhibit 4.2
Exhibit 10.1
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Sales		$	798.6			$	899.4			$	1,570.2			$	1,792.6
Costs and expenses:
Cost of sales, excluding depreciation, amortization and cost of timber harvested			639.5				697.7				1,240.0				1,377.9
Depreciation, amortization and cost of timber harvested			79.7				81.2				159.6				162.3
Distribution costs			82.8				83.5				158.1				166.4
Selling and administrative expense			46.3				41.3				95.0				79.3
Net gain on disposition of assets			(64.6	)			(71.7	)			(122.5	)			(100.5	)
Operating income			14.9				67.4				40.0				107.2
Interest expense			(47.3	)			(49.3	)			(94.6	)			(98.7	)
Other (expense) income, net			(14.3	)			(1.7	)			(18.7	)			4.8
(Loss) income before income taxes, minority interests, and cumulative effect of accounting change			(46.7	)			16.4				(73.3	)			13.3
Income tax provision			(17.9	)			(26.3	)			(19.6	)			(39.4	)
Minority interests, net of tax			2.0				(0.7	)			(5.1	)			(0.7	)
Loss before cumulative effect of accounting change			(62.6	)			(10.6	)			(98.0	)			(26.8	)
Cumulative effect of accounting change, net of tax			—				—				—				(2.6	)
Net loss		$	(62.6	)		$	(10.6	)		$	(98.0	)		$	(29.4	)
Loss per share:
Basic loss per common share:
Loss before cumulative effect of accounting change		$	(1.09	)		$	(0.18	)		$	(1.71	)		$	(0.46	)
Cumulative effect of accounting change, net of tax			—				—				—				(0.05	)
Net loss		$	(1.09	)		$	(0.18	)		$	(1.71	)		$	(0.51	)
Diluted loss per common share:
Loss before cumulative effect of accounting change		$	(1.09	)		$	(0.18	)		$	(1.71	)		$	(0.46	)
Cumulative effect of accounting change, net of tax			—				—				—				(0.05	)
Net loss		$	(1.09	)		$	(0.18	)		$	(1.71	)		$	(0.51	)
Average number of shares outstanding (in millions):
Basic and diluted			57.4				57.4				57.4				57.4
Dividends declared per common share		$	0.20			$	0.20			$	0.40			$	0.40

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions of US dollars except share and per-share amounts)

		June 30,				December 31,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	89.4			$	98.9
Accounts receivable, net			426.6				444.5
Inventories			383.4				349.8
Timberlands held for sale			4.2				18.7
Other current assets			67.8				47.1
Total current assets			971.4				959.0
Timber and timberlands			58.3				60.8
Fixed assets, net			2,782.0				2,877.9
Goodwill			590.7				590.2
Other assets			145.3				158.0
Total assets		$	4,547.7			$	4,645.9
Liabilities and shareholders’ equity
Current liabilities:
Current installments of long-term debt		$	15.8			$	14.9
Accounts payable and accrued liabilities			418.4				431.2
Total current liabilities			434.2				446.1
Long-term debt, net of current installments			2,243.0				2,251.6
Pension and other postretirement benefits obligations			648.9				651.1
Other long-term liabilities			92.8				92.5
Deferred income taxes			335.6				313.0
Minority interests in subsidiaries			74.8				59.0
Commitments and contingencies
Shareholders’ equity:
Common stock, $1 par value. Authorized 100,000,000 shares; issued 67,847,110 and 67,585,104 shares at June 30, 2007 and December 31, 2006, respectively			67.8				67.6
Exchangeable shares, no par value. Unlimited shares authorized; 1,202,154 and 1,423,830 shares outstanding at June 30, 2007 and December 31, 2006, respectively			56.8				67.6
Additional paid-in capital			1,648.0				1,630.1
Retained deficit			(195.1	)			(76.0	)
Accumulated other comprehensive loss			(373.4	)			(371.0	)
Treasury stock at cost, 11,598,105 and 11,600,717 shares at June 30, 2007 and December 31, 2006, respectively			(485.7	)			(485.7	)
Total shareholders’ equity			718.4				832.6
Total liabilities and shareholders’ equity		$	4,547.7			$	4,645.9

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in millions of US dollars except share and per-share amounts)

For the six months ended June 30, 2007

																		Accumulated
										Additional								Other								Total
		Common				Exchangeable				Paid In				Retained				Comprehensive				Treasury				Shareholders’
		Stock				Shares				Capital				Deficit				Loss				Stock				Equity
Balance at December 31, 2006		$	67.6			$	67.6			$	1,630.1			$	(76.0	)		$	(371.0	)		$	(485.7	)		$	832.6
Cumulative adjustment to retained deficit for the adoption of FIN 48			—				—				—				2.3				—				—				2.3
Dividends on common stock ($0.40 per share)			—				—				—				(23.4	)			—				—				(23.4	)
Retraction of exchangeable shares (221,676 shares issued and exchangeable shares retracted)			0.2				(10.8	)			10.6				—				—				—				—
Share-based compensation costs for equity awards			—				—				8.0				—				—				—				8.0
Restricted stock units vested (40,330 shares, net of shares forfeited for employee withholding taxes)			—				—				(0.7	)			—				—				—				(0.7	)
Treasury stock used for dividend reinvestment plans and to pay employee and director benefits (2,612 shares)			—				—				—				—				—				—				—
Comprehensive loss:
Net loss			—				—				—				(98.0	)			—				—				(98.0	)
Change in unrealized prior service costs, net of tax of $1.8			—				—				—				—				(1.4	)			—				(1.4	)
Change in actuarial gains and losses, net of tax of $4.8			—				—				—				—				16.8				—				16.8
Foreign currency translation			—				—				—				—				(18.6	)			—				(18.6	)
Change in unrealized gain on hedged transactions, net of tax of $0.5			—				—				—				—				0.8				—				0.8
Total comprehensive loss																											(100.4	)
Balance at June 30, 2007		$	67.8			$	56.8			$	1,648.0			$	(195.1	)		$	(373.4	)		$	(485.7	)		$	718.4

For the six months ended June 30, 2006

																		Accumulated
										Additional								Other								Total
		Common				Exchangeable				Paid In				Retained				Comprehensive				Treasury				Shareholders’
		Stock				Shares				Capital				Earnings				Loss				Stock				Equity
Balance at December 31, 2005		$	67.5			$	68.1			$	1,621.6			$	100.1			$	(156.0	)		$	(485.8	)		$	1,215.5
Cumulative adjustment to retained earnings for adoption of SAB 108			—				—				—				8.6				—				—				8.6
Dividends on common stock ($0.40 per share)			—				—				—				(23.0	)			—				—				(23.0	)
Share-based compensation costs for equity awards			—				—				2.1								—				—				2.1
Comprehensive loss:
Net loss			—				—								(29.4	)			—				—				(29.4	)
Minimum pension liability			—				—								—				(4.7	)			—				(4.7	)
Foreign currency translation			—				—				—				—				3.8				—				3.8
Change in unrealized gain on hedged transactions, net of tax of $9.4			—				—				—				—				(15.4	)			—				(15.4	)
Total comprehensive loss																											(45.7	)
Balance at June 30, 2006		$	67.5			$	68.1			$	1,623.7			$	56.3			$	(172.3	)		$	(485.8	)		$	1,157.5

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions of US dollars)

		Six Months Ended June 30,
		2007				2006
Cash flows from operating activities:
Net loss		$	(98.0	)		$	(29.4	)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:
Cumulative effect of accounting change, net of tax			—				2.6
Share-based compensation			8.3				(0.8	)
Depreciation, amortization and cost of timber harvested			159.6				162.3
Deferred income taxes			24.4				28.5
Minority interests, net of tax			5.1				0.7
Net pension (contributions) benefit costs			(11.1	)			(11.3	)
Net gain on disposition of assets			(122.5	)			(100.5	)
Changes in working capital:
Accounts receivable, net			17.9				(17.0	)
Inventories			(33.6	)			8.7
Income taxes receivable and payable			0.1				(2.0	)
Accounts payable and accrued liabilities			(15.0	)			(11.1	)
Other, net			9.0				11.8
Net cash (used for) provided by operating activities			(55.8	)			42.5
Cash flows from investing activities:
Cash invested in fixed assets, timber and timberlands			(51.1	)			(90.6	)
Dispositions of assets, including timber and timberlands			147.4				238.1
Direct acquisition costs related to the proposed merger with Abitibi-Consolidated Inc.			(12.4	)			—
Net cash provided by investing activities			83.9				147.5
Cash flows from financing activities:
Cash dividends			(22.9	)			(22.9	)
Short-term financing			8.0				289.9
Short-term financing repayments			(8.0	)			(351.5	)
Payments of long-term debt			(14.7	)			(22.0	)
Net cash used for financing activities			(37.6	)			(106.5	)
Net (decrease) increase in cash and cash equivalents			(9.5	)			83.5
Cash and cash equivalents:
Beginning of period			98.9				30.1
End of period		$	89.4			$	113.6
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, including capitalized interest of $0.2 and $2.8		$	96.0			$	104.9
Income taxes		$	1.0			$	7.2

See accompanying notes to consolidated financial statements.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

1.		Summary of Significant Accounting Policies
		Basis of Presentation
		The accompanying consolidated financial statements include the accounts of Bowater Incorporated and subsidiaries (“Bowater,” also referred to as “we” or “our”). The consolidated balance sheet as of June 30, 2007, and the related statements of operations, stockholders’ equity and cash flows for the periods ended June 30, 2007 and 2006 are unaudited. In our opinion, all adjustments (consisting of normal recurring adjustments) necessary for fair presentation of the interim financial statements have been made. The results of the interim period ended June 30, 2007 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 and related notes and critical accounting estimates 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 2007 presentation. The reclassifications had no effect on total shareholders’ equity or net loss.
		On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for the uncertainty in income taxes recognized by prescribing the threshold a tax position is required to meet before being recognized in the financial statements. As a result of the adoption, we recorded a $2.3 million credit to our opening retained deficit balance in 2007. The credit represents the cumulative effect of adoption on prior periods. For additional information regarding this adjustment, refer to Note 8, Income Taxes.
		In December 2006, we adopted the provisions of Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). We elected, as allowed under SAB 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted liabilities as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of our retained earnings in 2006. We recorded a cumulative adjustment to increase our retained earnings by $8.6 million for the adoption of SAB 108.
2.		Inventories

		June 30,				December 31,
(Unaudited, in millions)		2007				2006
At lower of cost or market:
Raw materials		$	66.0			$	87.7
Work in process			21.1				20.1
Finished goods			172.9				123.0
Mill stores and other supplies			136.8				132.0
			396.8				362.8
Excess of current cost over LIFO inventory value			(13.4	)			(13.0	)
		$	383.4			$	349.8

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

3.		Other (Expense) Income, Net
		“Other (expense) income, net” in the Consolidated Statements of Operations includes the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Foreign exchange losses		$	(16.5	)		$	(4.8	)		$	(19.6	)		$	(3.0	)
(Losses) earnings from equity method investments			(0.9	)			1.9				(2.7	)			4.2
Interest income			1.6				1.0				3.5				2.1
Miscellaneous income, net			1.5				0.2				0.1				1.5
		$	(14.3	)		$	(1.7	)		$	(18.7	)		$	4.8

4.		Timberlands Held for Sale
		We are currently marketing for sale approximately 16,000 acres of timberlands in the United States and Canada. The sale of these timberlands is expected to be completed in 2007. Timberlands held for sale are carried on our Consolidated Balance Sheets at cost as we expect the proceeds of the timberland sales to exceed the individual carrying values of the timberlands sold. Deferred income taxes include $1.0 million and $4.8 million at June 30, 2007 and December 31, 2006, respectively, of deferred tax assets associated with these timberlands held for sale.
		During the three months ended June 30, 2007, we sold approximately 55,600 acres of timberlands and other assets for proceeds of $82.8 million. During the six months ended June 30, 2007, we sold approximately 107,800 acres of timberlands and other assets for proceeds of $147.4 million
		During the three months ended June 30, 2006, we sold approximately 472,000 acres of timberlands, our Baker Brook sawmill and other assets for proceeds of $201.3 million. During the six months ended June 30, 2006, we sold approximately 496,800 acres of timberlands, our Dégelis and Baker Brook sawmills and other assets for proceeds of approximately $238.1 million.
5.		Accumulated Other Comprehensive Loss
		The components of “Accumulated other comprehensive loss” in the Consolidated Balance Sheets are as follows:

		June 30,				December 31,
(Unaudited, in millions)		2007				2006
Unrealized prior service costs (1)		$	(24.6	)		$	(23.2	)
Unrealized actuarial gains and losses (2)			(342.1	)			(358.9	)
Unrealized transition obligation (3)			(0.1	)			(0.1	)
Foreign currency translation (4)			(6.6	)			12.0
Unrealized gain on hedging transactions (5)			—				(0.8	)
		$	(373.4	)		$	(371.0	)

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

6.		Loss Per Share
		The information required to compute net loss per basic and diluted share is as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Basic weighted-average number of common shares outstanding			57.4				57.4				57.4				57.4
Effect of potentially dilutive securities:
Stock options			—				—				—				—
Restricted stock units			—				—				—				—
Diluted weighted-average number of common shares outstanding			57.4				57.4				57.4				57.4

		No adjustments to net loss are necessary to compute net loss per basic and diluted share. The dilutive effect of potentially dilutive securities is calculated using the treasury stock method. Options to purchase 4.8 million shares for both the three and six months ended June 30, 2007, and 5.1 million shares for both the three and six months ended June 30, 2006, were excluded from the calculation of diluted loss per share as the impact would have been anti-dilutive. In addition, 1.0 million restricted stock units for both the three and six months ended June 30, 2007, and 0.8 million restricted stock units for both the three and six months ended June 30, 2006 were excluded from the calculation of diluted loss per share for the same reason.
7.		Pension and Postretirement Expense
		The components of net periodic benefit costs relating to our pension and other postretirement (“OPEB”) plans are as follows for the three and six months ended June 30, 2007 and 2006:
		Pension Plans:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Components of net periodic benefit cost:
Service cost		$	9.2			$	11.0			$	18.3			$	21.9
Interest cost			31.6				30.0				61.9				59.2
Expected return on plan assets			(33.4	)			(30.6	)			(65.5	)			(60.2	)
Amortization of prior service cost			1.2				1.4				2.3				2.8
Amortization of net actuarial loss			7.0				8.8				13.8				17.7
Special termination benefits			4.0				—				4.0				—
Curtailment and settlement losses			2.9				—				7.4				4.6
Net periodic benefit cost		$	22.5			$	20.6			$	42.2			$	46.0

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

OPEB Plans:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Components of net periodic benefit cost:
Service cost		$	0.5			$	1.0			$	1.0			$	2.0
Interest cost			3.1				4.0				6.2				8.0
Amortization of prior service credit			(2.8	)			(1.5	)			(5.6	)			(3.0	)
Amortization of net actuarial loss			1.6				2.0				3.2				4.0
Curtailment and settlement gains			(0.3	)			—				(3.5	)			(0.2	)
Net periodic benefit cost		$	2.1			$	5.5			$	1.3			$	10.8

		Since the measurement date of our pension and OPEB plans is 90 days prior to the start of our year, curtailment gains and losses that arise during the year are recorded on a 90-day lag.
		In December 2006, January 2007 and March 2007, certain employees received lump-sum payouts from two of our retirement pension plans. Accordingly, settlement losses of $1.1 million and $5.6 million were included in the net periodic benefit cost of our pension plans during the three and six months ended June 30, 2007, respectively.
		In February 2007, union members at our Thunder Bay, Ontario facility ratified a new labor agreement. As a result of a mill-wide restructuring of this facility, 157 jobs are being eliminated. A curtailment loss of approximately $1.8 million and the cost of special termination benefits of $4.0 million were included in the net periodic benefit cost of our pension plans during the three and six months ended June 30, 2007, and a curtailment gain of $0.3 million was included in the net periodic benefit cost of our OPEB plans during the three and six months ended June 30, 2007 as a result of the employee reduction. This event will also result in a settlement loss at the time the benefits are paid.
		In October 2006, Bowater approved changes to its other postretirement plan for its U.S. salaried employees. Benefits for employees were either eliminated or reduced depending on whether the employee met certain age and years of service criteria. A curtailment gain of $3.2 million was included in the net periodic benefit cost of our OPEB plans during the six months ended June 30, 2007.
		The curtailment loss of $4.6 million and curtailment gain of $0.2 million included in net periodic benefit cost for our pension and OPEB plans, respectively, during the six months ended June 30, 2006 is due to the reduction of employees at our Thunder Bay “A” kraft pulp mill.
		In May 2007, union members at our Gatineau, Quebec facility ratified a new labor agreement. As a result of a mill-wide restructuring of this facility, 143 jobs are being eliminated. A curtailment loss of approximately $1.7 million will be recorded in the third quarter of 2007 as a result of the employee reduction.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

8.		Income Taxes
		The income tax provision attributable to loss before income taxes, minority interests and cumulative effect of accounting change differs from the amounts computed by applying the United States federal statutory income tax rate of 35% as a result of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
(Loss) income before income taxes, minority interests and cumulative effect of accounting change		$	(46.7	)		$	16.4			$	(73.3	)		$	13.3
Expected income tax benefit (provision)			16.4				(5.8	)			25.7				(4.7	)
Increase (decrease) in income taxes resulting from:
Valuation allowance (1)			(24.3	)			(42.1	)			(37.3	)			(55.6	)
Foreign exchange			(16.5	)			(10.2	)			(17.3	)			(12.6	)
State income taxes, net of federal income tax benefit			(0.3	)			(1.1	)			(0.4	)			(1.9	)
Foreign taxes (2)			6.9				29.4				11.3				30.4
Other, net			(0.1	)			3.5				(1.6	)			5.0
Income tax provision		$	(17.9	)		$	(26.3	)		$	(19.6	)		$	(39.4	)

		We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we decreased our liability for unrecognized tax benefits by $2.3 million, which was accounted for as a decrease to our January 1, 2007 retained deficit balance. Our liability for unrecognized tax benefits as of January 1, 2007 is $28.3 million, which includes interest of $0.6 million. We recognize interest and penalties accrued related to unrecognized tax benefits as components of income tax expense. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $23.1 million, which includes $0.6 million of interest. If recognized, these items would impact the Consolidated Statements of Operations and our effective tax rate. We anticipate that the total amount of unrecognized tax benefits will decrease by approximately $7.0 million to $8.5 million during the next twelve months due to certain U.S. statutes of limitations closing, primarily in the third quarter of 2007. The approximately $7.0 million to $8.5 million of unrecognized tax benefits is attributable to various U.S. income tax issues. We remain subject to income tax examination in Canada for tax years 2002-2006, in Korea for tax years 2005-2006 and in the U.S. for tax years 2003-2006.
9.		Financial Instruments
		Bowater utilizes certain derivative instruments to enhance its ability to manage risk relating to cash flow exposure. Derivative instruments are entered into for periods consistent with related underlying cash flow exposures and do not constitute positions independent of those exposures. 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. Counterparty risk is limited to institutions with long-term debt ratings of A or better for North American financial institutions or ratings of AA or better for international institutions.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

		For derivatives that qualify for hedge accounting (currently only the Canadian dollar forward contracts), we designate the derivative as a cash flow hedge at the inception of the hedge. We formally document all relationships between the hedging instruments and the hedged items, as well as our risk-management objectives and strategies for undertaking the various hedge transactions. We link all hedges that are designated as cash flow hedges to forecasted transactions. Under the terms of our risk management policy, we may enter into derivative contracts to hedge forecasted transactions for a period not to exceed 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 the hedged items. If it is determined that a derivative is no longer highly effective as a hedge, we discontinue hedge accounting prospectively.
		Canadian Dollar Forward Contracts
		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 periodically enter into and designate Canadian dollar forward contracts to hedge certain of the forecasted Canadian dollar cash outflows at our Canadian mill operations, which we believe are likely to occur. There were no hedging contracts outstanding at June 30, 2007. Hedge ineffectiveness associated with our Canadian dollar forward contracts was not material for the periods presented in our Consolidated Financial Statements.
		British Pound Sterling Forward Contracts
		We have entered into sales agreements denominated in British pound sterling. Beginning in the first quarter of 2007, we entered into currency forward contracts to partially limit our exposure to British pound sterling-U.S. dollar exchange rate fluctuations. These currency forward contracts, which do not currently meet the requirements for hedge accounting treatment, have been recorded at fair value in the Consolidated Statement of Operations. As a result, approximately $0.8 million and $0.7 million of pre-tax losses were recognized for the three and six months ended June 30, 2007, respectively, for contracts that we entered into to economically hedge forecasted transactions expected to occur through December 31, 2007.
		Natural Gas Swap Agreements
		Beginning in the third quarter of 2006, we entered into natural gas swap agreements under our natural gas hedging program for the purpose of reducing the risk inherent in fluctuating natural gas prices. Our hedged natural gas costs are billed to us based on a publicly traded index plus a fixed amount. The natural gas swap agreements allow us to minimize the effect of fluctuations in those indices by contractually exchanging the publicly traded index upon which we are billed for a fixed index of natural gas cost. The swap agreements, which do not currently meet the requirements for hedge accounting treatment, have been recorded at fair value in the Consolidated Statement of Operations. As a result, approximately $1.1 million of pre-tax losses and $0.1 million of pre-tax gains were recognized for the three and six months ended June 30, 2007, respectively, for contracts that we entered into in 2006 and 2007 to economically hedge forecasted transactions expected to occur through July 2008.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

Information regarding our outstanding British pound sterling and natural gas swap contracts’ notional amount, fair market value, and range of exchange rates or natural gas price index prices is summarized in the table below. The notional amount of these contracts represents the amount of foreign currencies or natural gas to be purchased or sold at maturity and does not represent our exposure on these contracts.

										Range Of
										US$/CDN$ and
										US$/GBP
		Notional								Exchange Rates
(Unaudited, in millions of U.S. dollars		Amount of				Asset /(Liability)				and Natural Gas
except rates and prices)		Derivatives				Fair Market Value				Index Prices
As of June 30, 2007:
Foreign Currency Exchange Agreements:
British pound sterling
Due in 2007		$	40.3			$	(0.5	)		$	1.9553 — 1.9992
Natural Gas Swap Agreements:
Due in 2007		$	6.1			$	(0.5	)		$	6.15 — 9.53
Due in 2008		$	1.4			$	0.1			$	6.99 — 9.87
As of December 31, 2006:
Foreign Currency Exchange Agreements:
Canadian dollar
Due in 2007		$	76.0			$	(0.4	)		$	.8592 — .8801
Natural Gas Swap Agreements:
Due in 2007		$	9.0			$	(1.1	)		$	5.87 — 8.98

		The counterparties to our derivative financial instruments are substantial and creditworthy multi-national financial institutions. The risk of counterparty nonperformance is considered to be remote, and no individual financial institution holds more than 34% of our derivative financial instruments.
		The components of the cash flow hedges included in “Accumulated other comprehensive loss” are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
(Gains) losses reclassified to earnings on matured cash flow hedges		$	(0.2	)		$	(11.6	)		$	1.1			$	(29.2	)
Unrealized gains for change in value on outstanding cash flow hedges			—				3.6				0.2				4.4
			(0.2	)			(8.0	)			1.3				(24.8	)
Income tax benefit			0.1				3.0				(0.5	)			9.4
Net (increase) decrease in “Accumulated other comprehensive loss”		$	(0.1	)		$	(5.0	)		$	0.8			$	(15.4	)

10.		Commitments and Contingencies
		Bowater is involved in various legal proceedings relating to contracts, commercial disputes, taxes, environmental issues, employment and workers’ compensation claims and other matters. We periodically review the status of

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

		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 the year.
		On September 30, 2005, the Ministry of Justice of the Province of Quebec (MOJ) cited one of our subsidiaries, Bowater Canadian Forest Products, Inc. (BCFPI), in connection with effluent water quality of the Dolbeau mill. BCFPI settled this citation on March 29, 2007, by agreeing to pay a fine and costs totaling CDN$158,000. The Dolbeau mill has taken steps to improve its effluent quality and has experienced only two other exceedences since January 1, 2005.
		On June 18, 2007, The Levin Group, L.P. filed a complaint against Bowater in the Supreme Court of New York, New York County, asserting claims for breach of contract and related claims relating to certain advisory services purported to have been provided by the plaintiff in connection with the combination (See Note 14). The complaint seeks damages of no less than $70 million, related costs and such other relief as the court deems just and proper. The management of Bowater believes this claim is entirely without merit and intends to contest this matter.
		There have been no material developments to those legal proceedings described in our Annual Report on Form 10-K filed on March 13, 2007.
11.		Share-Based Compensation
		We maintain incentive stock plans that provide for grants of stock options, equity participation rights (“EPRs”) and restricted stock units to our directors, officers and key employees. These plans are described more fully in our 2006 Annual Report on Form 10-K.
		Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share-based Payments” and related interpretations (“SFAS 123R”). The adoption of SFAS 123R resulted in a charge for the cumulative effect of accounting change of $2.6 million, net of tax, (or $0.05 per share) that we recorded in the first quarter of 2006.
		The following table details the share-based compensation expense (excluding the cumulative effect of accounting change) recorded in the Consolidated Statements of Operations by award:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Stock options		$	0.3			$	0.2			$	0.6			$	0.2
Restricted stock units			3.2				1.9				7.4				1.9
EPRs			0.2				(2.0	)			0.3				(2.9	)
Stock-based compensation expense (income)		$	3.7			$	0.1			$	8.3			$	(0.8	)

The following table details the tax (benefit) provision by award:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Unaudited, in millions)		2007				2006				2007				2006
Stock options		$	(0.1	)		$	(0.1	)		$	(0.3	)		$	(0.1	)
Restricted stock units			(0.9	)			(0.4	)			(2.0	)			(0.4	)
EPRs			(0.1	)			0.5				(0.1	)			0.7
Tax (benefit) provision		$	(1.1	)		$	—			$	(2.4	)		$	0.2

Stock Options

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

		On January 30, 2007, we granted 72,146 stock options. The awards cliff vest after three years and allow for accelerated vesting upon a grantee’s retirement. We have recognized compensation expense based on the requisite service period, which is less than three years for certain employees who are eligible for retirement as of the date of the grant or become eligible for retirement during the vesting period. We issued 350,630 stock options in May 2006, which either cliff vest after 32 months (100,630 shares) or vest ratably over 36 months (250,000 shares).
		A summary of option activity under our stock plans as of and for the six months ended June 30, 2007 is presented below:

										Weighted
						Weighted				Average				Aggregate
		Number Of				Average				Remaining				Intrinsic
		Options				Exercise				Contractual				Value
(Unaudited)		(000’s)				Price				Life (years)				($000)
Outstanding at December 31, 2006			4,982			$	43.45
Granted during the period			72				27.87
Exercised during the period			—				—
Canceled during the period			(249	)			42.77
Outstanding at June 30, 2007			4,805			$	43.25				4.7			$	—
Exercisable at June 30, 2007			4,511			$	44.28				4.4			$	—

		In accordance with SFAS 123R, we estimated the fair value of each stock option granted during the six months ended June 30, 2007 on the date of grant using a Black-Scholes option-pricing formula, applying weighted-average assumptions which are consistent with the assumptions described in “Note 21 Share-Based Compensation” included in our most recent Annual Report on Form 10-K, and amortize that value to expense over the option’s requisite service period using the straight-line attribution approach. The weighted-average fair value of options granted during the six months ended June 30, 2007 was $9.08.
		During the three and six months ended June 30, 2007 and 2006, all vested options had a strike price greater than the closing price of our common stock (i.e., were “out-of-the-money”), and there were no stock option exercises during those periods.
		As of June 30, 2007, there was $1.9 million of unrecognized compensation cost related to stock option awards granted under our stock plans. The unrecognized cost is expected to be recognized over a weighted-average period of 1.9 years.
		Restricted Stock Units
		On January 30, 2007, we granted 327,945 restricted stock units (“RSUs”), all of which are service-based awards. The awards cliff vest after three years and allow for accelerated vesting upon a grantee’s retirement. We have recognized compensation expense based on the requisite service period, which is less than three years for certain employees who are eligible for retirement as of the date of the grant or will become eligible for retirement during the vesting period.
		On February 7, 2007, we granted 36,101 RSUs, all of which are performance-based awards. These awards vest upon closing of the merger of Bowater and Abitibi-Consolidated Inc. (“Abitibi”), or upon cancellation of the merger if the cancellation is due to a failure to receive regulatory approval or Abitibi’s acts or failures to act. Accounting guidance dictates that, for purposes of recognizing compensation expense for this type of award, the business combination is not considered “probable” until the date the merger is consummated. As vesting of these awards is predicated upon close of the merger or other events related to the business combination, no compensation expense will be recorded for these awards until consummation of the merger. In the event of the consummation of the merger, $1.0 million of compensation expense will be immediately recognized. These awards are included in our outstanding RSUs at the end of the period.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

		On March 23, 2007, we granted 54,200 RSUs, all of which are performance-based awards. The vesting of these awards is contingent upon the realization of certain synergies within two years of consummation of the AbitbiBowater merger. The key terms and conditions of these RSUs have not been finalized; therefore a grant date for FAS 123R purposes has not occurred. As such, no compensation expense was recorded during the three and six months ended June 30, 2007, nor were these awards included in our outstanding RSUs at the end of the period.
		On May 10, 2006, we issued four separate grants of restricted stock units totaling 775,529 shares, of which 43,530 shares are performance-based awards. The performance-based awards cliff vest after 32 months. The remaining shares, which are service-based awards, cliff vest after 32 months (178,342 shares), 20 months (503,657 shares) or 12 months (50,000 shares).
		A summary of the status of our restricted stock units as of and for the six months ended June 30, 2007, is presented below:

		Number				Weighted Average
		Of Units				Fair Value at
(Unaudited)		(000’s)				Grant Date
Outstanding at December 31, 2006			665			$	26.11
Granted during the period			364				27.85
Vested during the period			(54	)			26.35
Forfeited during the period			(14	)			26.64
Outstanding at June 30, 2007			961			$	26.75

		As of June 30, 2007, there was $11.4 million of unrecognized compensation cost related to restricted stock units granted under our stock plans, excluding those granted on February 7, 2007 (discussed above). This unrecognized cost is expected to be recognized over a weighted-average period of 1.2 years. The total fair value of restricted stock units vested during the first six months of 2007 was $1.2 million.
		Equity Participation Rights
		EPRs confer the right to receive cash based on the appreciation of Bowater’s common stock price, but no right to acquire stock ownership. The rights have a vesting period of two years and, unless terminated earlier in accordance with their terms, expire 10 years after the grant date. The base price is the fair market value of our common stock on the day of grant. The rights may be redeemed only for cash, and the amount paid to the employee at the time of exercise is the difference between the base price and the average high/low of our common stock on the day of settlement. There have been no grants of EPRs since January 2003.
		The EPR awards are classified as liability awards under SFAS 123R since the EPRs are cash settled. In accordance with SFAS 123R, liability awards are remeasured at fair value at each reporting period and the income or expense included in the consolidated statement of operations. As of June 30, 2007, the fair value of our EPRs liability is $0.9 million. The assumptions used to value the liability are consistent with those used in the past. There have been no significant changes to the number of EPRs outstanding or exercisable since December 31, 2006. Refer to our most recent Annual Report on Form 10-K for additional details.

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

12.		Off-Balance Sheet Debt Guarantees
		In connection with Bowater’s 1999 land sale and note monetization, we guarantee 25% of the outstanding investor notes principal balance of Timber Note Holdings LLC, one of our Qualified Special Purpose Entities (QSPEs). Bowater guarantees approximately $6.9 million of the investor notes’ principal balance at June 30, 2007. This guarantee is proportionately reduced by annual principal repayments on the investor notes (annual minimum repayments of $2.0 million) through 2008. The remaining investor notes’ principal amount is to be repaid in 2009. Timber Note Holdings LLC has assets of approximately $29.9 million and obligations of approximately $26.3 million, which include the investor notes. Bowater would be required to perform on the guarantee if the QSPE were to default on the investor notes or if there were a default on the notes receivable, neither of which has ever occurred.
13.		Segment Information
		During the third quarter of 2006, we announced that we were realigning our organizational structure to move from a divisional organization to a functional organization that supports and focuses on our multi-product line manufacturing and sales across our mill base. As a result of this organizational realignment, we now manage our business based on the products that we manufacture and sell to external customers and, therefore, our reportable segments changed. Our new reportable segments are coated papers, specialty papers, newsprint, market pulp, and lumber. Prior year information has been recast to the current year presentation of our reportable segments.
		None of the income or loss items following “Operating income” in our Consolidated Statements of Operations are allocated to our segments, since those items are reviewed separately by Bowater’s management. For the same reason, impairments, employee termination costs, gains on dispositions of assets and other discretionary charges or credits are not allocated to the segments. Share-based compensation expense is, however, allocated to our segments. We also allocated depreciation expense to our segments, although the related fixed assets are not allocated to segment assets.
		The following tables summarize information about segment profit and loss for the three and six months ended June 30, 2007 and 2006:

						Coated				Specialty								Market								Corporate				Consolidated
(Unaudited, in millions)						Papers				Papers				Newsprint				Pulp				Lumber				and Other				Total
Sales
Second quarter			2007			$	129.5			$	151.3			$	313.0			$	137.7			$	64.1			$	3.0			$	798.6
Second quarter			2006				156.2				141.8				367.3				136.7				94.0				3.4				899.4
Year to date			2007				258.0				292.5				615.9				270.8				126.9				6.1				1,570.2
Year to date			2006				309.1				272.7				740.8				266.1				190.5				13.4				1,792.6
Operating income (loss) (1)
Second quarter			2007			$	4.6			$	(9.8	)		$	(10.7	)		$	17.3			$	(7.0	)		$	20.5			$	14.9
Second quarter			2006				23.0				(17.2	)			18.4				(1.6	)			(4.8	)			49.6				67.4
Year to date			2007				13.2				(18.5	)			(14.8	)			36.0				(20.6	)			44.7				40.0
Year to date			2006				44.7				(25.4	)			36.2				(1.3	)			(3.5	)			56.5				107.2

BOWATER INCORPORATED
Notes to Consolidated Financial Statements — Unaudited

14.		Combination with Abitibi-Consolidated Inc.
		In January 2007, Bowater and Abitibi announced a definitive agreement to combine in an all-stock “merger of equals” (the combined company which has been formed in connection with the combination is referred to herein as “AbitibiBowater”). In July 2007, we received final regulatory approval from the Canadian government, and the shareholders of both Abitibi and Bowater approved the combination. We are still awaiting approval from the antitrust division of the U.S. Department of Justice. In connection with the review and approval of the transaction by the Canadian government, AbitibiBowater agreed, among other things, for a period of three years after closing, to maintain its headquarters in Montreal, Canada; to maintain at least five Canadians on its Board of Directors; and to apply for listing of its common stock on the Toronto Stock Exchange (TSX). The combination is expected to be completed in the third quarter of 2007, subject to obtaining regulatory approval from the U.S. government and other customary closing conditions. Abitibi and Bowater will continue to operate separately until the transaction closes. In connection with this announced combination, we have approved a retention and severance program for approximately 320 Bowater employees who may be impacted by the pending combination with Abitibi. This program provides a retention bonus for employees who remain with Bowater through the closing of the combination or its cancellation for any reason and an additional retention bonus for employees who remain with Bowater for a transition period following closing of the combination. The costs associated with these programs are expensed as incurred. Also in connection with the combination, we have incurred $18.0 million in direct acquisition costs as of June 30, 2007. These costs have been capitalized in our Consolidated Balance Sheet based upon the assumption that Bowater is the acquirer in this combination for accounting purposes.
15.		Subsequent Event
		In order for us to maintain compliance with our U.S. and Canadian credit facilities subsequent to the consummation of the proposed combination with Abitibi, it was necessary to amend those facilities. The amendment was approved by our banks in July 2007 and will be entered into upon consummation of the combination. The amendment permits a structure that allows AbitibiBowater, which will become the parent corporation of Bowater upon consummation of the merger, to become a party to the credit facilities. All existing debt structures are expected to remain intact upon consummation of the merger; however, restrictions on the amount of cash that can be transferred from Bowater to AbitibiBowater are expected.

BOWATER INCORPORATED

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements Regarding Forward-Looking Information and Use of Third Party Data

Statements contained in this Form 10-Q that do not constitute historical financial results or other factual 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 and shipments, prices for our major products, inventory levels, cost reduction measures, manufacturing performance, product mix, capital spending and tax and exchange rates. Forward looking statements also include statements concerning our pending combination with Abitibi-Consolidated Inc., including statements about the expected timing of such transaction, conditions to closing and anticipated post-closing operations and results. 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 “Risk Factors” from time to time, in Bowater’s filings with the Securities and Exchange Commission. In addition, other risks could adversely affect us, as it is not possible for us to predict or assess all risks. We disclaim any obligation to publicly update or revise any forward-looking statements even if our situation changes in the future.

Information about industry or general economic conditions contained in this report is derived from third party sources (i.e., the Pulp and Paper Products Council; RISI, Inc.; and certain trade publications) that Bowater believes are widely accepted and accurate; however, Bowater has not independently verified this information and cannot provide assurances of its accuracy.

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 and should be read in conjunction with our unaudited Consolidated Financial Statements included in this quarterly report. Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2006. Bowater’s critical accounting estimates are described under the caption “Critical Accounting Estimates” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates, assumptions and judgments and rely on projections of future 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. It is important that the reader of our financial statements understand that actual results could differ materially from these estimates, assumptions, projections and judgments.

Overview of Financial Performance

We manage our business based on the products that we manufacture and sell to external customers. Our primary product lines include—coated papers, specialty papers, newsprint, market pulp, and lumber.

Our net loss for the second quarter of 2007 was $62.6 million, or $1.09 per diluted share, as compared to a net loss of $10.6 million, or $0.18 per diluted share, for the same period in 2006.

BOWATER INCORPORATED

Our sales in the second quarter of 2007 were $798.6 million, a decrease of $100.8 million from the second quarter of 2006 sales of $899.4 million. Average transaction prices decreased for all of our major products except market pulp, and shipments decreased for all of our major products except specialty papers. The increase in the shipments of specialty papers was due primarily to the conversion of a newsprint machine at our Calhoun facility in July 2006 to produce a lightly coated freesheet hybrid product. Shipments of newsprint were significantly lower in the second quarter of 2007 compared to the second quarter of 2006 due to the continued decline of North American newsprint consumption and the above mentioned shift to specialty paper production. We have increased our exports of newsprint into areas where market conditions are stronger, but those export sales only partially offset the effects of the North American declines. As such, we continue to curtail paper production at several facilities. The production of paper was curtailed at our Thunder Bay, Ontario facility from September 2006 through the end of May 2007. We also indefinitely idled paper machine no. 3 at our Gatineau, Quebec facility beginning in March 2007 and indefinitely idled paper machine no. 2 at our Dolbeau, Quebec facility beginning in late May 2007 in response to the decreased North American demand for newsprint and higher costs to operate our Canadian mills, primarily due to the stronger Canadian dollar. Shipments of market pulp decreased in the second quarter of 2007 compared to the same time period in 2006 primarily due to the permanent closure of our Thunder Bay “A” kraft pulp mill in May 2006 and increased internal consumption of pulp. However, the increase in the average transaction price for market pulp more than offset the negative effect of reduced shipments. Shipments of lumber were lower in the second quarter of 2007 as compared to the second quarter of 2006 primarily due to weak demand in the U.S. housing market and the impact of quotas imposed by the Softwood Lumber Agreement in January 2007.

Our costs decreased $58.2 million during the second quarter of 2007 as compared to the same time period in 2006. This reduction in costs was primarily due to lower volumes and lower maintenance and labor costs. These lower costs were partially offset by reduced benefits from our Canadian dollar hedging program and a stronger Canadian dollar (which increased from an average rate of US$0.8903 to US$0.9099). When combined, these offsets increased our costs by $19.7 million compared to the same time period in 2006. Higher wood costs, particularly recycled fiber costs increased our costs by $6.5 million compared to the same time period in 2006. Despite the significant increase in recycled fiber costs and the stronger Canadian dollar, our operating costs per ton have remained flat across all our paper grades when compared to the first quarter of 2007. We believe the decrease in our operating costs per ton, net of recycled fiber costs and the impact of the stronger Canadian dollar, is a result of our commitment to our operational improvement program and the progress we have made in reducing our controllable costs. Specifically, our Thunder Bay mill from December 2006 through June 2007 has lowered its costs to produce paper by approximately $150 per metric ton and its costs to produce pulp by approximately $25 per metric ton. We expect the full impact of the restart of one of Thunder Bay’s paper machine and these cost improvements to be reflected in the third quarter. Additional information regarding the changes in our manufacturing and other costs is included below in the section “Consolidated Results of Operations.” In addition, we recorded a net gain on the disposition of assets of $64.6 million in the second quarter of 2007, primarily associated with our ongoing land sales program.

Business Strategy and Outlook

Our focus is on improving our product mix and reducing our operating costs per ton. North American newsprint demand declined significantly during the first six months of 2007, and there is no clear indication as to the level at which demand will stabilize. As a result of the changes in customer demand, we indefinitely idled paper machine no. 3 at our Gatineau, Quebec facility and curtailed production at various other facilities in March 2007. We reduced production of newsprint by approximately 119,000 metric tons in the first six months of 2007, including approximately 10,000 metric tons as a result of a major rebuild of a paper machine at our Calhoun mill. In addition, we indefinitely idled paper machine no. 2 at our Dolbeau, Quebec facility in late May 2007. We will continue to evaluate our production options and focus on increasing production of our more profitable product lines from our lower cost sites. For example, we converted a newsprint machine to produce specialties at our Calhoun facility in July 2006, and we plan to increase production of specialty papers at our Thunder Bay facility in the third quarter of 2007.

We expect to spend approximately $100 million on capital projects during the remaining six months of 2007 compared to depreciation of approximately $160 million. Spending in 2007 is expected to be $50 million lower than in 2006. This reduction in capital spending reflects our disciplined approach to limit capital expenditures to those that are expected to achieve the highest return on our assets.

BOWATER INCORPORATED

On January 29, 2007, we announced that we had entered into an agreement to combine with Abitibi-Consolidated Inc. (“Abitibi”) in a merger of equals. In July 2007, we received final regulatory approval from the Canadian government, and the shareholders of both Abitibi and Bowater approved the combination. We are still awaiting approval from the antitrust division of the U.S. Department of Justice. In connection with the review and approval of the transaction by the Canadian government, the newly formed jointly combined company, AbitibiBowater Inc., agreed, among other things, for a period of three years after closing, to maintain its headquarters in Montreal, Canada; to maintain at least five Canadians on its Board of Directors; and to apply for listing of its common stock on the Toronto Stock Exchange (TSX). The combination, when completed, will have a material impact on our results of operations, financial condition and liquidity going forward. Management believes that, as a result of the merger and the synergies, the combined company will be operationally and financially stronger and better able to meet changing customer needs while competing more effectively in the global marketplace. We expect that the combination will generate approximately $250 million of annual cost synergies from improved efficiencies in such areas as production, selling, administrative, distribution and procurement costs. We continue to expect to complete the combination in the third quarter of 2007, subject to obtaining regulatory approval from the U.S. government and other customary closing conditions. In connection with the combination, we have approved a retention and severance program for approximately 320 Bowater employees who may be impacted by the combination. This program provides a retention bonus for employees who remain with Bowater through the closing of the combination or its cancellation and an additional retention bonus for employees who remain with Bowater for a transition period following closing of the combination.

Business and Financial Review

Consolidated Results of Operations

		Three Months Ended June 30,												Six Months Ended June 30,
(In millions)		2007				2006				Change				2007				2006				Change
Sales		$	798.6			$	899.4			$	(100.8	)		$	1,570.2			$	1,792.6			$	(222.4	)
Operating income			14.9				67.4				(52.5	)			40.0				107.2				(67.2	)
Significant items that improved (lowered) operating income:
Product pricing										$	(32.0	)										$	(45.5	)
Shipment volume											(68.8	)											(176.9	)
Change in total sales											(100.8	)											(222.4	)
Manufacturing costs											71.7												155.4
Employee termination costs											(12.0	)											(14.8	)
Change in total manufacturing costs and depreciation, amortization, and cost of timber harvested											59.7												140.6
Distribution costs											0.7												8.3
Selling and administrative expenses											(5.0	)											(15.7	)
Gain on disposition of assets											(7.1	)											22.0
										$	(52.5	)										$	(67.2	)

Three months ended June 30, 2007 versus June 30, 2006

Sales decreased in the second quarter of 2007 as compared to the second quarter of 2006 due primarily to lower transaction prices for coated papers, specialty papers, newsprint and lumber and decreased shipments of coated papers, newsprint, market pulp and lumber, partially offset by higher transaction prices for market pulp and higher shipments of specialty papers as further noted in the “Segment Results of Operations” section.

BOWATER INCORPORATED

Operating income decreased in the second quarter of 2007 as compared to the second quarter of 2006. The above table analyzes the major items that decreased operating income. A brief explanation of these major items follows:

Product pricing for our coated papers, specialty papers, newsprint, and lumber product groups was lower in the second quarter of 2007 as compared to the second quarter of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing.

Shipment volume for our coated papers, newsprint, market pulp and lumber product groups was lower in the second quarter of 2007 as compared to the second quarter of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of shipments.

Manufacturing costs were lower in the second quarter of 2007 as compared to the second quarter of 2006 resulting primarily from lower volumes ($48.6 million), lower maintenance ($20.0 million), lower labor costs ($9.2 million) and lower depreciation ($1.7 million), partially offset by reduced benefits from our Canadian dollar hedging program ($11.4 million), a stronger Canadian dollar ($8.3 million) and higher wood costs ($6.5 million).

Employee termination costs were higher in the second quarter of 2007 due to severance and pension and other postretirement related charges that exceeded amounts recorded in the second quarter of 2006. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of employee termination costs.

Selling and administrative expenses were higher in the second quarter of 2007 as compared to the same period of 2006, primarily as a result of higher share-based compensation costs and higher merger-related costs. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of these costs.

Gain on disposition of assets relates primarily to land sales. The decrease is due to lower net gains on land sold in the second quarter of 2007 compared to the same period of 2006.

Six months ended June 30, 2007 versus June 30, 2006

Sales decreased in the first six months of 2007 as compared to the same period of 2006 due primarily to lower transaction prices for coated papers, specialty papers, newsprint and lumber and decreased shipments of coated papers, newsprint, market pulp and lumber, partially offset by higher transaction prices for market pulp and higher shipments of specialty papers as further noted in the “Segment Results of Operations” section.

Operating income decreased in the first six months of 2007 as compared to the same period of 2006. The above table analyzes the major items that decreased operating income. A brief explanation of these major items follows:

Product pricing for our coated papers, specialty papers, newsprint, and lumber product groups was lower in the first six months of 2007 as compared to the same period of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of product pricing.

Shipment volume for our coated papers, newsprint, market pulp and lumber product groups was lower in the first six months of 2007 as compared to the same period of 2006. Please refer to the discussion of “Segment Results of Operations” for a more detailed analysis of shipments.

BOWATER INCORPORATED

Manufacturing costs were lower in the first six months of 2007 as compared to the same period of 2006 resulting primarily from lower volumes ($109.2 million), lower maintenance ($26.9 million), lower labor costs ($21.7 million), lower energy costs ($4.0 million) and lower depreciation ($2.9 million), partially offset by reduced benefits from our Canadian dollar hedging program ($30.2 million), higher wood costs ($9.0 million), a stronger Canadian dollar ($3.4 million), and higher chemical costs ($1.3 million).

Employee termination costs were higher in the first six months of 2007 due to severance and pension and postretirement related charges that exceeded amounts recorded in the same period of 2006. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of employee termination costs.

Distribution costs were lower in the first six months of 2007 as compared to the same period of 2006, primarily as a result of the reduced shipments of product and reduced lumber duties.

Selling and administrative expenses were higher in the first six months of 2007 as compared to the same period of 2006, primarily as a result of higher share-based compensation costs and higher merger-related costs. Please refer to the discussion of “Corporate and Other” for a more detailed analysis of these costs.

Gain on disposition of assets relates primarily to land sales. The increase is due to higher net gains on land sold in the first six months of 2007 compared to the same period of 2006.

Segment Results of Operations