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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended September 30, 2004
|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.: 000-09409

MERCER INTERNATIONAL INC.(Exact name of Registrant as specified in its charter)

|Washington(State or other jurisdiction of incorporation or organization)       |  | 91-6087550(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------ |  | ----------------------------------------------
|14900 Interurban Avenue South, Suite 282, Seattle, WA 98168(Address of office)
|(206) 674-4639(Registrant's telephone number, including area code)            

Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities
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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    YES ý    NO o

The Registrant had 18,074,229 shares of beneficial interest outstanding as at November 8, 2004.

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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

(Unaudited)

2

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MERCER INTERNATIONAL INC.

CONSOLIDATED BALANCE SHEETS

As at September 30, 2004 and December 31, 2003
(Unaudited)
(Euros in thousands)

|                                          |                                               | September 30, 2004                         |        | December 31, 2003
|----------------------------------------- | --------------------------------------------- | ------------------------------------------ | ------ | -----------------
|ASSETS                                    |                                               |                                            |        |                  
|Current Assets                            |                                               |                                            |        |                  
|                                          | Cash and cash equivalents                     |                                            | €      | 42,643           
|                                          | Cash restricted                               |                                            |        | 29,346           
|                                          | Receivables                                   |                                            |        | 33,003           
|                                          | Unrealized foreign exchange derivative gains  |                                            |        | 899              
|                                          | Inventories                                   |                                            |        | 59,225           
|                                          | Prepaid expenses                              |                                            |        | 4,603            
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total current assets                       |        |                  
|Long-Term Assets                          |                                               |                                            |        |                  
|                                          | Cash restricted                               |                                            |        | 47,538           
|                                          | Property, plant and equipment                 |                                            |        | 942,249          
|                                          | Investments                                   |                                            |        | 878              
|                                          | Equity method investments                     |                                            |        | 3,993            
|                                          | Deferred note issuance costs                  |                                            |        | 3,908            
|                                          | Unrealized foreign exchange derivative gains  |                                            |        | 14,442           
|                                          | Deferred income tax                           |                                            |        | 10,000           
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total assets                               |        | €                
|                                          |                                               |                                            |        |                  
|LIABILITIES                               |                                               |                                            |        |                  
|Current Liabilities                       |                                               |                                            |        |                  
|                                          | Accounts payable and accrued expenses         |                                            | €      | 64,373           
|                                          | Construction costs payable                    |                                            |        | 160,952          
|                                          | Note payable                                  |                                            |        | 1,403            
|                                          | Debt, Stendal                                 |                                            |        | 50,000           
|                                          | Debt, current portion                         |                                            |        | 15,465           
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total current liabilities                  |        |                  
|Long-Term Liabilities                     |                                               |                                            |        |                  
|                                          | Debt, Stendal                                 |                                            |        | 476,301          
|                                          | Debt, less current portion                    |                                            |        | 234,317          
|                                          | Unrealized interest rate derivative losses    |                                            |        | 58,874           
|                                          | Unrealized foreign exchange derivative losses |                                            |        | 594              
|                                          | Capital leases and other                      |                                            |        | 8,853            
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total liabilities                          |        |                  
|Minority Interest                         |                                               |                                            |       |                  
|SHAREHOLDERS' EQUITY                      |                                               |                                            |        |                  
|Shares of beneficial interest             |                                               |                                            | 79,736 |                  
|Additional paid-in capital, stock options |                                               |                                            | 14     |                  
|Retained earnings                         |                                               |                                            | 36,592 |                  
|Accumulated other comprehensive income    |                                               |                                            | 5,253  |                  
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total shareholders' equity                 |        |                  
|                                          |                                               |                                            |        |                  
|                                          |                                               | Total liabilities and shareholders' equity |        | €                
|                                          |                                               |                                            |        |                  

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

3

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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands, except for earnings per share)

|                                                |                                             | 2004                                                              |         | 2003    |        
|----------------------------------------------- | ------------------------------------------- | ----------------------------------------------------------------- | ------- | ------- | -------
|Revenues                                        |                                             |                                                                   |         |         |        
|                                                | Pulp and paper                              |                                                                   | €       | 145,084 |        
|                                                | Transportation                              |                                                                   |         | 2,134   |        
|                                                | Other                                       |                                                                   |         | 6,650   |        
|                                                |                                             |                                                                   |         |         |        
|                                                |                                             |                                                                   | 153,868 |         |        
|                                                |                                             |                                                                   |         |         |        
|Cost of sales                                   |                                             |                                                                   |         |         |        
|                                                | Pulp and paper                              |                                                                   |         | 131,420 |        
|                                                | Transportation                              |                                                                   |         | 2,222   |        
|                                                |                                             |                                                                   |         |         |        
|                                                |                                             |                                                                   | 133,642 |         |        
|                                                |                                             |                                                                   |         |         |        
|Gross profit                                    |                                             |                                                                   | 20,226  |         |        
|General and administrative expenses             |                                             |                                                                   | (21,182 | )       |        
|Settlement expenses                             |                                             |                                                                   |        |         |        
|Impairment of capital assets                    |                                             |                                                                   | (6,000  | )       |        
|Flooding losses and expenses, less grant income |                                             |                                                                   | (669    | )       |        
|                                                |                                             |                                                                   |         |         |        
|Loss from operations                            |                                             |                                                                   | (7,625  | )       |        
|                                                |                                             |                                                                   |         |         |        
|Other income (expense)                          |                                             |                                                                   |         |         |        
|                                                | Interest expense                            |                                                                   |         | (9,554  | )      
|                                                | Investment income                           |                                                                   |         | 1,679   |        
|                                                | Derivative financial instruments            |                                                                   |         |         |        
|                                                |                                             | Unrealized loss on interest rate derivatives                      |         |         | (15,825
|                                                |                                             | Unrealized and realized gain on foreign exchange rate derivatives |         |         | 14,748 
|                                                | Other                                       |                                                                   |         |        |        
|                                                | Impairment of available-for-sale securities |                                                                   |         |        |        
|                                                |                                             |                                                                   |         |         |        
|Total other income (expense)                    |                                             |                                                                   | (8,952  | )       |        
|                                                |                                             |                                                                   |         |         |        
|Loss before income taxes and minority interest  |                                             |                                                                   | (16,577 | )       |        
|Income tax benefit (expense)                    |                                             |                                                                   | 37      |         |        
|                                                |                                             |                                                                   |         |         |        
|Loss before minority interest                   |                                             |                                                                   | (16,540 | )       |        
|Minority interest                               |                                             |                                                                   | 3,936   |         |        
|                                                |                                             |                                                                   |         |         |        
|Net loss                                        |                                             |                                                                   | (12,604 | )       |        
|Retained earnings, beginning of period          |                                             |                                                                   | 49,196  |         |        
|                                                |                                             |                                                                   |         |         |        
|Retained earnings, end of period                |                                             | €                                                                 | 36,592  |         | €      
|                                                |                                             |                                                                   |         |         |        
|Loss per share                                  |                                             |                                                                   |         |         |        
|                                                | Basic                                       |                                                                   | €       | (0.73   | )      
|                                                |                                             |                                                                   |         |         |        
|                                                | Diluted                                     |                                                                   | €       | (0.73   | )      
|                                                |                                             |                                                                   |         |         |        

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

4

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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For Three Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands, except for earnings per share)

|                                                        |                                  | 2004                                                              |         | 2003   |        
|------------------------------------------------------- | -------------------------------- | ----------------------------------------------------------------- | ------- | ------ | -------
|Revenues                                                |                                  |                                                                   |         |        |        
|                                                        | Pulp and paper                   |                                                                   | €       | 47,316 |        
|                                                        | Transportation                   |                                                                   |         | 667    |        
|                                                        | Other                            |                                                                   |         | 1,119  |        
|                                                        |                                  |                                                                   |         |        |        
|                                                        |                                  |                                                                   | 49,102  |        |        
|                                                        |                                  |                                                                   |         |        |        
|Cost of sales                                           |                                  |                                                                   |         |        |        
|                                                        | Pulp and paper                   |                                                                   |         | 39,752 |        
|                                                        | Transportation                   |                                                                   |         | 753    |        
|                                                        |                                  |                                                                   |         |        |        
|                                                        |                                  |                                                                   | 40,505  |        |        
|                                                        |                                  |                                                                   |         |        |        
|Gross profit (loss)                                     |                                  |                                                                   | 8,597   |        |        
|General and administrative expenses                     |                                  |                                                                   | (7,348  | )      |        
|Settlement expenses                                     |                                  |                                                                   |        |        |        
|Impairment of capital assets                            |                                  |                                                                   | (6,000  | )      |        
|Flooding losses and expenses, less grant income         |                                  |                                                                   |        |        |        
|                                                        |                                  |                                                                   |         |        |        
|Loss from operations                                    |                                  |                                                                   | (4,751  | )      |        
|                                                        |                                  |                                                                   |         |        |        
|Other income (expense)                                  |                                  |                                                                   |         |        |        
|                                                        | Interest expense                 |                                                                   |         | (4,200 | )      
|                                                        | Investment income                |                                                                   |         | 215    |        
|                                                        | Derivative financial instruments |                                                                   |         |        |        
|                                                        |                                  | Unrealized gain (loss) on interest rate derivatives               |         |        | (14,110
|                                                        |                                  | Unrealized and realized gain on foreign exchange rate derivatives |         |        | 6,005  
|                                                        | Other                            |                                                                   |         |       |        
|                                                        |                                  |                                                                   |         |        |        
|Total other income (expense)                            |                                  |                                                                   | (12,090 | )      |        
|                                                        |                                  |                                                                   |         |        |        
|Income (loss) before income taxes and minority interest |                                  |                                                                   | (16,841 | )      |        
|Income tax benefit (expense)                            |                                  |                                                                   | 236     |        |        
|                                                        |                                  |                                                                   |         |        |        
|Income (loss) before minority interest                  |                                  |                                                                   | (16,605 | )      |        
|Minority interest                                       |                                  |                                                                   | 6,726   |        |        
|                                                        |                                  |                                                                   |         |        |        
|Net income (loss)                                       |                                  |                                                                   | (9,879  | )      |        
|Retained earnings, beginning of period                  |                                  |                                                                   | 46,471  |        |        
|                                                        |                                  |                                                                   |         |        |        
|Retained earnings, end of period                        |                                  | €                                                                 | 36,592  |        | €      
|                                                        |                                  |                                                                   |         |        |        
|Income (loss) per share                                 |                                  |                                                                   |         |        |        
|                                                        | Basic                            |                                                                   | €       | (0.57  | )      
|                                                        |                                  |                                                                   |         |        |        
|                                                        | Diluted                          |                                                                   | €       | (0.57  | )      
|                                                        |                                  |                                                                   |         |        |        

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

5

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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

|                                   |                                          | 2004                                                                  |         | 2003 |     
|---------------------------------- | ---------------------------------------- | --------------------------------------------------------------------- | ------- | ---- | ----
|Net loss                           |                                          | €                                                                     | (12,604 | )    | €   
|                                   |                                          |                                                                       |         |      |     
|Other comprehensive income (loss): |                                          |                                                                       |         |      |     
|                                   | Foreign currency translation adjustments |                                                                       |         | 313  |     
|                                   | Unrealized gains (losses) on securities  |                                                                       |         |      |     
|                                   |                                          | Unrealized holding gains (losses) arising during the period           |         |      | (269
|                                   |                                          | Reclassification adjustment for other than temporary decline in value |         |      |    
|                                   |                                          |                                                                       |         |      |     
|                                   | Other comprehensive income (loss)        |                                                                       |         | 44   |     
|                                   |                                          |                                                                       |         |      |     
|Total comprehensive loss           |                                          | €                                                                     | (12,560 | )    | €   
|                                   |                                          |                                                                       |         |      |     

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

6

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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For Three Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

|                                   |                                          | 2004                                                        |         | 2003  
|---------------------------------- | ---------------------------------------- | ----------------------------------------------------------- | ------- | ------
|Net income (loss)                  |                                          | €                                                           | (9,879  | )     
|                                   |                                          |                                                             |         |       
|Other comprehensive income (loss): |                                          |                                                             |         |       
|                                   | Foreign currency translation adjustments |                                                             |         | (2,039
|                                   | Unrealized gains (losses) on securities  |                                                             |         |       
|                                   |                                          | Unrealized holding gains (losses) arising during the period |         |       
|                                   |                                          |                                                             |         |       
|                                   | Other comprehensive income (loss)        |                                                             |         | (2,058
|                                   |                                          |                                                             |         |       
|Total comprehensive income (loss)  |                                          | €                                                           | (11,937 | )     
|                                   |                                          |                                                             |         |       

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

7

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MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For Nine Months Ended September 30, 2004 and 2003
(Unaudited)
(Euros in thousands)

|                                                             |                                                                           | 2004                                                                   |                                              | 2003     |         
|------------------------------------------------------------ | ------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------- | -------- | --------
|Cash Flows from (used in) Operating Activities:              |                                                                           |                                                                        |                                              |          |         
|                                                             | Net loss                                                                  |                                                                        | €                                            | (12,604  | )       
|                                                             | Adjustments to reconcile net loss to cash flows from operating activities |                                                                        |                                              |          |         
|                                                             |                                                                           | Unrealized net loss on interest rate derivatives                       |                                              |          | 15,825  
|                                                             |                                                                           | Unrealized and realized net gains on foreign exchange rate derivatives |                                              |          | (14,748 
|                                                             |                                                                           | Depreciation and amortization                                          |                                              |          | 17,217  
|                                                             |                                                                           | Impairment of capital assets                                           |                                              |          | 6,000   
|                                                             |                                                                           | Impairment of investments                                              |                                              |          |        
|                                                             |                                                                           | Minority interest                                                      |                                              |          | (3,936  
|                                                             |                                                                           | Stock-based expenses                                                   |                                              |          | 690     
|                                                             |                                                                           | Other                                                                  |                                              |          | 1,139   
|                                                             | Changes in current assets and liabilities                                 |                                                                        |                                              |          |         
|                                                             |                                                                           | Inventories                                                            |                                              |          | (35,825 
|                                                             |                                                                           | Receivables                                                            |                                              |          | (2,056  
|                                                             |                                                                           | Accounts payable and accrued expenses                                  |                                              |          | 26,331  
|                                                             |                                                                           | Other                                                                  |                                              |          | 782     
|                                                             |                                                                           |                                                                        |                                              |          |         
|                                                             |                                                                           |                                                                        | Net cash from (used in) operating activities |          |         
|                                                             |                                                                           |                                                                        |                                              |          |         
|Cash Flows from (used in) Investing Activities:              |                                                                           |                                                                        |                                              |          |         
|                                                             | Purchase of property, plant and equipment, net of investment grants       |                                                                        |                                              | (213,115 | )       
|                                                             | Sale of long-term investments                                             |                                                                        |                                              | 1,161    |         
|                                                             | Other                                                                     |                                                                        |                                              | 115      |         
|                                                             |                                                                           |                                                                        |                                              |          |         
|                                                             |                                                                           | Net cash used in investing activities                                  |                                              |          | (211,839
|                                                             |                                                                           |                                                                        |                                              |          |         
|Cash Flows from (used in) Financing Activities:              |                                                                           |                                                                        |                                              |          |         
|                                                             | Cash restricted                                                           |                                                                        |                                              | (17,517  | )       
|                                                             | Increase in construction costs payable                                    |                                                                        |                                              | 118,196  |         
|                                                             | Proceeds from borrowings of notes payable and debt                        |                                                                        |                                              | 126,000  |         
|                                                             | Repayment of notes payable and debt                                       |                                                                        |                                              | (21,886  | )       
|                                                             | Repayment of capital lease obligations                                    |                                                                        |                                              | (1,781   | )       
|                                                             | Issuance of shares of beneficial interest                                 |                                                                        |                                              | 582      |         
|                                                             |                                                                           |                                                                        |                                              |          |         
|                                                             |                                                                           | Net cash from financing activities                                     |                                              |          | 203,594 
|                                                             |                                                                           |                                                                        |                                              |          |         
|Effect of exchange rate changes on cash and cash equivalents |                                                                           |                                                                        | 80                                           |          |         
|                                                             |                                                                           |                                                                        |                                              |          |         
|Net decrease in cash and cash equivalents                    |                                                                           |                                                                        | (9,350                                       | )        |         
|Cash and cash equivalents, beginning of period               |                                                                           |                                                                        | 51,993                                       |          |         
|                                                             |                                                                           |                                                                        |                                              |          |         
|Cash and cash equivalents, end of period                     |                                                                           | €                                                                      | 42,643                                       |          | €       
|                                                             |                                                                           |                                                                        |                                              |          |         

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

8

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MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2004

(Unaudited)
(Euros in thousands, except for shares and per share data)

Note 1.    Basis of Presentation

The interim period consolidated financial statements contained herein include the accounts of Mercer International Inc. and its wholly-owned and
majority-owned subsidiaries (the "Company").

The
interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and
accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 2003. In the opinion of the Company, the
unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. The results for the periods
presented herein may not be indicative of the results for the entire year.

Note 2.    Stock-Based Expenses

The Company has a stock-based employee compensation plan, which is described more fully in the Company's annual report on Form 10-K
for the year ended December 31, 2003. The Company also has a 2004 Stock Incentive Plan, which is described more fully in the Form S-8 filed by the Company with the SEC
on June 16, 2004.
The Company accounts for the plans under the recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to
Employees, and related interpretations. The following tables illustrate the effect on net income (loss) and income (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation.

9

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|                       |                                                                                                                                                 | Nine Months Ended September 30, |  
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -
|
|
|Net Loss               |                                                                                                                                                 |                                 |  
|                       | As reported                                                                                                                                     |                                 | €
|                       | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects |                                 |  
|                       | Add: Reversal of stock-based compensation expense recognized under APB Opinion No. 25                                                           |                                 |  
|                       |                                                                                                                                                 |                                 |  
|                       | Pro forma                                                                                                                                       |                                 | €
|                       |                                                                                                                                                 |                                 |  
|Basic Loss Per Share   |                                                                                                                                                 |                                 |  
|                       | As reported                                                                                                                                     |                                 | €
|                       |                                                                                                                                                 |                                 |  
|                       | Pro forma                                                                                                                                       |                                 | €
|                       |                                                                                                                                                 |                                 |  
|Diluted Loss Per Share |                                                                                                                                                 |                                 |  
|                       | As reported                                                                                                                                     |                                 | €
|                       |                                                                                                                                                 |                                 |  
|                       | Pro forma                                                                                                                                       |                                 | €
|                       |                                                                                                                                                 |                                 |  

|                                |                                                                                                                                                 | Three Months Ended September 30, |  
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | -
|
|
|Net Income (Loss)               |                                                                                                                                                 |                                  |  
|                                | As reported                                                                                                                                     |                                  | €
|                                | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects |                                  |  
|                                | Add: Reversal of stock-based compensation expense recognized under APB Opinion No. 25                                                           |                                  |  
|                                |                                                                                                                                                 |                                  |  
|                                | Pro forma                                                                                                                                       |                                  | €
|                                |                                                                                                                                                 |                                  |  
|Basic Income (Loss) Per Share   |                                                                                                                                                 |                                  |  
|                                | As reported                                                                                                                                     |                                  | €
|                                |                                                                                                                                                 |                                  |  
|                                | Pro forma                                                                                                                                       |                                  | €
|                                |                                                                                                                                                 |                                  |  
|Diluted Income (Loss) Per Share |                                                                                                                                                 |                                  |  
|                                | As reported                                                                                                                                     |                                  | €
|                                |                                                                                                                                                 |                                  |  
|                                | Pro forma                                                                                                                                       |                                  | €
|                                |                                                                                                                                                 |                                  |  

In
March 2004, 73,330 shares of beneficial interest were issued as a result of the cashless exercise of 150,000 stock options. This resulted in a total stock-based expense of
€532, which was charged to net loss immediately.

10

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In
January 2004, 25,000 restricted shares of beneficial interest were issued to a trustee in connection with his role as Lead Trustee of the Board of Trustees.
One-third of such shares vested on January 20, 2004, one-third will vest on November 11, 2004 and the remaining one-third on November 11, 2005.
This resulted in a total expense of €161, one-third of which was charged to net loss immediately, while the remaining two-thirds is to be amortized over the
period to November 2005 on a straight-line basis.

In
June 2004, a total of 15,000 restricted shares of beneficial interest were issued to three trustees in connection with their roles as independent trustees of the Board of
Trustees. These shares vest on June 18, 2005. This resulted in a total expense of €112, which will be amortized over the period to June 2005.

In
June 2004, 21,000 shares of beneficial interest were issued as a result of the exercise of stock options by a former trustee.

Note 3.    Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during
a period. Diluted earnings (loss) per share takes into consideration shares outstanding (computed under basic earnings per share) and potentially dilutive shares. The following table sets out the
computation of basic and diluted earnings (loss) per share for the nine months and three months ended September 30, 2004 and 2003, respectively:

|                                                      |                            | Nine Months Ended
September 30, |         | Three Months Ended
September 30,
|----------------------------------------------------- | -------------------------- | ------------------------------- | ------- | --------------------------------
|
|
|Income (loss) from continuing operations  basic      |                            | €                               | (12,604 | )                               
|Interest on convertible notes, net of tax             |                            |                                 |        |                                 
|                                                      |                            |                                 |         |                                 
|Income (loss) from continuing operations  diluted    |                            | €                               | (12,604 | )                               
|                                                      |                            |                                 |         |                                 
|Weighted average number of common shares outstanding: |                            |                                 |         |                                 
|                                                      | Basic                      |                                 |         | 17,256,894                      
|                                                      | Effect of dilutive shares: |                                 |         |                                 
|                                                      |                            | Stock options and awards        |         |                                 
|                                                      |                            | Convertible notes               |         |                                 
|                                                      |                            |                                 |         |                                 
|                                                      | Diluted                    |                                 |         | 17,256,894                      
|                                                      |                            |                                 |         |                                 
|Income (loss) from continuing operations per share:   |                            |                                 |         |                                 
|                                                      | Basic                      |                                 | €       | (0.73                           
|                                                      |                            |                                 |         |                                 
|                                                      | Diluted                    |                                 | €       | (0.73                           
|                                                      |                            |                                 |         |                                 

11

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For
the nine months ended September 30, 2004 and 2003 and the three months ended September 30, 2004, warrants, options and convertible notes were not included in the
computation of diluted earnings (loss) per share because they were anti-dilutive.

Note 4.    Stendal Pulp Mill Project

The Stendal pulp mill was substantially complete and ready for its intended use on September 18, 2004. Effective September 18, 2004, the Company
began expensing all of the costs, including interest, related to the mill and began depreciating it. A depreciation period of 25 years was established based on the expected useful life of the
production assets. Depreciation was computed using the straight-line method in accordance with the Company's accounting policies.

12

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Note 5.    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.

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

|                                                        |  | Rosenthal Pulp |         | Stendal Pulp |   | Total Pulp |   | Paper |         | Corporate, Other and Eliminations |   | Consolidated Total |  
|------------------------------------------------------- |  | -------------- | ------- | ------------ | - | ---------- | - | ----- | ------- | --------------------------------- | - | ------------------ | -
|Nine Months Ended September 30, 2004                    |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Sales to external customers                             |  | €              | 103,743 |              | € |           |   | €     | 103,743 |                                   | € | 41,341             |  
|Transportation and other                                |  |                | 8,338   |              |   | 600        |   |       | 8,938   |                                   |   | 314                |  
|Intersegment net sales                                  |  |                | 1,822   |              |   |           |   |       | 1,822   |                                   |   |                   |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|                                                        |  |                | 113,903 |              |   | 600        |   |       | 114,503 |                                   |   | 41,655             |  
|Operating costs                                         |  |                | 78,773  |              |   | 509        |   |       | 79,282  |                                   |   | 39,869             |  
|Depreciation and amortization                           |  |                | 14,166  |              |   | 795        |   |       | 14,961  |                                   |   | 1,740              |  
|General and administrative                              |  |                | 7,960   |              |   | 6,645      |   |       | 14,605  |                                   |   | 3,960              |  
|Impairment of capital assets                            |  |                |        |              |   |           |   |       |        |                                   |   | 6,000              |  
|Flooding grants, less losses and expenses               |  |                |        |              |   |           |   |       |        |                                   |   | 669                |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|                                                        |  |                | 100,899 |              |   | 7,949      |   |       | 108,848 |                                   |   | 52,238             |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Income (loss) from operations                           |  |                | 13,004  |              |   | (7,349     | ) |       | 5,655   |                                   |   | (10,583            | )
|Interest expense                                        |  |                | (6,345  | )            |   | (1,888     | ) |       | (8,233  | )                                 |   | (421               | )
|Net loss on derivative financial instruments            |  |                | (275    | )            |   | (802       | ) |       | (1,077  | )                                 |   |                   |  
|Other income (expense)                                  |  |                | 2,327   |              |   | (453       | ) |       | 1,874   |                                   |   | 152                |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Income (loss) before income taxes and minority interest |  | €              | 8,711   |              | € | (10,492    | ) | €     | (1,781  | )                                 | € | (10,852            | )
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Nine Months Ended September 30, 2003                    |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Sales to external customers                             |  | €              | 92,418  |              | € |           |   | €     | 92,418  |                                   | € | 42,517             |  
|Transportation and other                                |  |                | 8,249   |              |   |           |   |       | 8,249   |                                   |   | 796                |  
|Intersegment net sales                                  |  |                | 2,178   |              |   |           |   |       | 2,178   |                                   |   |                   |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|                                                        |  |                | 102,845 |              |   |           |   |       | 102,845 |                                   |   | 43,313             |  
|Operating costs                                         |  |                | 80,968  |              |   |           |   |       | 80,968  |                                   |   | 37,581             |  
|Depreciation and amortization                           |  |                | 16,311  |              |   |           |   |       | 16,311  |                                   |   | 1,545              |  
|General and administrative                              |  |                | 5,588   |              |   | 1,752      |   |       | 7,340   |                                   |   | 3,721              |  
|Settlement expenses                                     |  |                |        |              |   |           |   |       |        |                                   |   |                   |  
|Flooding grants, less losses and expenses               |  |                |        |              |   |           |   |       |        |                                   |   | (1,162             | )
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|                                                        |  |                | 102,867 |              |   | 1,752      |   |       | 104,619 |                                   |   | 41,685             |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Income (loss) from operations                           |  |                | (22     | )            |   | (1,752     | ) |       | (1,774  | )                                 |   | 1,628              |  
|Interest expense                                        |  |                | (5,961  | )            |   | (8         | ) |       | (5,969  | )                                 |   | (323               | )
|Net gain (loss) on derivative financial instruments     |  |                | 18,335  |              |   | (21,939    | ) |       | (3,604  | )                                 |   |                   |  
|Impairment of investments                               |  |                | (4,441  | )            |   |           |   |       | (4,441  | )                                 |   | (1,070             | )
|Other income (expense)                                  |  |                | 1,475   |              |   | 50         |   |       | 1,525   |                                   |   | (51                | )
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  
|Income (loss) before income taxes and minority interest |  | €              | 9,386   |              | € | (23,649    | ) | €     | (14,263 | )                                 | € | 184                |  
|                                                        |  |                |         |              |   |            |   |       |         |                                   |   |                    |  

13

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|                                                        |  | Rosenthal Pulp |        | Stendal Pulp |   | Total Pulp |   | Paper |        | Corporate, Other and Eliminations |   | Consolidated Total |  
|------------------------------------------------------- |  | -------------- | ------ | ------------ | - | ---------- | - | ----- | ------ | --------------------------------- | - | ------------------ | -
|Three Months Ended September 30, 2004                   |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Sales to external customers                             |  | €              | 34,517 |              | € |           |   | €     | 34,517 |                                   | € | 12,799             |  
|Transportation and other                                |  |                | 2,575  |              |   | (327       | ) |       | 2,248  |                                   |   | (124               | )
|Intersegment net sales                                  |  |                | 643    |              |   |           |   |       | 643    |                                   |   |                   |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|                                                        |  |                | 37,735 |              |   | (327       | ) |       | 37,408 |                                   |   | 12,675             |  
|Operating costs                                         |  |                | 24,702 |              |   | 509        |   |       | 25,211 |                                   |   | 11,837             |  
|Depreciation and amortization                           |  |                | 3,030  |              |   | 795        |   |       | 3,825  |                                   |   | 599                |  
|General and administrative                              |  |                | 3,186  |              |   | 1,185      |   |       | 4,371  |                                   |   | 1,849              |  
|Impairment of capital assets                            |  |                |       |              |   |           |   |       |       |                                   |   | 6,000              |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|                                                        |  |                | 30,918 |              |   | 2,489      |   |       | 33,407 |                                   |   | 20,285             |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Income (loss) from operations                           |  |                | 6,817  |              |   | (2,816     | ) |       | 4,001  |                                   |   | (7,610             | )
|Interest expense                                        |  |                | (1,953 | )            |   | (1,720     | ) |       | (3,673 | )                                 |   | (137               | )
|Net gain (loss) on derivative financial instruments     |  |                | 4,997  |              |   | (13,102    | ) |       | (8,105 | )                                 |   |                   |  
|Other income (expense)                                  |  |                | 713    |              |   | (108       | ) |       | 605    |                                   |   | 21                 |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Income (loss) before income taxes and minority interest |  | €              | 10,574 |              | € | (17,746    | ) | €     | (7,172 | )                                 | € | (7,726             | )
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Three Months Ended September 30, 2003                   |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Sales to external customers                             |  | €              | 30,004 |              | € |           |   | €     | 30,004 |                                   | € | 13,657             |  
|Transportation and other                                |  |                | 1,993  |              |   |           |   |       | 1,993  |                                   |   | 236                |  
|Intersegment net sales                                  |  |                | 633    |              |   |           |   |       | 633    |                                   |   |                   |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|                                                        |  |                | 32,630 |              |   |           |   |       | 32,630 |                                   |   | 13,893             |  
|Operating costs                                         |  |                | 27,212 |              |   |           |   |       | 27,212 |                                   |   | 13,223             |  
|Depreciation and amortization                           |  |                | 5,534  |              |   |           |   |       | 5,534  |                                   |   | 556                |  
|General and administrative                              |  |                | 1,611  |              |   | 913        |   |       | 2,524  |                                   |   | 951                |  
|Settlement expenses                                     |  |                |       |              |   |           |   |       |       |                                   |   |                   |  
|Flooding grants, less losses and expenses               |  |                |       |              |   |           |   |       |       |                                   |   | 214                |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|                                                        |  |                | 34,357 |              |   | 913        |   |       | 35,270 |                                   |   | 14,944             |  
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Loss from operations                                    |  |                | (1,727 | )            |   | (913       | ) |       | (2,640 | )                                 |   | (1,051             | )
|Interest expense                                        |  |                | (1,978 | )            |   |           |   |       | (1,978 | )                                 |   | (120               | )
|Net gain on derivative financial instruments            |  |                | 3,734  |              |   | 6,005      |   |       | 9,739  |                                   |   |                   |  
|Other income (expense)                                  |  |                | 698    |              |   | (356       | ) |       | 342    |                                   |   | (379               | )
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  
|Income (loss) before income taxes and minority interest |  | €              | 727    |              | € | 4,736      |   | €     | 5,463  |                                   | € | (1,550             | )
|                                                        |  |                |        |              |   |            |   |       |        |                                   |   |                    |  

The total assets for the Stendal pulp mill were €838,679 and €555,966 as at September 30, 2004 and
December 31, 2003, respectively.

14

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Note 6.    Inventories

|               |                                    | September 30, 2004 |        | December 31, 2003
|-------------- | ---------------------------------- | ------------------ | ------ | -----------------
|Pulp and paper |                                    |                    |        |                  
|               | Raw materials                      |                    | €      | 47,099           
|               | Work in process and finished goods |                    |        | 12,126           
|               |                                    |                    |        |                  
|               |                                    | €                  | 59,225 |                  
|               |                                    |                    |        |                  

Note 7.    Derivatives Transactions

In addition to the derivatives reported in the Company's annual report on Form 10-K for the year ended December 31, 2003, the
Company entered into certain new derivative transactions in the first nine months of 2004.

The
Company's wholly-owned subsidiary, Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG ("Rosenthal"), entered into two currency swaps in the
aggregate principal amount of approximately €184,500 to convert all of its long-term indebtedness under its bank loan facility into U.S. dollars. The swaps mature in
September 2008 and September 2013, respectively. In addition, in the first nine months of 2004, Rosenthal entered into a currency forward in the notional amount of approximately
€40,700 which matures in March 2005. A marked to market non-cash holding loss of approximately €174 and a non-cash holding gain of
approximately €4,949 was recognized in respect of these derivatives in the nine months and three months ended September 30, 2004, respectively.

In
the first nine months of 2004, Stendal entered into a currency swap in the principal amount of approximately €306,300 which matures in April 2011 and a currency
forward in the notional amount of approximately €20,600 which matures in March 2005. A net non-cash holding gain of approximately €14,921 and
€1,055 was recognized in respect of these derivatives in the nine months and three months ended September 30, 2004, respectively.

Note 8.    Change in Accounting Estimate

In conjunction with establishing the depreciation period for the Stendal mill (see note 4), the Company also reviewed the useful life of the Rosenthal
mill, which resulted in a change in the estimate of its useful life from an initial 15 to 25 years. The change in estimate was reflected effective July 1, 2004. As the Rosenthal mill had
been depreciated for approximately 5 years as of July 1, 2004, the change in estimate reflects a remaining depreciable life of approximately 20 years. The total effect of the
change in estimate resulted in a decrease of approximately €2,188 in cost of sales and net loss, and a decrease in basic and diluted net loss per share of €0.13 for the
nine and three months ended September 30, 2004.

15

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Note 9.    Impairment Charge

The paper segment has reported weaker than expected returns for a period of time and certain initiatives to increase the return on the assets have been
unsuccessful to date. As a result, during the quarter, the Company reviewed the paper segment for possible impairment of value. The Company has recorded an impairment of €6,000 against
the Fährbrücke mill assets during the nine and three months ended September 30, 2004, respectively. Fair value of the assets was based primarily on cash flow
analysis and information available from unsolicited third-party interests in these assets.

Note 10.    Subsequent Event

Subsequent to September 30, 2004, 750,000 shares of beneficial interest were issued as a result of the exercise of stock options by the Company's Chief
Executive Officer for total proceeds of €3,792.

Note 11.    Reclassifications

Certain prior period amounts in the interim period consolidated financial statements contained herein have been reclassified to conform to the current period's
presentation.

16

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, "we", "our", "us", the "Company" or "Mercer" mean Mercer International Inc. and its
subsidiaries; (ii) information is provided as of September 30, 2004, unless otherwise stated; (iii) all references to monetary amounts are to "Euros", the lawful currency adopted
by most members of the European Union, unless otherwise stated; (iv) "€" refers to Euros; and (v) a "tonne" is one metric ton or 2,204.6 pounds.

The
following discussion and analysis of our results of operations and financial condition for the nine and three months ended September 30, 2004 should be read in conjunction
with our consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year
ended December 31, 2003 filed with the Securities and Exchange Commission (the "SEC"). Certain reclassifications have been made to the prior period financial statements to conform with the
current period presentation.

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) a
northern bleached softwood kraft ("NBSK") pulp mill operated by our wholly-owned subsidiary, Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG ("Rosenthal"), near
Blankenstein, Germany, which has an annual production capacity of approximately 310,000 tonnes; (b) a newly constructed, state-of-the-art NBSK pulp mill,
with a design production capacity of approximately 552,000 tonnes, near Stendal, Germany (the "Stendal project") built and being started up by our 63.6% owned subsidiary, Zellstoff Stendal GmbH
("Stendal"); and (c) two paper mills located at Heidenau and Fährbrücke, Germany (the "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.

The
Stendal mill was completed substantially on its planned schedule and budget in the third quarter of 2004. Total investment costs in respect of the Stendal mill were approximately
€1.0 billion, the majority of which was financed under a senior project finance facility (the "Stendal Loan Facility") in the amount of €828 million and
arranged with Bayerische Hypo-und Vereinsbank AG. The Stendal mill is currently in the start-up phase and is undergoing extensive testing and evaluation. Effective
September 18, 2004, we commenced expensing all of the costs, including interest, related to the Stendal mill. Prior to that date, most of
the costs, including interest, relating to the Stendal mill were capitalized. Our results for the nine and three months ended September 30, 2004 include operating and interest costs of
€9.8 million and €4.2 million, respectively, related to the Stendal mill. During such periods, we did not report any pulp sales revenues from Stendal.
Some lower quality pulp produced at the Stendal mill prior to September 18, 2004 was sold, but the revenues therefrom were capitalized against testing costs in property, plant and equipment.
See "Stendal Project Status".

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.

17

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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. 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 declined from a high of approximately $710 per tonne in late 2000 to an average of approximately $460 per tonne in late 2001 and most of 2002 as the
decline of North American and European economies caused a sharp reduction in paper demand and a build-up of producer inventories. 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 list prices for kraft pulp in Europe increasing to approximately
$560 per tonne in December 2003 despite relatively high inventory levels. List prices for kraft pulp in Europe continued to strengthen in 2004 due to the relatively weak U.S. dollar and
improving world economies. List prices increased to approximately $640 per tonne in August 2004, before decreasing to approximately $605 per tonne in September 2004, primarily as a
result of a build-up of producer inventories. There can be no assurance that prices will not continue to 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
operating results because the price for our principal product, NBSK pulp, is generally based on a global industry benchmark that is priced 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 operating results 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 also impact 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".

Stendal,
as required under its project financing, entered into variable-to-fixed rate interest swaps (the "Stendal Interest Rate Swaps") in August 2002 to
fix the interest rate on approximately €612.6 million of indebtedness for the full term of the Stendal Loan Facility. Rosenthal has also entered into forward interest rate and
interest cap contracts (the "Rosenthal Interest Rate Contracts" and, together with the Stendal Interest Rate Swaps, the "Interest Rate Contracts") in respect of a portion of its long-term
indebtedness under its bank loan facility (the "Rosenthal Loan Facility").

18

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In
the nine months ended September 30, 2004, we recorded a net non-cash holding loss of €15.8 million before minority interests on the marked to
market valuation of the Interest Rate Contracts versus a net loss of €22.8 million before minority interests thereon in the prior period of 2003. In the quarter ended
September 30, 2004, we recorded a net non-cash holding loss of €14.1 million before minority interests on the marked to market valuation of the Interest Rate
Contracts versus a net gain of €5.9 million before minority interests thereon in the prior period of 2003.

In
March 2004, to protect against a weakening U.S. dollar, Rosenthal entered into two currency swaps in the aggregate principal amount of
€184.5 million to convert all of its long-term indebtedness under the Rosenthal Loan Facility into U.S. dollars and a currency forward in the notional amount
of €40.7 million (the "Rosenthal Currency Derivatives"). In the same month, Stendal entered into a currency swap in the principal amount of
€306.3 million to convert approximately one-half of its indebtedness under the Stendal Loan Facility into U.S. dollars and a currency forward in the notional
amount of €20.6 million (the "Stendal Currency Derivatives" and, together with the Rosenthal Currency Derivatives, the "Currency Derivatives"). Primarily as a result of a
weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies, in the nine and three months ended September 30, 2004, we recognized a net
non-cash holding gain of approximately €14.7 million and €6.0 million, respectively, before minority interests on the Currency Derivatives. In
the nine and three months ended September 30, 2003, we recognized a net gain of approximately €19.2 million and €3.8 million, respectively, before
minority interests on the then outstanding currency derivatives of Rosenthal and Stendal. See "Quantitative and Qualitative Disclosures about Market Risk".

If
the U.S. dollar continues to weaken versus the Euro, we could record further marked to market non-cash holding gains on the Currency Derivatives in future periods,
although our pulp sales realizations would decrease. A strengthening of the U.S. dollar versus the Euro could result in our recording marked to market non-cash holding losses on the
Currency Derivatives in future periods, although we would expect to achieve higher pulp sales realizations. Improving world economies resulted in an increase in interest rates in the first half of
2004. If world economies continue to strengthen, we would expect interest rates to continue to rise from their historically low levels. Higher interest rates could result in our recording marked to
market non-cash holding gains on the Interest Rate Contracts in future periods, which may be offset in part by higher interest rates payable on Rosenthal's debt obligations. However, a
fall in interest rates could result in our recording non-cash holding losses on the Interest Rate Contracts in future periods when they are marked to market. See "Quantitative and
Qualitative Disclosures about Market Risk".

19

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Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Selected sales data for the nine months ended September 30, 2004 and 2003 is as follows:

|                              |                  | Nine Months Ended September 30,
|----------------------------- | ---------------- | -------------------------------
|
|
|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)                      |                  | €                              
|                              |                  |                                

---

Total revenues for the nine months ended September 30, 2004 increased to €153.9 million from
€144.1 million in the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €145.1 million in the current
period, versus €134.9 million in the comparative period of 2003.

Costs
of pulp and paper sales in the nine months ended September 30, 2004 decreased to €131.4 million from €131.8 million in the
comparative period of 2003, primarily as a result of lower pulp production costs at our Rosenthal mill.

In
the current period, pulp sales increased to €103.7 million from €92.4 million in the same period a year ago as a result of higher prices
and production from our Rosenthal mill. We did not report any revenues from the sale of pulp from the Stendal mill in the current period. List prices for NBSK pulp in Europe were approximately
€519 ($635) per tonne in the third quarter of 2004, compared to approximately €444 ($550) per tonne in the third quarter of last year. The increase in NBSK pulp prices
was partially offset by the weakness of the U.S. dollar versus the Euro in the current period. In the current period, pulp sales by volume were 229,462 tonnes, compared to 221,926 tonnes in the
comparative period of 2003.

Pulp
sales realizations were €452 per tonne on average in the current period, compared to €416 per tonne in the comparative period of 2003.

Transportation
and other revenues for the pulp operations were €8.9 million in the period ended September 30, 2004, compared to
€8.2 million in the comparative period of last year.

Cost
of sales and general, administrative and other expenses for the pulp operations increased to €108.8 million in the nine months ended September 30, 2004
from €104.6 million in the comparative period of 2003, primarily as a result of the inclusion of €7.9 million of operating costs related to the Stendal
mill.

20

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On
average, fiber costs for pulp production decreased by approximately 4.3% compared to the first nine months of last year.

Depreciation
for the pulp operations was €15.0 million in the current period, versus €16.3 million in the year ago period. A change
effective July 1, 2004 in our depreciation estimate in respect of our Rosenthal mill resulted in a decrease of €2.2 million in cost of sales and net loss, and a decrease
in net loss per share of €0.13 for the nine months ended September 30, 2004.

For
the nine months of 2004, our pulp operations generated operating income of €5.7 million, versus an operating loss of €1.8 million in the
year ago period.

Paper
sales in the current period were €41.3 million, compared with €42.5 million in the same period of last year. Sales of specialty papers
in the nine months ended September 30, 2004 were €28.0 million versus €30.2 million in the comparative period of 2003, primarily as a result of a
shift in the product mix. For the current period, total paper sales volumes were 47,501 tonnes, versus 46,988 tonnes in the nine months ended September 30, 2003. On average, prices for
specialty papers realized in the current period increased slightly, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 7.7% reflecting generally
weak demand.

Cost
of sales and general, administrative and other expenses for the paper operations in the nine months ended September 30, 2004 increased to
€52.2 million from €41.7 million in the comparative period of 2003, primarily as a result of a non-cash €6.0 impairment charge
relating to our paper operations. On November 3, 2004, our management determined to record and our audit committee approved a non-cash impairment charge of
€6.0 million to write-off the carrying value of our Fährbrücke paper mill assets. Based upon its current product mix, the mill has an
annual production capacity of approximately 35,000 tonnes and produces primarily printing and writing paper. We determined to take the impairment charge as the Fährbrücke
mill has generated weaker than expected returns over a period of time despite changes to its product mix. We do not expect the impairment charge in and of itself to result in future cash expenditures
as we intend to continue to operate the Fährbrücke mill.

Depreciation
for the paper operations was €1.7 million in the current period, compared to €1.5 million in the same period last year.

For
the nine months ended September 30, 2004, our paper operations generated an operating loss of €10.6 million, which included the non-cash
impairment charge of €6.0 million, compared to operating income of €1.6 million in the same period of last year.

For
the nine months ended September 30, 2004, consolidated general and administrative expenses increased to €21.2 million from
€13.0 million in the year ago period, primarily as a result of the inclusion of operating costs of €7.9 million related to the Stendal mill.

In
the current period, we reported a loss from operations of €7.6 million, compared to €2.5 million in the same period last year. Interest
expense (excluding capitalized interest of €27.2 million relating to the Stendal pulp mill) in the period ended September 30, 2004 increased to
€9.6 million from €6.9 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003 and the
inclusion of interest expense of €1.9 million relating to the Stendal project after September 18, 2004.

21

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In
the period ended September 30, 2004, we recorded a net non-cash holding loss of €15.8 million before minority interests on the marked to
market valuation of the Interest Rate Contracts versus a net loss of €22.8 million before minority interests thereon in the prior period of 2003. In addition, in the nine months
ended September 30, 2004, we recorded a net non-cash holding gain of approximately €14.7 million before minority interests on the valuation of the Currency
Derivatives as a result of the weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies. In the prior period of 2003, we recorded a net gain of
€19.2 million before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal.

In
the nine months ended September 30, 2004, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was
€3.9 million, compared to €8.5 million in the comparative period of 2003.

Our
results for the prior period of 2003 included an adjustment of €5.5 million for the non-cash impact of other-than-temporary
impairment losses on our available-for-sale securities.

We
reported a net loss for the nine months ended September 30, 2004 of €12.6 million, or €0.73 per basic and diluted share, which reflected
the non-cash €6.0 million impairment charge related to our paper operations, the inclusion of €9.8 million of operating and interest costs
related to our Stendal mill and the net non-cash holding loss on the marked to market valuation of our derivative instruments. In the comparative period of 2003, we reported a net loss of
€9.2 million, or €0.54 per basic and diluted share.

We
generated "Operating EBITDA" of €15.6 million in the nine months ended September 30, 2004 and 2003, respectively. Operating EBITDA is defined as income
(loss) from operations plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA is calculated by adding depreciation and amortization and
non-recurring capital asset impairment charges of €23.2 million and €18.1 million to the loss from operations of
€7.6 million and €2.5 million for the nine-month periods ended September 30, 2004 and 2003, 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 and non-recurring capital asset impairment charges are not an actual cash cost, and
depreciation expense 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.

22

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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.

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

|                                   |                   | Nine Months Ended September 30, |          
|---------------------------------- | ----------------- | ------------------------------- | ---------
|
|
|Net loss                           |                   |                                 | € (12,604
|Minority interest                  |                   |                                 | (3,936   
|Income taxes                       |                   |                                 | (37      
|Interest expense                   |                   |                                 | 9,554    
|Investment income                  |                   |                                 | (1,679   
|Derivative financial instruments   |                   |                                 | 1,077    
|Impairment of investments          |                   |                                 |         
|Other                              |                   |                                 |         
|                                   |                   |                                 |          
|Loss from operations               |                   |                                 | (7,625   
|Add: Depreciation and amortization |                   |                                 | 17,217   
|                                   | Impairment charge |                                 |          
|                                   |                   |                                 |          
|Operating EBITDA                   |                   | €                               | 15,592   
|                                   |                   |                                 |          

23

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Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Selected sales data for the three months ended September 30, 2004 and 2003 is as follows:

|                              |                  | Three Months Ended September 30,
|----------------------------- | ---------------- | --------------------------------
|
|
|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)                      |                  | €                               
|                              |                  |                                 

---

Total revenues for the three months ended September 30, 2004 increased to €49.1 million from
€45.8 million in the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €47.3 million in the third quarter
of 2004, versus €43.7 million in the comparative period of 2003.

Costs
of pulp and paper sales in the three months ended September 30, 2004 decreased to €39.8 million from €45.4 million in the
comparative period of 2003, primarily as a result of lower pulp production costs at our Rosenthal mill.

For
the three months ended September 30, 2004, pulp sales increased to €34.5 million from €30.0 million in the same period a year
ago, primarily as a result of higher prices. We did not report any revenues from the sale of pulp from the Stendal mill in the current period. List prices for NBSK pulp in Europe were approximately
€519 ($635) per tonne in the third quarter of 2004, approximately €535 ($645) per tonne in the second quarter of 2004 and approximately €444 ($550) per
tonne in the third quarter of last year. The increase in NBSK pulp prices was partially offset by the weakness of the U.S. dollar versus the Euro in the current period. In the current quarter,
pulp sales by volume were 73,128 tonnes, compared to 73,747 tonnes in the comparative period of 2003.

Pulp
sales realizations were €472 per tonne on average in the current quarter, compared to €471 per tonne in the second quarter of 2004 and
€407 per tonne in the three months ended September 30, 2003.

24

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Transportation
and other revenues for the pulp operations were €2.2 million in the three months ended September 30, 2004, compared to
€2.0 million in the three months ended September 30, 2003.

Cost
of sales and general, administrative and other expenses for the pulp operations were €33.4 million in the three months ended September 30, 2004
compared to €35.3 million in the comparative period of 2003, and included €2.5 million of operating costs related to the Stendal mill.

On
average, fiber costs for pulp production decreased by approximately 4.6% compared to the third quarter of last year.

Depreciation
for the pulp operations was €3.8 million in the current quarter, versus €5.5 million in the year ago period. A change in our
depreciation estimate in respect of our Rosenthal mill resulted in a decrease of €2.2 million in cost of sales and net loss, and a decrease in net loss per share of
€0.13 for the quarter ended September 30, 2004.

For
the three months ended September 30, 2004, our pulp operations generated operating income of €4.0 million, versus an operating loss of
€2.6 million in the year ago period.

Paper
sales in the three months ended September 30, 2004 were €12.8 million, compared to €13.7 million in the same period of last
year. Sales of specialty papers in the three months ended September 30, 2004 and 2003 were €8.6 million, respectively. For the current quarter, total paper sales volumes
were 14,712 tonnes, versus 15,979 tonnes in the comparative period of last year. On average, prices for specialty papers realized in the current quarter increased by 2.5%, reflecting a shift in the
product mix. Average prices for our printing papers decreased by approximately 2.8% reflecting generally weak demand.

Cost
of sales and general, administrative and other expenses for the paper operations in the three months ended September 30, 2004 increased to
€20.3 million from €14.9 million in the comparative quarter of 2003, primarily as a result of a non-cash €6.0 million
impairment charge relating to our paper operations. Depreciation for the paper operations was €0.6 million in the three months ended September 30, 2004 and 2003,
respectively.

For
the three months ended September 30, 2004, our paper operations generated an operating loss of €7.6 million, which included the non-cash
impairment charge of €6.0 million, compared to an operating loss of €1.1 million in the same period of last year.

For
the three months ended September 30, 2004, consolidated general and administrative expenses increased to €7.3 million from
€4.2 million in the year ago period, primarily as a result of the inclusion of operating costs of €2.5 million related to the Stendal mill.

In
the three months ended September 30, 2004, we reported a loss from operations of €4.8 million, compared to a loss from operations of
€5.1 million in the same period last year. Interest expense (excluding capitalized interest of €9.7 million relating to the Stendal pulp mill) in the
three months ended September 30, 2004 increased to €4.2 million from €2.2 million a year ago, due to higher borrowings resulting primarily from our
convertible note issue in October 2003 and the inclusion of interest expense of €1.7 million relating to the Stendal project after September 18, 2004.

25

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In
the three months ended September 30, 2004, the marked to market valuation of the Interest Rate Contracts resulted in a net non-cash holding loss of approximately
€14.1 million before minority interests, versus a net gain of €5.9 million before minority interests on such Interest Rate Contracts in the prior period
of 2003. In addition, in the three months ended September 30, 2004, we recorded a net non-cash holding gain of approximately €6.0 million before minority
interests on the valuation of the Currency Derivatives as a result of a weakening of the U.S. dollar versus the Euro and changes in interest rates related to such currencies, versus a net gain
of €3.8 million before minority interests on the then outstanding currency derivatives of Rosenthal and Stendal in the year ago period.

In
the current quarter, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was €6.7 million, compared to
€(1.9) million in the comparative period of 2003.

We
reported a net loss for the three months ended September 30, 2004 of €9.9 million, or €0.57 per basic and diluted share, which reflected
the non-cash €6.0 million impairment charge related to our paper operations, the inclusion of €4.2 million of operating and interest costs
related to the Stendal mill and the net non-cash holding loss on the marked to market valuation of our derivative instruments. In the comparative period of 2003, we reported net income of
€0.9 million, or €0.05 per basic and diluted share.

We
generated Operating EBITDA of €5.3 million in the current quarter, compared to Operating EBITDA of €1.1 million in the comparative period
of 2003. 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. See the
discussion of our results for the nine months ended September 30, 2004 for additional information relating to Operating EBITDA.

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

|                                   |                   | Three Months Ended September 30, |         
|---------------------------------- | ----------------- | -------------------------------- | --------
|
|
|Net (loss) income                  |                   |                                  | € (9,879
|Minority interest                  |                   |                                  | (6,726  
|Income taxes                       |                   |                                  | (236    
|Interest expense                   |                   |                                  | 4,200   
|Investment income                  |                   |                                  | (215    
|Derivative financial instruments   |                   |                                  | 8,105   
|Other                              |                   |                                  |        
|                                   |                   |                                  |         
|Income (loss) from operations      |                   |                                  | (4,751  
|Add: Depreciation and amortization |                   |                                  | 4,005   
|                                   | Impairment charge |                                  |         
|                                   |                   |                                  |         
|Operating EBITDA                   |                   | €                                | 5,254   
|                                   |                   |                                  |         

26

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Liquidity and Capital Resources

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

|                              |  | As at September 30, 2004 |           | As at December 31, 2003 |  
|----------------------------- |  | ------------------------ | --------- | ----------------------- | -
|
|Financial Position            |  |                          |           |                         |  
|Cash and cash equivalents     |  | €                        | 42,643    |                         | €
|Working capital               |  |                          | (122,474  | )(1)                    |  
|Property, plant and equipment |  |                          | 942,249   |                         |  
|Total assets                  |  |                          | 1,192,727 |                         |  
|Long-term liabilities         |  |                          | 778,939   |                         |  
|Shareholders' equity          |  |                          | 121,595   |                         |  

---

At September 30, 2004, our cash and cash equivalents were €42.6 million, compared to
€52.0 million at December 31, 2003. We also had €29.3 million of cash restricted to pay construction costs payable and
€19.1 million of cash restricted in a debt service account, both related to the Stendal project. In addition, we had €28.5 million of cash restricted in a
debt service account relating to the Rosenthal Loan Facility. At September 30, 2004, we had a working capital deficit of €122.5 million, primarily because we had Stendal
construction costs payable of €161.0 million for which we had not yet drawn down under the Stendal Loan Facility and, under our accounting policies, we do not record certain
government grants until they are received. The Stendal construction costs will be paid pursuant to the Stendal Loan Facility in the ordinary course. At September 30, 2004, we qualified for
investment grants related to the Stendal mill totaling approximately €65.2 million from the federal and state governments of Germany, which we expect to receive in 2005.
Approximately €61.2 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. We expect to qualify for additional investment grants totaling
€23.3 million when such Stendal construction costs have been substantially paid.

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 cash flow from operations.

Operating Activities

Operating activities in the current period used cash of €1.2 million, compared to providing cash of €7.0 million in
the comparative period of 2003. An increase in receivables related primarily to the start-up of the Stendal mill used cash of €2.1 million in the current period,
compared to using cash of €8.1 million in the comparative period of 2003. Higher inventories due primarily to the build up of fiber and finished goods in connection with the
start-up of the Stendal mill used cash of €35.8 million in the first nine months of 2004, compared to higher inventories using cash of
€6.6 million in the first nine months of 2003. We expect that as the Stendal mill ramps up operations, inventory levels at the mill will decrease to more normalized levels. An
increase in accounts payable and accrued expenses related primarily to the start-up of the Stendal mill provided cash of €26.3 million in the current period,
compared to providing cash of €11.6 million in the comparative period of 2003.

27

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Investing Activities

Investing activities in the nine months ended September 30, 2004 used cash of €211.8 million, primarily as a result of the
acquisition of properties, net of investment grants, of which €206.9 million was attributable to the Stendal project, compared to using cash of
€225.9 million in the nine months ended September 30, 2003, of which €145.9 million was attributable to the Stendal project. Sales of certain
legacy available-for-sale securities provided cash of €1.2 million in the current period.

We
qualify for investment grants related to the Stendal mill from the federal and state governments of Germany and had claim expenditures of €65.2 million
outstanding as of September 30, 2004, which we expect to receive in 2005. We received investment grants totaling €74.7 million with respect to the Stendal project during
the quarter ended September 30, 2004. 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.

Financing Activities

Financing activities provided cash of €203.6 million in the nine months ended September 30, 2004. A net increase in indebtedness,
primarily related to the Stendal project, provided cash of €104.1 million. An increase in construction costs payable provided cash of €118.2 million in
the current period. An increase in restricted cash used cash of €17.5 million in the current period. We made principal repayments of €20.1 million in
connection with the Rosenthal Loan Facility in the nine months ended September 30, 2004. The balance outstanding under such facility at September 30, 2004, net of cash in a restricted
debt service account, was €143.1 million. The issuance of shares in connection with the exercise of options provided cash of €0.6 million in the current
period. Financing activities provided cash of €206.2 million in the first nine months of 2003, primarily as a result of an increase in construction costs payable relating to the
Stendal project and an increase in indebtedness primarily in connection with the Stendal project.

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 September 30, 2004.
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.

28

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Stendal Project Status

The Stendal mill was completed substantially on its planned schedule and budget in the third quarter of 2004. The mill is currently in the start-up
phase and is undergoing extensive testing and evaluation. The mill has all of its requisite permits in place to commence operations and has secured sufficient fiber supplies for the balance of 2004
and into the first quarter of 2005. At September 30, 2004, the mill had filled in excess of 77% of its overall staffing requirements. The balance of the hiring will occur in affiliated
activities such as harvesting and transportation and will be completed through 2004 and 2005 as the mill ramps up operations.

The
Stendal mill is currently being supervised by the contractor using Stendal's personnel to operate the mill. Stendal commenced the initial production of pulp in the third quarter of
2004. The initial pulp produced was off-grade pulp which was primarily sold into the recycled fiber, corrugated board and similar markets. The mill is currently producing
"start-up quality" pulp. The prices realized on the sale of off-grade and start-up quality pulp are lower than the selling price for on-grade NBSK pulp.
Under our current start-up plan, we expect Stendal to commence ramping up pulp production and quality so that the Stendal mill will be producing a significant proportion of saleable kraft
pulp in the fourth quarter of 2004. Pursuant to our start up plan, we expect that the mill would be operating at approximately 80% of its design capacity by the end of 2004.

In
conjunction with the start-up of the Stendal mill, we built up the fiber and finished goods inventory at the mill. We expect that the inventory levels at the Stendal mill
will decrease to more normalized levels as the mill ramps up operations.

The
mill is currently undergoing extensive testing and evaluation in connection with its mechanical completion and to also determine, following several months of start-up
operations, whether certain performance requirements have been met, referred to as the "Acceptance Test". The Acceptance Test requires that the mill continuously produces pulp for a
72-hour period in compliance with specified operational, quality and environmental requirements. Following completion of such testing, if the requisite performance requirements are met, we
are required to provide the contractor with an acceptance certificate. Once we deliver the acceptance certificate, we assume responsibility for the operation of the mill, subject to the contractor's
warranty obligations.

Under
the current start-up plan, we expect that the contractor will shut down the mill for approximately one week in the fourth quarter of 2004 for the completion of any
adjustments, installations and the replacement of any equipment that may be required in order to fulfill its obligations under the construction contract. We also expect that, in the latter part of
2004, the Stendal mill will be shut down for a few days for fine tuning and cleaning so that the contractor may commence trials for the Acceptance Test.

Our
planned start up of the Stendal mill is subject to risks commonly associated with the start up of large greenfield industrial projects which could result in the Stendal mill
experiencing operating difficulties or delays in the start-up period and the Stendal mill may not achieve our planned production, timing, quality or cost projections. These risks include,
without limitation, equipment failures or damage, errors or miscalculations in engineering, design specifications or equipment manufacturing, faulty construction or workmanship, defective equipment or
installation, human error, industrial accidents, weather conditions, failure to comply with environmental and other permits, and complex integration of processes and equipment.

29

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Foreign Currency

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 nine months ended September 30, 2004, we reported a net €0.3 million foreign exchange translation loss and, as a result, the cumulative foreign
exchange translation gain decreased to €5.7 million at September 30, 2004 from €6.0 million at December 31, 2003.

Based
upon the exchange rate at September 30, 2004, the U.S. dollar decreased by approximately 6.2% in value against the Euro since September 30, 2003. 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 that are the most important to the portrayal of
our current financial condition and results of operations.

For
information about our significant accounting policies, see our annual report on Form 10-K for the year ended December 31, 2003. In addition, we had a
change in our depreciation estimate relating to the Rosenthal mill during the current quarter. See Note 8 to our consolidated financial statements included herein.

Cautionary Statement Regarding Forward-Looking Information

The statements in this report that are not based on historical facts are called "forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These statements appear in a number of different places in this report and can be identified by words
such as "estimates", "projects", "expects", "intends", "believes", "plans", or their negatives or other comparable words. Also look for discussions of strategy that involve risks and uncertainties.
Forward-looking statements include statements regarding the outlook for our future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal
proceedings, the adequacy of reserves, or other business plans. You are cautioned that any such forward-looking statements are not guarantees and may involve risks and uncertainties. Our actual
results may differ materially from those in the forward-looking statements due to risks facing us or due to actual facts differing from the assumptions underlying our estimates. Some of these risks
and assumptions include those set forth in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the year
ended December 31, 2003. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf.
Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and
other documents we file from time to time with the SEC.

30

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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 two of the past three calendar years, list pulp prices have fallen significantly. Although pulp prices improved overall in 2003 and the first half of 2004, they fell in the
third quarter of 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.

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.

31

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ITEM 3.    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.

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.

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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 gains and losses (whether realized or unrealized) are recognized in
earnings for a reporting period. We determine market valuations based primarily upon valuations provided by our counterparties.

In
March 2004, Rosenthal entered into the Rosenthal Currency Derivatives which include two currency swaps in the aggregate principal amount of
€184.5 million that mature in September 2008 and September 2013, respectively. 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.

The
Rosenthal Currency Derivatives also include a currency forward in the notional amount of €40.7 million which matures in March 2005 that was entered into
by Rosenthal to reduce or limit its exposure to currency risks and to augment its potential gains or to reduce its potential losses. In addition, Rosenthal entered into the Rosenthal Interest Rate
Contracts in 2002 to either fix or limit the interest rates in connection with certain of its indebtedness.

In
August 2002, Stendal entered into the Stendal Interest Rate Swaps 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 Swaps, 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 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
March 2004, Stendal also entered into the Stendal Currency Derivatives which are comprised of a currency swap in the principal amount of €306.3 million
which matures in April 2011 and a currency forward contract for the notional amount of €20.6 million maturing in March 2005 to reduce or limit its exposure to
currency risks and to augment its potential gains or reduce its potential losses.

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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 September 30, 2004, 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 September 30, 2004, no derivative contract had been executed with respect to pulp prices.

The
following table sets forth the maturity date, the notional amount and the recognized gain or loss in the nine and three months ended September 30, 2004 for derivatives that
were in effect during these periods:

|Derivative Instrument                     |  | Maturity Date  |  | Notional Amount |         | Recognized Gain (Loss) in Nine Months Ended September 30, 2004 |   | Recognized Gain (Loss) in Three Months Ended September 30, 2004 |  
|----------------------------------------- |  | -------------- |  | --------------- | ------- | -------------------------------------------------------------- | - | --------------------------------------------------------------- | -
|
|Interest Rate Derivatives                 |  |                |  |                 |         |                                                                |   |                                                                 |  
|Rosenthal Interest Rate Cap Agreements(1) |  | September 2007 |  | $               | 178.3   |                                                                | € | (0.1                                                            | )
|Stendal Interest Rate Swaps(2)            |  | October 2017   |  | €               | 1,147.5 |                                                                |   | (15.7                                                           | )
|                                          |  |                |  |                 |         |                                                                |   |                                                                 |  
|                                          |  |                |  |                 |         |                                                                | € | (15.8                                                           | )
|                                          |  |                |  |                 |         |                                                                |   |                                                                 |  
|Foreign Exchange Rate Derivatives         |  |                |  |                 |         |                                                                |   |                                                                 |  
|Rosenthal Currency Swap(3)                |  | September 2008 |  | €               | 111.8   |                                                                | € | (0.4                                                            | )
|Rosenthal Currency Swap(4)                |  | September 2013 |  | €               | 72.7    |                                                                |   | (0.2                                                            | )
|Stendal Currency Swap(5)                  |  | April 2011     |  | €               | 306.3   |                                                                |   | 14.4                                                            |  
|Rosenthal Currency Forward                |  | March 2005     |  | €               | 40.7    |                                                                |   | 0.4                                                             |  
|Stendal Currency Forward                  |  | March 2005     |  | €               | 20.6    |                                                                |   | 0.5                                                             |  
|                                          |  |                |  |                 |         |                                                                |   |                                                                 |  
|                                          |  |                |  |                 |         |                                                                | € | 14.7                                                            |  
|                                          |  |                |  |                 |         |                                                                |   |                                                                 |  

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For more information, see our annual report on Form 10-K for the year ended December 31, 2003.

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ITEM 4.    CONTROLS AND PROCEDURES

We are spending a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to financial
reporting, internal controls and procedures and public disclosure, including under the Sarbanes-Oxley Act of 2002 ("SOX"), new SEC regulations, standards adopted by the Public Company Accounting
Oversight Board and Nasdaq Stock Market rules. Specifically, Section 404 of SOX requires management's annual review and evaluation of our internal controls over financial reporting and
attestations of the effectiveness of these systems by our management and by our independent registered public accounting firm.

Section 404 Compliance Under the Sarbanes-Oxley Act of 2002.We have been undertaking a comprehensive effort since 2003 in preparation for
compliance with Section 404 of SOX. We have substantially completed the preliminary documentation of our internal control systems and have been testing these systems. We are in the process of
finalizing documentation of our internal control systems and testing and retesting these systems, where appropriate. This process along with our other Section 404 work has required us to hire
additional personnel and retain outside advisors and has resulted in additional professional expenses.

We
expect to validate any potential control deficiencies and to assess whether or not they rise to the level of significant deficiencies or material weaknesses. We believe that we are
prepared to investigate any potential control deficiencies and to remediate them, where appropriate. We are working to complete all of our Section 404 efforts in a timely manner to permit us to
identify and correct any deficiencies in our internal control systems by December 31, 2004. Although we have made this project a top priority, there can be no assurance that all control
deficiencies identified and validated will be remediated by December 31, 2004, the end of our fiscal year, or that any remaining unresolved control deficiencies will not rise to the level of
significant deficiencies or material weaknesses. The documentation, testing and review processes required by Section 404 of SOX are new, complex and may be subject to differing interpretations
and applications. We do not have significant experience in complying with these requirements. As a result, we may encounter problems or delays in completing these processes, including delays in
remediating any deficiencies that may be identified or implementing any improvements that may be required.

As
a result of the completion of the Stendal mill, it has transformed from a project construction company to an operating company. We have continued to refine and implement consistent
internal controls and procedures at Stendal to reflect such change and strengthen and integrate its business practices and internal controls.

While
we believe that we currently have adequate internal controls over financial reporting, in the event that our Principal Executive Officer, Principal Financial Officer or independent
registered public accounting firm determine that our controls over financial reporting are not effective as required by Section 404, investor perceptions of us may be adversely affected
and, among other things, this could cause a decline in the market price of our securities.

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Evaluation of Disclosure 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 and mirror certifications provided by senior management, 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.

Changes in Internal Controls.There have been no significant changes in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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 II.    OTHER INFORMATION

ITEM 1.    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 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

31.1

Section 302 Certification of Chief Executive Officer31.2

Section 302 Certification of Chief Financial Officer32.1*

Section 906 Certification of Chief Executive Officer32.2*

Section 906 Certification of Chief Financial Officer


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(b)   Reports on Form 8-K

The Company filed the following reports on Form 8-K with respect to the indicated items during the third quarter of 2004:



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SIGNATURES

Pursuant
to the requirements 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.
|---------------------- |  | -------------------------
|                       |  | By:                      
|Date: November 8, 2004 |  |                          

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