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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2003

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No.: 0-9409

MERCER INTERNATIONAL INC.

Exact name of Registrant as specified in its charter

WashingtonState or other jurisdiction
of incorporation or organization

91-6087550IRS Employer Identification No.


14900 Interurban Avenue South, Suite 282, Seattle, Washington, 98168Address of Office

Registrant's telephone number including area code:(206) 674-4639

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:

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Shares of beneficial interest, $1.00 par value
Preferred Stock Purchase RightsTitle of Class

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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 1934during 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 ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ý

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes ý    No o

The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant as of June 30, 2003, the last business day
of the Registrant's most recently completed second fiscal quarter, based on the closing price of the voting stock on the Nasdaq National Market on such date, was approximately $75,093,300.

As
of March 10, 2004, the Registrant had 17,174,566 common shares of beneficial interest, $1.00 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information that will be contained in the definitive proxy statement for the Registrant's annual meeting to be held in 2004 is incorporated by reference
into Part III of this Form 10-K.

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TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | BUSINESS                                                                              |  | 5   
|         |  | The Company                                                                           |  | 5   
|         |  | Corporate Strategy                                                                    |  | 7   
|         |  | The Pulp Industry                                                                     |  | 7   
|         |  | The Paper Industry                                                                    |  | 10  
|         |  | Raw Materials                                                                         |  | 10  
|         |  | Our Pulp Cash Production Costs                                                        |  | 12  
|         |  | Our Products                                                                          |  | 12  
|         |  | Sales, Marketing and Distribution                                                     |  | 14  
|         |  | Capital Expenditures                                                                  |  | 16  
|         |  | Government Financing                                                                  |  | 17  
|         |  | Rosenthal Conversion Project and Financing                                            |  | 18  
|         |  | Stendal Pulp Mill Project and Financing                                               |  | 19  
|         |  | Description of Certain Indebtedness                                                   |  | 23  
|         |  | Environmental                                                                         |  | 26  
|         |  | Human Resources                                                                       |  | 28  
|         |  | Additional Information                                                                |  | 28  
|Item 2.  |  | PROPERTIES                                                                            |  | 29  
|Item 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 31  
|Item 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 31  
|PART II 
|Item 5.  |  | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |  | 32  
|Item 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 34  
|Item 7.  |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 36  
|         |  | Results of Operations                                                                 |  | 36  
|         |  | Year Ended December 31, 2003 Compared to Year Ended December 31, 2002                 |  | 38  
|         |  | Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001             |  | 42  
|         |  | Liquidity and Capital Resources                                                       |  | 44  
|         |  | Operating Activities                                                                  |  | 45  
|         |  | Investing Activities                                                                  |  | 45  
|         |  | Financing Activities                                                                  |  | 46  
|         |  | Capital Resources                                                                     |  | 47  
|         |  | Sensitivity Analysis                                                                  |  | 47  
|         |  | Foreign Currency                                                                      |  | 48  
|         |  | Critical Accounting Policies                                                          |  | 48  
|         |  | Cautionary Statement Regarding Forward-Looking Information                            |  | 50  
|         |  | Inflation                                                                             |  | 54  
|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 54  
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 60  
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 60  
|Item 9A. |  | CONTROLS AND PROCEDURES                                                               |  | 60  
|PART III
|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 61  
|Item 11. |  | EXECUTIVE COMPENSATION                                                                |  | 63  
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 63  
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 63  
|Item 14. |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                                                |  | 64  
|PART IV 
|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                      |  | 65  
|         |  | Financial Statements                                                                  |  | 69  
|         |  | Supplementary Financial Information                                                   |  | 96  
|         |  | SIGNATURES                                                                            |  | 97  

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FORWARD-LOOKING STATEMENTS

This annual report contains "forward-looking statements". They can be identified by words such as "estimates", "projects", "scheduled", "anticipates", "expects",
"intends", "plans", "will", "should", "believes", or their negatives or other comparable words. These statements are subject to a number of risks and uncertainties including the risks and
uncertainties outlined under "Cautionary Statement Regarding Forward-Looking Information" in "Management's Discussion and Analysis of Financial Condition and Results of Operations", many of which are
beyond our control. We wish to caution the reader that these forward-looking statements are only estimates or predictions, such as statements regarding:



We
do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe
that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this annual report are reasonable, we can give no assurance that such plans,
intentions or expectations will be achieved. Actual events or results may differ materially due to risks facing us or due to actual facts differing from the assumptions underlying our predictions.
Some of these risks and assumptions include:



any
of which could cause actual results to vary materially from anticipated results.

We
advise the reader that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Important
factors that you should also consider, include, but are not limited to, the factors discussed below under "Cautionary Statement Regarding Forward-Looking Information" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

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EXCHANGE RATES

As of January 1, 2002, we changed our reporting currency from the U.S. dollar to the Euro, as a significant majority of our business transactions
are originally denominated in Euros. Accordingly, our financial statements for the years ended December 31, 2002 and 2003 included in this annual report are stated in Euros and our financial
statements and other financial information for prior periods included in this annual report have been restated in Euros. We translate non-euro denominated assets and liabilities at the
rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period.

The
following table sets out exchange rates, based on the noon buying rates in New York City for cable transfers in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York (the "Noon Buying Rate") for the conversion of U.S. dollars to Euros in effect at the end of the following periods, the average exchange rates during
these periods (based on daily Noon Buying Rates) and the range of high and low exchange rates for these periods:

|                   |  | Year Ended December 31,
|------------------ |  | -----------------------
|
|
|End of period      |  | 0.7938                 
|High for period    |  | 0.9652                 
|Low for period     |  | 0.7938                 
|Average for period |  | 0.8838                 

On
March 10, 2004, the Noon Buying Rate for the conversion of U.S. dollars to Euros was €0.8179 per U.S. dollar.

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PART I

ITEM 1.    BUSINESS

In this document, please note the following:



The Company

General

Mercer is a business trust organized under the laws of the State of Washington in 1968. Under Washington law, shareholders of a business trust have the same
limited liability as shareholders of a corporation.

We
operate in the pulp and paper business. Our operations are located primarily in Germany and we currently employ approximately 1,022 people.

We
own and operate a modern, efficient ISO 9002 certified pulp mill (the "Rosenthal mill") that produces northern bleached softwood kraft ("NBSK") pulp. It has an annual
production capacity of approximately 300,000 tonnes. Located near Blankenstein, the mill is currently the only producer of market kraft pulp in Germany. Our existing pulp operations are conducted
through Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG and its affiliates ("Rosenthal"), which are our wholly-owned subsidiaries.

Our
63.6% owned project subsidiary, Zellstoff Stendal GmbH ("Stendal"), is implementing a "greenfield" project (the "Stendal project") to construct a new
state-of-the-art single-line NBSK kraft pulp mill (the "Stendal mill"). The Stendal mill is designed to have an annual production capacity of
approximately 552,000 tonnes and is under construction near the town of Stendal, Germany, approximately 300 kilometers north of the Rosenthal mill.

We
also own and operate two paper mills located at Heidenau and Fährbrücke, Germany (the "paper mills") that produce specialty papers and printing and
writing papers. The paper mills, based upon their current product mix, have an aggregate annual production capacity of approximately 70,000 tonnes. Our paper operations are conducted through Dresden
Papier GmbH and its affiliates ("Dresden"), which are our wholly-owned subsidiaries.

History and Development of Business

We originally invested in various real estate assets with the intention of becoming a real estate investment trust, but in 1985 changed our operational direction
to acquiring controlling interests in operating companies. We acquired our current pulp and paper operations beginning in 1993.

Over
the last five years, we have expended an aggregate of approximately €337.0 million on capital investments at our pulp and paper mills, not including the
Stendal project, to increase production capacities, improve efficiencies, reduce effluent discharges and emissions and modernize the mills. Such capital investments were financed in large part through
government guaranteed term financing and government grants of approximately €94.2 million. For more information about these grants, see
"Business  Government Financing".

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In
late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp from sulphite pulp, increased its annual production capacity from
approximately 160,000 tonnes to approximately 300,000 tonnes and reduced emissions and energy costs. The aggregate cost of the project was approximately €361.0 million.

We
completed financing arrangements and commenced construction of the Stendal mill in August 2002. We estimate that the Stendal project will cost approximately
€1.0 billion and the Stendal mill is scheduled to be producing saleable kraft pulp in the third quarter of 2004. For more information about the Stendal project, see
"Business  Stendal Pulp Mill Project and Financing".

Commencing
in 1998, we implemented a strategy to focus on our core operations and rationalize assets that either were not part of our core operations or did not provide the desired level
of return. As a result, between 1998 and 2000, we took a charge of €17.9 million relating to our paper operations and sold four paper mills that produced packaging, carton and
printing papers located at Greiz, Raschau, Trebsen and Hainsberg, Germany.

The
sale of these paper mills was the result of a strategic decision to withdraw from commodity paper grades produced principally from waste paper where we had little market share and,
we believed, limited potential for long-term profitability. We continue to operate and upgrade the Heidenau and Fährbrücke paper mills as they principally
produce niche products.

We
reorganized our interest in Landqart AG ("Landqart"), which owns a specialty paper mill in Switzerland, at the end of 2002 by transferring a 20% interest to a Swiss bank and
exchanging the other 80% interest for an indirect 39% minority interest through a limited partnership on a non-cash basis. See "Business  Our
Products  Paper" and "Certain Relationships".

Organizational Chart

The following chart sets out our directly and indirectly owned principal operating subsidiaries, all of which are organized under the laws of Germany, and their
principal activities:

FLOW CHART

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Corporate Strategy

Our corporate strategy is to create shareholder value within the context of a long-term, inclusive stakeholder approach. We expect to pursue focused
expansion of our asset and earnings base
through acquisitions primarily in Europe and North America and through organic growth. We seek to acquire interests in companies and assets in the pulp and paper industry and related businesses where
we can leverage our experience and expertise in adding value through a focused management approach. We pursue organic growth through focused capital expenditures designed to produce a high return by
increasing production, reducing costs and improving quality.

The Pulp Industry

General

Pulp is used in the production of paper, tissues and paper related products. Pulp is generally classified according to fiber type, the process used and the degree
to which it is bleached. Kraft pulp is produced through a sulphate chemical process in which lignin, the component of wood which binds individual fibers, is dissolved in a chemical reaction.
Chemically treated pulp allows the wood's fiber to retain its length and flexibility, resulting in stronger paper products. Kraft pulp can be bleached to increase its brightness. Kraft pulp is noted
for its strength, brightness and absorption properties and is used to produce a variety of products, including lightweight publication grades of paper, tissues and paper related products.

The
market value of pulp depends in part on the raw materials, or fiber, used in the production process. There are two primary species of wood used as fiber: softwood and hardwood.
Softwood species generally have long, flexible fibers which add strength to paper, while fibers from species of hardwood contain shorter fibers which lend bulk and opacity. NBSK pulp, which is kraft
pulp manufactured using species of northern softwood, is a premium grade because of its relative strength. It generally obtains the highest price relative to other kraft pulps. Southern bleached
softwood kraft pulp is kraft pulp manufactured using southern softwood species and does not possess the strength found in NBSK pulp. NBSK pulp is the Rosenthal mill's, and will be the Stendal mill's,
sole product.

Kraft
pulp can be made in different grades, with varying technical specifications, for different end uses. High quality kraft pulp is valued for its reinforcing role in mechanical
printing papers, while other grades of kraft pulp are used to produce lower priced grades of paper, including tissues and paper related products.

Pulp Markets

Producers ranging from small independent manufacturers to large integrated companies produce pulp worldwide. Generally, more than 100 million tonnes
annually of bleached pulp is converted into printing and writing papers, tissues, cartonboards and other white grades of paper and paperboard around the world. Approximately 55% of this pulp is
produced for internal purposes by integrated paper and paperboard manufacturers, and approximately 45% is produced for sale on the open market. Although demand is cyclical and has weakened during the
recent global economic slowdown, demand for bleached market pulp has been growing over the long-term at an average rate of approximately 3% annually worldwide and approximately 2% annually
in Europe. The growth rate for demand for NBSK pulp reflects similar trends.

Approximately
14 million tonnes of market pulp is consumed in Europe annually, of which approximately 6.3 million tonnes is comprised of NBSK pulp. Within Europe, Germany
is the largest pulp market and consumes approximately five million tonnes of market pulp annually relying largely on imports from North America and Scandinavia. Approximately 35% of the market pulp
consumed in Germany is NBSK grade.

The
markets for kraft pulp are cyclical in nature and demand for kraft pulp is related to global and regional levels of economic activity. A measure of demand for kraft pulp is the ratio
obtained by dividing the worldwide consumption of kraft pulp by the worldwide capacity for the production of kraft pulp, or the

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"consumption/capacity
ratio". An increase in this ratio generally occurs when there is an increase in global and regional levels of economic activity and low inventories of kraft pulp. An increase in
this ratio generally indicates greater demand as consumption increases, which generally results in rising kraft pulp prices and a build-up of inventories by buyers and a reduction by
producers. As prices continue to rise, producers continue to run at higher operating rates. However, an adverse change in global and regional levels of economic activity generally negatively affects
demand for kraft pulp, often leading to a high level of inventory build-up by buyers. As demand falls, buyers generally reduce their purchases and rely on inventories of kraft pulp and
many producers will run at lower operating rates by taking downtime to limit the build-up of their own inventories.

The
consumption/capacity ratio was approximately 93% in 2003, 92% in 2002 and 90% in 2001. We expect the long lead time and significant capital investment required to bring new pulp
mills on stream to limit growth in industry capacity in the next few years.

Kraft Pulp Pricing

Global economic conditions, changes in production capacity and inventory levels are the primary factors affecting kraft list pulp prices. Kraft list pulp prices
are quoted in U.S. dollars. Historically, kraft list pulp prices have been cyclical in nature. The average annual list prices for NBSK pulp between 1990 and 2003 ranged from a low of
approximately $444 per tonne in 1993 to a high of approximately $875 per tonne in 1995.

The
1995 price peak was followed by a steep decline as inventory levels for North American and Scandinavian ("Norscan") producers grew to over 2.5 million tonnes by early 1996.
Norscan producers currently produce a majority of the market NBSK pulp sold in North America and Europe and inventory levels held by Norscan producers are considered an industry benchmark in
determining industry inventory levels. Between 1996 and 1999, list pulp prices remained relatively low due in part to the Asian financial crisis which began in late 1997.

Prices
started to recover in 1999 due to a combination of factors including a recovery in the Asian economy, the shutdown of unprofitable mills or older mills in need of environmental
upgrades and a decline in capacity expansion. This contributed to tightening inventory levels among Norscan producers, which fell to approximately 1.1 million tonnes in June 2000,
resulting in list prices increasing to an average of approximately $710 per tonne in the fourth quarter of 2000. However, the decline of the American and major European economies in 2001 caused a
sharp reduction in paper demand. As a result, Norscan pulp inventories rose to a high of approximately two million tonnes in early 2001 and list price levels eroded to an average of approximately $460
per tonne in late 2001. Norscan inventory levels ranged between approximately 1.3 million and 1.9 million tonnes in 2002, and list prices averaged approximately $463 per tonne in 2002.
Although Norscan inventory levels remained relatively high in 2003, the weakening of the U.S. dollar against the Euro and other major currencies and increased demand resulting from improving
American and major European economies lead to higher list prices for kraft pulp. Norscan inventory levels were approximately 1.8 million tonnes in December 2003 and list prices for kraft
pulp in Europe increased to approximately $560 per tonne in December 2003. A continued recovery in the global economy in early 2004 and the weak U.S. dollar resulted in producers
increasing list prices for kraft pulp to approximately $590 per tonne in February 2004. A further price increase of $10 to $20 per tonne has been announced by various pulp producers for
March 2004. There can be no assurance that any such increase will be implemented or, if implemented, that prices will not fall in ensuing months.

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The Manufacturing Process

The following diagram provides a simplified description of the Rosenthal mill's manufacturing process:

FLOW CHART

In
order to transform wood chips into kraft pulp, wood chips undergo a multi-step process involving the following principal stages: chip screening, digesting, pulp washing,
and screening, bleaching and drying.

In
the initial processing stage, wood chips are screened to remove oversized chips and sawdust and are conveyed to a pressurized continuous digester where they are heated and cooked with
chemicals. This process softens and eventually dissolves the phenolic material called lignin that binds the fibers to each other in the wood.

Cooked
pulp continuously flows out of the digester and is washed and screened to remove most of the residual spent chemicals, called black liquor, and partially cooked wood chips. The
pulp then undergoes a series of bleaching stages where the brightness of the pulp is gradually increased. Finally, the bleached pulp is sent to the pulp machine where it is dried to achieve a dryness
level of more than 90%. The pulp is then ready to be baled for shipment to customers.

A
significant feature of kraft pulping technology is the recovery system, whereby chemicals used in the cooking process are captured and extracted for re-use, which reduces
chemical costs and improves environmental performance. During the cooking stage, dissolved organic wood materials and black liquor are extracted from the digester. After undergoing an evaporation
process, black liquor is burned in a recovery boiler. The chemical compounds of the black liquor are collected from the recovery boiler and are reconstituted into cooking chemicals used in the
digesting stage through additional processing in the recausticizing plant.

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The
heat produced by the recovery boiler is used to generate high-pressure steam. Additional steam is generated by a power boiler through the combustion of biomass consisting
of bark and other wood residues from sawmills, residue generated by the effluent treatment system and natural gas. The steam produced by the recovery and power boilers is used to power a
turbogenerator to generate electricity, as well as to provide heat for the digesting and pulp drying processes.

The Paper Industry

The paper industry is global in nature with many international, national and regional producers competing over many different product lines. Prices and
profitability in the paper industry are driven primarily by global supply and demand. Demand is strongly influenced by global and regional levels of economic activity. Supply is determined by industry
capacity and operating rates. In general, the paper industry has experienced periods of supply and demand imbalance. When demand increases, prices rise, which leads producers to increase their
capacity and operating rates. As supply increases in response, price competition increases, driving prices lower.

We
produce principally specialty papers and printing and writing papers. The specialty papers that we produce are comprised of coated and uncoated wallpaper base, non-woven
wallpaper base, pre-impregnated décor paper and greaseproof paper.

Wallpaper
can be coated with an agent to enhance its appearance and printing capability. In addition, non-woven wallpaper contains a certain proportion of synthetic fibers so
that it does not expand when wet, paste can be applied to the wall instead of the wallpaper and it can be easily torn from the wall, or drystripped. Demand for wallpaper is related to activity in the
construction and refurbishing industries. Non-woven wallpapers are the fastest growing category of wallpaper and are generally sold at a premium to standard wallpaper. Demand for
non-woven wallpaper in Europe in 2003 generally increased while demand for standard wallpaper generally decreased due to overcapacity in western Europe.

Décor
papers are used in laminate flooring, interior panels, furniture and other applications to provide a decorative surface. Décor papers can be
pre-impregnated with an agent to provide extra strength. Demand for décor paper is related to activity in the construction and refurbishing industries. In periods when
prices increase, consumers often substitute less expensive alternatives for more expensive wood-based material. Historically, markets for pre-impregnated décor
paper have grown faster than the décor paper market. The main markets for décor paper are in Europe. Demand for décor papers in Europe, and Germany in
particular, in 2003 generally remained at 2002 levels.

Greaseproof
paper is a consumer oriented product that can be used for, among other things, baking and the packaging of food products such as fast foods.

Printing
and writing papers which we produce consist of only uncoated woodfree papers. Woodfree papers generally contain less than 10% mechanical pulp. Uncoated woodfree papers can be
finished to enhance their surface and are often used to print less costly products. In 2003, while markets in western Europe for printing and writing papers, including for uncoated woodfree papers,
improved marginally over 2002, they remained at historically low levels.

Raw Materials

The Rosenthal mill is situated in a region which offers an ample and stable supply of fiber. The fiber consumed by the Rosenthal mill consists of wood chips
produced by local sawmills and pulpwood, which are cyclical in both price and supply. Wood chips are small pieces of wood used to make pulp and are a product of either wood waste from sawmills or
pulpwood processed, or chipped, especially for this purpose. Pulpwood consists of lower quality logs not used in the production of lumber. The costs of wood chips and pulpwood in Germany are primarily
affected by the supply and demand for lumber. In 2003, the Rosenthal mill consumed approximately 1.7 million cubic meters of fiber. Approximately 66%, or approximately 1.1 million cubic
meters, of such consumption was in the form of sawmill wood chips. The balance of approximately 34%, or approximately 0.6 million cubic meters, was in the form of pulpwood.

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Approximately
85% to 90% of the fiber consumed by the Rosenthal mill is spruce and the remainder is pine.

The
wood chips for the Rosenthal mill are sourced from approximately 60 sawmills located in the States of Bavaria and Thuringia within a 150 kilometer radius of the Rosenthal
mill. Within this radius, the Rosenthal mill is the largest consumer of wood chips. Given its location and size, the Rosenthal mill is the best economic outlet for the sale of wood chips in the
area. We believe the Rosenthal mill's fiber costs have historically been among the lowest for European pulp producers. The Rosenthal mill's transportation division, which operates approximately 50
trucks, handled approximately 50% of our wood chip deliveries to the mill in 2003. While fiber costs and supply are subject to cyclical changes largely in the sawmill industry, we expect that we will
be able to continue to obtain an adequate supply of fiber on reasonably satisfactory terms for the Rosenthal mill due to its location and our long-term relationships with suppliers. We
have not historically experienced any fiber supply interruptions at the Rosenthal mill.

Wood
chips are normally sourced from sawmills under one year or quarterly supply contracts with fixed volumes, which provide for price adjustments. In 2003, we entered into a
three-year agreement with one of our existing wood chip suppliers for the supply of approximately 500,000 cubic meters of wood chips annually until 2006. Pulpwood is partly sourced from
the state forest agency in Thuringia on a contract basis and partly from private holders, on the same basis as wood chips. We
organize the harvesting of pulpwood sourced from the state forest agency in Thuringia after discussions with the agency regarding the quantities of pulpwood that we require.

The
Rosenthal mill's fiber requirements were historically principally procured by SCA Holz, a large wood supply company. Our agreement with SCA Holz expired in April 2003 and was
not renewed. We have organized our own internal wood procurement department to handle and source the fiber requirements for the Rosenthal mill. Five people are employed in the department. The
department also assisted in sourcing fiber for the start-up of the Stendal mill. We expect to coordinate the fiber procurement for the Rosenthal and Stendal mills in the future. Handling
our own fiber procurement slightly reduced our operating costs in 2003 due to the elimination of fees paid to the previous supplier.

The
Stendal mill will be situated in a region which offers an ample and stable supply of fiber. The fiber consumed by the Stendal mill will consist of wood chips and pulpwood. When fully
operational, the Stendal mill is expected to consume approximately 2.8 to 3.0 million cubic meters of fiber annually. The core wood supply region for the Stendal mill will include most of the
northern part of Germany within an approximately 240 kilometer radius of the mill. The wood supply potential in this core region is not yet fully utilized and we expect that it should be able
to supply 80% of all of the fiber needed by the mill. We expect to obtain the balance primarily from southwestern and southern Germany. The fiber base in the planned wood supply area for the Stendal
mill consists of approximately 80% pine and 20% spruce and fir. We expect approximately 25% of the fiber consumed by the Stendal mill to be in the form of sawmill wood chips and approximately 75% in
the form of pulpwood. The Stendal mill will have sufficient chipping capacity to fully operate using solely pulpwood, if required. We expect to source wood chips from sawmills within an approximately
360 kilometer radius of the mill. We expect to source pulpwood partly from private forest holders and partly from state forest agencies in Thuringia, Sachsen-Anhalt and Brandenburg. In 2003,
Stendal commenced putting into place definitive fiber supply arrangements similar to those of the Rosenthal mill. We have arranged for almost all of the fiber requirements for the Stendal mill for
2004.The Stendal mill is expected to be the largest consumer of wood chips in Germany and, together with the Rosenthal mill, provide the best economic outlet for the sale of wood chips in eastern
Germany.

Stendal
has established its own wood procurement organization to handle the fiber requirements for the Stendal mill. Currently, there are approximately 43 people employed in this
division. This division focuses on three principal activities, being wood procurement and sales, harvesting, and transportation. The procurement and sales main activity is to procure the required wood
chip and pulplog assortments for the mill's annual production. In conjunction with this activity, it may also procure higher quality sawlogs, either through harvesting or through purchases that it can
sell or trade with others for wood chips in order

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to
optimize the fiber mix. We expect these activities to employ up to 17 people. The harvesting activities focus on acquiring up to approximately 800,000 cubic meters per annum of harvestable timber,
of which approximately 75% is expected to be pulpwood and the balance likely to be higher quality logs that could be sold or traded to third parties for wood chips. We expect that approximately half
of this volume may be harvested directly by us and the other half would be contracted out to third parties. When fully operational, we expect to engage up to 57 people in this division. Transportation
activities would focus on managing, controlling and optimizing shipping and flows of pulpwood to the mill. When fully operational, we expect that the transportation activities may employ up to 39
people.

When
the Stendal mill commences production, we expect to be the largest consumer of wood chips and pulplogs in Germany. We intend to coordinate and integrate the wood procurement
activities for the Rosenthal mill and the Stendal mill to realize on a number of potential synergies between them. These include reduced overall personnel and administrative costs, greater purchasing
power and coordinated buying and trading activities. We also believe such coordination and integration of fiber flows will allow us to optimize transportation costs, and the species and fiber mix for
both mills.

The
fiber used by the paper mills consists of pulp and waste paper (recycled paper), which are cyclical in both price and supply. The cost of this fiber is primarily affected by the
supply and demand for paper and pulp. In 2003, approximately 84.6%, or approximately 64,036 tonnes, of the fiber consumed by our paper mills was in the form of market pulp and chemical additives.
Market pulp and chemical additives are available at market prices from various suppliers throughout Europe. The balance of approximately 15.4%, or approximately 11,621 tonnes, of the fiber consumed by
our paper mills was in the form of waste paper. Germany has extensive waste paper recycling and collection laws which result in a readily available supply. The cost of lower grade waste paper is
currently relatively low in comparison to virgin pulp. We have not historically experienced any fiber supply interruptions at our paper mills.

Our Pulp Cash Production Costs

The Rosenthal mill commenced operations in December of 1999. As production and sales ramped-up and increased, we achieved efficiencies within our mill
operations, resulting in lower per unit costs. Cash production costs for the periods indicated below are as follows:

|          |                                | Year Ended December 31,
|--------- | ------------------------------ | -----------------------
|
|
|
|Fiber     |                                | € 178                  
|Labor     |                                | 51                     
|Chemicals |                                | 46                     
|Energy    |                                | 4                      
|Other     |                                | 28                     
|          |                                |                        
|          | Total cash production costs(1) |                        
|          |                                |                        

---

Our Products

We manufacture and sell softwood kraft pulp and two primary classes of paper products. Our products are produced from both virgin fiber, being wood chips,
pulpwood and chemical woodfree pulp, and recycled fiber, being waste paper.

Pulp

In early 2000, we completed the conversion of the Rosenthal mill to the production of kraft pulp. The kraft pulp produced at the Rosenthal mill is a
long-fibered softwood pulp produced by a sulphate cooking

12

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process
and manufactured primarily from wood chips and pulpwood. A number of factors beyond economic supply and demand have an impact on the market for chemical pulp, including requirements for pulp
bleached without any chlorine compounds or without the use of chlorine gas. The Rosenthal mill has the capability of producing both "totally chlorine free" and "elemental chlorine free" pulp. Totally
chlorine free pulp is bleached to a high brightness using oxygen, ozone and hydrogen peroxide as bleaching agents, whereas elemental chlorine free pulp is produced by substituting chlorine dioxide for
chlorine gas in the bleaching process. This substitution virtually eliminates complex chloro-organic compounds from mill effluent.

Kraft
pulp is valued for its reinforcing role in mechanical printing papers and is sought after by producers of paper for the publishing industry, primarily for magazines and advertising
materials. Kraft pulp produced for reinforcement fibers is considered the highest grade of kraft pulp and generally obtains the highest price. Through a focused technical and marketing effort, we have
changed the mix of the kraft pulp that we produce to substantially increase our relative amount of reinforcement fibers from approximately 16% at the beginning of 2000 to approximately 41% at the end
of 2003.

We
produce pulp for reinforcement fibers to the specifications of certain of our customers. We believe that a number of our customers consider us their supplier of choice.

The
Rosenthal mill is located in the State of Thuringia and has an annual production capacity of approximately 300,000 tonnes. For more information about the facilities at the Rosenthal
mill, see "Business  Rosenthal Conversion Project and Financing" and "Properties".

The
kraft pulp that is scheduled to be produced at the Stendal mill will be of a slightly different grade than the kraft pulp produced at the Rosenthal mill as the mix of softwood fiber
used will be slightly different. This will result in a complementary product more suitable for different end uses. The Stendal mill is also designed to have the capability of producing both totally
chlorine free and elemental chlorine free pulp. The Stendal mill, being constructed in the State of Sachsen-Anhalt, is scheduled to begin producing saleable kraft pulp in the third quarter of 2004,
with an overall design capacity of approximately 552,000 tonnes per annum. For more information about the facilities at the Stendal mill, see "Business  Stendal
Pulp Mill Project and Financing" and "Properties".

Paper

Our paper manufacturing strategy has focused on utilizing our existing machines, with certain modifications, in combination with our skilled workforce, to
principally produce niche products. As a result, we have divested certain paper mills which focused on packaging, carton and recycled printing and writing papers, and shifted our production away from
woodfree printing and writing papers.

The
following table sets out the primary classes of paper products that we produce and the mills at which they are produced:

|Paper Product Class |  | Mill       |  | Product Description                                       
|------------------- |  | ---------- |  | ----------------------------------------------------------
|Specialty Paper     |  | Heidenau   |  | Coated and uncoated wallpaper and non-woven wallpaper base
|                    |  | Fährbrücke |  | Greaseproof paper and pre-impregnated décor paper         
|Printing Paper      |  | Fährbrücke |  | Printing and writing paper                                

We
sell our wallpaper and non-woven wallpaper base primarily to specialty paper converters and printers. It is used primarily in new construction and in the renovation
industry in residential housing and commercial buildings. We sell our pre-impregnated décor paper primarily to specialist converters serving furniture and interior
accessories, such as doors and panels, producers. It is used primarily for furniture coverings. We sell our greaseproof paper to paper converters supplying the food industry. It is used primarily for
wrapping and baking food. We sell our printing and writing papers primarily to traders, converter suppliers and paper wholesalers.

13

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We
currently manufacture specialty and printing paper at two facilities located in Germany. For more information about the facilities at the paper mills, see "Properties".

We
reorganized our interest in the Landqart specialty paper mill at the end of 2002 by transferring a 20% interest to a Swiss bank and exchanging the other 80% interest for a 49%
interest in a limited
partnership on a non-cash basis. This resulted in our having a 39% indirect interest in Landqart. We reduced our Landqart stake to prioritize our available capital and resources on Stendal
because of our obligation to repay or refinance the two bridge loans obtained in connection with the financing arrangements for Stendal, and poor capital market conditions. The reorganization has
allowed the management of Landqart to focus on its operations and financial requirements without regard to our other operations. The Swiss bank had agreed to reduce and refinance a portion of
Landqart's debt in consideration of the equity stake, and was in a better position to assist Landqart in securing the funds necessary to make the required capital investment in the Landqart mill. See
"Certain Relationships".

Sales, Marketing and Distribution

The distribution of our pulp and paper sales volume and revenues by product class, and revenues by geographic area is set out in the following table for the
periods indicated:

|                              |                  | Year Ended December 31,
|----------------------------- | ---------------- | -----------------------
|
|
|Sales Volume by Product Class |                  |                        
|Pulp(1)                       |                  |                        
|Papers                        |                  |                        
|                              | Specialty Papers |                        
|                              | Printing Papers  |                        
|                              |                  |                        
|                              |                  | Total Papers           
|                              |                  |                        
|Total(1)                      |                  |                        
|                              |                  |                        
|
|Revenues by Product Class     |                  |                        
|Pulp(1)                       |                  | €                      
|Paper                         |                  |                        
|                              | Specialty Papers |                        
|                              | Printing Papers  |                        
|                              |                  |                        
|                              |                  | Total Papers           
|                              |                  |                        
|Total(1)                      |                  | €                      
|                              |                  |                        
|
|Revenues by Geographic Area   |                  |                        
|Germany                       |                  | €                      
|Italy                         |                  |                        
|European Union(3)             |                  |                        
|Eastern Europe and Other      |                  |                        
|                              |                  |                        
|Total(1)                      |                  | €                      
|                              |                  |                        

---

14

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The following charts illustrate the geographic distribution of our revenues for the periods indicated:

|Year Ended
December 31, 2003 |  | Year Ended
December 31, 2002 |  | Year Ended
December 31, 2001
|---------------------------- |  | ---------------------------- |  | ----------------------------
|PIE CHART                    |  | PIE CHART                    |  | PIE CHART                   

---

A large proportion of our kraft pulp sales in western Europe were historically handled through a sales agency agreement with Oy
Metsä Botnia Ab ("Metsä"), a member of the M-Real Group of Finland which operates a number of different paper mills. Sales and marketing in other countries
were conducted by our own sales staff and through independent agents. We chose not to renew our sales agency agreement with Metsä when it expired in December 2002. In 2003, we
successfully placed with other customers all of the volumes formerly sold to the M-Real Group. We are now conducting all sales and marketing of our kraft pulp internally through our sales
staff and through independent agents. We believe that this allows us to better coordinate our pulp sales and results in reduced sales and marketing costs due to reduced third party fees in the
distribution of our products. In addition, the Stendal mill is establishing a sales and marketing division that will be responsible for conducting all sales and marketing of the kraft pulp produced at
the mill. We expect approximately eight people to be employed in this division. We intend to coordinate and integrate the sales and marketing activities at the Rosenthal mill and Stendal mill to
realize on a number of synergies between them. These include reduced overall administrative and personnel costs and coordinated selling, marketing and transportation activities. When the Stendal mill
is fully operational, we expect to sell substantially all of its kraft pulp production in continental Europe.

The
Rosenthal mill is the only market kraft pulp producer in Germany, which is one of the leading import markets for kraft pulp in western Europe. We therefore have a material
competitive transportation cost advantage compared to North American and Scandinavian pulp producers. Due to the Rosenthal mill's central location, it delivers pulp to customers primarily by truck.
Most trucks that deliver goods into eastern Germany generally do not also haul goods out of the region as eastern Germany is primarily an importer of goods. We are therefore able to obtain relatively
low freight rates for the delivery of our products to many of our customers. Further, the Rosenthal mill's transportation division handled approximately 9% of the Rosenthal mill's pulp deliveries in
2003. Approximately 37% of our pulp sales in 2003 were to customers or destinations located within a 500 kilometer radius of the Rosenthal mill. As a result, we can generally supply our pulp
customers faster than our competitors because of the short distances between the Rosenthal mill and our customers. For our customers in western Europe, we can, if requested, often supply them with
pulp within one day of it being ordered. This permits us to be a "just in

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time"
supplier to our customers. When operational, the Stendal mill should also have similar advantages over Norscan producers based upon its location.

Our
pulp sales are on customary industry terms. At December 31, 2003, we had no material payment delinquencies. In 2003 one customer, which operates a number of paper mills,
accounted for approximately 11% of our pulp sales. In 2002 one customer accounted for approximately 12% and in 2001 two customers accounted for approximately 22% of our pulp sales. Our pulp sales are
not dependent upon a single customer or upon a concentrated group of major customers.

Our
paper sales operations focus primarily on Europe and are responsible for the majority of our paper sales. Our paper sales conducted through agents were approximately 26% of total
paper sales in
2003, compared to approximately 27% in 2002 and 30% in 2001. We sell the majority of our paper products to paper converters, printers and wallpaper manufacturers.

Our
paper sales are also on customary industry terms. At December 31, 2003, we had no material payment delinquencies. No single customer accounted for more than 10% of our paper
sales in 2003, 2002 or 2001. Our paper sales are not dependent upon a single customer or upon a concentrated group of major customers.

Capital Expenditures

In 2003, we continued with our capital investment programs designed to increase production capacity, improve efficiency and reduce effluent discharges and
emissions at our manufacturing facilities. The improvements made at our mills over the past five years have reduced operating costs and increased the competitive position of our facilities.

Our
capital investments at the Rosenthal mill were approximately €4.3 million, €3.4 million and €7.4 million in 2003,
2002 and 2001, respectively. We estimate capital expenditures at the Rosenthal mill to be approximately €5.2 million for 2004 relating primarily to maintaining the quality and
efficiency of the mill and the reconstruction of the wastewater reservoirs at the mill. In addition, in 2003, we completed a strategic capital project to reconstruct the landfill related to the
Rosenthal mill so that it will be useable for an additional 15 years. The total cost of this reconstruction was approximately €7.6 million, which Rosenthal is fully
funding through a bank loan. Of this amount, we incurred €2.6 million in 2003 and €5.0 million in 2002. We estimate this project to have an approximately
three-year payback period and the project required no equity investment on our part. We installed a reboiler at the Rosenthal mill in 2003 at a cost of approximately
€1.9 million which we expect will reduce energy costs at the mill.

Construction
of the Stendal mill commenced in August 2002. Total capital costs incurred in respect of the project in 2003 were approximately
€399.4 million. For more information about the Stendal project, see "Business  Stendal Pulp Mill Project and Financing".

Our
capital investments at our paper operations were approximately €7.8 million, €5.4 million and €2.7 million in
2003, 2002 and 2001, respectively. As a result of flooding in parts of Germany and other eastern European countries during the third quarter of 2002, our paper mills had to replace certain damaged
equipment at an aggregate cost of approximately €3.3 million. We have applied for reimbursement for these costs under German government grants and for assistance under special
credit programs instituted by the German government for flooding victims. In 2004, we estimate capital investments to be approximately €4.0 million relating primarily to quality
and productivity upgrades of the paper machines at the paper mills and the completion of a wastewater treatment plant at the Fährbrücke mill. Our capital investments at
the Heidenau mill in 2003 included a new waste paper storage building, replacement of a gas turbine and the installation of a head box top wire on the paper machine at the mill at an aggregate cost of
approximately €3.8 million. Our capital expenditures at the Fährbrücke mill in 2003 included the addition of a reel packing machine to the paper
machine and the continued construction of a wastewater treatment plant at the mill at an aggregate cost of approximately €1.1 million. We also continued with the adjustment to
the paper machine at the Fährbrücke mill to produce pre-impregnated décor paper and the adjustment to the paper machine at the Heidenau mill to
produce non-woven

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wallpaper
base in 2003 at a cost of approximately €0.9 million and €0.3 million, respectively. We continue to review strategic initiatives designed to
upgrade the product mix at our paper mills and enhance returns.

Over
the last five years we have invested an aggregate of approximately €337.0 million in gross capital improvements at our facilities, not including the Stendal
project. Our significant level of capital investment has largely been facilitated by government financing and assistance initiatives in Germany.

Our
capital investments to reduce effluent discharges have offset wastewater fees that we would otherwise be required to pay. We estimate the aggregate wastewater fees we saved over the
last five fiscal years as a result of environmental capital expenditures to be approximately €18.7 million. For more information about our environmental capital expenditures,
see "Business  Environmental".

Government Financing

Grants

Our capital investment programs are partially financed through government grants made available by German federal and state governments. Under legislation adopted
by the federal and certain state governments of Germany, government grants are provided to qualifying businesses operating in eastern Germany to finance capital investments. The grants are made to
encourage investment and job creation. Pursuant to the current terms of these grants, federal and state governments will provide funding for up to 35% of the cost of qualified investments. The terms
of such government grants also require that at least one permanent job be created for each €500,000 of capital investment eligible for such grants and that such jobs be maintained for
a period of five years from the completion of the capital investment project. Such government grants are not repayable by a recipient unless it fails to complete the proposed capital investment or
fails to create or maintain the requisite amount of jobs. In the case of such failure, the government is entitled to revoke the grants and seek repayment unless such failure resulted from material
unforeseen market developments beyond the control of the recipient, wherein the government may refrain from reclaiming previous grants. Pursuant to such grants provided in respect of our Rosenthal
mill and being provided in respect of the Stendal project, we have agreed to maintain stipulated job levels at each operation for the specified five-year period. For more information, see
"Business  Human Resources". We believe that we are in compliance with all of the terms and conditions governing the government grants we have received.

Such
government grants are not reported in our income. These grants reduce the cost basis of the assets purchased when the grants are received.

The
following table sets out the capital expenditures and government grants recorded for the periods indicated:

|                               |  | Year Ended December 31,
|------------------------------ |  | -----------------------
|
|
|Capital expenditures, gross(1) |  | €                      
|                               |  |                        
|Government grants(1)           |  | €                      
|                               |  |                        

---

In addition, the Stendal project qualifies for approximately €274.5 million of government grants, of which
€82.7 million has been received as at December 31, 2003. For more information about the Stendal project, see "Business  Stendal
Pulp Mill Project and Financing".

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The following table sets out for the periods indicated the effect of these government grants on the recorded value of such assets in our consolidated balance sheets:

|                                                                        |  | As at December 31,
|----------------------------------------------------------------------- |  | ------------------
|
|
|Properties, net (as shown on consolidated balance sheets)               |  | €                 
|Add back: government grants less amortization, deducted from properties |  |                   
|                                                                        |  |                   
|Properties, gross amount including government grants less amortization  |  | €                 
|                                                                        |  |                   

Loan Guarantees

Loan guarantees are available from German federal and state governments for up to an aggregate of 80% of the borrowed amount for qualifying capital investments
made in certain parts of Germany. The federal and state governments are each severally committed to a portion of the guaranteed amount. These guarantees are provided by German federal and state
governments to assist any qualifying businesses with financing capital investments. The guarantees permit qualifying businesses to obtain term loans for such capital investments on terms and at
interest rates that are more favorable than available in the general market. In addition, subsidized interest rate loans are available from public
financial institutions in Germany, which provide loans at below market interest rates for qualified investments.

These
loan guarantees have permitted us to obtain a significantly greater amount of financing for the project to convert the Rosenthal mill to the production of kraft pulp, as well as
the construction of the Stendal mill, at substantially more favorable rates and upon substantially more favorable terms than would otherwise have been available.

Rosenthal Conversion Project and Financing

In late 1999, we completed a major capital project to convert the Rosenthal mill to the production of kraft pulp and increase its annual production capacity to
approximately 280,000 tonnes. Through subsequent minor capital investments and efficiency improvements, the annual production capacity at the Rosenthal mill has been increased to approximately 300,000
tonnes. The project has also substantially reduced effluent and sulphur dioxide emissions and has reduced energy costs, with natural gas consumption decreasing by approximately 45% during the period
from the beginning of 2000 to the end of 2003 as a result of operating efficiencies.

The
aggregate cost of the project, including project financing, capitalized interest of approximately €14.1 million and related costs and an amount for
contingencies, was approximately €361.0 million. The project was financed through a combination of a project loan supported by government guarantees, government grants and an
equity investment made by us.

In
1998, Rosenthal entered into a project loan agreement (the "Rosenthal Loan Facility") to finance the project. The Rosenthal Loan Facility is secured by liens on all of the assets of
Rosenthal and the German federal government and the state government of Thuringia severally guaranteed an aggregate of 80% of the facility. For a brief summary of the Rosenthal Loan Facility, see
"Business  Description of Certain Indebtedness  Rosenthal Project Financing".

In
addition to the government guarantee, the state government of Thuringia also provided government grants of €73.6 million (DM144.0 million) in respect of
the project. The German federal government also provided, under existing programs, government grants totaling €27.1 million (DM53.0 million) in respect of the project. As
of December 31, 2003, Rosenthal had received government grants totaling approximately €101.7 million for the Rosenthal mill conversion.

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The
sulphite pulp production at the Rosenthal mill was shut-down in July 1999 to implement the conversion to kraft pulp. The mill was successfully
started-up to produce kraft pulp in December 1999. The Rosenthal mill was producing at approximately 89% of its planned production capacity in the first year and was producing at
full capacity by the end of 2000.

Stendal Pulp Mill Project and Financing

The Project

Our 63.6% owned subsidiary, Stendal, is the project company formed to develop, construct and operate the Stendal mill. The other shareholders of Stendal are RWE
Industrie  Lösungen GmbH ("RWE") as to a 29.4% interest, and AIG Altmark-Industrie AG ("AIG") as to a 7.0% interest. RWE is a subsidiary of
the second largest utility company in Germany and is experienced in the construction of pulp mills. AIG is a German real estate company which owns 1,050 acres of a 1,250 acre industrial park on which
the Stendal mill will be situated.

The
Stendal mill is a "greenfield" softwood kraft pulp mill that is being constructed at a cost we estimate will be approximately €1.0 billion near the town of
Stendal, in the German State of Sachsen-Anhalt. The mill will be a modern, state-of-the-art single line mill with a planned annual production capacity of
approximately 552,000 tonnes. The overall mill design is based on proven or existing processes and technologies. The process and mill operations will be highly automated to ensure stable operation and
pulp quality. The mill process will be a modern but ordinary kraft pulping process that emphasizes environmentally sound operational principles. The Stendal mill will use a batch pulp cooking process.
Batch cooking allows for different grades to be batch produced for different end uses.

Construction
of the Stendal mill commenced on August 26, 2002. The Stendal mill will be located approximately 300 kilometers north of the Rosenthal mill. As a result of the
proximity of the Stendal mill to the Rosenthal mill and the use of similar equipment at both mills, we believe we will be able to realize operating synergies between the two operations, particularly
in the areas of raw material costs, production engineering, maintenance and marketing.

The
Stendal mill will be situated on an approximately 200 acre site owned by Stendal that is part of a larger 1,250 acre industrial park. The balance of the industrial park is owned by
AIG, which is seeking to develop the park. Although no assurances can be provided that any development will occur and we
are not directly a party to these discussions, we are aware of third party proposals to build manufacturing facilities on the balance of the industrial park that would be complementary to our pulp
operations.

When
completed, the Stendal mill will be the largest market kraft pulp facility in Germany, the only other being our Rosenthal mill. We anticipate that the addition of production from
the Stendal mill will allow us to expand our customer base, as our two pulp mills will produce slightly different grades of softwood kraft pulp suitable for different end uses.

When
the Stendal mill is fully operational, we anticipate that we will have an aggregate annual production capacity of approximately 852,000 tonnes of NBSK pulp from our two mills.

The
summaries of certain material provisions of agreements entered into in connection with the Stendal project set forth herein are not complete and such summaries, including definitions
of certain terms, are qualified in their entirety by reference to such agreements on file with the Securities and Exchange Commission ("SEC").

Control and Management

We, Stendal and its other shareholders, RWE and AIG, entered into a shareholders' agreement dated August 26, 2002 to govern our respective interests in
Stendal. The agreement contains terms and conditions customary for these types of agreements, including restrictions on transfers of share capital and

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shareholder
loans other than to affiliates, rights of first refusal on share and shareholder loan transfers, pre-emptive rights and piggyback rights on dispositions of our interest. The
shareholders are not obligated to fund any further equity capital contributions to the project. Pursuant to the shareholders' agreement, we are entitled to transfer up to 12.5% of our interest in
Stendal without the prior consent of the other shareholders. The shareholders' agreement provides that Stendal's managing directors may be appointed by holders of a simple majority of its share
capital. Further, shareholder decisions, other than those mandated by law or for the provision of financial assistance to a shareholder, are determined by a simple majority of Stendal's share capital.
If a shareholder is in default under the shareholders' agreement or commits certain acts of insolvency or bankruptcy, it shall be considered to be a defaulting shareholder and must offer to sell its
share capital and shareholder loans to the remaining shareholders on a pro rata basis, to a third party nominated by the other shareholders or permit them to be redeemed by Stendal. Other than
in circumstances where a shareholder is considered to be a defaulting shareholder, the shareholders' agreement does not provide for any mandatory or forced purchases and sales of a shareholder's
interest in Stendal.

In
addition to integrating the wood procurement activities at the Rosenthal and Stendal mills, we plan to coordinate other activities and operations between the two mills to realize
efficiencies and optimize the cost structure of each mill. Such activities include establishing a unified sales organization to conduct the sales and marketing of the pulp produced by both mills.
Mercer currently coordinates the pulp sales of the Rosenthal mill pursuant to a sales agency agreement with Rosenthal whereby we receive a commission on overall sales. We intend to establish a similar
arrangement for the Stendal mill when it is operational. Other activities that we intend to coordinate between the two mills include purchases of supplies and stores, maintenance activities, workforce
and management training and transportation.

EPC Contract

The Stendal mill is being constructed under a €716.0 million fixed-price turn-key EPC contract between Stendal and RWE. RWE's
obligations under the EPC contract are guaranteed by its parent company.

The
contract price for the completion of the project is fixed, taking into account all risks associated with the project and is subject only to certain changes that we cause or agree to,
changes that arise due to changes in the law and specified events of force majeure. Payments under the EPC contract are to be made periodically against milestones as and when achieved by RWE.

Under
the EPC contract, RWE is responsible for all planning, design, engineering, procurement, construction and testing in connection with the build-out and
start-up of the mill. We are responsible for obtaining legal title and possession of the site and providing the site and certain equipment, materials and services, as well as personnel,
raw materials and other items in connection with the start-up of the mill. RWE is also primarily responsible for obtaining construction and operating permits. We will construct
approximately €23.5 million of the site infrastructure and additional general site infrastructure connections will be constructed by the local government. The costs of such
infrastructure construction are 90% subsidized and co-financed by us, among others. Our co-financing obligations amount to approximately €3.0 million and
are funded out of the project loan facility.

Construction
of the mill is scheduled to be completed in mid- 2004. Start-up of the mill is scheduled to occur and production of saleable kraft pulp is expected
to begin in the third quarter of 2004. Our acceptance of the mill and related works is to occur by December 2004. Between completion of construction and our acceptance of the mill scheduled for
December 2004, the mill will undergo extensive testing and evaluation to determine whether mechanical completion has occurred and whether certain performance requirements have been met (the
"Acceptance Test"). The Acceptance Test requires that the mill continuously produce pulp for a 72-hour period. If acceptance of the mill has not occurred prior to December 2004, RWE
has agreed to pay liquidated damages equal to 0.4% of the contract price per week

20

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of
delay, up to a maximum of 12% of the contract price. If certain performance requirements are not met within the terms of the agreement, subject to certain conditions, RWE has agreed to pay
liquidated damages totaling up to a maximum of 10% of the contract price. The combined amounts that may become payable to us by RWE as a result of delays in completion and failure to meet performance
requirements are capped at 17% of the contract price. Payment of such amounts will not relieve RWE of its obligations to complete the project, attain minimum performance requirements or cure
deficiencies.

Following
completion of testing, if the requisite minimum performance requirements are met, we are required to provide RWE with an acceptance certificate. Once we deliver the acceptance
certificate to RWE, we assume responsibility for the operation of the mill, subject to RWE's warranty obligations. Furthermore, each department of the mill will be tested on a stand-alone basis for
compliance with its design specifications after the Acceptance Test. Such testing is scheduled to be completed within the six-month period after the Acceptance Test. Under the EPC
contract, RWE warrants conformity to specifications, compliance with permits and laws, suitability for intended use, compliance with performance requirements and warrants against defects in
construction, in each case for a period of 18 months after acceptance, subject to extension in certain circumstances. RWE is required under the EPC contract to provide irrevocable bank
guarantees in our favor, in agreed upon amounts, as security for an initial advance payment and for any deficiencies arising during the warranty period. In July 2006, RWE is required to provide
an additional guarantee in the same form, in respect of the same matters, in an amount not less than 5% of the contract price which shall remain in effect until January 1, 2009.

We
have the right under the EPC contract to temporarily suspend construction of the mill for a period of up to 150 days should we choose to do so, subject to certain conditions.
In addition, subject to certain conditions, we have the right to terminate the EPC contract if, among other things, RWE becomes insolvent, assigns or transfers its interest in the agreement in
violation of the provisions of the agreement or fails, without valid reason, to perform any of its material obligations.

The
EPC contract also contains reciprocal indemnities between us and RWE pursuant to which we each agree to indemnify the other in respect of losses or claims arising from negligent,
illegal or other wrongful acts in connection with the agreement or arising out of any violation of applicable laws or permits.

Project Financing

In August 2002 (the "Closing Date"), we completed financing arrangements for the Stendal project. Total investment costs in connection with the project are
approximately €1.0 billion, the majority of which is to be provided under a senior project finance facility (the "Stendal Loan Facility") arranged by Bayerische
Hypo-und Vereinsbank AG ("HVB"), pursuant to a project finance loan agreement (the "Project Finance Loan Agreement") entered into between Stendal and HVB. We also contributed financing to
Stendal of approximately €63.5 million from cash on hand and through bridge loans from a U.S. investment partnership and a bank. For a brief summary of the Stendal Loan
Facility, see "Business  Description of Certain Indebtedness  Stendal Pulp Mill Project Financing".

As
the site of the Stendal project is located in eastern Germany, it qualifies for approximately €274.5 million of government grants, which are applied to reduce
the cost basis of the assets acquired with such grants. As of December 31, 2003, we have claims for €82.1 million of such grants in connection with the Stendal project,
of which we have received €8.1 million and we expect to receive the remainder in 2004. In accordance with our accounting policies, these grants are not recorded by us until they
are received.

Under
European Union rules, the Commission of the European Communities (the "Commission") was formally notified in March 2002 by Germany of plans to provide support to the Stendal
project through grants and guarantees. The Commission considered these plans and, on June 19, 2002, decided not to raise any objection against such support being provided by the German federal
and state governments in respect of the Stendal project. In its decision, the Commission was not called upon to

21

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determine
whether the governmental aid schemes, on which the support is based, were acceptable, but was limited to a determination as to whether a reduction of the pre-approved aid level
for investment in the German State of Sachsen-Anhalt under the previously approved schemes was required under European Union law in the case of the Stendal project. In coming to its decision, the
Commission generally has a wide margin of discretion in its assessment of facts and data. Under European Union law, member states, competitors or trade associations directly affected by a decision of
the Commission may appeal such decision within a period of two months and twenty-four days after publication of the Commission decision. Generally to be successful, an appeal must show
that the Commission failed to comply with procedural requirements or committed a manifest error in assessing facts and data in adopting its decision. On December 23, 2002, Kronoply and
Kronotex, two related manufacturers of, among other things, OSB and MDF boards that do not compete with the Stendal project by selling pulp or paper, filed an appeal with the Court of First Instance
of the European Communities (Luxembourg) against the Commission decision of June 19, 2002. Although no assurance can be provided, we believe that the complainants are unlikely to have standing
under the applicable rules to proceed with the appeal and that their appeal is without merit.

Project Development

Beginning in February 2002, approximately three months of pre-construction activity was carried out in respect of the Stendal project. This was
comprised of, among other things, pre-engineering, planning and reviewing and sourcing procurement requirements. Construction activity commenced on the Stendal project upon the
effectiveness of the EPC contract on the Closing Date.

As
at December 31, 2003, progress on the Stendal project was substantially on schedule and there were no significant deviations from the project budget. As at December 31,
2003, the project was approximately 92% completed. Approximately 99% of the total engineering and approximately 93% of the civil works were completed. Progress was made in a number of areas including
the erection of the recovery boiler, which was also successfully hydro tested. In addition, most storage tanks have been completed and insulated, construction of the steam distribution system is in
progress with the delivery of the steam turbine, and all of the main equipment for the evaporator and the recausticizing plant has been installed. Progress was also made in connection with the
construction of the infrastructure of the mill site, including with respect to the gas system which we started using in February 2004. In addition, power was switched on at the site and
construction of a road to the site was completed in December 2003. The public awareness and project acceptance by the local community has been very positive and the project has received good
cooperation from all governmental authorities. At December 31, 2003, no major insurance claims had been filed in respect of the project and there had been no casualties or severe injuries on
the site.

Stendal
currently employs approximately 291 people, approximately 59 of whom were part of the management organization charged with supervising the implementation and completion of the
Stendal project. The members of the management team are experienced in large capital projects, including those related to pulp mills, and several are former senior members of Jaakko
Pöyry Consulting. The management team at Stendal is charged with ensuring the project is effectively implemented in accordance with the EPC contract and planned schedules and budgets.
They meet regularly with the main contractor and sub-contractors to, among other things, coordinate site activities, review progress, review and approve engineering and equipment
specifications, and review any necessary work changes or permit amendments. Payments are made to contractors against defined milestones set forth in the EPC contract. Such milestone payments are due
within 30 days of receipt of an approved invoice by Stendal. As at December 31, 2003, Stendal had approved invoices representing milestone payments equal to approximately 66% of the
total value of the EPC contract.

As
at December 31, 2003, Stendal had applied for investment grants and had claims totaling €82.1 million with respect to the project, of which we have
received €8.1 million and we expect to receive the remainder in 2004. In accordance with our accounting policies, these grants are not recorded by us until they are received.

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At
the end of 2003, there were over 1,500 people working at the site. This number is expected to increase to over 2000 third party construction workers in the first half of 2004.

Our
organization build-up and staff recruitment for the Stendal mill are on schedule. We anticipate having approximately 460 employees at Stendal by the end of the second
quarter of 2004, to be at the required level for the commissioning and start-up of the mill. We have developed a detailed manning and organizational plan which we started implementing in
2003. Hiring is coordinated through the Stendal management team and we also use a recruitment firm. We have hired a new transportation and logistics manager and central purchase manager for the
Stendal mill. We have also started training the bulk of the mill's operating and maintenance staff. Such training consists of fundamental classroom training, on-job sessions at our
Rosenthal mill and courses and training sessions provided by equipment and other suppliers to the project.

Start-Up

Pursuant to the EPC contract, construction of the Stendal mill is scheduled to be completed around the end of June 2004. Such completion means that the
construction and installation of all equipment and works are essentially finished and the final checks are occurring so that continuous production from the mill can commence. Upon such completion, the
mill will be supervised by RWE, the EPC contractor, using Stendal's personnel to operate the mill. The mill must then pass the Acceptance Test prior to being accepted by Stendal. During the period
that RWE is commissioning the mill and supervising its operations in connection with the Acceptance Test, the mill is expected to have a low capacity utilization. Upon passing the Acceptance Test, the
mill will be operated by Stendal and we plan to ramp up production at the Stendal mill to approximately 76% of the rated capacity of the mill during the first year thereafter and in excess of 90% of
rated capacity in the following year.

Project Risks

The Stendal project is subject to customary risks and uncertainties inherent for large capital projects which could result in the construction of the Stendal mill
not occurring on schedule or as budgeted.
Delays or amendments to Stendal's operating permits or governmental grants could result in construction delays, operational deficiencies or funding shortfalls. Further, the Stendal mill could
experience operating difficulties or delays during the start-up period when production is being ramped up. Also, the Stendal mill may not achieve our planned production, quality or cost
projections. See "Cautionary Statement Regarding Forward-Looking Information" in "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Description of Certain Indebtedness

Rosenthal Project Financing

The following summary of certain material provisions of the Rosenthal project loan agreement is not complete and these provisions, including definitions of
certain terms, are qualified by reference to the Rosenthal project loan agreement and the applicable amendment agreements on file with the SEC.

In
1998, Rosenthal entered into the Rosenthal Loan Facility, as amended, having a 15 year term with a German bank and other syndicated lenders in the aggregate amount of
€259.7 million (DM508.0 million) to finance the conversion project. The Rosenthal Loan Facility is secured by liens on all of the assets of Rosenthal and the German
federal government and the state government of Thuringia severally guaranteed an aggregate of 80% of the facility. We have agreed with the lenders under the Rosenthal Loan Facility that, so long as
Rosenthal has liability thereunder, to retain control over at least 51% of the voting shares of Rosenthal.

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The
rate of interest under the Rosenthal Loan Facility, other than for amounts drawn as special credits, is an amount equal to the three or six month Euribor rates plus a margin of
between 60 and 75 basis points. The amounts drawn as special credits, under programs established by certain German public banks for projects which enhance environmental performance, are part of
the overall Rosenthal Loan Facility and repayment structure. The rates of interest for the special credits are set for the first 10 years at an annual amount equal to the lenders' variable
costs of such funds. The rates of interest will be adjusted and reset after 10 years for the balance of the term. These special credits permit qualifying borrowers to borrow money at favorable
rates of interest.

As
part of the Rosenthal Loan Facility, there is a credit line which allows for derivative transactions, subject to certain controls, including certain maximum notional and
at-risk amounts, to manage risk. Rosenthal has entered into derivatives with the lead bank under the Rosenthal Loan Facility to manage its risk exposure with respect to certain amounts
outstanding thereunder.

Repayment
of the Rosenthal Loan Facility commenced on March 31, 2001. During 2003, we repaid €13.2 million of the principal amount of the Rosenthal Loan
Facility and at year end €191.7 million was outstanding. Of this amount, an aggregate of €118.0 million was drawn by Rosenthal pursuant to special credit
programs.

Rosenthal
also has a €7.6 million bank facility in connection with the reconstruction of the landfill at the Rosenthal mill. See
"Business  Capital Expenditures" and "Business  Environmental".

Stendal Pulp Mill Project Financing

The following summary of certain material provisions of the Stendal loan facility agreement is not complete and these provisions, including definitions of certain
terms, are qualified by reference to the Stendal loan facility agreement on file with the SEC.

In
August 2002, we completed financing arrangements for the Stendal project. Total investment costs in connection with the project are estimated to be
€1.0 billion, the majority of which is to be provided under the Stendal Loan Facility pursuant to the Project Finance Loan Agreement entered into between Stendal and HVB. We
also contributed financing to Stendal of approximately €63.5 million from cash on hand and through the bridge loans from a U.S. investment partnership and a bank.

The
Stendal Loan Facility is in the aggregate amount of €828.0 million and is divided into tranches which cover, among other things, project construction and
development costs, financing and start-up costs and working capital, as well as the financing of a debt service reserve account, approved cost overruns and a revolving loan facility to
cover any time lag for receipt of grant funding and value-added tax refunds in the amount of €160 million, referred to as "Tranche E". The Stendal Loan Facility is
available for disbursement from August 2002 until the earlier of the issuance by us of a final acceptance certificate for the project and December 2005, except that financing under the
Stendal Loan Facility for approved cost overruns will be available for up to one month prior to the first repayment.

Pursuant
to the Project Finance Loan Agreement, interest on the credit facilities was to accrue at variable rates between Euribor plus 0.60% and Euribor plus 1.55% per year. The Project
Finance Loan Agreement provides for facilities to allow us to manage our risk exposure to interest rate risk, currency risk and pulp price risk by way of interest rate swaps, Euro and
U.S. dollar swaps and pulp hedging transactions, subject to certain controls, including certain maximum notional and at-risk amounts. Pursuant to the terms of the Project Finance
Loan Agreement, in 2002 Stendal entered into interest rate swap agreements in respect of borrowings under the Stendal Loan Facility to fix most of the interest costs under the Stendal Loan Facility at
a rate of 3.795% per year until April 2004 and at a rate of 5.28% commencing May 2004 until final payment in October 2017. For more information, see "Quantitative and Qualitative
Disclosures about Market Risk". In March 2003, as part of its loan syndication, HVB exercised

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its
right under the Stendal Loan Facility to increase its up-front arrangement fee by 20 basis points and the rate of interest under the facility by 30 basis points.

Stendal
has agreed to initially reduce the aggregate advances outstanding under the Stendal Loan Facility, other than in respect of Tranche E, to a maximum of
€599.0 million, from a maximum original amount of €638.0 million (assuming no draws for approved cost overruns), on or before the first March 31 or
September 30 following the fourth anniversary of the first advance under the Stendal Loan Facility for project construction and development costs. The tranches are generally repayable in
installments and mature between the fifth and 15th anniversary of the first advance under the Stendal Loan Facility for project construction and development costs. Subject to various conditions,
including a minimum debt service coverage test, Stendal may make distributions, in the form of interest and capital payments on shareholder debt or dividends on equity invested, to its shareholders,
including us.

The
tranches under the Stendal Loan Facility for project construction and development costs, financing costs, start-up costs and working capital are severally guaranteed by
German federal and state governments in respect of an aggregate of 80% of the principal amount of these tranches, but the tranche under the Stendal Loan Facility for financing and start-up
costs, working capital and certain of the project construction and development costs benefiting from these guarantees will be reduced semi-annually by 12.5% per year beginning on the first
repayment date following the fourth anniversary of the first advance under the Stendal Loan Facility for each of these costs. Under the guarantees, the German federal and state governments that
provide the guarantees are responsible for the performance of our payment obligations for the guaranteed amounts. Approximately €394.4 million was drawn under the Stendal Loan
Facility as of December 31, 2003.

On
December 12, 2003, Stendal entered into agreements with Nord Deutsche Landesbank ("Nord LB") and the European Investment Bank ("EIB"). Pursuant to the agreements, EIB
will provide a refinancing credit facility to Nord LB at preferred interest rates for up to €495.0 million. Such refinancing loan is made to Nord LB for the benefit of the
Stendal project. Instead of actually refinancing the Stendal Loan Facility through Nord LB, and Stendal benefiting from lower interest rates over time, the agreements provide for the disbursement to
Stendal
of the net present value of the interest rate differential offered to Nord LB by EIB (less a portion retained by Nord LB).

A
first draw down refinancing of €250.0 million was completed in December 2003 which resulted in a net present value of the interest rate differential of
approximately €2.1 million being disbursed to Stendal. A second draw down refinancing in the amount of up to €245.0 million is expected to be concluded
within the first quarter of 2004. Upon second draw down, Stendal is expected to benefit from a net present value interest rate differential credit of approximately
€2.0 million.

The
proceeds received from the interest rate differential arrangement with EIB will be transferred to the Stendal project's disbursement account. These EIB proceeds will be considered
additional cash flow in the period between the Stendal mill's start-up and acceptance.

The
Stendal Loan Facility is secured by all of the assets of Stendal. In addition, the Project Finance Loan Agreement provides for the establishment of an equity reserve account into
which excess start-up cash flows may be deposited. The account will be used to secure claims and amounts owing to the lenders in priority to the funding of the debt service reserve account
under the Stendal Loan Facility. The Project Finance Loan Agreement also provides that revenues held by Stendal after certain payments may be paid to a shareholders' account.

In
connection with the Stendal Loan Facility, we entered into a shareholders' undertaking agreement (the "Undertaking") dated August 26, 2002 with RWE, AIG and HVB in order to
finance the shareholders' contribution to the Stendal project. Pursuant to the terms of the Undertaking, on the Closing Date the shareholders of Stendal, on a pro rata basis, subscribed for
€15 million of share capital of Stendal and advanced to it €55 million in subordinated loans. In addition, on a pro rata basis, the shareholders of

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Stendal
agreed to advance to it €30 million of stand-by equity to, among other things, cover approved cost overruns, fund the equity reserve account and partially
fund the debt service reserve account under the Stendal Loan Facility. On the Closing Date, we provided HVB with a cash deposit for our pro rata portion of such equity reserve account. Our
total funding commitment under the Undertaking was €63.5 million, all of which was effected in August 2002. Pursuant to the Undertaking, we have agreed, for as long as
Stendal has any liability under the Stendal Loan Facility to HVB, to retain control over at least 51% of the voting shares of Stendal.

On
the Closing Date, we entered into and completed funding under two bridge financing loan agreements and used the net proceeds from the two bridge loans (the "Bridge Loans") in the
principal
amounts of €15.0 million and €30.0 million to fund, in part, our contribution to the Stendal project and commitment pursuant to the Undertaking. The
Bridge Loans were negotiated at the same time and the agreements in respect of the Bridge Loans were entered into upon substantially the same terms. The Bridge Loans accrued interest at rates equal to
Euribor plus 6.5% per year until April 2003 and Euribor plus 9.0% per year thereafter until October 2003.

In
October 2003, we completed the sale of $82.5 million in aggregate principal amount of convertible senior subordinated notes due 2010. The notes bear interest at a rate
of 8.5% per annum and are convertible into our shares of beneficial interest at a conversion price of $7.75 per share. The net proceeds from the offering of approximately $78.4 million were
used to repay in full our indebtedness, including fees and accrued interest, under the Bridge Loans aggregating approximately $66.9 million and the balance was used for general corporate
purposes, including working capital. For more information, see "Market for Registrant's Common Equity and Related Stockholder Matters".

Paper Mill Project Facilities

In 2003, our paper operations secured two long-term credit facilities aggregating approximately €2.5 million, which facilities
along with certain government grants are being utilized to repair flooding damage suffered by the mills in 2002. One facility totaling approximately €1.0 million matures on
June 30, 2009, bears interest at a rate of 2.65% per annum and is repayable in ten equal semi-annual installments. The other facility in the amount of approximately
€1.5 million matures on June 30, 2013, bears interest at a rate of 2.65% per annum and is repayable in 15 equal semi-annual installments. Both facilities are
guaranteed as to 80% thereof by a German governmental agency.

In
addition, in 2003, our Fährbrücke paper mill secured three credit facilities aggregating €5.5 million, which facilities along with
certain government grants will be utilized to finance equipment and construction costs associated with expanding and adapting the paper machine at the mill for the production of
pre-impregnated décor paper. Two of the facilities aggregating €3.5 million mature on December 30, 2012 and bear interest at rates between
4.15% and 4.3% per annum and are repayable in 16 equal semi-annual installments. The other facility in the amount of €2.0 million matures on March 31, 2009
and bears interest at a rate equal to the three-month Euribor rate plus 1.75% per annum and is repayable in 16 equal quarterly installments. All three facilities are guaranteed as to 80% thereof by a
German state government. As at December 31, 2003, we had utilized an aggregate of approximately €6.0 million of €8.0 million available under these
five credit facilities relating to the paper operations.

Environmental

Our operations are subject to a wide range of German federal, state and local environmental laws and regulations, dealing primarily with water, air and land
pollution control. In recent years, we have devoted significant financial and management resources to comply with all applicable environmental laws and regulations. Our total capital expenditures on
environmental projects, excluding those incurred in connection with the conversion of the Rosenthal mill to the production of kraft pulp, were approximately €3.7 million in 2003
and are expected to be approximately €3.2 million in 2004.

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We
believe we have obtained all required environmental permits, authorizations and approvals for our operations. We believe our operations are currently in substantial compliance with
the requirements of all applicable environmental laws and regulations and our respective operating permits.

The
Rosenthal mill has a relatively modern biological wastewater treatment and oxygen bleaching facility. We have significantly reduced our levels of Adsorbable Organic Halogen, or
"AOX", discharge at the Rosenthal mill and we believe the Rosenthal mill's AOX discharges are substantially below those currently mandated by the German government. Effective January 1, 2001,
the Rosenthal mill is required to maintain levels of Chemical Oxygen Demand, or "COD" discharge at the Rosenthal mill below 25 kilograms per tonne of pulp. The Rosenthal mill is currently in
compliance with these levels of COD discharge. We will continue to modify our wastewater and bleaching facilities at the Rosenthal mill, which have been further enhanced as a result of the conversion
of the mill to the production of kraft pulp, to meet or exceed prescribed regulations. In addition, in 2003 we completed a strategic capital project to reconstruct the landfill at the Rosenthal mill
so that it will be useable for an additional 15 years. The aggregate cost of the project was approximately €7.6 million.

Under
German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These
rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures
against the wastewater fees that they would otherwise be required to pay. As a result, we estimate that the aggregate wastewater fees we saved in 2003 as a result of environmental capital expenditures
made at our manufacturing plants were approximately €3.0 million. We expect that capital investment programs for our manufacturing plants will fully offset the wastewater fees
that may be payable for 2004 and 2005 and will ensure that our operations continue in substantial compliance with prescribed standards.

Environmental
compliance is a priority for our operations. To ensure compliance with environmental laws and regulations, we regularly monitor emissions at our mills and periodically
perform
environmental audits of operational sites and procedures both with our internal personnel and outside consultants. These audits identify opportunities for improvement and allow us to take proactive
measures at the mills as considered appropriate.

Although
the Rosenthal mill's overall emission levels for nitric oxide and nitrogen oxide, collectively referred to as "NOx", are substantially below prescribed levels, NOx emissions
from one gas burner have recently exceeded its permitted emission level. We made a claim on the warranty from the supplier of the gas burner who installed an ammonia scrubber to reduce NOx emissions.
Due to a technical issue, emission levels from the gas burner were not reduced to permitted levels. Pursuant to our agreement with the gas burner supplier, the supplier is responsible for installing a
new burner that reduces NOx emission levels to prescribed standards. We estimate the aggregate cost of the new burner to be approximately €750,000, approximately half of which is
expected to be borne by the supplier and the balance by us. We have advised German environmental authorities of the technical issue relating to the burner and the proposal to replace the same.
Although there can be no assurance, we do not expect any regulatory action in respect thereof as a result of the Rosenthal mill's plans to install a new burner and that its overall NOx emissions are
well below permitted standards.

We
have until the end of 2005 to begin biologically treating the wastewater at the Fährbrücke mill. We are in the process of constructing a wastewater
treatment plant at the Fährbrücke mill, the first stage of which was completed in 2002 and brought into operation at the beginning of 2003. The cost of the treatment
plant is expected to be approximately €2.0 million, of which €0.2 million was incurred in 2003. The project is being funded by government grants as to
28%, a bank loan as to 45% and the remainder from our funds. We expect construction of the plant to be completed in early 2005.

Future
regulations or permits may place lower limits on allowable types of emissions, including air, water, waste and hazardous materials, and may increase the financial consequences of
maintaining

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compliance
with environmental laws and regulations or conducting remediation. Our ongoing monitoring and policies have enabled us to develop and implement effective measures to maintain emissions in
material compliance with environmental laws and regulations to date in a cost-effective manner. However, there can be no assurances that this will be the case in the future.

Human Resources

We currently employ approximately 1,022 people. Approximately 677 salaried and 125 hourly employees work in our pulp operations, including our
transportation subsidiary, and approximately 84 salaried and 136 hourly employees work in our paper operations.

Pursuant
to the government grants and financing arranged in connection with the conversion of the Rosenthal mill to the production of kraft pulp, we have agreed with state government
authorities in Germany to maintain at least 504 jobs at our Rosenthal pulp operations until June 30, 2005. This includes the employees of the Rosenthal mill's transportation operations which
deliver raw materials to the mill and pulp to our customers.

When
the Stendal mill is completed, Stendal and its subsidiaries are expected to employ approximately 580 people. Pursuant to the government grants and financing arranged in connection
with the Stendal project, we have agreed with German state authorities to maintain this number of jobs until 2010.

Rosenthal
and Dresden are bound by collective agreements negotiated with IG-BCE on behalf of pulp and paper workers in Germany. In February 2003, we entered into a new
labor agreement with IG-BCE for our pulp workers which, among other things, had a one-year term and provided for a 2% wage increase effective March 1, 2003 and that the
parties would negotiate in respect of a further wage increase for August 2003 depending upon general economic conditions. Our pulp workers agreed to defer negotiations in respect of a further
wage increase as a result of current general economic conditions. The agreement has no fixed term, but could not be terminated by either party before February 28, 2004. A new agreement is
expected to be negotiated in the first half of 2004.

A
labor agreement was reached with the workers at our paper mills in 1999 upon terms which provided for wage increases of 1.5% in July 2000 and January 2001. A further
agreement was reached in May 2001 upon terms which provided for wage increases of 2.0% in each of July 2001 and January 2002. In December 2002, a new agreement was reached
for 2003 which provided for a wage increase of 2.5%. In February 2004, a new agreement was reached which provides for a 1.5% wage increase on each of February 1, 2004, July 1,
2004, January 1, 2005 and July 1, 2005. This agreement cannot be terminated prior to August 31, 2005 and a new agreement is expected to be negotiated in the fourth quarter of
2005.

We
have a highly skilled and educated workforce. Over 90% of the employees at our pulp and paper operations have post-secondary education or are trained tradespersons. We
consider the relationships with our employees to be good. We have implemented profit sharing plans, training programs and early retirement schemes for the benefit of our employees. Although no
assurances can be provided, we have not had any significant work stoppages at any of our paper operations and we would therefore expect to enter into labor agreements with our paper workers without
any significant work stoppages at our paper mills.

Additional Information

We make available free of charge on or through our website at www.mercerinternational.com annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments to these reports, as soon as
reasonably practicable after we file these materials with the SEC. The public may read and copy any material we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may also obtain information on the operation of

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the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding us.

ITEM 2.    PROPERTIES

We lease offices in Seattle, Washington, Vancouver, British Columbia and in Germany. We own the paper mills and the Rosenthal mill and the underlying property.
The Stendal mill will be situated on property owned by Stendal, our 63.6% owned subsidiary.

The
Rosenthal mill is situated on a 220 acre site near the town of Blankenstein in the State of Thuringia, approximately 300 kilometers south of the Stendal mill. The Saale river
flows through the site of the mill. In late 1999, we completed a major capital project which converted the Rosenthal mill to the production of kraft pulp. It is a single line mill with an annual
production capacity of approximately 300,000 tonnes of kraft pulp. The mill is self-sufficient in steam and electrical power. Some excess electrical power which is constantly generated is
sold to the regional power grid. The facilities at the mill include:



The
Stendal mill will be situated on a 200 acre site near the town of Stendal in the State of Sachsen-Anhalt, approximately 300 kilometers north of the Rosenthal mill and
130 kilometers from the city of Berlin. The mill will be adjacent to the Elbe river and have access to harbor facilities for water transportation. Construction of the Stendal mill commenced in
2002 and is scheduled to be completed by the third quarter of 2004. The mill will be a single line mill with a planned annual production capacity of approximately 552,000 tonnes of kraft pulp. The
Stendal mill is designed to be self-sufficient in steam and electrical power. Some excess electrical power which is constantly being generated will be sold to the regional power grid. The
facilities at the mill are designed to include:



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The
Heidenau mill is situated on a 26 acre site in the town of Heidenau in the State of Saxony at the Elbe river, approximately 120 kilometers east of the
Fährbrücke mill and 12 kilometers south of the city of Dresden. The mill was constructed in 1956 and has been continually upgraded. The mill has an annual
production capacity of approximately 45,000 tonnes of specialty papers. The facilities at the mill include:



The
Fährbrücke mill is situated on a 27 acre site near the town of Langenweissbach in the State of Saxony, in the western part of the Erzebirge mountains at
the Zwickauer Mulde river. The mill is approximately 100 kilometers east of the Rosenthal mill and approximately 120 kilometers west of the Heidenau mill. The mill was constructed
between 1972 and 1973 and has been continually upgraded. The mill has an annual production capacity for approximately 40,000 tonnes of printing and writing papers and specialty papers. The mill uses
virgin fiber in producing various grades of printing and writing papers and specialty papers. The facilities at the mill include:



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The
following table sets out, by primary product class, our production capacity and actual production for the periods indicated:

|       |                  |              |        | Production
|------ | ---------------- | ------------ | ------ | ----------
|
|
|
|
|Pulp   |                  | 300,000      | (2)    | 310,244   
|Papers |                  |              |        |           
|       | Specialty Papers |              | 55,000 | (3)(4)    
|       | Printing Papers  |              | 30,000 | (4)       
|       |                  |              |        |           
|       |                  | Total Papers |        | 70,000    
|       |                  |              |        |           
|Total  |                  | 370,000      | (2)    | 372,156   
|       |                  |              |        |           

---

We
own a substantial amount of real estate adjacent to the paper mills, which is in excess of our production requirements and may be divested. Substantially all of our pulp related
assets, including our pulp facilities, are pledged to secure the Rosenthal Loan Facility and the Stendal Loan Facility.

ITEM 3.    LEGAL PROCEEDINGS

We are subject to routine litigation incidental to our business. We do not believe that the outcome of such litigation will have a material adverse effect on our
business or financial condition.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held a special meeting of shareholders on October 2, 2003 at which we obtained approval for the issuance of up to 10,750,000 shares of beneficial
interest upon the conversion of convertible senior subordinated notes that we sold in a private offering on October 10, 2003. For more information, see "Submission of Matters to a Vote of
Securityholders" in our quarterly report on Form 10-Q for the third quarter of 2003 on file with the SEC.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)Market Information.Our shares of beneficial interest are quoted for trading on the Nasdaq National Market
under the symbol "MERCS" and listed in U.S. dollars on the Toronto Stock Exchange under the symbol "MRI.U". The following table sets forth the high and low reported sale prices of our shares on
the Nasdaq National Market for each quarter in the two year period ended December 31, 2003, and for the period ended March 10, 2004:

|Fiscal Quarter Ended  |  | High |      | Low
|--------------------- |  | ---- | ---- | ---
|2002                  |  |      |      |    
|March 31              |  | $    | 7.90 |    
|June 30               |  |      | 8.50 |    
|September 30          |  |      | 7.75 |    
|December 31           |  |      | 5.78 |    
|2003                  |  |      |      |    
|March 31              |  |      | 5.88 |    
|June 30               |  |      | 5.25 |    
|September 30          |  |      | 6.55 |    
|December 31           |  |      | 6.97 |    
|2004                  |  |      |      |    
|Period ended March 10 |  |      | 9.39 |    

(b)Shareholder Information.As at March 10, 2004, there were approximately 507 holders of record of our
shares and a total of 17,174,566 shares were outstanding.

(c)Dividend Information.The declaration and payment of dividends is at the discretion of our board of
trustees. Our board of trustees has not declared or paid any dividends on our shares in the past two years and does not anticipate declaring or paying dividends in the foreseeable future.

(d)Equity Compensation Plans.The following table sets forth information as at December 31, 2003
regarding: (i) our stock option plan under which options to acquire an aggregate of 3,600,000 of our shares may be granted to our officers and employees, and to our trustees who are not our
officers or employees up to a maximum of 130,000 shares; and (ii) a non-qualified stock option plan to acquire up to 375,000 of our shares:

|                                   |  | Number of Shares to be Issued Upon Exercise of Outstanding Options |  | Weighted-average Exercise Price of Outstanding Options |      | Number of Shares Available for Future Issuance Under Plan
|---------------------------------- |  | ------------------------------------------------------------------ |  | ------------------------------------------------------ | ---- | ---------------------------------------------------------
|Stock Option Plan                  |  | 2,045,500                                                          |  | $                                                      | 7.12 |                                                          
|Non-Qualified Stock Option Plan(1) |  | 150,000                                                            |  | $                                                      | 4.53 |                                                          

---

(e)Private Placements.    In October 2002, we sold 200,000 of our shares to an accredited investor for
gross proceeds of $900,000 by way of private placement in reliance on the exemption from the registration

32

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provisions
of theSecurities Act of 1933, as amended (the "Securities Act") provided under Section 4(2) of the act.

In
October 2003, we completed the sale of $82.5 million in aggregate principal amount of convertible senior subordinated notes due October 15, 2010. The notes bear
interest at a rate of 8.5% per annum and are convertible into our shares of beneficial interest at a conversion price of $7.75 per share, which
is equal to a conversion rate of approximately 129 shares per $1,000 principal amount of the notes, subject to adjustment for certain customary anti-dilution matters. The notes were
offered only to qualified institutional buyers in reliance on Rule 144A and to certain buyers outside of the United States in reliance on Regulation S under the Securities
Act. The notes were sold to RBC Dain Rauscher Inc., as the initial purchaser. The aggregate initial purchaser's discounts of the offering were approximately $3.4 million.

In
connection with the offering of the notes, we filed a shelf registration statement on Form S-3 (File No. 33-111118) with the SEC in
December 2003 to register for resale the notes and shares of beneficial interest into which the notes are convertible on behalf of the purchasers of the notes. The shelf registration statement
was declared effective by the SEC on January 29, 2004. We will not receive any proceeds from the sale of the notes or shares of beneficial interest into which the notes are convertible under
the shelf registration statement.

33

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ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth selected historical financial and operating data as at and for the periods indicated. Effective January 1, 2002, we changed
our reporting currency from the U.S. dollar to the Euro. Accordingly, the following selected financial data for periods prior to the year ended December 31, 2002 has been restated in
Euros and reclassified to conform with the current year's presentation. The following selected financial data is qualified in its entirety by, and should be read in conjunction with, our consolidated
financial statements and related notes contained in this annual report and "Management's Discussion and Analysis of Financial Condition and Results of Operations".

Selected
historical financial data as at and for the period ended December 31, 1999 is set out below. Management believes that the financial data relating to 1999 does not provide
a meaningful comparison of financial and operating data to the other periods shown below. In 1999, the Rosenthal mill was shut down from July to December while we completed a major capital project
which converted the Rosenthal mill to the production of kraft pulp from sulphite pulp and increased its annual production capacity from approximately 160,000 tonnes to approximately 300,000 tonnes.
Between 1998 and 2000, we owned and operated an additional four paper mills that produced packaging, carton and printing papers which have been divested pursuant to our strategy to focus on our core
operations.

|                                                    |         | Year Ended December 31,
|--------------------------------------------------- | ------- | -----------------------
|
|
|Statement of Operations Data                        |         |                        
|Revenues                                            |         | €                      
|Cost of sales                                       |         | €                      
|Gross profit                                        |         | €                      
|Income (loss) from operations                       |         | €                      
|Net income (loss)                                   |         | €                      
|Net income (loss) per share,                        |         |                        
|                                                    | Basic   |                        
|                                                    | Diluted |                        
|Weighted average shares outstanding (in thousands), |         |                        
|                                                    | Basic   |                        
|                                                    | Diluted |                        
|Balance Sheet Data                                  |         |                        
|Current assets                                      |         | €                      
|Current liabilities                                 |         | €                      
|Working capital                                     |         | €                      
|Total assets                                        |         | €                      
|Long-term liabilities                               |         | €                      
|Shareholders' equity                                |         | €                      
|                                                    |         |                        

34

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|Other Data          |                                           |  |   |         |  |  |  |   |         |  |  |  |   |         |  |   |         |  |   |        |  
|------------------- | ----------------------------------------- |  | - | ------- |  |  |  | - | ------- |  |  |  | - | ------- |  | - | ------- |  | - | ------ | -
|Pulp Operations(7): |                                           |  |   |         |  |  |  |   |         |  |  |  |   |         |  |   |         |  |   |        |  
|                    | Pulp sales                                |  | € | 126,594 |  |  |  | € | 130,173 |  |  |  | € | 146,245 |  | € | 159,713 |  | € | 37,622 |  
|                    | Sales volume (tonnes)                     |  |   | 303,655 |  |  |  |   | 293,607 |  |  |  |   | 285,654 |  |   | 239,552 |  |   | 94,523 |  
|                    | Productivity (tonnes produced
per day)    |  |   | 898     |  |  |  |   | 887     |  |  |  |   | 876     |  |   | 736     |  |   | 469    |  
|                    | Cash production costs
(per tonne sold)(8) |  | € | 307     |  |  |  | € | 312     |  |  |  | € | 342     |  | € | 353     |  | € | 412    |  
|                    | Income (loss) from operations             |  | € | 127     |  |  |  | € | 1,838   |  |  |  | € | 18,610  |  | € | 49,594  |  | € | (4,152 | )
|                    | Depreciation                              |  | € | 21,881  |  |  |  | € | 21,567  |  |  |  | € | 21,422  |  | € | 20,481  |  | € | 4,607  |  
|                    | Average price realized (per tonne)        |  | € | 417     |  |  |  | € | 443     |  |  |  | € | 512     |  | € | 667     |  | € | 398    |  
|Dividends:          |                                           |  |   |         |  |  |  |   |         |  |  |  |   |         |  |   |         |  |   |        |  
|                    | Cash dividends                            |  |   |        |  |  |  |   |        |  |  |  |   |        |  |   |        |  | € | 789    |  
|                    | Cash dividends per share                  |  |   |        |  |  |  |   |        |  |  |  |   |        |  |   |        |  | € | 0.05   |  
|                    | Cash dividends ($)                        |  |   |        |  |  |  |   |        |  |  |  |   |        |  |   |        |  | $ | 834    |  
|                    | Cash dividends per share ($)              |  |   |        |  |  |  |   |        |  |  |  |   |        |  |   |        |  | $ | 0.05   |  

---

35

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations as of and for the three years ended December 31, 2003 should be
read in conjunction with the consolidated financial statements and related notes included in this annual report. Effective January 1, 2002, we changed our reporting currency from the
U.S. dollar to the Euro. Accordingly, our financial statements for the years ended December 31, 2002 and 2003 included in this annual report are stated in Euros and our financial
statements for periods prior to the year ended December 31, 2002 included in this annual report have been restated in Euros and reclassified to conform to the current presentation. The
following management discussion and analysis of our financial condition and results of operations is based upon the restated financial statements for all periods.

Results of Operations

We operate in the pulp and paper business and our operations are located primarily in Germany. Our manufacturing facilities are comprised of: (a) the
Rosenthal mill which produces softwood kraft pulp and has an annual production capacity of approximately 300,000 tonnes; (b) the Stendal project, a "greenfield" project to construct a new,
state-of-the-art softwood kraft pulp mill, which is designed to have an annual production capacity of approximately 552,000 tonnes, being implemented by Stendal,
our 63.6% owned project subsidiary; and (c) two paper mills which produce specialty papers and printing and writing papers and, based upon their current product mix, have an aggregate annual
production capacity of approximately 70,000 tonnes.

Total
investment costs in respect of the Stendal project are estimated to be approximately €1.0 billion, the majority of which is being financed under the Stendal
Loan Facility in the amount of €828 million and arranged with HVB. The construction of the Stendal mill commenced in August 2002 and is scheduled to be completed in the
third quarter of 2004. Costs, including interest, in respect of the Stendal project are capitalized.

Our
financial performance depends on a number of variables that impact sales and production costs. Sales and production results are influenced largely by the market price for products
and raw materials, the mix of products produced and foreign currency exchange rates. Kraft pulp and paper markets are highly cyclical, with prices determined by supply and demand. Demand for kraft
pulp and paper is influenced to a significant degree by global levels of economic activity and supply is driven by industry capacity and utilization rates. Our product mix is important because premium
grades of kraft pulp and specialty papers generally achieve higher prices and profit margins.

Our
production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the
form of wood chips and pulplogs for pulp production, and waste paper and pulp for paper production. Fiber costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both
highly cyclical. Production costs also depend on the total volume of production. High operating rates and production efficiencies permit us to lower our average cost by spreading fixed costs over more
units.

Global
economic conditions, changes in production capacity and inventory levels are the primary factors affecting kraft pulp and paper prices. Historically kraft pulp and paper prices
have been cyclical in nature. Kraft pulp prices, which had been at historically low levels between 1996 and 1999, rebounded in 2000 as a result of recoveries in Asian economies and a decline in
capacity resulting from the shut-down of unprofitable or older mills requiring environmental upgrades. This contributed to tightening inventory levels and list prices increasing to an
average of approximately $710 per tonne in the fourth quarter of 2000. However, the decline of North American and European economies in 2001 caused a sharp reduction in paper demand. As a result,
producer inventories increased markedly and list price levels eroded to an average of approximately $460 per tonne in late 2001. List prices for kraft pulp averaged approximately

36

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$463
per tonne in 2002. The weakening of the U.S. dollar against the Euro and other major currencies and an increase in demand resulting from improving American and major European economies in
2003 resulted in producers increasing list prices for kraft pulp in Europe to approximately $560 per tonne in December 2003 despite relatively high inventory levels. Most producers, including
ourselves, announced a price increase for NBSK pulp for February 2004 to approximately $590 per tonne, which was largely implemented. Further price increases of $10 to $20 per tonne have been
announced by various pulp producers for March 2004. However, there can be no assurance that any such increase will be implemented or, if implemented, that prices will not fall in ensuing
months.

Our
financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro exchange rate and in interest rates. Changes in currency rates affect our
performance because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is quoted in U.S. dollars, even though our sales are invoiced in
Euros. Therefore, a weakening of the U.S. dollar against the Euro will generally reduce the amount of Euro revenues of our pulp operations. Most of our costs, including our debt obligations,
are incurred in Euros. These do not fluctuate with the U.S. dollar to Euro exchange rate. Thus, a weakening of the U.S. dollar against the Euro tends to reduce our sales revenue, gross
profit and income from operations.

Changes
in interest rates can impact our performance because the indebtedness we incurred under the credit facilities for establishing the Rosenthal and Stendal pulp mills provide for
floating rates of interest.

Changes
in currency exchange and interest rates can impact both our operating results and certain foreign currency and interest rate derivatives Rosenthal and Stendal use to partially
protect against the effect of such changes. Gains or losses on such derivatives are included in our earnings, either as they are settled or as they are marked to market for each reporting period. See
"Quantitative and Qualitative Disclosures about Market Risk".

In
order to partially protect against a weakening U.S. dollar, Rosenthal uses derivatives to swap its Euro denominated debt obligations to U.S. dollars (the "Currency
Swaps") under the Rosenthal Loan Facility. Such derivatives effectively converted Rosenthal's loan obligations from Euros into U.S. dollars. Rosenthal's use of U.S. dollar currency
derivatives ("Currency Forwards") had provided additional protection and augmented earnings and cash flow during a weakening U.S. dollar environment. We settled these Currency Swaps and
Currency Forwards in December 2003. Primarily as a result of the substantial weakening of the U.S. dollar versus the Euro in 2003, we recognized a net gain of approximately
€28.5 million on these Rosenthal foreign currency derivatives and certain interest rate derivatives of Rosenthal in the year ended December 31, 2003.

Stendal,
as required under its project financing, entered into variable-to-fixed rate swaps (the "Stendal Interest Rate Swap Agreements") to fix the interest rate
for the full term of the Stendal Loan Facility. While such swaps effectively fix the interest cost on the Stendal Loan Facility and provide stability with respect to future interest payments, they
have kept Stendal from benefiting from the general decline in interest rates in the later part of 2002 and in 2003. These swaps are marked to market on a quarterly basis taking into account, among
other things, all future payments and the yield curve. Declining interest rates resulted in a non-cash holding loss of approximately €13.0 million on these swaps in
2003, compared to a non-cash holding loss of approximately €30.1 million in 2002. Stendal also entered into a currency forward contract in connection with the
Stendal Loan Facility in the third quarter of 2003. This derivative instrument is also marked to market on a quarterly basis. Primarily as a result of the weakening of the U.S. dollar versus
the Euro, a non-cash holding gain of €0.7 million on such currency forward contract was recognized for the year ended December 31, 2003.

Since
mid-2003, general trends with respect to interest rates have partially reversed and long-term European interest rates have risen somewhat, while the
U.S. dollar has continued to weaken versus the Euro and other major currencies. The weak U.S. dollar has effectively reduced pulp selling prices in

37

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Europe.
However, the weak U.S. dollar and increased pulp demand resulting from improving American and major European economies has led to higher list prices for kraft pulp in Europe. We would
expect the U.S. dollar to remain relatively weak against the Euro in the near term, although generally we would expect our operations to benefit from higher pulp pricing. If higher interest
rates continue, the Stendal variable-to-fixed rate swaps may have a mark to market non-cash holding gain in future periods, which may be offset in part by higher
interest rates payable on Rosenthal's debt obligations. If the Euro continued to materially strengthen against the U.S. dollar, it could, among other things, result in lower European interest
rates. If European interest rates were to so decline, the Stendal variable-to-fixed rate interest swaps would result in further non-cash holding losses in future
periods when they were marked to market. See "Quantitative and Qualitative Disclosures about Market Risk".

Selected
sales data for each of our last three years is as follows:

|                              |                  | Year Ended December 31,
|----------------------------- | ---------------- | -----------------------
|
|
|Sales Volume by Product Class |                  |                        
|Pulp(1)                       |                  |                        
|Papers                        |                  |                        
|                              | Specialty papers |                        
|                              | Printing papers  |                        
|                              |                  |                        
|                              |                  | Total papers           
|                              |                  |                        
|Total(1)                      |                  |                        
|                              |                  |                        
|                              |                  |                        
|Revenues by Product Class     |                  |                        
|Pulp(1)                       |                  | €                      
|Papers                        |                  |                        
|                              | Specialty papers |                        
|                              | Printing papers  |                        
|                              |                  |                        
|                              |                  | Total papers           
|                              |                  |                        
|Total(1)                      |                  | €                      
|                              |                  |                        

---

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

In the year ended December 31, 2003, total revenues decreased to €194.6 million from €239.1 million in the
year ended December 31, 2002, primarily as the current period does not include the revenues of the Landqart specialty paper mill, which we reorganized in December 2002 and now account
for under the equity method. Primarily as a result thereof, pulp and paper revenues decreased to €182.5 million in the current period from €227.9 million
in 2002.

Cost
of pulp and paper sales in the year ended December 31, 2003 decreased to €179.7 million from €213.5 million in the year ended
December 31, 2002, primarily as a result of the deconsolidation of Landqart.

38

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Pulp
sales in the current period were €126.6 million, compared to €130.2 million in 2002. U.S. dollar denominated list pulp price
increases were mostly offset by a 17% decline in the U.S. dollar against the Euro in 2003. Average list prices for NBSK pulp in Europe were approximately €420 ($440) per tonne
at the end of 2002, approximately €441 ($480) per tonne in the first quarter of 2003, approximately €484 ($550) per tonne in the second quarter of 2003, approximately
€444 ($500) per tonne in the third quarter of 2003 and approximately €444 ($560) per tonne in the fourth quarter of 2003. Prices further improved to approximately
€464 ($590) per tonne in early 2004. Our pulp sales realizations were
€417 per tonne on average in the current period, compared to €443 per tonne in 2002. Pulp sales by volume increased to 303,655 tonnes in the current period from 293,607
tonnes in 2002.

Cost
of sales and general and administrative expenses for the pulp operations were €136.6 million for the year ended December 31, 2003, compared to
€138.9 million for the year ended December 31, 2002. On average, fiber costs for pulp production in the current period generally remained at the same level as in the year
ended December 31, 2002. Depreciation within the pulp segment was €21.9 million in the current period, compared to €21.6 million in 2002.

Our
pulp operations generated operating income of €0.1 million in the year ended December 31, 2003, compared to operating income of
€1.8 million in 2002.

Results
for our paper segment during the current period reflect the aforementioned exclusion of the results from the Landqart specialty paper mill, which were included in the results for
the prior year. Paper sales in the current period decreased to €55.9 million from €97.7 million in 2002. Sales of specialty papers in the year ended
December 31, 2003 decreased to €40.1 million from €79.4 million in the year ended December 31, 2002. Total paper sales volumes decreased to
62,018 tonnes in the year ended December 31, 2003 from 84,922 tonnes in the year ended December 31, 2002. On average, prices for specialty papers realized in the year ended
December 31, 2003 decreased by approximately 23.3% as our product mix changed upon the deconsolidation of the Landqart mill, and for printing papers decreased by approximately 6.8%, compared to
the year ended December 31, 2002.

Cost
of sales and general and administrative expenses for the paper operations decreased to €57.9 million in the current period from
€101.0 million in 2002 as a result of lower paper sales. Paper segment depreciation decreased to €2.0 million in the year ended December 31, 2003
from €4.0 million in the prior period.

Our
paper operations generated operating income of €0.1 million in the year ended December 31, 2003, compared to an operating loss of
€4.5 million in the year ended December 31, 2002.

Consolidated
general and administrative expenses decreased to €19.3 million in the year ended December 31, 2003 from €25.0 million in
the year ended December 31, 2002, primarily as a result of the exclusion of the results of the Landqart mill and a decrease in professional fees in the current period.

For
the year ended December 31, 2003, we reported a loss from operations of €4.5 million, compared to €1.1 million in 2002. Interest
expense (excluding capitalized interest of €17.4 million in respect of the Stendal project) in the current period decreased to €11.5 million from
€13.8 million in 2002, primarily as a result of lower borrowing costs and lower indebtedness for our operating units. During the current period, we made principal repayments of
€13.2 million in respect of the indebtedness of the Rosenthal pulp mill.

Pursuant
to the Stendal Loan Facility, Stendal entered into the Stendal Interest Rate Swap Agreements for the full term of the facility to manage the risk exposure with respect to an
aggregate maximum amount of approximately €612.6 million of the principal amount of the Stendal Loan Facility. Under these swaps, Stendal pays a fixed rate and receives a
floating rate with respect to interest payments calculated on a notional amount. These swaps manage the exposure to variable cash flow risk from the variable interest payments under the Stendal Loan
Facility. Stendal also entered into a currency forward contract in connection with the Stendal Loan Facility in the third quarter of 2003. These derivatives are marked to market at the end of each
reporting period and all unrealized gains and losses are recognized in

39

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earnings
for such period. In 2003, we recorded a non-cash holding loss of approximately €13.0 million when these swaps were marked to market at the end of the
period, compared to a non-cash holding loss of approximately €30.1 million in 2002. A non-cash holding gain of €0.7 million before
minority interests was recognized in respect of the currency forward in the year ended December 31, 2003. We determine market valuations based primarily upon values provided by our
counterparties.

In
addition, Rosenthal had entered into Currency Swaps to manage its exposure with respect to an aggregate amount of approximately €198.4 million of the principal
long-term indebtedness of the Rosenthal mill under the Rosenthal Loan Facility. Rosenthal had also entered into Currency Forwards and forward interest rate and interest cap contracts
("Interest Rate Contracts") in connection with certain indebtedness relating to the Rosenthal mill. The Currency Swaps and the Currency Forwards were settled in December 2003. These derivatives
are also marked to market at the end of each reporting period, and all gains and losses are recognized in earnings for such period. Primarily as a result of the weakening of the U.S. dollar
versus the Euro, in the current year we recognized a net gain of €28.5 million upon the settlement of the Currency Swaps and Currency Forwards and the mark to market valuation
of the Interest Rate Contracts. In 2002, we recognized a net gain of €23.4 million from these derivative contracts.

Minority
interest in the year ended December 31, 2003 amounted to €5.6 million and represented the proportion of the loss of the Stendal project allocated
to the two minority shareholders of Stendal. Minority interest in the year ended December 31, 2002 amounted to €11.0 million.

Our
results for the year ended December 31, 2003 include an adjustment of €5.6 million for the non-cash aggregate pre-tax earnings
impact of other-than-temporary impairment losses on certain of our available-for-sale securities. This adjustment was recorded in other income (expense)
in our consolidated statement of operations. This adjustment did not affect our shareholders' equity since all of our available-for-sale securities are marked to market on a
quarterly basis and unrealized gains or losses are reported through the statement of comprehensive income in our financial statements and recorded in other comprehensive income (loss) within
shareholders' equity on our balance sheet. Such unrealized gains or losses, the cost base and the current marked to market value of our available-for-sale securities are
further described in the notes to our annual financial statements. These were legacy investments and unrelated to our pulp and paper operations and were largely sold in December 2003.

SFAS 115,Accounting for Certain Investments in Debt and Equity Securities, EITF 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments, and SEC Staff Accounting Bulletin 59, Accounting for Noncurrent Marketable Equity Securities, provide guidance on determining when an impairment is
other-than-temporary, which requires judgment. In making this judgment, we evaluate, among other factors, the duration and extent to which the fair value of an investment is
less than its cost; the financial health of and business outlook for the investee, including factors such as industry and sector performance, changes in technology, operational and financing cash
flow, the investee's financial position including its appraisal and net asset value, market prices, its business plan and investment strategy; and our intent and ability to hold the investment.

During
2003, we recorded a reserve for potential tax obligations of €3.0 million and an asset write-down of €2.3 million related
to the valuation of certain assets in which we have a non-controlling interest as a result of the Landqart reorganization in 2002. No similar reserves or write-downs were recorded in 2002.
Our results for 2003 also include a one-time pre-tax charge of approximately €1.0 million for settlement expenses relating to a proxy solicitation and
settlement agreement with respect to our 2003 annual meeting.

For
the year ended December 31, 2003, we reported a net loss of €3.6 million, or €0.21 per share on a basic and diluted basis, compared to a
net loss of €6.3 million, or €0.38 per share on a basic and diluted basis, in the year ended December 31, 2002.

40

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As
the Stendal project is currently under construction and because of its overall size relative to our other facilities, management uses consolidated operating results excluding
derivative items relating to the Stendal project to measure the performance and results of our operating units. Management
believes this measure provides meaningful information for it and securityholders on the performance of our operating facilities for a reporting period. Upon commencement of commercial production, the
Stendal project will be evaluated with our other operating units. For the year ended December 31, 2003, we reported a net loss of €3.6 million or €0.21
per share on a diluted basis. If we had excluded items relating to the Stendal project by adding the loss on derivative financial instruments of €13.0 million on the Stendal
Interest Rate Swap Agreements to, and subtracting the gain on the currency forward relating to the Stendal Loan Facility of €0.7 million and minority interest of
€5.6 million from, the reported net loss of €3.6 million, we would have reported net income of €3.1 million or
€0.18 per share on a diluted basis. For the year ended December 31, 2002, we reported a net loss of €6.3 million or €0.38 per share on a
diluted basis. If we had excluded items relating to the Stendal project by adding the loss on derivative financial instruments of €30.1 million on the Stendal Interest Rate Swap
Agreements to, and subtracting minority interests of €11.0 million from, the reported net loss of €6.3 million, we would have reported net income of
€12.8 million or €0.76 per share on a diluted basis. This measure has significant limitations as an analytical tool, and should not be considered in isolation,
or as a substitute for analysis of our results as reported under generally accepted accounting principles in the United States ("GAAP").

We
generated "Operating EBITDA" of €19.6 million in the current period, compared to Operating EBITDA of €24.5 million in 2002. Operating
EBITDA is defined as income (loss) from operations plus depreciation and amortization. Operating EBITDA is calculated by adding depreciation and amortization of €24.1 million
and €25.6 million to the loss from operations of €4.5 million and €1.1 million for the years ended December 31, 2003 and
2002, respectively.

Management
uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful
supplement to operating income as a performance measure primarily because depreciation expense is not an actual cash cost, and varies widely from company to company in a manner that management
considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other
interested parties to evaluate our financial performance.

Operating
EBITDA does not reflect the impact of a number of items that affect our net income (loss), including financing costs and the effect of derivative instruments. Operating EBITDA
is not a measure of financial performance under GAAP, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an
alternative to net cash from operating activities as a measure of liquidity.

Operating
EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some
of these limitations are: (i) Operating EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) Operating EBITDA
does not reflect changes in, or cash requirements for, working capital needs; and (iii) Operating EBITDA does not reflect the significant interest expense, or the cash requirements necessary to
service interest or principal payments, on our outstanding debt. Because of these limitations, operating EBITDA should not be considered as a measure of liquidity or cash available to us to invest in
the growth of our business. See the Statement of Cash Flows set out in our consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same
manner, Operating EBITDA as calculated by us may differ from Operating EBITDA as calculated by other companies.

41

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The
following table provides a reconciliation of net income (loss) to (loss) income from operations and Operating EBITDA for the periods indicated:

|                                   |                      | Year Ended December 31, |        
|---------------------------------- | -------------------- | ----------------------- | -------
|
|
|Net loss                           |                      | €                       | (3,593 
|Minority interest                  |                      |                         | (5,647 
|Income taxes                       |                      |                         | 3,172  
|Interest expense                   |                      |                         | 11,523 
|Investment income                  |                      |                         | (1,653 
|Derivative financial instruments   |                      |                         | (16,168
|Impairment of investments          |                      |                         | 7,825  
|Other non-operating income         |                      |                         |       
|                                   |                      |                         |        
|                                   | Loss from operations |                         |        
|Add: Depreciation and amortization |                      |                         | 24,105 
|                                   |                      |                         |        
|Operating EBITDA                   |                      | €                       | 19,564 
|                                   |                      |                         |        

Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

In 2002, total revenues increased by approximately 10.5% to €239.1 million from €216.4 million in 2001, primarily as
a result of increased sales of specialty papers resulting from the acquisition of the Landqart mill in December 2001. In 2002, pulp and paper revenues increased by approximately 11.2% to
€227.9 million from €205.0 million in 2001, on a 66.3% increase in paper sales partially offset by an 11.0% decrease in pulp sales.

Costs
of sales in 2002 increased to €213.5 million from €184.7 million in 2001, primarily as a result of higher revenues.

Pulp
sales in 2002 decreased to €130.2 million from €146.2 million in 2001, as global economic weakness and high producer inventory levels
lead to lower prices. List prices for kraft pulp in Europe decreased from approximately €528 ($470) per tonne at the end of 2001 to approximately €420 ($440) per tonne
at the end of the fourth quarter of 2002, before improving in early 2003 due primarily to supply disruptions. Our pulp sales realizations in 2002 decreased to €443 per tonne from
€512 per tonne in 2001 as a result of such lower sales prices and the weaker dollar versus the Euro during 2002 compared to the prior period. Pulp sales by volume increased to 293,607
tonnes in 2002 from 285,654 tonnes in 2001, when we had 19 days of unscheduled technical downtime at the Rosenthal mill.

Cost
of sales and general and administrative expenses for our pulp operations decreased to €138.9 million in 2002 from €140.4 million in
2001 despite higher production and sales volumes. On average, our per tonne fiber costs for pulp production decreased by approximately 5.8% in 2002 compared to 2001 primarily because of lower fiber
costs. Additionally, efficiency improvements at the Rosenthal mill also reduced energy and chemical costs relative to 2001. Depreciation was €21.6 million in 2002 compared to
€21.4 million in 2001. In 2002, our average per tonne production costs (excluding depreciation) were reduced by approximately 9% compared to 2001.

Our
pulp operations generated €1.8 million of income from operations in 2002, compared to €18.6 million in 2001.

Paper
sales in 2002 increased to €97.7 million from €58.8 million in 2001. Sales of specialty papers in 2002 increased to
€79.4 million from €36.0 million in 2001 as a result of the inclusion of the results of the Landqart mill, which contributed sales volumes of 18,222
tonnes in 2002. Excluding Landqart, our sales

42

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volumes
for these grades increased to 43,505 tonnes in 2002 from 40,437 tonnes in 2001. This increase in specialty paper sales is largely the result of our strategy to focus on niche products. In
response to market conditions, we adjusted our product mix to more specialty products at our Heidenau mill where volumes of printing papers decreased to 23,195 tonnes in 2002 from 26,815 in the prior
period. On average, prices for specialty papers realized in 2002 increased by approximately 44.6% and for printing papers decreased by approximately 6.9%, compared to 2001.

Cost
of sales and general and administrative expenses for our paper operations increased to €101.0 million in 2002 from €61.7 million in
2001 as a result of the inclusion of Landqart. This increase was partially offset by lower raw material prices, particularly for virgin pulp and waste paper as compared to 2001. Furthermore, the
flooding experienced at our Heidenau and Fährbrücke paper mills in August 2002 resulted in a period of reduced production and increased costs. Depreciation
increased to €4.0 million in 2002 from €1.5 million in the prior year, as a result of the inclusion of Landqart.

A
loss from operations of €4.5 million was recorded by our paper operations in 2002 relative to a €2.5 million loss from operations in 2001.

General
and administrative expenses increased to €25.0 million in 2002 from €18.4 million in 2001, primarily as a result of the inclusion of
the results of the
Landqart mill and a foreign exchange transaction loss of €3.0 million in 2002. In 2001, we recorded a foreign exchange transaction gain of €3.4 million.

We
had a loss from operations of €1.1 million in 2002, compared to income from operations of €13.3 million in 2001. Interest expense
(excluding capitalized interest of €3.1 million in respect of the Stendal project) in 2002 decreased to €13.8 million from
€16.2 million in 2001, primarily as a result of repayments made on outstanding indebtedness.

We
recognized a holding loss of €30.1 million before minority interests in respect of the Stendal Interest Rate Swap Agreements for the year ended
December 31, 2002. See "Quantitative and Qualitative Disclosures about Market Risk".

During
2002, we settled two Currency Swaps which were entered into earlier in the year to realize gains. We then subsequently re-entered into two Currency Swaps and one of
them was settled and a gain was realized in December 2002. In addition, we have entered into Currency Forwards and Interest Rate Contracts in connection with certain indebtedness relating to
the Rosenthal mill. These derivatives are also marked to market at the end of each reporting period and all gains and losses are recognized in earnings for a reporting period. In 2002, we realized a
total gain of €23.4 million from these derivative contracts. See "Quantitative and Qualitative Disclosures about Market Risk".

Income
tax impacts were negligible in both 2002 and 2001 given the pre-tax losses sustained in both years. Minority interest in 2002 amounted to
€11.0 million and represented the minority shareholders' interest in the losses of Stendal. There was no minority interest in 2001.

For
2002, we reported a net loss of €6.3 million, or €0.38 per share on a basic and diluted basis, compared to a net loss of
€2.8 million, or €0.17 per share on a basic and diluted basis, in 2001.

For
2002, excluding items related to the Stendal project, net income would have been €12.8 million, or €0.76 per share on a diluted basis, which
was determined by adding the loss on derivative financial instruments of €30.1 million to, and subtracting minority interest of €11.0 million from, the
reported net loss of €6.3 million. As the Stendal project is currently under construction and because of its overall size relative to our other facilities, management uses our
consolidated operating results excluding items relating to the Stendal project to measure the performance and results of our operating units. Management believes this measure provides meaningful
information on the performance of our operating facilities for a reporting period.

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Liquidity and Capital Resources

The following table is a summary of selected financial information for the periods indicated:

|                          |  | As at December 31,
|------------------------- |  | ------------------
|
|
|Financial Position        |  |                   
|Cash and cash equivalents |  | €                 
|Working capital           |  |                   
|Properties, net           |  |                   
|Total assets              |  |                   
|Long-term liabilities     |  |                   
|Shareholders' equity      |  |                   

---

At December 31, 2003, our cash and cash equivalents were €52.0 million, compared to
€30.3 million at the end of 2002. We also had €15.2 million of cash restricted to pay construction in progress costs payable and
€19.1 million of cash restricted in a debt service account, both related to the Stendal project. In addition, we had €25.1 million of cash restricted in a
debt service account relating to the Rosenthal mill. At December 31, 2003, we had a working capital deficit of €48.9 million, primarily because we pre-finance
certain governmental grants which we expect to receive under a dedicated tranche of the Stendal Loan Facility but, under our accounting policies, do not record these grants until they are received, as
well as Stendal construction in progress costs payable for which we had not drawn down under such facility. At the end of 2003, we had applied for investment grants totaling approximately
€82.1 million from the federal and state governments of Germany which we expect to receive in 2004. Approximately €74.0 million of these grants, when
received, will be applied to repay the amounts drawn under the dedicated tranche of the Stendal Loan Facility. The grants are not reported in our income and reduce the cost basis of the assets
purchased when they are received. At the end of 2003, we had Stendal construction in progress costs payable of €42.8 million which will be paid pursuant to the Stendal Loan
Facility in the ordinary course.

In
October 2003, we completed the sale of $82.5 million in aggregate principal amount of convertible senior subordinated notes due October 2010. The notes bear
interest at a rate of 8.5% per annum and are convertible into our shares of beneficial interest at a conversion price of $7.75 per share. The net proceeds from the offering of approximately
$78.4 million were used to repay in full our indebtedness, including fees and accrued interest, under two bridge loan facilities aggregating approximately $66.9 million and the balance
was used for general corporate purposes, including working capital.

We
expect to continue to generate sufficient cash flow from operations to pay our interest and debt service expenses and meet the working and maintenance capital requirements for our
current operations. We currently do not have any revolving credit facilities. From time to time, we have entered into project specific credit facilities to finance capital projects and expect to
continue to do so, subject to availability. We expect to meet the capital requirements for the Stendal mill, including working capital and potential losses during start-up, through
shareholder advances already made to Stendal, the Stendal Loan Facility, which includes a revolving line of credit for the mill, the receipt of government grants and, when

44

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operational,
cash flow from operations. See "Business  Stendal Pulp Mill Project and Financing" and "Business  Description
of Certain Indebtedness  Stendal Pulp Mill Project Financing".

Operating Activities

Operating activities in 2003 provided cash of €31.4 million, compared to €40.4 million in 2002. Net changes in
trading securities provided cash of €0.3 million in 2003, compared to €4.4 million in 2002. An increase in receivables due primarily to higher sales in
December 2003 used cash of €4.7 million in the current period, compared to a decrease in receivables providing cash of €18.2 million in 2002. An
increase in inventories due primarily to the build up of fiber in connection with the start-up of the Stendal mill used cash of €7.5 million in 2003, compared to a
decrease in inventories providing cash of €1.7 million in 2002. A decrease in cumulative unrealized gains on derivatives provided cash of €3.8 million in
2003, compared to an increase in the same using cash of €3.3 million in 2002. An increase in accounts payable and accrued expenses provided cash of
€1.1 million in 2003, compared to a decrease in the same using cash of €12.7 million in 2002.

Investing Activities

Investing activities in 2003 used cash of €318.5 million, primarily as a result of the acquisition of properties, net of investment grants,
of which €316.7 million was attributable to the Stendal project, compared to €195.7 million in 2002, of which €186.6 million was
attributable to the Stendal project. Sales of available-for-sale securities provided cash of €6.4 million in 2003.

We
have applied for investment grants from the federal and state governments of Germany and have claims of €82.1 million outstanding as of December 31,
2003. We expect to receive the full amount of our currently outstanding claims in 2004. We received investment grants totaling €82.7 million with respect to the Stendal project
as at December 31, 2003. In accordance with our accounting policies, we do not record these grants until they are received. These grants reduce the cost basis of the assets purchased with them.
See "Business  Government Financing".

Our
paper mills had to replace certain equipment that was damaged as a result of flooding in parts of Germany and other eastern European countries during the third quarter of 2002. The
aggregate equipment costs are estimated to be approximately €3.3 million, of which approximately €3.0 million was incurred in 2003. We have applied for
German government grants and for assistance under special credit programs instituted by the German government for flooding victims in connection with these costs and for certain repairs required at
the paper mills as a result of the flooding. As at December 31, 2003, we had received approximately €3.5 million of grants, of which €1.9 million
was recognized as income in the current period and the balance has either been deferred or deducted from the cost of property acquired. Although we have received approval for the full amount of these
grants and assistance applied for, there can be no assurance that we will receive any unpaid amounts of such grants and assistance.

We
are in the process of constructing a wastewater treatment plant at the Fährbrücke mill and have completed reconstructing the landfill at the Rosenthal
mill. See "Business  Environmental" and "Business  Capital Expenditures".

In
August 2002, we completed financing arrangements for the Stendal project. Total investment costs in connection with the project are approximately
€1.0 billion, the majority of which is to be provided under the Stendal Loan Facility. We also contributed approximately €63.5 million to Stendal. For
more information about the Stendal project, see "Business  Stendal Pulp Mill Project and Financing" and "Business  Capital
Expenditures".

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Financing Activities

Financing activities provided cash of €307.1 million in the year ended December 31, 2003. A net increase in indebtedness, primarily
related to the Stendal project, provided cash of €299.0 million. An increase in restricted cash used cash of €11.1 million in the current period. We made
principal repayments of €13.2 million in connection with the Rosenthal Loan Facility in the year ended December 31, 2003. The issuance of shares in connection with the
exercise of options provided cash of €0.9 million in the current period. Financing activities provided cash of €174.7 million in 2002, primarily as a
result of a net increase in indebtedness relating to the Stendal project.

In
2003, our paper operations secured two term credit facilities aggregating approximately €2.5 million, which facilities along with certain government grants are
being utilized to repair flooding damage suffered by the mills in 2002. For information about these credit facilities, see "Business  Description of Certain
Indebtedness  Paper Mill Project Facilities".

In
addition, in 2003, our Fährbrücke paper mill secured three credit facilities aggregating €5.5 million, which facilities along with
certain government grants will be utilized to finance equipment and construction costs associated with expanding, adapting and improving the efficiency of the paper machine at the mill. This will also
permit the mill to produce pre-impregnated décor paper. For information about these credit facilities, see "Business  Description of
Certain Indebtedness  Paper Mill Project Facilities". As at December 31, 2003, we had utilized an aggregate of approximately
€6.0 million of €8.0 million available under these five credit facilities relating to the paper operations.

Our
pulp and paper operations were reorganized in 2002 which resulted in a reduction of tax losses being carried forward from December 31, 2001 and these tax losses were fully
utilized. For more information, see Note 10 of our consolidated financial statements included in this annual report.

Other
than the agreements entered into by Stendal relating to the Stendal project, we had no material commitments to acquire assets or operating businesses at December 31, 2003.
We anticipate that there will be acquisitions of businesses or commitments to projects in the future. To achieve our long-term goals of expanding our asset and earnings base through the
acquisition of interests in companies and assets in the pulp and paper and related businesses, and organically through high return capital expenditures at our operating facilities, we will require
substantial capital resources. The required necessary resources for such long-term goals will be generated from cash flow from operations, cash on hand, borrowing against our assets, the
sale of debt and/or equity securities and/or asset sales.

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Contractual Obligations and Commitments

The following table sets out our contractual obligations and commitments as at December 31, 2003 in connection with our long-term liabilities:

|                                     |  | Payments Due By Period
|------------------------------------ |  | ----------------------
|
|
|
|Long-term debt(1)                    |  | €                     
|Construction in progress, Stendal(2) |  |                       
|Capital lease obligations(3)         |  |                       
|Operating lease obligations(4)       |  |                       
|Purchase obligations(5)              |  |                       
|Other long-term liabilities(6)       |  |                       
|                                     |  |                       
|Total                                |  | €                     
|                                     |  |                       

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Capital Resources

For a description of our credit facilities, see "Business  Description of Certain Indebtedness".

Sensitivity Analysis

The pulp and paper business is cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in
turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to changes in industry capacity and in the economy, both of which can have a significant influence on
our selling prices and earnings. Approximately €126.6 million, or approximately 69.4%, of our revenues in 2003 were from pulp sales. The following table illustrates the effect
on our net operating results in 2003 and 2002 of a $20 change in our average selling

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price
per tonne for NBSK pulp in 2003 and 2002, based upon our pulp sales during each year and translated into Euros at the average exchange rate for the U.S. dollar to the Euro for the year:

|                                 |                              | Year Ended December 31,
|-------------------------------- | ---------------------------- | -----------------------
|
|
|NBSK Pulp  $20 per tonne change |                              |                        
|                                 | Change in net loss           |                        
|                                 | Change in net loss per share |                        

Foreign Currency

Effective January 1, 2002, we changed our reporting currency from the U.S. dollar to the Euro as a significant majority of our business transactions
are originally denominated in Euros. By adopting the
Euro, most cumulative foreign currency translation losses were eliminated. However, we hold certain assets and liabilities in U.S. dollars, Swiss francs and, to a lesser extent, in Canadian
dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We
translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Unrealized gains or losses from these translations are recorded as
shareholders' equity on the balance sheet and do not affect our net earnings.

In
the year ended December 31, 2003, we reported a net €2.5 million foreign exchange translation gain and, as a result, the cumulative foreign exchange
translation gain increased to €6.0 million at December 31, 2003 from €3.5 million at December 31, 2002.

Based
upon the exchange rate at December 31, 2003, the U.S. dollar decreased by approximately 17% in value against the Euro since December 31, 2002. See
"Quantitative and Qualitative Disclosures about Market Risk".

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting
for doubtful accounts, depreciation and amortization, asset impairments, income taxes, and contingencies. Actual results could differ from these estimates.

Our
management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable
future resolution of the uncertainties increase, these judgments become even more subjective and complex. We have identified certain accounting policies, described below, that are the most important
to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements
included in this annual report.

Derivative Instruments.We adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. Derivative instruments are measured at fair value and reported in the balance sheet as assets or
liabilities. Accounting for gains or losses depends on the intended use of the derivative instruments. Gains or losses on derivative instruments which are not designated hedges are recognized in
earnings in the period of the change in fair value. Accounting for gains or losses on derivative instruments designated as hedges depends on the type of hedge and these gains or losses are recognized
in either earnings or other comprehensive income.

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We reported a non-cash holding loss of €13.0 million before minority interests in respect of the Stendal Interest Rate Swap Agreements, a
non-cash holding gain of €0.7 million before minority interests in respect of the Stendal currency forward contract and a gain of
€28.5 million in respect of the Rosenthal Interest Rate Contracts and settlement of the Currency Swaps and Currency Forwards in our loss for the year ended December 31,
2003.

Impairment of Long-Lived Assets.We periodically evaluate long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, we estimate future cash flows expected to
result from the use of the asset and its eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require our management to make
subjective judgments. In addition, the time periods for estimating future cash flows is often lengthy, which increases the sensitivity of the assumptions made. Depending on the assumptions and
estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. Our management considers the likelihood of
possible outcomes in determining the best estimate of future cash flows.

Deferred Taxes.We currently have deferred tax assets which are comprised primarily of tax loss
carryforwards and deductible temporary differences, both of which will reduce taxable income in the future. We assess the realization of these deferred tax assets on a periodic basis to determine
whether a valuation allowance is required. We determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized, based on currently available information,
including, but not limited to, the following:



If
we believe that it is more likely than not that some of these deferred tax assets will not be realized, based on currently available information, an income tax valuation allowance is
recorded against these deferred tax assets. As at December 31, 2003, we had €84.5 million in deferred tax assets and €74.5 million in valuation
allowances, resulting in a net deferred tax asset of €10.0 million.

If
market conditions improve or tax planning opportunities arise in the future, we will reduce our valuation allowances, resulting in future tax benefits. If market conditions
deteriorate in the future, we will increase our valuation allowances, resulting in future tax expenses. Any change in tax laws, particularly in Germany, will change the valuation allowances in future
periods.

Environmental.Our operations are subject to a wide range of German federal, state and local
environmental laws and regulations, dealing primarily with water, air and land pollution control. In recent years, we have devoted significant financial and management resources to comply with all
applicable environmental laws and regulations. We believe our operations are currently in substantial compliance with the requirements of all applicable environmental laws and regulations and our
respective operating permits.

Under
German state environmental rules relating to effluent discharges, industrial users are required to pay wastewater fees based upon the amount of their effluent discharge. These
rules also provide that an industrial user which undertakes environmental capital expenditures and lowers certain effluent discharges to prescribed levels may offset the amount of these expenditures
against the wastewater fees that they would otherwise be required to pay in a three-year period. The requirement and timing of capital expenditures and the amount of wastewater fee charges
are subject to negotiation with government agencies. As a result, we believe that our capital investment programs for our manufacturing plants will fully offset the wastewater fees that would have
been payable for the past three years, subject to

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environmental
audits. We estimate the aggregate wastewater fees for the past three years to be approximately €9.6 million.

Other
than wastewater fees, we accrue for environmental remediation liabilities on a site-by-site basis when it is probable that a loss can be reasonably
estimated, or as a result of an environmental action or claim, environmental studies that we conduct or regulatory assessment. As at December 31, 2003, we recorded a liability for environmental
conservation expenditures of €1.8 million, based on environmental studies that we conducted. We believe that the liability amount recorded is sufficient, subject to future
changes in German environmental regulations.

Cautionary Statement Regarding Forward-Looking Information

Statements in this annual report that are not reported financial results or other historical information are "forward-looking statements" within the meaning of
thePrivate Securities Litigation Reform Act of 1995, as amended. These statements are based on present information we have related to our existing
business circumstances and involve a number of risks and uncertainties, any of which could cause actual results to differ materially from these forward-looking statements. We caution you that we do
not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. Factors that could cause actual results to differ materially include, but are not
limited to:

Indebtedness.We have incurred a significant amount of debt. Our high debt levels may have important
consequences for us, including, but not limited to the following:



Our
ability to repay or refinance our indebtedness will depend on our future financial and operating performance. Our performance, in turn, will be subject to prevailing economic and
competitive conditions, as well as financial, business, legislative, regulatory, industry and other factors, many of which are beyond our control. Our ability to meet our future debt service and other
obligations may depend in significant part on the success of the Stendal pulp mill and the extent to which we can
implement successfully our business and growth strategy. We cannot assure you that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized.

Cyclical Nature of Business.The pulp and paper business is cyclical in nature and markets for our
principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and are sensitive to
cyclical changes in industry capacity and in the global economy, all of which can have a significant influence on selling prices and our earnings. Demand for pulp and paper products has historically
been determined by the level of economic growth and has been closely tied to overall business activity. During the past three calendar years, list pulp prices have fallen significantly. Although pulp
prices have improved overall in 2003 and 2004, we cannot predict the impact of continued economic weakness in most world markets or the impact of war, terrorist activity or other events on our
markets.

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Our
production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the
form of wood chips and pulplogs for pulp production, and waste paper and pulp for paper production. Fiber costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both
highly cyclical in nature. Production costs also depend on the total volume of production. Lower operating rates and production efficiencies during periods of cyclically low demand result in higher
average production costs and lower margins.

Stendal Pulp Mill Project Uncertainties.We are the majority shareholder of a project company that is
constructing a softwood kraft pulp mill near the town of Stendal, Germany. We estimate the overall cost of this project at about €1.0 billion, and the performance of this
project will have a material impact on our financial condition and operating performance. The construction of the Stendal mill is subject to various risks and uncertainties customary to larger
"greenfield" projects of this nature which may result in the Stendal project not proceeding or being completed as scheduled or budgeted. Such delays and cost overruns may result from the lack of
availability and cost of materials and labor, construction delays, equipment failures or damage, weather conditions, industrial accidents, governmental regulations, changes to government assistance,
delays in obtaining or amending our permits, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship or defective equipment or
installation. Further, the Stendal mill could experience operating difficulties or delays during the start-up period when production is being ramped up and the Stendal mill may not achieve
our planned production, quality or cost projections.

The
Stendal project will also be subject to extensive and complex regulations and environmental compliance which may result in unanticipated delays, in substantial costs to Stendal
and/or its shareholders, including us, or in the Stendal project being changed or not being completed at all. Any change in the foregoing could have a material adverse impact on our business,
financial condition, results of operations and cash flow. The implementation of the Stendal project commenced in 2002 and
is currently scheduled to be completed by the third quarter of 2004. However, there can be no assurance that the Stendal project will be completed as currently planned or that, if completed, the mill
will perform as currently planned. For more information about the Stendal project, see "Business  Stendal Pulp Mill Project and Financing".

Currency Exchange Rate and Interest Rate Fluctuations.Approximately 69% of our sales in 2003 were in
products quoted and listed in U.S. dollars while most of our operating costs and expenses are incurred in Euros. Our results of operations and financial condition are reported in Euros. A
significant increase in the value of the Euro relative to the U.S. dollar would reduce the amount of revenues in Euros realized by us from sales denominated or priced in U.S. dollars.
This would reduce our operating margin and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition,
results of operation and cash flow.

Stendal
has entered into variable-to-fixed interest rate swaps to fix interest payments under the Stendal project financing facility, which has kept Stendal from
benefiting from the general decline in interest rates in the latter part of 2002 and first half of 2003. In addition, Rosenthal has entered into interest rate contracts to limit the interest rate in
connection with certain of its indebtedness. However, an increase in interest rates to such limit would require Rosenthal to make higher interest payments, which could adversely affect our results of
operations and financial condition.

Derivatives.A significant amount of our sales revenue is based on pulp sales priced in
U.S. dollars while our reporting currency is Euros and our costs are predominantly in Euros. We therefore use foreign currency derivative instruments primarily to manage against depreciation of
the U.S. dollar against the Euro.

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We
also use derivative instruments to limit our exposure to interest rate fluctuations. Concurrently with entering into the Stendal financing, Stendal entered into
variable-to-fixed rate interest swaps for the full term of the facility to manage its interest rate risk exposure with respect to a maximum aggregate amount of approximately
$612.6 million of the principal amount of such facility. Stendal has also entered into a currency forward contract in connection with the Stendal financing. Rosenthal also entered into currency
swap, currency forward, interest rate and interest cap derivative instruments in connection with its outstanding floating rate indebtedness. Our derivative instruments are marked to market and can
materially impact our operating results. For example, our operating results for fiscal 2003 and 2002 included net gains of €28.5 million and
€23.4 million, respectively, on the Rosenthal derivatives and unrealized losses of €13.0 million and €30.1 million, respectively,
on the Stendal interest rate swaps.

If
any of the variety of instruments and strategies we utilize are not effective, we may incur losses which may have a materially adverse effect on our business, financial condition,
results of operations and cash flow. The purpose of our derivative activity may also be considered speculative in nature; our management does not use these instruments with respect to any
pre-set percentage of revenues or other formula, but to reduce our potential losses or augment potential gains depending on our management's perception of future economic events and
developments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations  Results of Operations" and "Quantitative and
Qualitative Disclosures about Market Risk".

Raw Materials.Wood chips and pulplogs comprise the fiber used by the Rosenthal mill and which will
be used by the Stendal mill. The fiber used by our paper mills consists of waste paper and pulp. Such fiber is cyclical in terms of both price and supply. The cost of wood chips and pulplogs is
primarily affected by the supply and demand for lumber. The cost of fiber for our paper mills is primarily affected by the supply and demand for paper and pulp. Demand for these raw materials is
determined by the volume of pulp and paper products produced globally and regionally. The markets for pulp and paper products, including our products, are highly variable and are characterized by
periods of excess product supply due to many factors, including periods of insufficient demand due to weak general economic activity or other causes. The cyclical nature of pricing for these raw
materials represents a potential risk to our profit margins if we are unable to pass along price increases to our customers.

We
do not own any timberlands, have any governmental timber concessions or have any long-term fiber contracts. Although raw materials are available from a number of
suppliers, and we have not historically experienced supply interruptions or substantial price increases, our requirements will increase when the Stendal mill commences production and we may not be
able to purchase sufficient quantities of these raw materials to meet our production requirements at prices acceptable to us during times of tight supply. In addition, the quality of fiber we receive
could be reduced as a result of industrial disputes, material curtailments or shut-down of operations by suppliers, government orders and legislation, acts of god and other events beyond
our control. An insufficient supply of fiber or reduction in the quality of fiber we receive would materially adversely affect our business, financial condition, results of operations and cash flow.

Competitive Markets.We sell our products primarily in Europe and the markets for our products are
highly competitive. A number of global companies compete in each of our markets and no company holds a dominant position. For both pulp and paper, a large number of companies produce products that are
reasonably standardized. As a result, the traditional basis for competition in our markets has been price. Many of our competitors have greater resources than we do and may be able to adapt more
quickly to industrial changes or devote greater resources to the sale of products than we can. We cannot assure you that we will be able to compete successfully against these competitors.

Environmental Regulation.We are subject to extensive environmental laws and regulations. These laws
and regulations impose stringent standards on us regarding, among other things, air emissions, effluent discharges and remediation of environmental contamination. We may incur substantial costs to
comply

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with
current requirements or new environmental laws that might be adopted. In addition, we may discover currently unknown environmental problems or conditions in the future and may incur substantial
costs in correcting such problems or conditions.

Labor Agreements.The majority of our employees in Germany are represented by the IG-BCE,
a national union that represents pulp and paper workers in Germany. The collective agreement relating to employees at our paper mills expired at the end of 2003. We expect to negotiate a new
collective agreement with employees at our paper mills in the first half of 2004. Our pulp workers have agreed to defer negotiations in respect of an additional wage increase as a result of current
general economic conditions. Although we have not experienced any significant work stoppages in the past, there can be no assurance that we will be able to negotiate an acceptable collective agreement
with our employees at the paper mills or in potential wage negotiations with our pulp workers. This could result in a strike or work stoppage by the affected workers. The renewal of the collective
agreements could result in higher wages or benefits paid to union members. Accordingly, we could experience a significant disruption of our operations or higher on-going labor costs, which
could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Key Personnel.Our future success depends, to a large extent, on the efforts and abilities of our
executive and senior mill operating officers. Such officers are industry professionals many of whom have operated through multiple business cycles. Our officers play an integral role in, among other
things:



The
loss of our officers or any one of them could make us less competitive in these areas which could materially adversely affect our business, financial condition, results of operations
and cash flows.We do not maintain any key person life insurance on any of our executive or senior mill operating officers.

Insurance.We have obtained insurance coverage that we believe would ordinarily be maintained by an
operator of facilities similar to our pulp and paper mills. Our insurance is subject to various limits and exclusions. Damage or destruction to our facilities could result in claims that are excluded
by, or exceed the limits of, our insurance coverage.

Legal Proceedings.Although we are not currently subject to any material legal proceedings, should
legal proceedings be initiated against us in the future, whether in connection with environmental matters or otherwise, pursuant to which we are required to pay significant amounts under an order
issued in or to settle such a proceeding, our results of operations and financial condition would be materially adversely affected.

Other Risks.Our future results could be adversely affected by a variety of other factors beyond our
control, including, but not limited to:



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Inflation

We do not believe that inflation has had a material impact on revenues or income during 2003.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates, foreign currency exchange rates, particularly the exchange rate between the U.S. dollar and
the Euro, and equity prices which may affect our results of operations and financial condition and, consequently, our fair value. We manage these risks through internal risk management policies as
well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We may in the future use derivatives to reduce or limit our exposure to
fluctuations in pulp prices. We also use derivatives to reduce our potential losses or to augment our potential gains, depending on our management's perception of future economic events and
developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in
proportion to notional amounts.

Many
of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management's
expectations of future events. However, these strategies may not be fully effective in all market environments or against all types of risks. Unexpected market developments may affect our risk
management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize are not
effective, we may incur losses.

Derivatives

Derivatives are contracts between two parties where payments between the parties are dependent upon movements in the price of an underlying asset, index or
financial rate. Examples of derivatives include swaps, options and forward rate agreements. The notional amount of the derivatives is the contract amount used as a reference point to calculate the
payments to be exchanged between the two parties and the notional amount itself is not generally exchanged by the parties.

The
principal derivatives we use are foreign exchange derivatives and interest rate derivatives.

Foreign
exchange derivatives include currency swaps which involve the exchange of fixed payments in one currency for the receipt of fixed payments in another currency. Such
cross-currency swaps involve the exchange of both interest and principal amounts in two different currencies. They also include foreign exchange forwards which are contractual obligations in which two
counterparties agree to exchange one currency for another at a specified price for settlement at a pre-determined future date. Forward contracts are effectively tailor-made
agreements that are transacted between counterparties in the over-the-counter market.

Interest
rate derivatives include interest rate forwards (forward rate agreements) which are contractual obligations to buy or sell an interest-rate-sensitive
financial instrument on a future date at a specified price. Forward contracts are effectively tailor-made agreements that are transacted between different counterparties in the
over-the-counter market. They also include interest rate swaps which are over-the-counter contracts in which two counterparties exchange interest
payments based upon rates applied to a notional amount.

54

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We
use foreign exchange derivatives to convert some of our costs (including currency swaps relating to our long-term indebtedness) from Euros to U.S. dollars. We use
interest rate derivatives
to fix the rate of interest on indebtedness under the Rosenthal Loan Facility and the Stendal Loan Facility.

All
of the derivatives we enter into are pursuant to the Rosenthal Loan Facility and the Stendal Loan Facility, each of which provide facilities for foreign exchange derivatives,
interest rate derivatives and commodities derivatives, subject to prescribed controls, including maximum notional and at-risk amounts. These credit facilities are secured by substantially
all of the assets of the Rosenthal and Stendal pulp mills, respectively, and have the benefit of certain German governmental guarantees. These credit facilities do not have any separate margin
requirements when derivatives are entered into pursuant to the terms and conditions thereof and are subsequently marked to market.

All
of the derivatives of Rosenthal and Stendal are marked to market at the end of each reporting period, and all unrealized gains and losses are recognized in earnings for a reporting
period.

Rosenthal
entered into the Currency Swaps in connection with our long-term indebtedness relating to the conversion of the Rosenthal mill to the production of kraft pulp.
These derivatives had been contracted by Rosenthal using a dedicated credit line within the Rosenthal Loan Facility. As NBSK pulp prices are quoted in U.S. dollars and the majority of our
business transactions are denominated in Euros, Rosenthal had entered into the Currency Swaps to reduce the effects of exchange rate fluctuations between the U.S. dollar and the Euro on
notional amounts under the Rosenthal Loan Facility. Under these Currency Swaps, Rosenthal effectively pays the principal and interest in U.S. dollars and at U.S. dollar borrowing rates.

In
December 2000, Rosenthal entered into U.S. dollar/Euro Currency Swaps to manage its risk exposure with respect to in aggregate approximately
€223.3 million of the principal amount under the Rosenthal Loan Facility. These swaps were subsequently settled and realized in July 2002. A currency gain was recognized
when loan repayments were made under the currency swap contracts during the current period. As a consequence of the settlement of these Currency Swaps, commencing from April 1, 2002, interest
was paid at the six-month Euribor plus bank margin rate and 4.5% fixed rate including bank margin, as applicable, in accordance with the terms of the original underlying loans.

Subsequently
in July 2002, Rosenthal re-entered the Currency Swaps for the principal amounts of €74.5 million and
€130.4 million. In December 2002, the swap relating to the principal amount of €130.4 million under the Rosenthal Loan Facility was settled. In
2003, Rosenthal re-entered the Currency Swap for the notional amount of €124.2 million, maturing on September 30, 2008. In December 2003, both Currency
Swaps were settled as a result of the substantial weakening of the U.S. dollar against the Euro in 2003.

In
addition, Rosenthal entered into the Interest Rate Contracts in the fourth quarter of 2002 and in 2003 to either fix or limit the interest rates in connection with certain of its
indebtedness. Rosenthal also has entered into various Currency Forwards to reduce or limit its exposure to currency risks and to augment its potential gains or to reduce its potential losses. These
Currency Forwards were also settled in 2003 as a result of the substantial weakening of the U.S. dollar against the Euro in 2003.

In
August 2002, Stendal entered into the Stendal Interest Rate Swap Agreements in connection with its long-term indebtedness relating to the Stendal project to fix the
interest rate under the Stendal Loan Facility at the then low level, relative to its historical trend and projected variable interest rate. These contracts were entered into under a specific credit
line under the Stendal Loan Facility and are subject to prescribed controls, including certain maximum amounts for notional and at-risk amounts. Under the Stendal Interest Rate Swap
Agreement, Stendal pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. The interest rates payable under the Stendal Loan Facility were
swapped into fixed rates based on the Eur-Euribor rate for the repayment periods of

55

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the
tranches under the Stendal Loan Facility. Stendal effectively converted the Stendal Loan Facility from a variable interest rate loan into a fixed interest rate loan, thereby reducing interest rate
uncertainty.

In
the third quarter of 2003, Stendal also entered into a currency forward contract for the notional amount of $10.0 million maturing in August 2004 to reduce or limit its
exposure to currency risks and to augment its potential gains or reduce its potential losses.

The
following table sets forth the maturity date, the notional amount and the recognized gain or loss, for derivatives that were transacted during 2002 and 2003:

|Derivative Instrument                    |  | Maturity Date  |  | Notional Amount |         | Recognized Gain (Loss) Year Ended
December 31, 2002 |   | Notional Amount |   | Recognized Gain (Loss) Year Ended
December 31, 2003 |        
|---------------------------------------- |  | -------------- |  | --------------- | ------- | --------------------------------------------------- | - | --------------- | - | --------------------------------------------------- | -------
|
|Rosenthal                                |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|Currency Forward                         |  | Settled        |  | $               | 20.0    |                                                     | € | 319             |   |                                                     |        
|Currency Forward                         |  | Settled        |  | $               | 20.0    |                                                     |   | 591             |   |                                                     |        
|Currency Forward                         |  | Settled        |  | $               | 20.0    |                                                     |   | 724             |   |                                                     |        
|Currency Forward                         |  | Settled        |  | $               | 10.0    |                                                     |   | 582             |   |                                                     |        
|Currency Forward                         |  | Settled        |  | $               | 1.0     |                                                     |   | (79             | ) |                                                     |        
|Currency Swaps                           |  | Settled        |  | €               | 223.3   |                                                     |   | 13,890          |   |                                                     |        
|Repayment of Loan under Currency Swap    |  | Settled        |  | $               | 5.2     |                                                     |   | 245             |   |                                                     |        
|Currency Swap                            |  | Settled        |  | €               | 130.4   |                                                     |   | 6,974           |   |                                                     |        
|Forward Rate Agreements(1)               |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 149.0  
|Forward Rate Agreements(2)               |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 124.8  
|Currency Swap(3)                         |  | Settled        |  | €               | 74.5    |                                                     |   | 2,486           |   | €                                                   | 74.5   
|Currency Swap(4)                         |  | Settled        |  |                 |         |                                                     |   |                 |   | €                                                   | 124.2  
|Currency Forward                         |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 20.0   
|Currency Forward                         |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 30.0   
|Forward Rate Agreement                   |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 126.9  
|Forward Rate Agreement(5)                |  | Settled        |  |                 |         |                                                     |   |                 |   | $                                                   | 200.9  
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   | 25,732          |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|
|Interest Rate Cap Agreements(6)          |  | September 2007 |  | $               | 205.9   |                                                     |   | (1,612          | ) | $                                                   | 192.6  
|Forward Rate Agreements(1)               |  | September 2003 |  | $               | 149.0   |                                                     |   | (509            | ) |                                                     |        
|Forward Rate Agreement(2)                |  | June 2003      |  | $               | 124.8   |                                                     |   | (182            | ) |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   | (2,303          | ) |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     | € | 23,429          |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|Stendal                                  |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|Stendal Interest Rate Swap Agreements(7) |  | October 2017   |  | €               | 1,108.4 |                                                     | € | (30,108         | ) | €                                                   | 1,419.3
|Stendal Currency Forward                 |  | Settled        |  |                 |         |                                                     |   |                |   | $                                                   | 10.0   
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        
|                                         |  |                |  |                 |         |                                                     | € | (30,108         | ) |                                                     |        
|                                         |  |                |  |                 |         |                                                     |   |                 |   |                                                     |        

---

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We are exposed to very modest credit-related risks in the event of non-performance by counterparties to derivative contracts. However,
we do not expect that the counterparties, which are major financial institutions, will fail to meet their obligations.

As
of December 31, 2003, we have not entered into any material financial derivatives outside of our project companies, Rosenthal and Stendal, under their existing lines of credit.
As at December 31, 2003, no derivative contract had been executed with respect to pulp prices.

Interest Rate Risk

Fluctuations in interest rates may affect the fair value of fixed interest rate financial instruments which are sensitive to such fluctuations. A decrease in
interest rates may increase the fair value of such fixed interest rate financial instrument assets and an increase in interest rates may decrease the fair value of such fixed interest rate financial
instrument liabilities, thereby increasing our fair value. An increase in interest rates may decrease the fair value of such fixed interest rate financial instrument assets and a decrease in interest
rates may increase the fair value of such fixed interest rate financial instrument liabilities, thereby decreasing our fair value. The following tables provide information about our exposure to
interest rate

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fluctuations
for the carrying amount of financial instruments sensitive to such fluctuations as at December 31, 2003 and 2002, respectively, and expected cash flows from these instruments:

As at December 31, 2003

|                             |  |   |         |  |   | Expected Future Cash Flow*
|---------------------------- |  | - | ------- |  | - | --------------------------
|
|
|
|Cash restricted              |  | € | 59,367  |  | € | 59,367                    
|Debt obligations(1)          |  |   | 210,664 |  |   | 210,664                   
|Capital lease obligations(2) |  |   | 4,046   |  |   | 4,046                     

---

As at December 31, 2002

|                             |  |   |         |  |   | Expected Future Cash Flow*
|---------------------------- |  | - | ------- |  | - | --------------------------
|
|
|
|Cash restricted              |  | € | 48,254  |  | € | 48,254                    
|Debt obligations(1)          |  |   | 224,257 |  |   | 224,257                   
|Capital lease obligations(2) |  |   | 2,087   |  |   | 2,087                     

---

Foreign Currency Exchange Rate Risk

Our reporting currency is the Euro. However, we hold financial instruments denominated in U.S. dollars, Swiss francs and, to a lesser extent, in Canadian
dollars, which are sensitive to foreign currency exchange rate fluctuations. A depreciation of these currencies against the Euro will decrease the fair value of such financial instrument assets and an
appreciation of these currencies against the Euro will increase the fair value of such financial instrument liabilities, thereby decreasing our fair value. An appreciation of these currencies against
the Euro will increase the fair value of such financial instrument assets and a depreciation of these currencies against the Euro will decrease the fair value of financial instrument liabilities,
thereby increasing our fair value. As a result of the change in our reporting currency from the U.S. dollar to the Euro, we re-calculated our financial instrument assets and
liabilities that are sensitive to foreign currency exchange rate risk to measure their risk against the Euro, and cash restricted is no longer sensitive to foreign currency exchange rate risk. The
following tables provide information about our exposure to foreign currency exchange rate fluctuations for the carrying amount of financial

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instruments
sensitive to such fluctuations as at December 31, 2003 and 2002, respectively, and expected cash flows from these instruments:

As at December 31, 2003

|                    |  |   |        |  |   | Expected Future Cash Flow*
|------------------- |  | - | ------ |  | - | --------------------------
|
|
|
|Investments(1)      |  | € | 1,649  |  | € | 1,649                     
|Debt obligations(2) |  |   | 66,449 |  |   | 66,449                    

---

As at December 31, 2002

|                    |  |   |        |  |   | Expected Future Cash Flow*
|------------------- |  | - | ------ |  | - | --------------------------
|
|
|
|Investments(1)      |  | € | 5,842  |  | € | 5,842                     
|Debt obligations(2) |  |   | 11,686 |  |   | 11,686                    

---

Equity Price Risk

Changes in trading prices of equity securities may affect the fair value of equity securities or the fair value of other securities convertible into equity
securities. An increase in trading prices will increase the fair value of equity based financial instrument assets, thereby increasing our fair value. A decrease in trading prices will decrease the
fair value of equity based financial instrument assets, thereby decreasing our fair value. The following tables provide information about our exposure to fluctuations in trading prices for the
carrying amount of equity based financial instruments sensitive to such fluctuations as at December 31, 2003 and 2002, respectively, and expected cash flows from these instruments:

As at December 31, 2003

|               |  |   |       |  |   | Expected Future Cash Flow*
|-------------- |  | - | ----- |  | - | --------------------------
|
|
|
|Investments(1) |  | € | 1,650 |  | € | 1,650                     

---

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As at December 31, 2002

|               |  |   |       |  |   | Expected Future Cash Flow*
|-------------- |  | - | ----- |  | - | --------------------------
|
|
|
|Investments(1) |  | € | 5,899 |  | € | 5,899                     

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and supplementary data required with respect to this Item 8, and as listed in Item 15 of this annual
report, are included in this annual report commencing on page 69.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

We appointed Deloitte & Touche LLP as our new independent auditors in place of Peterson Sullivan PLLC effective July 14, 2003. We also
appointed Deloitte & Touche as the auditors for our significant subsidiaries. The appointment of Deloitte & Touche was approved by the audit committee of our board of trustees and the
board of trustees. We received shareholder ratification of the appointment of Deloitte & Touche at our annual meeting held on August 22, 2003. The dismissal of Peterson Sullivan as our
independent auditors was not the result of any disagreement between us and Peterson Sullivan on any matter. Peterson Sullivan has provided an unqualified audit opinion in connection with our annual
financial statements for the periods ended December 31, 2002. For more information, see our Form 8-K/A dated August 6, 2003 filed with the SEC on August 7,
2003, and proxy statement dated as of and filed with the SEC on August 11, 2003.

ITEM 9A.    CONTROLS AND PROCEDURES

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as
of the end of the period covered by this report. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or
submit under the Exchange Act. It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its
effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals. In addition, no changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

As a Massachusetts trust, we are managed by "trustees", who have comparable duties and responsibilities as directors of corporations. Trustees are elected by
shareholders at annual meetings for three-year terms. Each issued and outstanding share of beneficial interest is entitled to one vote at such meetings. Our trustees and executive officers
are as follows:

Jimmy S.H. Lee, age 46, has been a trustee since May 1985 and President and Chief Executive Officer since 1992. Previously,
Mr. Lee served with MFC Bancorp Ltd. as a director from 1986, Chairman from 1987 and President from 1988 to December 1996, respectively.

C.S. Moon, age 56, has been a trustee since June 1994. Mr. Moon is an independent consultant. He was formerly the Executive
Director of Shin Ho Group of Korea, an international paper manufacturer headquartered in Korea until 1998. Mr. Moon joined Shin Ho Group in 1990 and previously served in managerial positions
with Moo Kim Paper Manufacturing Co., Ltd. and Sam Yung Pulp Co., Ltd.

Kenneth A. Shields, age 55, has been a trustee since August 2003. Mr. Shields was a founder of the institutional firm of
Goepel Shields & Partners Inc., where he held the position of President and Chief Executive Officer. In April of 1998, the firm merged with McDermid St. Lawrence Securities Ltd.
to become the investment firm of Goepel McDermid Inc. which was subsequently acquired, in January of 2001, by Florida-based Raymond James Financial, Inc. Mr. Shields currently
serves as a member of the board of directors of Raymond James Financial, Inc. and serves as the President, Chief Executive Officer and a member of the board of directors of the Canadian
subsidiary, Raymond James Ltd. Mr. Shields is also a director of TimberWest Forest Corp., a member of the Accounting Standards Oversight Council, and a Director of the Council for
Business and the Arts in Canada. Additionally, Mr. Shields has served as past Chairman of the Investment Dealers Association of Canada and Pacifica
Papers Inc., and is a former director of each of Slocan Forest Products Ltd. and the Investment Dealers Association of Canada.

Guy W. Adams, age 52, has been a trustee since August 2003. Mr. Adams is the managing member of GWA Advisors, LLC,
GWA Investments, LLC ("GWA") and GWA Capital Partners, LLC, where he has served since 2002. GWA Advisors, LLC is a private equity investment firm and a holding company for
Mr. Adams' private equity investments. GWA is an investment fund investing in publicly traded securities managed by GWA Capital Partners, LLC, a registered investment advisor. Prior to
2002, Mr. Adams was the President of GWA Capital, which he founded in 1996 to invest his own capital in public and private equity transactions, and a business consultant to entities seeking
refinancing or recapitalization.

William D. McCartney, age 48, has been a trustee since January 2003. Mr. McCartney has been President and a director of
Pemcorp Management Inc., a management services company, since 1990. Mr. McCartney is a member of the Institute of Chartered Accountants in Canada.

Graeme A. Witts,age 64, has been a trustee since December 2002. Mr. Witts organized Sanne Trust Company Limited, a trust
company located in the Channel Islands, in 1988 and was managing director from 1988 to 2000, when he retired. Mr. Witts is also a fellow of the Institute of Chartered Accountants of England and
Wales.

David M. Gandossi, age 46, has been Secretary, Executive Vice-President and Chief Financial Officer since August 15,
2003. Mr. Gandossi was formerly the Chief Financial Officer and Executive Vice-President of Formation Forest Products (a closely held corporation) since 2002. Mr. Gandossi
previously served as Chief Financial Officer, Vice-President, Finance and Secretary of Pacifica Papers Inc., a North American specialty pulp and paper manufacturing company
previously listed on the Toronto Stock Exchange, from December 1999 to August 2001 and Controller and Treasurer from June 1998 to December 1999. From June 1998 to
August 31, 1998, he also served as Secretary to Pacifica Papers Inc.

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From
March 1998 to June 1998, Mr. Gandossi served as Controller, Treasurer and Secretary of MB Paper Ltd. From April 1994 to March 1998,
Mr. Gandossi held the position of Controller and Treasurer with Harmac Pacific Inc., a Canadian pulp manufacturing company previously listed on the Toronto Stock Exchange.
Mr. Gandossi is a member of the Institute of Chartered Accountants in Canada.

Wolfram Ridder, age 41, was appointed a managing director of Stendal in September 2002. Mr. Ridder was the principal
assistant to our Chief Executive Officer from November 1995 until September 2002.

The
terms of Mr. Moon and Mr. Witts as trustees expire at the annual meeting of shareholders to be held in 2004. The terms of Mr. Lee and Mr. McCartney as
trustees expire at the annual meeting of shareholders to be held in 2005. The terms of Mr. Shields and Mr. Adams as trustees expire at the annual meeting of shareholders to be held in
2006.

Our
board has developed corporate governance guidelines in respect of: (i) the duties and responsibilities of the board, its committees and the officers of the Company; and
(ii) practices with respect to the holding of regular quarterly and strategic meetings of the board including separate meetings of non-management trustees. The board is also
developing additional disclosure controls and procedures in connection with periodic reports and certifications we are required to file with the SEC pursuant to the Sarbanes-Oxley Act of 2002. Our
board has established three standing committees, the Audit Committee, the Compensation Committee and the Governance and Nominating Committee.

Audit Committee

The audit committee functions pursuant to a charter adopted by the trustees. A copy of the current charter is included in Appendix "A" to our
definitive proxy statement dated and filed with the SEC on August 11, 2003. The function of the audit committee is to meet with and review the results of the audit of our financial statements
performed by the independent public accountants and to recommend the selection of independent public accountants. The members of the audit committee are Mr. Moon, Mr. McCartney and
Mr. Witts each of whom is independent under the standards of the Nasdaq National Market. Mr. Moon replaced Mr. Arnulphy on the audit committee as of August 22, 2003. The
audit committee met 5 times during 2003. Both Mr. McCartney and Mr. Witts are chartered accountants and Mr. McCartney is a "financial expert" within the meaning of such term under
the Sarbanes-Oxley Act of 2002.

Compensation Committee Interlocks and Insider Participation

Mr. Moon and Michel Arnulphy, a former trustee, served as members of the compensation committee of our board of trustees until August 2003. Neither
Mr. Moon nor Mr. Arnulphy was one of our officers or employees during this period, or has formerly been one of our officers. Effective August 2003, the compensation committee was
reorganized to be comprised of Mr. McCartney, Mr. Shields and Mr. Adams, none of whom is one of our officers or employees, or has formerly been one of our officers.

Governance and Nominating Committee

Our board has established a Governance and Nominating Committee comprised of Mr. McCartney, Mr. Shields and Mr. Witts. The purpose of the
committee is to: (i) manage the corporate governance system of the board; (ii) assist the board in fulfilling its duties to meet applicable legal and regulatory and
self-regulatory business principles and codes of best practice; (iii) assist in the creation of a corporate culture and environment of integrity and accountability; (iv) in
conjunction with the Lead Trustee, monitor the quality of the relationship between the board and management; (v) review management succession plans; (vi) recommend to the board nominees
for appointment to the board; (vii) lead the board's annual review of the Chief Executive Officer's performance; and (viii) set the board's forward meeting agenda.

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Lead Trustee

Our board appointed Mr. Shields as its Lead Trustee in September 2003. The role of the Lead Trustee is to provide leadership to the
non-management trustees on the board and to ensure that the board can operate independently of management and that trustees have an independent leadership contact. The duties of the Lead
Trustee include, among other things: (i) ensuring that the board has adequate resources to support its decision-making process and ensuring that the board is appropriately approving strategy
and supervising management's progress against that strategy; (ii) ensuring that the independent trustees have adequate opportunity to meet to discuss issues without management being present;
(iii) chairing meetings of trustees in the absence of the Chairman and Chief Executive Officer; (iv) ensuring that delegated committee functions are carried out and reported to the
board; and (v) communicating to management, as appropriate, the results of private discussions among outside trustees and acting as a liaison between the board and the Chief Executive Officer.

Code of Business Conduct and Ethics

Our board has adopted a Code of Business Conduct and Ethics that applies to our trustees and executive officers. A copy of the code is attached as
Appendix "B" to our proxy statement dated and filed on August 11, 2003 with the SEC, and a copy may be obtained without charge upon request to Investor Relations, Mercer
International Inc., 14900 Interurban Avenue South, Suite 282, Seattle WA, U.S.A. 98168 (Telephone: (206) 674-4639).

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that our officers and trustees and persons who own more than 10% of our shares file reports of ownership and
changes in ownership with the SEC and furnish us with copies of all such reports that they file. Based solely upon a review of the copies of these reports received by us, and upon written
representations by our trustees and officers regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that all of our trustees
and officers filed all required reports under Section 16(a) in a timely manner for the year ended December 31, 2003.

ITEM 11.    EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2004, which
will be filed with the SEC within 120 days of our most recently completed fiscal year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2004, which
will be filed with the SEC within 120 days of our most recently completed fiscal year.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MFC Bancorp Ltd. ("MFC") was our approximately 92% owned subsidiary until June 1996, when we spun-off approximately 83% of the issued
shares of MFC to our shareholders by way of a special dividend-in-kind. Prior to the spin-off, MFC provided and arranged for the majority of our financial
requirements.

As
part of the financing for the Stendal project, we obtained a €15 million bridge loan from Babcock & Brown Investment Management Partners LP
("Babcock & Brown") and a €30 million bridge loan arranged by a Swiss banking affiliate of MFC with variable interest rates and specified fees.

63

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Babcock &
Brown was our advisor in connection with the overall financing arrangements for the Stendal project. In October 2003, we fully repaid the bridge loans from Babcock &
Brown and MFC, which with fees and accrued interest aggregated $66.9 million.

In
addition to the bridge loan, we had other indebtedness to MFC in the amount of approximately €8.6 million at December 31, 2002, of which approximately
€6.4 million was repaid in December 2003 from the proceeds of the sale of MFC shares and the balance was fully repaid in early 2004. We previously held, directly and
indirectly, approximately 575,683 common shares of MFC, being approximately 4% of its outstanding shares. We sold 538,683 MFC shares to an affiliate of MFC in December 2003 at a price of $15.84
per share (being the 20-day weighted average trading price of the shares on the Nasdaq National Market at the time of the agreement to sell the shares) for total proceeds of
$8.5 million. The proceeds were used to repay indebtedness to MFC. We continue to own approximately 37,000 MFC shares. Jimmy S.H. Lee, our Chairman, Chief Executive Officer and a trustee is
currently a non-executive director of the Swiss banking affiliate of MFC and he and members of his family, directly and indirectly, own approximately 2% of MFC's outstanding shares, which
shares were in part acquired pursuant to the 1996 spin-off. Ian Rigg, a former trustee and our former Chief Financial Officer, became a Vice President of MFC in August 2003.
Mr. Rigg resigned as our chief financial officer in August 2003 and as a trustee in December 2003.

We
have in the course of our business entered into transactions and other arrangements with MFC and its affiliates. From time to time, our Rosenthal pulp mill sells pulp to a commodities
trading subsidiary of MFC, both for its own account and as an agent for sales to certain parts of eastern Europe. All such transactions are conducted on market terms on an arm's length basis as
provided for in the Rosenthal project loan agreements. As at December 31, 2003, we had trade receivables for pulp sales of approximately €1.4 million from MFC affiliates,
which we expect to collect in the ordinary course.

In
December 2002, we contributed our 80% interest in Landqart to a limited partnership in exchange for a 49% interest therein. The other limited partner of the limited partnership
is MFC and the general partner is wholly-owned by Cade Struktur Corporation ("CSC"). CSC is a Canadian public company in which we own an approximate 26% interest and MFC owns 25% of its issued and
outstanding shares. Mr. Lee, our Chief Executive Officer, previously served as an officer and director of CSC from July 2001 to December 2002. During such time, Mr. Lee
received no remuneration of any sort from CSC and did not have any ownership interest therein. At the time of the Landqart reorganization, Mr. Lee was neither an officer nor a director of CSC.
MFC currently arranges receivables financing for Landqart. In addition, from time to time, MFC assists Landqart in obtaining supplier credit for its capital requirements by arranging for credit
enhancement of Landqart's obligations. Such arrangements are negotiated between Landqart and MFC. Mr. Lee is a director of Landqart.

In
2003, MFC acquired and increased its stake to acquire an indirect majority interest in AIG, which is a 7% shareholder of Stendal. As at December 31, 2003, we had an
approximately €1.5 million investment in shares and loans of a venture company, which is an affiliate of both us and MFC. This is a legacy investment which we intend to divest
in 2004.

Our
board has developed corporate governance guidelines which, among other things, provides that our audit committee or other special committee of trustees review and approve
transactions with related and affiliated parties, including those with MFC.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 is incorporated by reference from the proxy statement relating to our annual meeting to be held in 2004, which
will be filed with the SEC within 120 days of our most recently completed fiscal year.

64

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|       |  |                                                            |  | Page
|------ |  | ---------------------------------------------------------- |  | ----
|(a)(1) |  | Financial Statements                                       |  |     
|       |  | Independent Auditors' Report                               |  | 69  
|       |  | Consolidated Balance Sheets                                |  | 71  
|       |  | Consolidated Statements of Operations                      |  | 72  
|       |  | Consolidated Statements of Comprehensive Income            |  | 73  
|       |  | Consolidated Statements of Changes in Shareholders' Equity |  | 74  
|       |  | Consolidated Statements of Cash Flows                      |  | 75  
|       |  | Notes to the Consolidated Financial Statements             |  | 76  

65

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|(3)List of Exhibits
|-------------------
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   
|                   

66

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| |  | 10.12  |  |  |  |  | Shareholders' Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen
AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated September 10, 2002.                                                                                                                                                                     
| |  | ------ |  |  |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10.13* |  |  |  |  | Shareholders' Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie- Lösungen GmbH and FAHR Beteiligungen AG.                                                                                                                                                                                                                                                                                                                                                 
| |  | 10.14  |  |  |  |  | Loan Agreement dated August 26, 2002 among Babcock & Brown Investment Management Partners LP, Babcock & Brown Investment Management Partners LP et. al. and Mercer International Inc.
Incorporated by reference from Form 8-K dated September 10, 2002.                                                                                                                                                                                                                                                         
| |  | 10.15  |  |  |  |  | Loan Agreement dated August 26, 2002 among MFC Merchant Bank S.A., MFC Merchant Bank S.A. et. al. and Mercer International Inc. Incorporated by reference from Form 8-K dated September 10,
2002.                                                                                                                                                                                                                                                                                                               
| |  | 10.16* |  |  |  |  | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain
non-public information has been omitted from the appendices to Exhibit 10.16 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the
request for confidential treatment in January 2004.
| |  | 10.17* |  |  |  |  | Purchase and Sale Agreement dated December 30, 2002 between Equitable Industries Limited Partnership and Mercer International Inc. relating to the sale of Landqart AG.                                                                                                                                                                                                                                                                                                                                         
| |  | 10.18* |  |  |  |  | Form of Trustee's Indemnity Agreement between Mercer International Inc. and its Trustees.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | 10.19* |  |  |  |  | English Translation of Agreement between Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d. Saale and Bayerische Hypo-und Vereinsbank AG dated May 27, 2002.                                                                                                                                                                                                                                                                                                                                 
| |  | 10.20  |  |  |  |  | Purchase Agreement dated as of October 6, 2003 between Mercer International Inc. and RBC Dain Rauscher Inc. Incorporated by reference from Form 10-Q for the period ended September 30,
2003.                                                                                                                                                                                                                                                                                                                   
| |  | 10.21  |  |  |  |  | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003.                                                                                                                                                                                                                                                                                                                                    
| |  | 10.22  |  |  |  |  | Settlement Agreement dated as of August 5, 2003 among Mercer International Inc., Greenlight Capital, L.L.C. and Greenlight Capital, Inc. Incorporated by reference from Form 8-K dated August 6,
2003.                                                                                                                                                                                                                                                                                                          
| |  | 10.23  |  |  |  |  | English translation of Refinancing Agreement dated December 12, 2003 between European Investment Bank and Zellstoff Stendal GmbH.                                                                                                                                                                                                                                                                                                                                                                               
| |  | 16     |  |  |  |  | Letter regarding change in certifying accountant. Incorporated by reference from Form 8-K/A dated August 6, 2003.                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 21     |  |  |  |  | List of Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 23.1   |  |  |  |  | Independent Auditors' Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 23.2   |  |  |  |  | Independent Auditors' Consent of Peterson Sullivan PLLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 31.1   |  |  |  |  | Section 302 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 31.2   |  |  |  |  | Section 302 Certificate of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 32.1** |  |  |  |  | Section 906 Certificate of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |        |  |  |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

67

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| |  | 32.2** |  |  |  |  | Section 906 Certificate of Chief Financial Officer.
| |  | ------ |  |  |  |  | ---------------------------------------------------

---

*    Filed in Form 10-K for prior years.

**    In
accordance with Release 33-8212 of the Commission, these Certifications: (i) are "furnished" to the Commission and are not "filed" for the purposes
of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company's registration statements
filed under the Securities Act of 1933, as amended for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

|(b) |  | Reports on Form 8-K                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|    |  | The Registrant filed the following reports on Form 8-K with respect to the indicated items during the fourth quarter of the fiscal year:
|    |  | Form 8-K dated October 6, 2003
          Item 5. Other Events and Regulation FD Disclosure
          Item 7. Exhibits                   
|    |  | Form 8-K dated October 10, 2003
          Item 5. Other Events and Regulation FD Disclosure
          Item 7. Exhibits                  
|    |  | Form 8-K dated October 15, 2003
          Item 5. Other Events and Regulation FD Disclosure
          Item 7. Exhibits                  
|    |  | Form 8-K dated November 14, 2003
          Item 7. Exhibits
          Item 12. Results of Operations and Financial Condition            
|    |  | Form 8-K dated December 16, 2003
          Item 9. Regulation FD Disclosure
          Item 7. Exhibits                                  
|    |  | Form 8-K dated December 23, 2003
          Item 5. Other Events and Regulation FD Disclosure
          Item 7. Exhibits                 

68

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INDEPENDENT AUDITORS' REPORT

To the Board of Trustees and Shareholders of
Mercer International Inc.

We
have audited the accompanying consolidated balance sheet of Mercer International Inc. and subsidiaries (the "Company") as of December 31, 2003, and the related
consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2003, and the
consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.



Vancouver,
British Columbia
February 26, 2004

69

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INDEPENDENT AUDITORS' REPORT

To the Shareholders
Mercer International Inc.

We
have audited the accompanying consolidated balance sheet of Mercer International Inc. and Subsidiaries as of December 31, 2002, and the related consolidated statements
of operations, comprehensive income, changes in shareholders' equity, and cash flows for the years ended December 31, 2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mercer International Inc. and
Subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting
principles generally accepted in the United States of America.



January 31,
2003
Seattle, Washington

70

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MERCER INTERNATIONAL INC.        CONSOLIDATED BALANCE SHEETS        December 31, 2003 and 2002  (In Thousands of Euros)

|                                                                                                                                                                  |                                                                      | 2003 |                           | 2002    |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ---- | ------------------------- | ------- | -
|ASSETS                                                                                                                                                            |                                                                      |      |                           |         |  
|Current Assets                                                                                                                                                    |                                                                      |      |                           |         |  
|                                                                                                                                                                  | Cash and cash equivalents                                            |      | €                         | 51,993  |  
|                                                                                                                                                                  | Cash restricted (Note 1)                                             |      |                           | 15,187  |  
|                                                                                                                                                                  | Investments (Note 2)                                                 |      |                           | 6       |  
|                                                                                                                                                                  | Receivables (Note 3)                                                 |      |                           | 32,285  |  
|                                                                                                                                                                  | Cumulative derivative gains                                          |      |                           | 743     |  
|                                                                                                                                                                  | Inventories (Note 4)                                                 |      |                           | 23,909  |  
|                                                                                                                                                                  | Prepaid expenses                                                     |      |                           | 4,278   |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|Total current assets                                                                                                                                              |                                                                      |      | 128,401                   |         |  
|Long-Term Assets                                                                                                                                                  |                                                                      |      |                           |         |  
|                                                                                                                                                                  | Cash restricted (Note 1)                                             |      |                           | 44,180  |  
|                                                                                                                                                                  | Property, plant and equipment (Note 5)                               |      |                           | 745,178 |  
|                                                                                                                                                                  | Investments (Note 2)                                                 |      |                           | 1,644   |  
|                                                                                                                                                                  | Equity method investments (Note 2)                                   |      |                           | 2,309   |  
|                                                                                                                                                                  | Deferred note issuance costs                                         |      |                           | 4,213   |  
|                                                                                                                                                                  | Deferred income tax (Note 10)                                        |      |                           | 9,980   |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|                                                                                                                                                                  |                                                                      |      | 807,504                   |         |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|Total assets                                                                                                                                                      |                                                                      | €    | 935,905                   |         | €
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|LIABILITIES                                                                                                                                                       |                                                                      |      |                           |         |  
|Current Liabilities                                                                                                                                               |                                                                      |      |                           |         |  
|                                                                                                                                                                  | Accounts payable and accrued expenses (Note 6)                       |      | €                         | 37,414  |  
|                                                                                                                                                                  | Construction in progress costs payable                               |      |                           | 42,756  |  
|                                                                                                                                                                  | Note payable (Note 7)                                                |      |                           | 1,377   |  
|                                                                                                                                                                  | Note payable, construction in progress (Note 7)                      |      |                           |        |  
|                                                                                                                                                                  | Debt, construction in progress (Note 8)                              |      |                           | 80,000  |  
|                                                                                                                                                                  | Debt, current portion (Note 9)                                       |      |                           | 15,801  |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|                                                                                                                                                                  |                                                                      |      | Total current liabilities |         |  
|Long-Term Liabilities                                                                                                                                             |                                                                      |      |                           |         |  
|                                                                                                                                                                  | Debt, construction in progress (Note 9)                              |      |                           | 324,238 |  
|                                                                                                                                                                  | Debt, less current portion (Note 9)                                  |      |                           | 255,901 |  
|                                                                                                                                                                  | Derivative financial instruments, construction in progress (Note 15) |      |                           | 43,151  |  
|                                                                                                                                                                  | Capital leases and other                                             |      |                           | 2,412   |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|                                                                                                                                                                  |                                                                      |      | 625,702                   |         |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|Total liabilities                                                                                                                                                 |                                                                      |      | 803,050                   |         |  
|Minority Interest                                                                                                                                                 |                                                                      |      |                          |         |  
|Commitments and Contingencies (Note 17)                                                                                                                           |                                                                      |      |                           |         |  
|SHAREHOLDERS' EQUITY                                                                                                                                              |                                                                      |      |                           |         |  
|Preferred shares, no par value; 50,000,000 authorized and issuable in series                                                                                      |                                                                      |      |                           |         |  
|                                                                                                                                                                  | Series A, 500,000 authorized, none issued and outstanding            |      |                           |        |  
|                                                                                                                                                                  | Series B, 3,500,000 authorized, none issued and outstanding          |      |                           |        |  
|Shares of beneficial interest, U.S.$1 par value; unlimited authorized; 17,099,899 issued and outstanding at December 31, 2003 and 16,874,899 at December 31, 2002 |                                                                      |      | 78,139                    |         |  
|Additional paid-in capital, stock options                                                                                                                         |                                                                      |      | 223                       |         |  
|Retained earnings                                                                                                                                                 |                                                                      |      | 49,196                    |         |  
|Accumulated other comprehensive income (loss)                                                                                                                     |                                                                      |      | 5,297                     |         |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|Total shareholders' equity                                                                                                                                        |                                                                      |      | 132,855                   |         |  
|                                                                                                                                                                  |                                                                      |      |                           |         |  
|Total liabilities and shareholders' equity                                                                                                                        |                                                                      | €    | 935,905                   |         | €
|                                                                                                                                                                  |                                                                      |      |                           |         |  

The accompanying notes are an integral part of these financial statements.

71

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MERCER INTERNATIONAL INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        For the Years Ended December 31, 2003, 2002 and 2001  (In Thousands of Euros, Except Per Share Data)

|                                          |                                             | 2003                                                |                                                | 2002    |         | 2001    |        
|----------------------------------------- | ------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | ------- | ------- | ------- | -------
|Revenues                                  |                                             |                                                     |                                                |         |         |         |        
|                                          | Sales of pulp and paper                     |                                                     | €                                              | 182,456 |         | €       | 227,883
|                                          | Transportation                              |                                                     |                                                | 3,607   |         |         | 4,953  
|                                          | Other                                       |                                                     |                                                | 8,493   |         |         | 6,296  
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | 194,556                                        |         |         | 239,132 |        
|Cost of sales                             |                                             |                                                     |                                                |         |         |         |        
|                                          | Pulp and paper                              |                                                     |                                                | 176,655 |         |         | 208,454
|                                          | Transportation                              |                                                     |                                                | 3,035   |         |         | 5,009  
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | Gross profit                                   |         |         | 14,866  |        
|General and administrative                |                                             |                                                     | 19,323                                         |         |         | 24,979  |        
|Settlement expenses                       |                                             |                                                     | 1,041                                          |         |         |        |        
|Flooding grants, less losses and expenses |                                             |                                                     | (957                                           | )       |         | 1,835   |        
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | (Loss) income from operations                  |         |         | (4,541  | )      
|Other income (expense)                    |                                             |                                                     |                                                |         |         |         |        
|                                          | Interest expense                            |                                                     |                                                | (11,523 | )       |         | (13,753
|                                          | Investment income                           |                                                     |                                                | 1,653   |         |         | 436    
|                                          | Derivative financial instruments            |                                                     |                                                |         |         |         |        
|                                          |                                             | Unrealized loss, construction in progress financing |                                                |         | (13,042 | )       |        
|                                          |                                             | Realized gain, construction in progress financing   |                                                |         | 743     |         |        
|                                          |                                             | Net gains (losses), other                           |                                                |         | 28,467  |         |        
|                                          | Impairment of equity method investments     |                                                     |                                                | (2,255  | )       |         |       
|                                          | Impairment of available-for-sale securities |                                                     |                                                | (5,570  | )       |         |       
|                                          | Other                                       |                                                     |                                                |        |         |         | 3,590  
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | Total other expense                            |         |         | (1,527  | )      
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | Loss before income taxes and minority interest |         |         | (6,068  | )      
|Income tax (provision) benefit (Note 10)  |                                             |                                                     | (3,172                                         | )       |         | 264     |        
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | Loss before minority interest                  |         |         | (9,240  | )      
|Minority interest                         |                                             |                                                     | 5,647                                          |         |         | 10,965  |        
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          |                                             |                                                     | Net loss                                       |         | €       | (3,593  | )      
|                                          |                                             |                                                     |                                                |         |         |         |        
|Loss per share (Note 13)                  |                                             |                                                     |                                                |         |         |         |        
|                                          | Basic                                       |                                                     | €                                              | (0.21   | )       | €       | (0.38  
|                                          |                                             |                                                     |                                                |         |         |         |        
|                                          | Diluted                                     |                                                     | €                                              | (0.21   | )       | €       | (0.38  
|                                          |                                             |                                                     |                                                |         |         |         |        

The
accompanying notes are an integral part of these financial statements.

72

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MERCER INTERNATIONAL INC.        CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)        For the Years Ended December 31, 2003, 2002 and 2001  (In Thousands of Euros)

|                                  |                                         | 2003                                                                  |        | 2002  |       | 2001   |      
|--------------------------------- | --------------------------------------- | --------------------------------------------------------------------- | ------ | ----- | ----- | ------ | -----
|Net loss                          |                                         | €                                                                     | (3,593 | )     | €     | (6,322 | )    
|Other comprehensive income (loss) |                                         |                                                                       |        |       |       |        |      
|                                  | Foreign currency translation adjustment |                                                                       |        | 2,501 |       |        | 2,186
|                                  | Unrealized gains (losses) on securities |                                                                       |        |       |       |        |      
|                                  |                                         | Unrealized holding gains (losses) arising during the period           |        |       | (201  | )      |      
|                                  |                                         | Reclassification adjustment for losses included in net loss           |        |       | 2,293 |        |      
|                                  |                                         | Reclassification adjustment for other than temporary decline in value |        |       | 5,519 |        |      
|                                  |                                         |                                                                       |        |       |       |        |      
|                                  |                                         |                                                                       | 7,611  |       |       | (2,781 | )    
|                                  |                                         |                                                                       |        |       |       |        |      
|Other comprehensive income (loss) |                                         |                                                                       | 10,112 |       |       | (595   | )    
|                                  |                                         |                                                                       |        |       |       |        |      
|Comprehensive income (loss)       |                                         | €                                                                     | 6,519  |       | €     | (6,917 | )    
|                                  |                                         |                                                                       |        |       |       |        |      

The
accompanying notes are an integral part of these financial statements.

73

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MERCER INTERNATIONAL INC.        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        For the Years Ended December 31, 2003, 2002 and 2001  (In Thousands of Euros)

|                                           |  | Shares of Beneficial Interest |   |   |        |   |   | Accumulated Other Comprehensive Income (Loss) |   |   |     
|------------------------------------------ |  | ----------------------------- | - | - | ------ | - | - | --------------------------------------------- | - | - | ----
|
|Balance at December 31, 2000               |  | 16,794,899                    |   | € | 12,781 |   | € | 63,941                                        |   | € |    
|Net loss                                   |  |                              |   |   |       |   |   |                                              |   |   |    
|Other comprehensive income (loss)          |  |                              |   |   |       |   |   |                                              |   |   |    
|                                           |  |                               |   |   |        |   |   |                                               |   |   |     
|Balance at December 31, 2001               |  | 16,794,899                    |   |   | 12,781 |   |   | 63,941                                        |   |   |    
|Shares issued for cash                     |  | 200,000                       |   |   | 191    |   |   | 695                                           |   |   |    
|Repurchase of shares                       |  | (120,000                      | ) |   | (121   | ) |   | (492                                          | ) |   |    
|Net loss                                   |  |                              |   |   |       |   |   |                                              |   |   |    
|Other comprehensive income (loss)          |  |                              |   |   |       |   |   |                                              |   |   |    
|                                           |  |                               |   |   |        |   |   |                                               |   |   |     
|Balance at December 31, 2002               |  | 16,874,899                    |   |   | 12,851 |   |   | 64,144                                        |   |   |    
|Shares issued on exercise of stock options |  | 225,000                       |   |   | 202    |   |   | 942                                           |   |   | (231
|Granting of stock options                  |  |                              |   |   |       |   |   |                                              |   |   | 454 
|Net loss                                   |  |                              |   |   |       |   |   |                                              |   |   |    
|Other comprehensive income                 |  |                              |   |   |       |   |   |                                              |   |   |    
|                                           |  |                               |   |   |        |   |   |                                               |   |   |     
|Balance at December 31, 2003               |  | 17,099,899                    |   | € | 13,053 |   | € | 65,086                                        |   | € | 223 
|                                           |  |                               |   |   |        |   |   |                                               |   |   |     

The accompanying notes are an integral part of these financial statements.

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MERCER INTERNATIONAL INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Years Ended December 31, 2003, 2002 and 2001        (In Thousands of Euros)

|                                                             |                                                                           | 2003                                                                    |                                            | 2002                                         |        | 2001   |         
|------------------------------------------------------------ | ------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------ | -------------------------------------------- | ------ | ------ | --------
|Cash Flows from Operating Activities                         |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             | Net loss                                                                  |                                                                         | €                                          | (3,593                                       | )      | €      | (6,322  
|                                                             | Adjustments to reconcile net loss to cash flows from operating activities |                                                                         |                                            |                                              |        |        |         
|                                                             |                                                                           | Loss on derivative financial instruments, construction in progress, net |                                            |                                              | 12,299 |        |         
|                                                             |                                                                           | Depreciation and amortization                                           |                                            |                                              | 24,105 |        |         
|                                                             |                                                                           | Impairment of investments                                               |                                            |                                              | 7,825  |        |         
|                                                             |                                                                           | Minority interest                                                       |                                            |                                              | (5,647 | )      |         
|                                                             |                                                                           | Loss from equity investee                                               |                                            |                                              | 1,676  |        |         
|                                                             |                                                                           | Stock compensation expense                                              |                                            |                                              | 454    |        |         
|                                                             |                                                                           | Changes in current assets and liabilities                               |                                            |                                              |        |        |         
|                                                             |                                                                           |                                                                         | Investments                                |                                              |        | 298    |         
|                                                             |                                                                           |                                                                         | Inventories                                |                                              |        | (7,534 | )       
|                                                             |                                                                           |                                                                         | Receivables                                |                                              |        | (4,699 | )       
|                                                             |                                                                           |                                                                         | Cumulative unrealized gains on derivatives |                                              |        | 3,792  |         
|                                                             |                                                                           |                                                                         | Accounts payable and accrued expenses      |                                              |        | 1,082  |         
|                                                             |                                                                           |                                                                         | Other                                      |                                              |        | 1,382  |         
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             |                                                                           |                                                                         |                                            | Net cash from operating activities           |        |        | 31,440  
|Cash Flows used in Investing Activities                      |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             | Purchase of property, plant and equipment, net of investment grants       |                                                                         |                                            | (325,257                                     | )      |        | (199,171
|                                                             | Sale of properties                                                        |                                                                         |                                            | 48                                           |        |        | 4,394   
|                                                             | Purchases of available-for-sale securities                                |                                                                         |                                            |                                             |        |        | (612    
|                                                             | Sale of available-for-sale securities                                     |                                                                         |                                            | 6,408                                        |        |        | 948     
|                                                             | Purchase of a subsidiary, net of cash acquired                            |                                                                         |                                            |                                             |        |        |        
|                                                             | Disposal of a subsidiary                                                  |                                                                         |                                            |                                             |        |        | (1,156  
|                                                             | Other                                                                     |                                                                         |                                            | 342                                          |        |        | (56     
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             |                                                                           |                                                                         |                                            | Net cash used in investing activities        |        |        | (318,459
|Cash Flows from (used in) Financing Activities               |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             | Cash restricted                                                           |                                                                         |                                            | (11,113                                      | )      |        | (14,866 
|                                                             | Increase in construction in progress costs payable                        |                                                                         |                                            | 19,347                                       |        |        | 24,885  
|                                                             | Decrease in operating pulp mill renovation costs payable                  |                                                                         |                                            |                                             |        |        |        
|                                                             | Proceeds from borrowings of notes payable and debt                        |                                                                         |                                            | 367,588                                      |        |        | 183,017 
|                                                             | Repayment of notes payable and debt                                       |                                                                         |                                            | (68,581                                      | )      |        | (23,725 
|                                                             | Repayment of capital lease obligations                                    |                                                                         |                                            | (1,011                                       | )      |        | (1,097  
|                                                             | Issuance of shares of beneficial interest                                 |                                                                         |                                            | 913                                          |        |        | 273     
|                                                             | Equity and loans from minority shareholders                               |                                                                         |                                            |                                             |        |        | 6,259   
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         
|                                                             |                                                                           |                                                                         |                                            | Net cash from (used in) financing activities |        |        | 307,143 
|Effect of exchange rate changes on cash and cash equivalents |                                                                           |                                                                         | 1,608                                      |                                              |        | (1,019 | )       
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         
|Net increase (decrease) in cash and cash equivalents         |                                                                           |                                                                         | 21,732                                     |                                              |        | 18,520 |         
|Cash and Cash Equivalents, beginning of year                 |                                                                           |                                                                         | 30,261                                     |                                              |        | 11,741 |         
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         
|Cash and Cash Equivalents, end of year                       |                                                                           | €                                                                       | 51,993                                     |                                              | €      | 30,261 |         
|                                                             |                                                                           |                                                                         |                                            |                                              |        |        |         

The accompanying notes are an integral part of these financial statements.

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MERCER INTERNATIONAL INC.        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    The Company and Summary of Significant Accounting Policies

Mercer International Inc. ("the Company") is a business trust organized under the laws of the State of Washington, U.S. Under Washington law,
shareholders of a business trust have the same limited liability as shareholders of a corporation. The Company produces and markets pulp and paper products. The amounts in the notes are rounded to the
nearest thousand of Euros except for the share and per share amounts.

Basis of Presentation

The
consolidated financial statements include the accounts of the Company and its subsidiaries or investees in which the Company exercises control. Significant intercompany accounts and
transactions have been eliminated.

Cash and Cash Equivalents

Cash
and cash equivalents include highly liquid investments with original maturities of three months or less. The Company maintains cash balances in foreign financial institutions in
excess of insured limits.

At
December 31, 2003, €15,187 in cash was restricted by a lender to pay construction in progress costs payable. In addition, the Company had
€44,180 of long-term restricted cash representing debt service reserve accounts required by long-term debt agreements.

Investments

Trading
securities, consisting of marketable securities, are classified as current investments and are reported at fair values with realized gains or losses and unrealized holding gains
or losses included in the results of operations.

The
Company has certain equity investments in publicly traded companies in which it has less than 20% of the voting interest and in which it does not exercise significant influence.
These securities are classified as available-for-sale securities and reported at fair values; based upon quoted market prices, with the unrealized gains or losses included as a
separate component of shareholders' equity, until realized. If a loss in value in available-for-sale securities is considered to be other than temporary, the loss is recognized
in the determination of net income. Available-for-sale securities have been classified as long-term investments.

The
Company has certain equity investments in non-publicly traded companies in which it has less than 20% of the voting interest and in which it does not exercise significant
influence. The Company monitors these securities for impairment and makes appropriate reductions in carrying values when necessary. These investments have been classified as long-term
investments.

The
cost of securities sold is based on the specific identification method to determine realized gains or losses.

Investments
in entities where the Company owns between 20% and 50% of the voting interest, and in which the Company exercises significant influence are accounted for using the equity
method. Under this method, the investment is initially recorded at cost then reduced by dividends and increased or decreased by the Company's proportionate share of the investee's net earnings or
loss. The amount of earnings or losses from equity investees is included in other investment income.

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Inventories

Inventories
of pulp, paper and logs are valued at the lower of average cost and net realizable value. Other materials and supplies are valued at the lower of average cost and replacement
cost.

Property, plant and equipment

Property,
plant and equipment is stated at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and
is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production equipment over 8 to 20 years. Repairs and maintenance are charged to
expense as incurred. Expenditures for new facilities and those expenditures that substantially increase the useful lives of existing property, plant and equipment are capitalized, as well as interest
costs associated with major capital projects until ready for their intended use. Construction in progress includes costs related to building the Stendal pulp mill in Germany and capitalized interest
(Note 5).

The
Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets
held for use is based on the fair value of the asset.

The
Company provides for asset retirement obligations when there are legislated or contractual bases for those obligations and fair value can be reasonably estimated. Due to the
long-term nature of the underlying assets and discount rates, such amounts cannot currently be reliably estimated. Obligations, if any, are capitalized and amortized over the remaining
useful life of the related operations.

Government Grants

The
Company records investment grants from federal and state governments when they are received. Grants related to assets are government grants whose primary condition is that the
company qualifying for them should purchase, construct or otherwise acquire long-term assets. Secondary conditions may also be attached restricting the type or location of the assets
and/or other conditions must be met. Grants related to assets, when received, are deducted from the asset costs. Grants related to income are government grants which are either unconditional or
related to the Company's normal business operations, and are reported as income when received.

Deferred Note Issuance Costs

Note
issuance costs are deferred and amortized as expenses over the term of the related debt instrument.

Foreign Operations and Currency Translation

The
Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in Euros, at the rate of exchange at the balance sheet date. Revenues and expenses
are translated at the average rate of exchange throughout the year. Gains or losses from these translations are reported as a separate component of other comprehensive income (loss), until all or a
part of the investment in the

77

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subsidiaries
is sold or liquidated. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations.

Transaction
gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in "General and
administrative expenses" in the statement of operations, which amounted to €(1,664), €(3,026) and €3,361 for the years ended December 31, 2003,
2002 and 2001, respectively.

Effective
January 1, 2002, the Company changed its reporting currency from the U.S. dollar to the Euro (except for currency amounts as contractually required). The reason
for this change was because a significant majority of the Company's assets and operations are located in Germany where the currency is the Euro. The Company's functional currency and reporting
currency are now the same. Prior years' financial statements had been reported in U.S. dollars, but have been restated into Euros using the guidance of Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation." Therefore, the financial statements for prior years depict the same trends as the previous financial statements presented in
U.S. dollars.

Revenue and Related Cost Recognition

The
Company recognizes revenue from product sales, transportation and other when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, title of
ownership and risk of loss have passed to the customer and collectibility is reasonably assured. Sales are reported net of discounts and allowances. Amounts charged to customers for shipping and
handling are recognized as revenue. Shipping and handling costs incurred by the Company are included in cost of sales.

Environmental Conservation

Liabilities
for environmental conservation are recorded when it is probable that obligations have been incurred and their fair value can be reasonably estimated. Any potential recoveries
of such liabilities are recorded when there is an agreement with the reimbursing entity and recovery is assessed as likely to occur.

Stock-Based Employee Compensation

The
Company has a stock-based employee compensation plan, which is described more fully in Note 11. The Company accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and related interpretations. In 2002, no stock-based employee compensation cost is reflected in
net loss, as all options granted under the plan had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. In 2003, the Company granted stock
options to its Chief Financial Officer to acquire up to 100,000 shares of beneficial interest of the Company. At the date of the granting, the market value of the options was greater than the exercise
price. Accordingly, the intrinsic value of the stock options was recognized as a stock-based compensation expense in accordance with APB 25 and included in the consolidated statements of
operations. The following table illustrates the effect on net loss and loss per

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share
if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.

|         |                                                                                                                                                  | 2003 |   | 2002   |   | 2001 |       
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ---- | - | ------ | - | ---- | ------
|Net Loss |                                                                                                                                                  |      |   |        |   |      |       
|         | As reported                                                                                                                                      |      | € | (3,593 | ) | €    | (6,322
|         | Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of any related tax effects |      |   | (29    | ) |      | (9    
|         | Add: Reversal of stock-based compensation expense recognized under APB Opinion No. 25                                                            |      |   | 14     |   |      |      
|         |                                                                                                                                                  |      |   |        |   |      |       
|         | Pro forma                                                                                                                                        |      | € | (3,608 | ) | €    | (6,331
|         |                                                                                                                                                  |      |   |        |   |      |       

|                       |             | 2003 |   | 2002  |   | 2001 |      
|---------------------- | ----------- | ---- | - | ----- | - | ---- | -----
|Basic Loss Per Share   |             |      |   |       |   |      |      
|                       | As reported |      | € | (0.21 | ) | €    | (0.38
|                       | Pro forma   |      | € | (0.21 | ) | €    | (0.38
|Diluted Loss Per Share |             |      |   |       |   |      |      
|                       | As reported |      | € | (0.21 | ) | €    | (0.38
|                       | Pro forma   |      | € | (0.21 | ) | €    | (0.38

The
fair value of each option granted is estimated on the grant date using the Black Scholes Model. The assumptions used in calculating fair value are as follows:

|                             |  | 2003    |  | 2002    |  | 2001
|---------------------------- |  | ------- |  | ------- |  | ----
|Risk-free interest rate      |  | 2.0%    |  | 8.03%   |  |    
|Expected life of the options |  | 3 years |  | 3 years |  |    
|Expected volatility          |  | 32.4%   |  | 34.7%   |  |    
|Expected dividend yield      |  | 0.0%    |  | 0.0%    |  |    

No
stock options were granted in fiscal 2001 (Note 12).

Taxes on Income

Income
taxes are reported under SFAS No. 109, "Accounting for Income Taxes", and, accordingly, deferred income taxes are recognized using the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Valuation allowances are provided if, after considering available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.

Derivative Financial Instruments

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The
Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective January 1, 2001. All
derivative financial instruments are marked-to-market and any resulting unrealized gains and losses on such derivative contracts are recorded in cumulative derivative gains,
accounts payable and accrued expenses and derivative financial instruments, construction in progress, on the Company's consolidated balance sheets.

The
Company enters into derivative financial instruments, including foreign currency forward contracts and swaps and interest rate swaps, caps and forward rate agreements, to limit
exposures to changes in foreign currency exchange rates and interest rates. These derivative instruments are not designated as hedging instruments under SFAS No. 133 and, accordingly,
any change in their fair value is recognized in other income (expense) in the consolidated statements of operations.

Loss Per Share

Basic
loss per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted loss per share
takes into consideration common shares outstanding (computed under basic earnings per share) plus potentially dilutive common shares. Dilutive common shares consist of stock options, warrants and
convertible notes.

Reclassifications

Certain
prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

Estimates

The
preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for doubtful accounts,
depreciation and amortization, asset impairments, derivative financial instruments, environmental conservation, income taxes, and contingencies. Actual results could differ from these estimates.

New Accounting Standards

In
June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which
addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the
normal operation of long-lived assets, except for certain obligations of leases. SFAS 143 requires entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is initially recorded an entity capitalizes the cost by increasing the carrying amount of the related long-lived
assets. Over time the liability is accreted to its present value each period, and the capitalized cost is amortized over the useful life of the related asset. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS 143 is effective for financial statements issued for fiscal years beginning after
June 15, 2002 with earlier application encouraged. Adoption of this standard did not have a material effect on the Company's results of operations, financial position or disclosures.

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In
November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee.
FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The disclosure requirements of
FIN 45 were effective for financial statements for period ending after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 in fiscal 2002. The initial
recognition and measurement provisions of FIN 45 are effective for any guarantees that are issued or modified after December 31, 2002. The Company adopted the recognition and measurement
requirements of FIN 45 in fiscal 2003, which had no material impact on its results of operations, financial position or liquidity.

In
January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003 however, earlier
adoption is permitted. The Company adopted FIN 46 on July 1, 2003. Adoption of this standard did not have a material effect on the Company's results of operations, financial position or
disclosures.

In
April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued. In general, this statement amends and
clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The Company adopted
SFAS No. 149 on July 1, 2003. Adoption of this standard did not have a material impact on the Company's financial position or disclosures.

In
May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", was issued. In general this statement
requires that those instruments be classified as liabilities rather than equity on the balance sheet. The Company adopted this standard on July 1, 2003. Adoption of this standard did not have a
material impact on the Company's financial position or disclosures.

Note 2.    Investments

Investments  Current

As
of December 31, 2003, an investment in common shares of one company represents 100% of the total value of trading securities. As of December 31, 2002, an investment in
common shares of one company represents 95% of the total value of trading securities. The change in net unrealized holding gains (losses) on trading securities which has been included in earnings was
€184, €(501) and €1,383 during 2003, 2002 and 2001, respectively.

Investments  Non-Current

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Equity
securities of two companies represented 96% and 98% of the total available-for-sale securities at December 31, 2003 and 2002, respectively.

The
proceeds from sales of these securities amounted to €6,408, €948 and none which resulted in realized gains of €682,
€66 and none during 2003, 2002 and 2001, respectively. The fair value of available-for-sale securities included on the balance sheets at December 31,
2003, 2002 and 2001, was €1,021, €4,727 and €8,202, respectively. The cost of these securities was €1,716, €13,033 and
€13,727 which resulted in unrealized losses being recorded in comprehensive income of €(695), €(8,306) and €(5,525) at
December 31, 2003, 2002 and 2001, respectively. Also, included in long-term investments were equity securities stated at cost of €623 and €865 at
December 31, 2003 and 2002, respectively, which did not have a readily determinable fair value. However, management believes that the estimated market value is not less than the carrying value.

Equity method investments

At December 31, 2002, the Company exchanged its 80% interest in Landqart AG ("Landqart") for a 49% interest in Equitable Industries Limited Partnership
("Equitable"), resulting in a 39% indirect interest in Landqart. The Company recorded this non-monetary exchange based on the carrying value of Landqart, resulting in no gain or loss being
recorded.

In
the year ended December 31, 2003, in addition to recognition of equity losses, an impairment charge of €2,255 was taken to reflect uncertainty about value.

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Note 3.    Receivables

|                                                                                  |  | December 31
|--------------------------------------------------------------------------------- |  | -----------
|
|Sale of pulp and paper products (net of allowance of €137 and €115, respectively) |  | €          
|Value added tax                                                                   |  |            
|Other                                                                             |  |            
|                                                                                  |  |            
|                                                                                  |  | €          
|                                                                                  |  |            

The
Company reviews the collectability of receivables on a periodic basis. The Company maintains an allowance for doubtful accounts at an amount estimated to cover the potential losses
on the receivables. Any amounts that are determined to be uncollectible are charged off against the allowance. The amounts of allowance and charge-off are based on the Company's evaluation
of numerous factors, including the payment history and financial position of the debtors. The Company does not generally require collateral for any of its receivables.

Note 4.    Inventories

|               |                                    | December 31
|-------------- | ---------------------------------- | -----------
|
|Pulp and paper |                                    |            
|               | Raw materials                      |            
|               | Work in process and finished goods |            
|               |                                    |            
|               |                                    | €          
|               |                                    |            

Note 5.    Property, plant and equipment

|                               |  | December 31 |         
|------------------------------ |  | ----------- | --------
|
|Land                           |  | €           | 8,034   
|Buildings                      |  |             | 13,504  
|Production and other equipment |  |             | 336,204 
|                               |  |             |         
|                               |  |             | 357,742 
|Less: Accumulated depreciation |  |             | (115,799
|                               |  |             |         
|                               |  |             | 241,943 
|Construction in progress       |  |             | 503,235 
|                               |  |             |         
|                               |  | €           | 745,178 
|                               |  |             |         

Construction
in progress represents the costs incurred (including €17,407 and €3,134 of debt interest capitalized in 2003 and 2002, respectively) to build
a 552,000 tonne softwood kraft pulp mill located in Stendal, Germany. A subsidiary that is owned 63.6% by the Company is building the mill and will operate it on completion. Management estimates the
total cost of the mill will be approximately €1,000,000. Under German legislation, non-repayable grants are provided to qualifying businesses that comply with the terms

83

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of
the grants and are operating in eastern Germany to finance capital investments and when received, they will reduce the overall cost. As at December 31, 2003, the Company has total claims of
approximately €82,085 in construction grants which are expected to be received prior to the end of 2004.

Included
in production and other equipment is equipment under capital leases which had gross amounts of €6,645 and €5,693, and accumulated depreciation of
€4,185 and €3,113, respectively, as at December 31, 2003 and 2002. During the years 2003, 2002 and 2001, production and other equipment totaling
€2,809, €385 and €685, respectively, was acquired under capital lease obligations.

Note 6.    Accounts Payable and Accrued Expenses

|                           |  | December 31
|-------------------------- |  | -----------
|
|Trade payables             |  | €          
|Accounts payable and other |  |            
|Accrued expenses           |  |            
|Derivative contracts       |  |            
|                           |  |            
|                           |  | €          
|                           |  |            

Note 7.    Notes Payable

At December 31, 2002, the Company had a note payable to a financial institution in the amount of €15,000 relating to the Company's
investment in the Stendal pulp mill project. The note payable was repaid in October 2003.

The
Company also has a note payable to banks of €1,377 and €832 at December 31, 2003 and 2002, respectively. The notes bear interest at a rate of
5.25% as at December 31, 2003.

Note 8.    Debt  Construction in Progress

As part of the Company's total Stendal credit facility (Note 9), the Company has secured a line of credit specifically to finance a portion of construction
in progress that will be recovered by way of government grants (Note 5). The interest rate is described in Note 9 and the balance will be extinguished upon receipt of the grants.
As at December 31, 2003, €80,000 had been advanced to the Company, and €74,000 of applications for grant recoveries were outstanding.

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MERCER INTERNATIONAL INC.        NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 9.    Long-Term Debt

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | December 31 |         
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------
|
|Note payable to bank, included in a total credit facility of €827,950 to finance our construction in progress related to the Stendal pulp mill, interest at rates varying from Euribor plus 0.90% to Euribor plus 1.85%
(rates on amounts of borrowing at December 31, 2003 range from 3.0% to 4.0%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the assets of the Stendal pulp mill, and at
December 31, 2003, restricted cash amounting to €19,074, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Sachsen-Anhalt, respectively, of up to €586,550 of outstanding principal balance, subject to a
debt service reserve account required to pay amounts due in the following twelve months under the terms of credit facility (none required at December 31, 2003); payment of dividends is permitted if certain cash flow requirements are met. A
€80,000 special purpose tranche is described in Note 8. |  | €           | 314,400 
|Loans payable to minority shareholders of Stendal pulp mill, interest at 7% payable in September 2006 then payable semi-annually beginning March 2007, unsecured, subordinated to all liabilities of the Stendal
pulp mill, due in 2017, €5,647 and €4,707 of Stendal's net loss was applied to these loans in 2003 and 2002 due to a right of offset under German law                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |             | 9,838   
|Note payable to bank relating to the Company's investment in the Stendal pulp mill project. Repaid in October 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |             |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         
|Debt, construction in progress.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |             | 324,238 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         
|Note payable to bank, interest at rates varying from 4.5% to 6.8% at December 31, 2003, principal due in semi-annual installments based on a percentage of the final loan amount beginning at 2.4% to 5.1%, until the
note is due on September 30, 2013, collateralized by receivables (amounting to €13,716 and €10,522 at December 31, 2003 and 2002, respectively), inventory (amounting to €15,791 and €10,885 at December 31, 2003 and
2002, respectively) and a subsidiary's operating pulp mill assets with 48% and 32% principal plus interest guaranteed by the Federal Republic of Germany and the State of Thuringia, respectively; restricted cash amounted to €25,106 and
€19,721 at December 31, 2003 and 2002, respectively, in connection with this borrowing; payment of dividends by the subsidiary is permitted if certain cash flow requirements are met. This borrowing was used to finance the completed
conversion of the operating pulp mill                                              |  |             | 191,653 
|Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually, convertible at any time by the holder into shares of beneficial interest of the Company at U.S. $7.75 per
share, unsecured. The Company may redeem for cash all or a portion of these notes at any time on or after October 15, 2008 at 100% of the principal amount of the notes plus accrued and unpaid interest up to the redemption date, the holders of
the convertible notes will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal amount of the notes, plus
accrued and unpaid interest, the notes are not subject to any sinking fund requirements.                                                                                                                                                                                                    |  |             | 65,496  
|Note payable to bank, interest at Euribor plus 4.5% (rate on amount of borrowing at December 31, 2003, is 7.4%), unsecured, due in semi-annual installments beginning in March 2004, due in 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             | 7,600   
|Notes payable to a bank, interest at 4.15% and 4.3% at December 31, 2003, secured by paper mill property, inventory and guarantee, due in semi-annual installments beginning in June 2005, due in
December 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |             | 3,500   
|Notes payable to a bank, interest at 2.65% at December 31, 2003, secured by paper mill property and guarantee, due in quarterly instalments beginning in December 2004, due in June 2013                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |             | 2,500   
|Note payable to a company, interest at 6%, due February 26, 2004, unsecured                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |             | 953     
|Debenture payable, repaid during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |             |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             | 271,702 
|Less: Current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |             | (15,801 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         
|Debt, other operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |             | 255,901 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |             | €580,139
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |             |         

85

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As of December 31, 2003, the principal maturities of long-term debt are as follows:

|Matures    |  | Amount
|---------- |  | ------
|2004       |  | €     
|2005       |  |       
|2006       |  |       
|2007       |  |       
|2008       |  |       
|Thereafter |  |       
|           |  |       
|           |  | €     
|           |  |       

|                                              |  | Amount
|--------------------------------------------- |  | ------
|Consisting of:                                |  |       
|Debt, construction in progress                |  | €     
|Debt, other operations before current portion |  |       
|                                              |  |       
|                                              |  | €     
|                                              |  |       

For
information on derivative financial instruments, see Note 15.

Interest
paid amounted to €25,441 in 2003, €13,984 in 2002 and €15,854 in 2001.

Note 10.    Income Taxes

The provision for income taxes is current and consists entirely of non U.S. taxes for the years ended December 31, 2003, 2002 and 2001,
respectively.

Differences
between the U.S. Federal Statutory and the Company's effective rates are as follows:

|                                                             |  | Year Ended December 31 |       
|------------------------------------------------------------ |  | ---------------------- | ------
|
|U.S. Federal statutory rates on loss from operations benefit |  | €                      | 2,063 
|Tax differential on foreign income (loss)                    |  |                        | (66   
|Valuation allowance                                          |  |                        | (1,992
|Provision for tax reassessments                              |  |                        | (2,962
|Other                                                        |  |                        | (215  
|                                                             |  |                        |       
|                                                             |  | €                      | (3,172
|                                                             |  |                        |       

86

---

Deferred
tax assets are composed of the following:

|                                                                                                       |                        | December 31 |        
|------------------------------------------------------------------------------------------------------ | ---------------------- | ----------- | -------
|
|German tax loss carryforwards                                                                          |                        | €           | 62,672 
|Basis difference between income tax and financial reporting with respect to German operating pulp mill |                        |             | 1,079  
|Derivative financial instruments                                                                       |                        |             | 16,251 
|U.S. tax loss carryforwards                                                                            |                        |             | 4,481  
|                                                                                                       |                        |             |        
|                                                                                                       |                        |             | 84,483 
|Valuation allowance                                                                                    |                        |             | (74,503
|                                                                                                       |                        |             |        
|                                                                                                       | Net deferred tax asset |             | €      
|                                                                                                       |                        |             |        

Subsequent
to year end the Company initiated action to merge certain German subsidiary companies retroactive to November 30, 2003. The above table reflects balances that existed
as at December 31, 2003. Further, the Company's subsidiaries in Germany are the subject of income tax audits in Germany on a continuing basis which may result in changes to the amounts in the
above table. Because of this and other uncertainties regarding future amounts of taxable income in Germany, the Company has provided a valuation reserve for much of its German deferred tax assets.
However, management believes that, while realization of the net deferred tax asset in Germany is not assured, it is more likely than not that it will be realized.

The
Company's U.S. losses carried forward amount to approximately €13,179 at December 31, 2003, and will expire in years ending in 2021, if not used.
Management believes that these tax loss carryforwards are not likely to be utilized under current circumstances and has fully reserved any resulting potential tax benefit.

Income
(loss) from foreign source operations amounted to €5,270, €(3,275) and €2,366 for the years ended December 31, 2003, 2002
and 2001, respectively. These amounts are intended to be indefinitely reinvested in operations. Since available-for-sale securities are primarily securities held by foreign
subsidiaries and the proceeds are expected to be reinvested, no tax has been provided in the determination of other comprehensive income for the years ended December 31, 2003, 2002 and 2001.

Income
taxes paid amounted to €309, €895 and €83 in 2003, 2002 and 2001, respectively.

Note 11.    Shareholders' Equity

In December 2003, the Company adopted a shareholder protection rights plan to replace its current plan which expired on December 31, 2003. The new
plan is on substantially similar terms as the Company's prior rights plan and will expire on December 31, 2005. Under the new plan, the Company issued one attached preferred share purchase
right for each outstanding share of beneficial interest. A total of 17,099,899 rights were issued which allow the holder to acquire from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of U.S. $75 per one one-hundredth of a preferred share. The Company has the right to repurchase the rights for
U.S. $0.01 each.

87

---

The
Company has reserved 110,000 Series A Junior Participating Preferred Shares in connection with the rights. The preferred shares are entitled to quarterly dividends of
U.S. $10 per share and have 100 votes per share. However, the preferred shares will be entitled to an aggregate dividend of 100 times any dividends declared on shares of beneficial
interest and an aggregate of 100 times any payment to shares of beneficial interest on merger or liquidation.

Also,
during a prior year, the Company authorized the issuance of 3.5 million shares of Cumulative Retractable Convertible Preferred Shares, Series B at a price of
U.S. $20 per share. These shares have a cumulative dividend rate of up to 4%, a liquidation preference of $20 per share plus unpaid dividends, a redemption right beginning January 1,
2004, at $20 per share plus unpaid dividends, and may convert up to 10% of the issued and outstanding shares into shares of beneficial interest based on dividing the issue price plus unpaid dividends
by $20 per share.

Note 12.    Stock-Based Compensation

The Company has a non-qualified stock option plan which provides for options to be granted to officers and employees to acquire a maximum of 3,600,000
shares of beneficial interest including options for 130,000 shares to trustees who are not officers or employees.

During
2003, options to acquire 100,000 shares of beneficial interest at U.S. $5.65 per share were granted to an officer of the Company which vest one-third at grant
date and one-third each for the next two years. These options expire in ten years. The weighted fair value of these options was U.S. $1.70 each. Another 100,000 options were
surrendered by the president of the Company and cancelled. Options to acquire 100,000 shares of beneficial interest at U.S.$6.375 per share were granted to another officer of the Company. The weighted
fair value of these options was U.S.$0.57 each. Options to acquire 272,500 shares of beneficial interest were cancelled as a result of the termination of employment of the officers and employees and
the resignation of a trustee.

During
2002, options to acquire 18,000 shares of beneficial interest at U.S. $7.46 per share were granted to trustees of the Company which vest one-third at the grant
date and one-third each of the next two years. The options expire in ten years. The weighted fair value of these options was U.S. $2.07 each. The options granted to one trustee
expired upon his resignation in 2002.

Following
is a summary of the status of the plan during 2003, 2002 and 2001:

|                                          |  | Number of Shares |   | Weighted Average Exercise Price
|----------------------------------------- |  | ---------------- | - | -------------------------------
|
|Outstanding at December 31, 2001 and 2000 |  | 2,206,000        |   | $                              
|Granted                                   |  | 18,000           |   |                                
|Cancelled                                 |  | (6,000           | ) |                                
|                                          |  |                  |   |                                
|Outstanding at December 31, 2002          |  | 2,218,000        |   |                                
|Granted                                   |  | 200,000          |   |                                
|Cancelled                                 |  | (372,500         | ) |                                
|                                          |  |                  |   |                                
|Outstanding at December 31, 2003          |  | 2,045,500        |   | $                              
|                                          |  |                  |   |                                

88

---

In
2003, the Company and one of its major shareholders entered into a settlement agreement pursuant to which, among other things, the Company issued options to acquire an aggregate of
375,000 shares of beneficial interest of the Company exercisable at a price of U.S.$4.53 per share expiring between September 22, 2003 and June 20, 2004, of which options to acquire
225,000 shares of beneficial interest were exercised in 2003, and options to acquire 150,000 shares of beneficial interest were outstanding as of December 31, 2003. The total fair value of
these stock options were €440, which is estimated on the grant date using the Black-Scholes model, based on the risk-free interest rate of 0.60%, expected life of
0.28 years, expected volatility of 20.84% and expected dividend yield of 0%. The fair value of these stock options are included in settlement expense in the consolidated statements of
operations.

Following
is a summary of the status of options outstanding at December 31, 2003:

Outstanding Options

Exercisable OptionsExercise Price Range

Number

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Number

Weighted Average Exercise Price(In U.S. Dollars)









(In U.S. Dollars)$
4.53

150,000

0.5

$
4.53

150,000

$
4.535.65 - 6.375

1,775,000

6.2


6.32

1,708,333


6.347.46

6,000

8.3


7.46

4,000


7.468.50 - 11.66

141,000

3.4


8.63

141,000


8.6316.89 - 17.53

123,500

1.5


16.92

123,500


16.92


Note 13.    Loss Per Share

Loss per share data for years ended December 31 is summarized as follows:

|         |  | 2003    |   | 2002    |   | 2001    |  
|-------- |  | ------- | - | ------- | - | ------- | -
|Net loss |  | €(3,593 | ) | €(6,322 | ) | €(2,823 | )
|         |  |         |   |         |   |         |  

|                                                                  |  | Shares    
|----------------------------------------------------------------- |  | ----------
|
|Weighted average number of shares outstanding  basic and diluted |  | 16,940,858
|                                                                  |  |           

For
2003, subordinated convertible notes were not included in the computation of diluted loss per share because they were anti-dilutive. For 2003, 2002 and 2001, options and
warrants were not included in the computation of diluted loss per share because they were anti-dilutive.

Note 14.    Business Segment Information

The Company operates in two reportable business segments: pulp and paper. The segments are managed separately because each business requires different production
and marketing strategies.

89

---

The
pulp segment consists of a single operating mill located in Germany which produces and markets kraft pulp. The paper segment consists of two mills located in Germany. In 2002 the
paper segment also consisted of a mill located in Switzerland. As of December 31, 2002, this mill became an equity investee with its losses included as one line item on the consolidated
statements of operations in 2003.

Both
segments operate in industries which are cyclical in nature and their markets are affected by fluctuations in supply and demand in each cycle. These fluctuations have significant
effect on the cost of materials and the eventual sales prices of products.

Summarized
financial information concerning the segments is shown in the following table:

|                                                                                                            |                                                                                  | Pulp                                                        |  | Paper   |   | Total    |         
|----------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------- |  | ------- | - | -------- | --------
|2003                                                                                                        |                                                                                  |                                                             |  |         |   |          |         
|Sales to external customers                                                                                 |                                                                                  | €126,594                                                    |  | €55,862 |   | €182,456 |         
|Intersegment net sales                                                                                      |                                                                                  | 2,335                                                       |  |        |   | 2,335    |         
|Depreciation and amortization                                                                               |                                                                                  | 21,881                                                      |  | 2,026   |   | 23,907   |         
|Segment income (loss) including net gain on financial derivative instruments for pulp operations of €29,210 |                                                                                  | 18,006                                                      |  | (2,814  | ) | 15,192   |         
|Segment assets, excluding pulp mill construction in progress of €555,966                                    |                                                                                  | 374,738                                                     |  | 30,523  |   | 405,261  |         
|Capital expenditures, excluding pulp mill construction in progress of €399,403                              |                                                                                  | 6,869                                                       |  | 7,778   |   | 14,647   |         
|Reconciliations                                                                                             |                                                                                  |                                                             |  |         |   |          |         
|Loss:                                                                                                       |                                                                                  |                                                             |  |         |   |          |         
|                                                                                                            | Total income for reportable segments                                             |                                                             |  |         |   |          | €15,192 
|                                                                                                            | Elimination of intersegment profits                                              |                                                             |  |         |   |          | 5,532   
|                                                                                                            | Net loss on financial derivative instruments, construction in progress financing |                                                             |  |         |   |          | (12,299 
|                                                                                                            | Impairment of investments                                                        |                                                             |  |         |   |          | (7,825  
|                                                                                                            | Unallocated amounts, other corporate expenses                                    |                                                             |  |         |   |          | (6,668  
|                                                                                                            |                                                                                  |                                                             |  |         |   |          |         
|                                                                                                            |                                                                                  | Consolidated loss before income taxes and minority interest |  |         |   |          |         
|                                                                                                            |                                                                                  |                                                             |  |         |   |          |         
|Assets:                                                                                                     |                                                                                  |                                                             |  |         |   |          |         
|                                                                                                            | Total assets for reportable segments                                             |                                                             |  |         |   |          | €405,261
|                                                                                                            | Stendal pulp mill under construction                                             |                                                             |  |         |   |          | 555,966 
|                                                                                                            | Intersegment investments and receivables                                         |                                                             |  |         |   |          | (42,911 
|                                                                                                            | Other unallocated amounts                                                        |                                                             |  |         |   |          | 17,589  
|                                                                                                            |                                                                                  |                                                             |  |         |   |          |         
|                                                                                                            |                                                                                  | Consolidated total assets                                   |  |         |   |          |         
|                                                                                                            |                                                                                  |                                                             |  |         |   |          |         

90

---

|                                                                                                        |                                                                              | Pulp                                                        |  | Paper   |   | Total    |         
|------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------------------------- |  | ------- | - | -------- | --------
|2002                                                                                                    |                                                                              |                                                             |  |         |   |          |         
|Sales to external customers                                                                             |                                                                              | €130,173                                                    |  | €97,710 |   | €227,883 |         
|Intersegment net sales                                                                                  |                                                                              | 4,878                                                       |  |        |   | 4,878    |         
|Depreciation and amortization                                                                           |                                                                              | 21,567                                                      |  | 3,991   |   | 25,558   |         
|Segment income (loss) including gain on financial derivative instruments for pulp operations of €23,429 |                                                                              | 16,557                                                      |  | (1,928  | ) | 14,629   |         
|Segment assets, excluding pulp mill construction in progress of €225,386                                |                                                                              | 405,002                                                     |  | 29,438  |   | 434,440  |         
|Capital expenditures, excluding pulp mill construction in progress of €186,570                          |                                                                              | 8,426                                                       |  | 5,374   |   | 13,800   |         
|Reconciliations                                                                                         |                                                                              |                                                             |  |         |   |          |         
|Loss:                                                                                                   |                                                                              |                                                             |  |         |   |          |         
|                                                                                                        | Total income for reportable segments                                         |                                                             |  |         |   |          | €14,629 
|                                                                                                        | Elimination of intersegment profits                                          |                                                             |  |         |   |          | 3,391   
|                                                                                                        | Loss on financial derivative instruments, construction in progress financing |                                                             |  |         |   |          | (30,108 
|                                                                                                        | Unallocated amounts, other corporate expenses                                |                                                             |  |         |   |          | (5,463  
|                                                                                                        |                                                                              |                                                             |  |         |   |          |         
|                                                                                                        |                                                                              | Consolidated loss before income taxes and minority interest |  |         |   |          |         
|                                                                                                        |                                                                              |                                                             |  |         |   |          |         
|Assets:                                                                                                 |                                                                              |                                                             |  |         |   |          |         
|                                                                                                        | Total assets for reportable segments                                         |                                                             |  |         |   |          | €434,440
|                                                                                                        | Stendal pulp mill under construction                                         |                                                             |  |         |   |          | 223,386 
|                                                                                                        | Intersegment investments and receivables                                     |                                                             |  |         |   |          | (67,476 
|                                                                                                        | Other unallocated amounts                                                    |                                                             |  |         |   |          | 9,400   
|                                                                                                        |                                                                              |                                                             |  |         |   |          |         
|                                                                                                        |                                                                              | Consolidated total assets                                   |  |         |   |          |         
|                                                                                                        |                                                                              |                                                             |  |         |   |          |         

91

---

|                                                                                                       |                                               | Pulp                                  |  | Paper   |   | Total    |         
|------------------------------------------------------------------------------------------------------ | --------------------------------------------- | ------------------------------------- |  | ------- | - | -------- | --------
|2001                                                                                                   |                                               |                                       |  |         |   |          |         
|Sales to external customers                                                                            |                                               | €146,245                              |  | €58,756 |   | €205,001 |         
|Intersegment net sales                                                                                 |                                               | 5,795                                 |  |        |   | 5,795    |         
|Depreciation and amortization                                                                          |                                               | 21,422                                |  | 1,492   |   | 22,914   |         
|Segment income (loss) including loss on financial derivative instruments for pulp operations of €2,504 |                                               | 4,546                                 |  | (3,230  | ) | 1,316    |         
|Segment assets                                                                                         |                                               | 374,287                               |  | 53,198  |   | 427,485  |         
|Capital expenditures                                                                                   |                                               | 7,416                                 |  | 2,681   |   | 10,097   |         
|Reconciliations                                                                                        |                                               |                                       |  |         |   |          |         
|Loss:                                                                                                  |                                               |                                       |  |         |   |          |         
|                                                                                                       | Total income for reportable segments          |                                       |  |         |   |          | €1,316  
|                                                                                                       | Elimination of intersegment profits           |                                       |  |         |   |          | 2,541   
|                                                                                                       | Unallocated amounts, other corporate expenses |                                       |  |         |   |          | (6,597  
|                                                                                                       |                                               |                                       |  |         |   |          |         
|                                                                                                       |                                               | Consolidated loss before income taxes |  |         |   |          |         
|                                                                                                       |                                               |                                       |  |         |   |          |         
|Assets:                                                                                                |                                               |                                       |  |         |   |          |         
|                                                                                                       | Total assets for reportable segments          |                                       |  |         |   |          | €427,485
|                                                                                                       | Intersegment receivable                       |                                       |  |         |   |          | (7,365  
|                                                                                                       | Other unallocated amounts                     |                                       |  |         |   |          | 9,473   
|                                                                                                       |                                               |                                       |  |         |   |          |         
|                                                                                                       |                                               | Consolidated total assets             |  |         |   |          |         
|                                                                                                       |                                               |                                       |  |         |   |          |         

The
following table presents net sales to external customers by geographic area based on location of the customer.

|                               |  | 2003     |  | 2002     |  | 2001    
|------------------------------ |  | -------- |  | -------- |  | --------
|Germany                        |  | €80,306  |  | €88,809  |  | €94,486 
|Italy                          |  | 46,609   |  | 46,027   |  | 50,016  
|Other European Union countries |  | 29,936   |  | 31,631   |  | 21,938  
|Eastern European and other     |  | 25,605   |  | 61,416   |  | 38,561  
|                               |  |          |  |          |  |         
|                               |  | €182,456 |  | €227,883 |  | €205,001
|                               |  |          |  |          |  |         

The
following table presents total assets by geographic area based on location of the asset.

|        |  | 2003     |  | 2002     |  | 2001    
|------- |  | -------- |  | -------- |  | --------
|Germany |  | €918,316 |  | €590,350 |  | €395,794
|Other   |  | 17,589   |  | 9,400    |  | 33,799  
|        |  |          |  |          |  |         
|        |  | €935,905 |  | €599,750 |  | €429,593
|        |  |          |  |          |  |         

In
2003, pulp sales to one customer amounted to 11% of total pulp sales, pulp sales to one customer amounted to 12% of total pulp sales in 2002, and pulp sales to two customers amounted
to 22% in 2001.

92

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Note 15.    Financial Instruments

The fair value of financial instruments at December 31 is summarized as follows:

|                                                                      |  | 2003 |         | 2002
|--------------------------------------------------------------------- |  | ---- | ------- | ----
|
|Cash and cash equivalents                                             |  | €    | 51,993  |     
|Cash restricted                                                       |  |      | 59,367  |     
|Notes payable                                                         |  |      | 1,377   |     
|Long-term debt and debt, construction in progress                     |  |      | 675,940 |     
|Interest rate derivative contract liability, construction in progress |  |      | 43,151  |     
|Currency and other interest rate derivative contracts  asset         |  |      | 743     |     
|Currency and other interest rate derivative contracts  liability     |  |      | 1,156   |     

In
common with other pulp and paper companies, sales are made basis U.S. dollars. As a result of these transactions the Company has financial risk that the value of the Company's
financial instruments will vary due to fluctuations in foreign exchange rates, and the degree of volatility of these rates.

The
carrying value of cash and cash equivalents approximates the fair value due to its short-term maturity. The fair value of cash restricted was equal to its carrying amount
because it is in an account which bears a market rate of interest. The fair value of notes payable and long-term debt was determined using discounted cash flows at prevailing market rates.
The fair values of the interest rate and foreign currency exchange contracts are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate
agreements taking into consideration current interest rates, the creditworthiness of the counterparties and current foreign currency exchange rates.

At
December 31, 2003, the Company has entered into certain variable-to-fixed interest rate swaps in connection with the construction in progress in Stendal
with respect to an aggregate maximum amount of approximately €612,619 of the principal amount of the long-term indebtedness under the Stendal loan facility. The aggregate
notional amount of these contracts ranges from €341,882 to €612,619, interest rates range from 3.795% to 5.28% and they mature from May 2004 to
October 2017 (the maturity of the Stendal loan facility). The Company recognized a loss of €13,042 and €30,108 with respect to these interest rate swaps for the
year ended December 31, 2003 and 2002, respectively. The Company also entered into a currency forward contract in connection with the construction in progress in Stendal in 2003 and recognized
a gain of €743. There was no currency forward contract outstanding as at December 31, 2003.

At
December 31, 2003, the Company has entered into certain currency swaps with an aggregate notional amount of €Nil and recognized a gain of
€24,059 and €23,595 with respect to these currency swap contracts for the year ended December 31, 2003 and 2002, respectively.

At
December 31, 2003, the Company has entered into certain currency forward contracts with an aggregate notional amount of €Nil and recognized a gain of
€4,519 and €2,137 with respect to these currency forward contracts for the year ended December 31, 2003 and 2002, respectively.

93

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At
December 31, 2003, the Company has entered into certain interest rate contracts with an aggregate notional amount of €153,389, maturing September 2007
and recognized a loss of €111 and €2,303 with respect to these interest rate cap contracts for the year ended December 31, 2003 and 2002, respectively.

The
Company does not have significant exposure to any individual customer or counterparty. Concentrations of credit risk on the sale of paper and pulp products are with customers based
in Germany, Italy, other European countries, and other. The Company has entered into interest rate and foreign exchange derivative instruments in connection with certain of its long-term
debt (Note 9). The contracts are with the same banks which hold the debt and the Company does not anticipate non-performance by the banks.

Note 16.    Lease Commitments

Minimum lease payments under capital and non-cancelable operating leases and the present value of net minimum payments at December 31, 2003
were as follows:

|                                                    |  | Capital Leases |  | Operating Leases
|--------------------------------------------------- |  | -------------- |  | ----------------
|2004                                                |  | €1,932         |  | €2,097          
|2005                                                |  | 1,510          |  | 1,750           
|2006                                                |  | 344            |  | 1,399           
|2007                                                |  | 214            |  | 3,224           
|2008                                                |  | 239            |  | 56              
|Thereafter                                          |  |               |  | 80              
|                                                    |  |                |  |                 
|Total                                               |  | 4,239          |  | €8,606          
|                                                    |  |                |  |                 
|Less imputed interest                               |  | 193            |  |                 
|                                                    |  |                |  |                 
|Total present value of minimum capitalized payments |  | 4,046          |  |                 
|Less current portion of capital lease obligations   |  | 1,843          |  |                 
|                                                    |  |                |  |                 
|Long-term capital lease obligations                 |  | €2,203         |  |                 
|                                                    |  |                |  |                 

Rent
expense under non-cancelable operating leases was €2,231, €1,876 and €1,587 for 2003, 2002 and 2001, respectively. The
current portion of the capital lease obligations is included in accounts payable and accrued expenses and the long-term portion is included in capital leases and other in the consolidated
balance sheets.

Note 17.    Commitments and Contingencies

At December 31, 2003 and 2002, the Company recorded a liability for environmental conservation expenditures of €1,848 and
€2,309, respectively. Management believes the liability amount recorded is sufficient.

The
Company is required to pay certain charges based on water pollution levels at its mills. Unpaid charges can be reduced by investing in qualifying equipment that results in less water
pollution. The Company believes that equipment investments already made will offset most of these charges, although it

94

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has
not received final determination from the appropriate authorities. Accordingly, a liability for these water charges has only been recognized to the extent that equipment investments have not been
made.

The
Company is involved in various matters of litigation arising in the ordinary course of business. In the opinion of management, the estimated outcome of such issues will not have a
material effect on the Company's financial statements.

Note 18.    Certain Relationships

Prior to June, 1996, MFC Bancorp ("MFC") was the Company's 92% owned subsidiary. In June, 1996, the Company distributed shares of MFC to its shareholders by way
of a special dividend in kind and spun off approximately 83% of the issued shares of MFC. Prior to the spin off, MFC provided and arranged for the majority of the Company's financial requirements.
From time to time, since then, the Company and MFC (and its affiliates) have entered into certain arm's length transactions.

A
trustee and former Chief Financial Officer of the Company, became a Vice President of MFC in August, 2003 and resigned in December, 2003. For that period of time, MFC was considered to
be a related party.

As
at December 31, 2003 the Company was not related to MFC, but in recognition of the brief period of the trustee's joint interests:



During
the year, the Company repaid a bridge loan obtained during 2002 from a Swiss banking subsidiary of MFC, and liquidated miscellaneous residual investment and credit accounts which
it shared with MFC.

MFC
has an indirect interest in an entity which holds a 7% interest in the Stendal Project.

95

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                      |  | MERCER INTERNATIONAL INC.
|--------------------- |  | -------------------------
|Dated: March 12, 2004 |  | By:                      

Pursuant
to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

|/s/JIMMY S.H. LEE                                            |  |                     
|------------------------------------------------------------ |  | --------------------
|Jimmy S.H. Lee
Chairman, Chief Executive Officer and Trustee |  | Date: March 12, 2004
|                                                             |  |                     
|/s/DAVID M. GANDOSSI                                         |  |                     
|David M. Gandossi
Chief Financial Officer                    |  | Date: March 12, 2004
|                                                             |  |                     
|/s/C.S. MOON                                                 |  |                     
|C.S. Moon
Trustee                                            |  | Date: March 12, 2004
|                                                             |  |                     
|/s/WILLIAM D. MCCARTNEY                                      |  |                     
|William D. McCartney
Trustee                                 |  | Date: March 12, 2004
|                                                             |  |                     
|/s/GRAEME A. WITTS                                           |  |                     
|Graeme A. Witts
Trustee                                      |  | Date: March 12, 2004
|                                                             |  |                     
|/s/KENNETH A. SHIELDS                                        |  |                     
|Kenneth A. Shields
Trustee                                   |  | Date: March 12, 2004
|                                                             |  |                     
|/s/GUY W. ADAMS                                              |  |                     
|Guy W. Adams
Trustee                                         |  | Date: March 12, 2004

97

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EXHIBIT INDEX

|Exhibit No. |     |   | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                        
|----------- | --- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         | (a) | * | Restated Declaration of Trust of the Company as filed with the Secretary of State of Washington on June 11, 1990 together with an Amendment to Declaration of Trust dated December 12, 1991.                                                                                                                                                                                                  
|            | (b) | * | Amendments to Declaration of Trust dated July 8, 1993; August 17, 1993; and September 9, 1993.                                                                                                                                                                                                                                                                                                
|3.2*        |     |   | Trustees' Regulations dated September 24, 1973.                                                                                                                                                                                                                                                                                                                                               
|4.1         |     |   | Indenture dated as of October 10, 2003 between Mercer International Inc. and Wells Fargo Bank Minnesota, N.A. Incorporated by reference from Form 8-K dated October 15, 2003.                                                                                                                                                                                                                 
|4.2         |     |   | Registration Rights Agreement dated as of October 10, 2003 between Mercer International Inc. and RBC Dain Rauscher Inc. Incorporated by reference from Form 8-K dated October 15, 2003.                                                                                                                                                                                                       
|4.3         |     |   | Shareholder Rights Plan. Incorporated by reference from Form 8-K dated December 24, 2003.                                                                                                                                                                                                                                                                                                     
|10.1        |     |   | Acquisition Agreement among Treuhandanstalt, Dresden Papier AG, Dresden Papier Holding GmbH, Mercer International Inc., and Shin Ho Paper Mfg. Co., Ltd. Incorporated by reference from Form 8-K
dated September 20, 1993.                                                                                                                                                                    
|10.2        |     |   | Acquisition Agreement among Treuhandanstalt, Zellstoff-und Papierfabrik Rosenthal GmbH, Raboisen Einhundertsechsundfunfzigste Vermogensverwaltungsgesellschaft GmbH, to be renamed ZPR Zellstoff-und Papierfabrik
Rosenthal Holding GmbH, Mercer International Inc. and 448380 B.C. Ltd. dated July 3, 1994. Incorporated by reference from Form 8-K dated July 3, 1994.                      
|10.3        |     |   | Amended and Restated 1992 Stock Option Plan. Incorporated by reference from Form S-8 dated March 2, 2000.                                                                                                                                                                                                                                                                                     
|10.4*       |     |   | 2002 Employee Incentive Bonus Plan.                                                                                                                                                                                                                                                                                                                                                           
|10.5*       |     |   | Form of Separation Agreement between Mercer International Inc. and Arbatax International Inc.                                                                                                                                                                                                                                                                                                 
|10.6        |     |   | English Translation of a Loan Agreement in the amount of DM508,000,000 between Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein on the one hand and Bayerische Hypotheken-und Wechsel-Bank
Aktiengesellschaft, Munich and Bayerische Vereinsbank Aktiengesellschaft, Munich on the other hand dated July 6, 1998. Incorporated by reference from Form 8-K dated July 16, 1998.
|10.7*       |     |   | English Translation of Agreement on the obligations of the shareholders between Mercer International Inc., Spezialpapierfabrik Blankenstein GmbH and Zellstoff-und Papierfabrik Rosenthal Verwaltungs GmbH and
Bayerische Hypo-und Vereinsbank Aktiengesellschaft dated February 11, 1999.                                                                                                    
|10.8*       |     |   | Amended and Restated Employment Agreement between Mercer International Inc. and Jimmy S.H. Lee dated November 20, 2000.                                                                                                                                                                                                                                                                       
|10.9        |     |   | English Translation of Amendment Agreement No. 4 dated December 13, 2000 between Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG and Bayerische Hypo-und Vereinsbank Aktiengesellschaft to
the Loan Agreement dated July 6, 1998. Incorporated by reference from Form 8-K dated January 23, 2001.                                                                                          
|10.10*      |     |   | Purchase Agreement between Sihl and Mercer International Inc. dated December 14, 2001 relating to the acquisition of Landqart AG.                                                                                                                                                                                                                                                             
|            |     |   |                                                                                                                                                                                                                                                                                                                                                                                               

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|10.11  |  |  | Project Financing Facility Agreement dated August 26, 2002 between Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated September 10,
2002.                                                                                                                                                                                                                                                                                                             
|------ |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12  |  |  | Shareholders' Undertaking Agreement dated August 26, 2002 among Mercer International Inc., Stendal Pulp Holdings GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG and FAHR Beteiligungen
AG and Zellstoff Stendal GmbH and Bayerische Hypo-und Vereinsbank AG. Incorporated by reference from Form 8-K dated September 10, 2002.                                                                                                                                                                     
|10.13* |  |  | Shareholders' Agreement dated August 26, 2002 among Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE Industrie- Lösungen GmbH and FAHR Beteiligungen AG.                                                                                                                                                                                                                                                                                                                                                 
|10.14  |  |  | Loan Agreement dated August 26, 2002 among Babcock & Brown Investment Management Partners LP, Babcock & Brown Investment Management Partners LP et. al. and Mercer International Inc.
Incorporated by reference from Form 8-K dated September 10, 2002.                                                                                                                                                                                                                                                         
|10.15  |  |  | Loan Agreement dated August 26, 2002 among MFC Merchant Bank S.A., MFC Merchant Bank S.A. et. al. and Mercer International Inc. Incorporated by reference from Form 8-K dated September 10,
2002.                                                                                                                                                                                                                                                                                                               
|10.16* |  |  | Contract for the Engineering, Design, Procurement, Construction, Erection and Start-Up of a Kraft Pulp Mill between Zellstoff Stendal GmbH and RWE Industrie-Lösungen GmbH dated August 26, 2002. Certain
non-public information has been omitted from the appendices to Exhibit 10.16 pursuant to a request for confidential treatment filed with the SEC. Such non-public information was filed with the SEC on a confidential basis. The SEC approved the
request for confidential treatment in January 2004.
|10.17* |  |  | Purchase and Sale Agreement dated December 30, 2002 between Equitable Industries Limited Partnership and Mercer International Inc. relating to the sale of Landqart AG.                                                                                                                                                                                                                                                                                                                                         
|10.18* |  |  | Form of Trustee's Indemnity Agreement between Mercer International Inc. and its Trustees.                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.19* |  |  | English Translation of Agreement between Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d. Saale and Bayerische Hypo-und Vereinsbank AG dated May 27, 2002.                                                                                                                                                                                                                                                                                                                                 
|10.20  |  |  | Purchase Agreement dated as of October 6, 2003 between Mercer International Inc. and RBC Dain Rauscher Inc. Incorporated by reference from Form 10-Q for the period ended September 30,
2003.                                                                                                                                                                                                                                                                                                                   
|10.21  |  |  | Employment Agreement dated for reference August 7, 2003 between Mercer International Inc. and David Gandossi. Incorporated by reference from Form 8-K dated August 11, 2003.                                                                                                                                                                                                                                                                                                                                    
|10.22  |  |  | Settlement Agreement dated as of August 5, 2003 among Mercer International Inc., Greenlight Capital, L.L.C. and Greenlight Capital, Inc. Incorporated by reference from Form 8-K dated August 6,
2003.                                                                                                                                                                                                                                                                                                          
|10.23  |  |  | English translation of Refinancing Agreement dated December 12, 2003 between European Investment Bank and Zellstoff Stendal GmbH.                                                                                                                                                                                                                                                                                                                                                                               
|16     |  |  | Letter regarding change in certifying accountant. Incorporated by reference from Form 8-K/A dated August 6, 2003.                                                                                                                                                                                                                                                                                                                                                                                               
|21     |  |  | List of Subsidiaries of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|23.1   |  |  | Independent Auditors' Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|23.2   |  |  | Independent Auditors' Consent of Peterson Sullivan PLLC.
|------ |  |  | --------------------------------------------------------
|31.1   |  |  | Section 302 Certificate of Chief Executive Officer.     
|31.2   |  |  | Section 302 Certificate of Chief Financial Officer.     
|32.1** |  |  | Section 906 Certificate of Chief Executive Officer.     
|32.2** |  |  | Section 906 Certificate of Chief Financial Officer.     

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