Arnold M. Nemirow Chairman, President and Chief Executive Officer

Fellow Shareholders:

Although we significantly narrowed our loss compared with the previous year, Bowater’s financial performance in 2004 was still unsatisfactory. For 2004, Bowater had a net loss of $87.1 million, or $1.52 per share, compared with a net loss of $205.0 million, or $3.60 per share in 2003. Price increases for our major products were offset by cost increases and the strong Canadian dollar. However, we generated positive cash flow in the second half of the year and are experiencing healthier markets for our major products. Consequently, I look to 2005 for a strong rebound in earnings.

Operating Performance and Achievements

In 2004, we continued to focus on enhancing our product mix and increasing the ability of our manufacturing platform to produce a more diverse offering of publication papers. Industry statistics indicate that North American newsprint consumption has been steadily declining, while demand for specialty and coated groundwood (or “mechanical”) papers grew by 7% in 2004. We are responding to these trends by converting newsprint production to those grades of publication papers with stronger growth characteristics. These include papers used in flyers, catalogs and magazines. At the Calhoun, Tennessee, newsprint mill, 30% of our capacity is now producing specialty papers. Company-wide, we produced 15% more coated and specialty papers in 2004 compared with 2003. As the financial health of our company improves, we expect to invest in high-return capital projects to accelerate product mix enhancements at Calhoun and Thunder Bay. These are sites with large, integrated kraft pulp mills, thereby providing a flexible manufacturing platform to produce a variety of coated and specialty products.