UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to

Commission File 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 the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  ý                     NOo

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES  ý                     NOo

The Registrant had 17,324,229 shares of beneficial interest outstanding as at August 6, 2004.



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PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.    CONSOLIDATED FINANCIAL STATEMENTS    FOR THE SIX MONTHS ENDED JUNE 30, 2004    (Unaudited)

2

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MERCER INTERNATIONAL INC.        CONSOLIDATED BALANCE SHEETS        As at June 30, 2004 and December 31, 2003  (Unaudited)  (Euros in thousands)

|                                          |                                               | June 30,
2004                              |          | December 31,
2003
|----------------------------------------- | --------------------------------------------- | ------------------------------------------ | -------- | -----------------
|ASSETS                                    |                                               |                                            |          |                  
|Current Assets                            |                                               |                                            |          |                  
|                                          | Cash and cash equivalents                     |                                            | € 42,236 |                  
|                                          | Cash restricted                               |                                            | 20,887   |                  
|                                          | Receivables                                   |                                            | 32,386   |                  
|                                          | Unrealized foreign exchange derivative gains  |                                            | 783      |                  
|                                          | Inventories                                   |                                            | 41,904   |                  
|                                          | Prepaid expenses                              |                                            | 5,675    |                  
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total current assets                       |          | 143,871          
|Long-Term Assets                          |                                               |                                            |          |                  
|                                          | Cash restricted                               |                                            | 45,948   |                  
|                                          | Property, plant and equipment                 |                                            | 823,017  |                  
|                                          | Investments                                   |                                            | 844      |                  
|                                          | Equity method investments                     |                                            | 4,378    |                  
|                                          | Deferred note issuance costs                  |                                            | 4,072    |                  
|                                          | Unrealized foreign exchange derivative gains  |                                            | 13,826   |                  
|                                          | Deferred income tax                           |                                            | 10,000   |                  
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total assets                               |          | € 1,045,956      
|                                          |                                               |                                            |          |                  
|LIABILITIES                               |                                               |                                            |          |                  
|Current Liabilities                       |                                               |                                            |          |                  
|                                          | Accounts payable and accrued expenses         |                                            | € 49,140 |                  
|                                          | Construction in progress costs payable        |                                            | 19,782   |                  
|                                          | Note payable                                  |                                            | 1,002    |                  
|                                          | Debt, construction in progress                |                                            | 78,700   |                  
|                                          | Debt, current portion                         |                                            | 15,009   |                  
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total current liabilities                  |          | 163,633          
|Long-Term Liabilities                     |                                               |                                            |          |                  
|                                          | Debt, construction in progress                |                                            | 454,328  |                  
|                                          | Debt, less current portion                    |                                            | 244,533  |                  
|                                          | Unrealized interest rate derivative losses    |                                            | 44,717   |                  
|                                          | Unrealized foreign exchange derivative losses |                                            | 4,665    |                  
|                                          | Capital leases and other                      |                                            | 4,664    |                  
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total liabilities                          |          | 916,540          
|Minority Interest                         |                                               |                                           |          |                 
|SHAREHOLDERS' EQUITY                      |                                               |                                            |          |                  
|Shares of beneficial interest             |                                               | 79,736                                     |          | 78,139           
|Additional paid-in capital, stock options |                                               | 14                                         |          | 223              
|Retained earnings                         |                                               | 46,471                                     |          | 49,196           
|Accumulated other comprehensive income    |                                               | 3,195                                      |          | 5,297            
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total shareholders' equity                 |          | 129,416          
|                                          |                                               |                                            |          |                  
|                                          |                                               | Total liabilities and shareholders' equity |          | € 1,045,956      
|                                          |                                               |                                            |          |                  

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

3

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MERCER INTERNATIONAL INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        For Six Months Ended June 30, 2004 and 2003  (Unaudited)  (Euros in thousands, except for earnings per
share)

|                                                        |                                             | 2004                                                       |          | 2003     |         
|------------------------------------------------------- | ------------------------------------------- | ---------------------------------------------------------- | -------- | -------- | --------
|Revenues                                                |                                             |                                                            |          |          |         
|                                                        | Pulp and paper                              |                                                            | € 97,768 |          | € 91,274
|                                                        | Transportation                              |                                                            | 1,467    |          | 2,022   
|                                                        | Other                                       |                                                            | 5,531    |          | 5,018   
|                                                        |                                             |                                                            |          |          |         
|                                                        |                                             | 104,766                                                    |          | 98,314   |         
|                                                        |                                             |                                                            |          |          |         
|Cost of sales                                           |                                             |                                                            |          |          |         
|                                                        | Pulp and paper                              |                                                            | 90,664   |          | 86,472  
|                                                        | Transportation                              |                                                            | 1,469    |          | 1,863   
|                                                        |                                             |                                                            |          |          |         
|                                                        |                                             | 92,133                                                     |          | 88,335   |         
|                                                        |                                             |                                                            |          |          |         
|Gross profit                                            |                                             | 12,633                                                     |          | 9,979    |         
|General and administrative expenses                     |                                             | (14,434                                                    | )        | (8,730   | )       
|Flooding losses and expenses, less grant income         |                                             | (669                                                       | )        | 1,376    |         
|                                                        |                                             |                                                            |          |          |         
|(Loss) income from operations                           |                                             | (2,470                                                     | )        | 2,625    |         
|                                                        |                                             |                                                            |          |          |         
|Other income (expense)                                  |                                             |                                                            |          |          |         
|                                                        | Interest expense                            |                                                            | (5,354   | )        | (4,651  
|                                                        | Investment income                           |                                                            | 1,464    |          | 639     
|                                                        | Derivative financial instruments            |                                                            |          |          |         
|                                                        |                                             | Unrealized gain (loss), construction in progress financing |          | 12,300   |         
|                                                        |                                             | Unrealized and realized net (losses) gains, other          |          | (5,272   | )       
|                                                        | Other                                       |                                                            | (404     | )        | 11      
|                                                        | Impairment of available-for-sale securities |                                                            |         |          | (5,511  
|                                                        |                                             |                                                            |          |          |         
|Total other income (expense)                            |                                             | 2,734                                                      |          | (22,855  | )       
|                                                        |                                             |                                                            |          |          |         
|Income (loss) before income taxes and minority interest |                                             | 264                                                        |          | (20,230  | )       
|Income tax benefit (expense)                            |                                             | (199                                                       | )        | (198     | )       
|                                                        |                                             |                                                            |          |          |         
|Income (loss) before minority interest                  |                                             | 65                                                         |          | (20,428  | )       
|Minority interest                                       |                                             | (2,790                                                     | )        | 10,379   |         
|                                                        |                                             |                                                            |          |          |         
|Net loss                                                |                                             | (2,725                                                     | )        | (10,049  | )       
|Retained earnings, beginning of period                  |                                             | 49,196                                                     |          | 52,789   |         
|                                                        |                                             |                                                            |          |          |         
|Retained earnings, end of period                        |                                             | € 46,471                                                   |          | € 42,740 |         
|                                                        |                                             |                                                            |          |          |         
|Loss per share                                          |                                             |                                                            |          |          |         
|                                                        | Basic                                       |                                                            | € (0.16  | )        | € (0.60 
|                                                        |                                             |                                                            |          |          |         
|                                                        | Diluted                                     |                                                            | € (0.16  | )        | € (0.60 
|                                                        |                                             |                                                            |          |          |         

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 June 30, 2004 and 2003  (Unaudited)  (Euros in thousands, except for earnings per share)

|                                                        |                                  | 2004                                                       |          | 2003     |         
|------------------------------------------------------- | -------------------------------- | ---------------------------------------------------------- | -------- | -------- | --------
|Revenues                                                |                                  |                                                            |          |          |         
|                                                        | Pulp and paper                   |                                                            | € 48,535 |          | € 45,041
|                                                        | Transportation                   |                                                            | 732      |          | 980     
|                                                        | Other                            |                                                            | 2,577    |          | 1,892   
|                                                        |                                  |                                                            |          |          |         
|                                                        |                                  | 51,844                                                     |          | 47,913   |         
|                                                        |                                  |                                                            |          |          |         
|Cost of sales                                           |                                  |                                                            |          |          |         
|                                                        | Pulp and paper                   |                                                            | 43,987   |          | 41,472  
|                                                        | Transportation                   |                                                            | 743      |          | 797     
|                                                        |                                  |                                                            |          |          |         
|                                                        |                                  | 44,730                                                     |          | 42,269   |         
|                                                        |                                  |                                                            |          |          |         
|Gross profit                                            |                                  | 7,114                                                      |          | 5,644    |         
|General and administrative expenses                     |                                  | (7,272                                                     | )        | (3,923   | )       
|Flooding losses and expenses, less grant income         |                                  | (416                                                       | )        | (353     | )       
|                                                        |                                  |                                                            |          |          |         
|(Loss) income from operations                           |                                  | (574                                                       | )        | 1,368    |         
|                                                        |                                  |                                                            |          |          |         
|Other income (expense)                                  |                                  |                                                            |          |          |         
|                                                        | Interest expense                 |                                                            | (2,366   | )        | (2,188  
|                                                        | Investment income                |                                                            | 530      |          | 102     
|                                                        | Derivative financial instruments |                                                            |          |          |         
|                                                        |                                  | Unrealized gain (loss), construction in progress financing |          | 29,855   |         
|                                                        |                                  | Unrealized and realized net (losses) gains, other          |          | (382     | )       
|                                                        | Other                            |                                                            | (404     | )        | 11      
|                                                        |                                  |                                                            |          |          |         
|Total other income (expense)                            |                                  | 27,233                                                     |          | (6,852   | )       
|                                                        |                                  |                                                            |          |          |         
|Income (loss) before income taxes and minority interest |                                  | 26,659                                                     |          | (5,484   | )       
|Income tax benefit (expense)                            |                                  | (219                                                       | )        | (186     | )       
|                                                        |                                  |                                                            |          |          |         
|Income (loss) before minority interest                  |                                  | 26,440                                                     |          | (5,670   | )       
|Minority interest                                       |                                  | (10,199                                                    | )        | 6,543    |         
|                                                        |                                  |                                                            |          |          |         
|Net income                                              |                                  | 16,241                                                     |          | 873      |         
|Retained earnings, beginning of period                  |                                  | 30,230                                                     |          | 41,867   |         
|                                                        |                                  |                                                            |          |          |         
|Retained earnings, end of period                        |                                  | € 46,471                                                   |          | € 42,740 |         
|                                                        |                                  |                                                            |          |          |         
|Income per share                                        |                                  |                                                            |          |          |         
|                                                        | Basic                            |                                                            | € 0.94   |          | € 0.05  
|                                                        |                                  |                                                            |          |          |         
|                                                        | Diluted                          |                                                            | € 0.57   |          | € 0.05  
|                                                        |                                  |                                                            |          |          |         

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 Six Months Ended June 30, 2004 and 2003  (Unaudited)  (Euros in thousands)

|                                   |                                          | 2004                                                                  |       | 2003      |      
|---------------------------------- | ---------------------------------------- | --------------------------------------------------------------------- | ----- | --------- | -----
|Net loss                           |                                          | € (2,725                                                              | )     | € (10,049 | )    
|                                   |                                          |                                                                       |       |           |      
|Other comprehensive income (loss): |                                          |                                                                       |       |           |      
|                                   | Foreign currency translation adjustments |                                                                       | 2,352 |           | 1,125
|                                   | Unrealized gains (losses) on securities  |                                                                       |       |           |      
|                                   |                                          | Unrealized holding gains (losses) arising during the period           |       | (250      | )    
|                                   |                                          | Reclassification adjustment for other than temporary decline in value |       |          |      
|                                   |                                          |                                                                       |       |           |      
|                                   | Other comprehensive income (loss)        |                                                                       | 2,102 |           | 6,375
|                                   |                                          |                                                                       |       |           |      
|Total comprehensive loss           |                                          | € (623                                                                | )     | € (3,674  | )    
|                                   |                                          |                                                                       |       |           |      

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 June 30, 2004 and 2003  (Unaudited)  (Euros in thousands)

|                                   |                                          | 2004                                                        |     | 2003    |      
|---------------------------------- | ---------------------------------------- | ----------------------------------------------------------- | --- | ------- | -----
|Net income                         |                                          | € 16,241                                                    |     | € 873   |      
|                                   |                                          |                                                             |     |         |      
|Other comprehensive income (loss): |                                          |                                                             |     |         |      
|                                   | Foreign currency translation adjustments |                                                             | 696 |         | 1,016
|                                   | Unrealized gains (losses) on securities  |                                                             |     |         |      
|                                   |                                          | Unrealized holding gains (losses) arising during the period |     | 257     |      
|                                   |                                          |                                                             |     |         |      
|                                   | Other comprehensive income               |                                                             | 953 |         | 868  
|                                   |                                          |                                                             |     |         |      
|Total comprehensive income         |                                          | € 17,194                                                    |     | € 1,741 |      
|                                   |                                          |                                                             |     |         |      

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 Six Months Ended June 30, 2004 and 2003  (Unaudited)  (Euros in thousands)

|                                                             |                                                                           | 2004                                                                              |                                    | 2003     |          
|------------------------------------------------------------ | ------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------- | -------- | ---------
|Cash Flows from (used in) Operating Activities:              |                                                                           |                                                                                   |                                    |          |          
|                                                             | Net loss                                                                  |                                                                                   | € (2,725                           | )        | € (10,049
|                                                             | Adjustments to reconcile net loss to cash flows from operating activities |                                                                                   |                                    |          |          
|                                                             |                                                                           | Unrealized net loss on derivative financial instruments, construction in progress |                                    | (12,300  | )        
|                                                             |                                                                           | Unrealized net losses (gains) on derivative financial instruments, other          |                                    | 5,272    |          
|                                                             |                                                                           | Depreciation and amortization                                                     |                                    | 12,607   |          
|                                                             |                                                                           | Impairment of investments                                                         |                                    |         |          
|                                                             |                                                                           | Minority interest                                                                 |                                    | 2,790    |          
|                                                             |                                                                           | Stock-based expenses                                                              |                                    | 616      |          
|                                                             |                                                                           | Other                                                                             |                                    | 204      |          
|                                                             | Changes in current assets and liabilities                                 |                                                                                   |                                    |          |          
|                                                             |                                                                           | Inventories                                                                       |                                    | (17,995  | )        
|                                                             |                                                                           | Receivables                                                                       |                                    | (2,489   | )        
|                                                             |                                                                           | Accounts payable and accrued expenses                                             |                                    | 12,166   |          
|                                                             |                                                                           | Other                                                                             |                                    | (1,224   | )        
|                                                             |                                                                           |                                                                                   |                                    |          |          
|                                                             |                                                                           |                                                                                   | Net cash from operating activities |          | (3,078   
|                                                             |                                                                           |                                                                                   |                                    |          |          
|Cash Flows from (used in) Investing Activities:              |                                                                           |                                                                                   |                                    |          |          
|                                                             | Purchase of property, plant and equipment, net of investment grants       |                                                                                   | (88,617                            | )        | (88,456  
|                                                             | Sale of long-term investments                                             |                                                                                   | 1,161                              |          |         
|                                                             | Other                                                                     |                                                                                   | 115                                |          | (30      
|                                                             |                                                                           |                                                                                   |                                    |          |          
|                                                             |                                                                           | Net cash used in investing activities                                             |                                    | (87,341  | )        
|                                                             |                                                                           |                                                                                   |                                    |          |          
|Cash Flows from (used in) Financing Activities:              |                                                                           |                                                                                   |                                    |          |          
|                                                             | Cash restricted                                                           |                                                                                   | (7,468                             | )        | (5,839   
|                                                             | (Decrease) increase in construction in progress costs payable             |                                                                                   | (22,974                            | )        | 38,931   
|                                                             | Proceeds from borrowings of notes payable and debt                        |                                                                                   | 126,000                            |          | 49,253   
|                                                             | Decrease in notes payable and debt                                        |                                                                                   | (14,782                            | )        |         
|                                                             | Repayment of notes payable and debt                                       |                                                                                   |                                   |          | (9,266   
|                                                             | Repayment of capital lease obligations                                    |                                                                                   | (633                               | )        | (416     
|                                                             | Issuance of shares of beneficial interest                                 |                                                                                   | 582                                |          |         
|                                                             |                                                                           |                                                                                   |                                    |          |          
|                                                             |                                                                           | Net cash from financing activities                                                |                                    | 80,725   |          
|                                                             |                                                                           |                                                                                   |                                    |          |          
|Effect of exchange rate changes on cash and cash equivalents |                                                                           | (63                                                                               | )                                  | 122      |          
|                                                             |                                                                           |                                                                                   |                                    |          |          
|Net decrease in cash and cash equivalents                    |                                                                           | (9,757                                                                            | )                                  | (8,310   | )        
|Cash and cash equivalents, beginning of period               |                                                                           | 51,993                                                                            |                                    | 30,261   |          
|                                                             |                                                                           |                                                                                   |                                    |          |          
|Cash and cash equivalents, end of period                     |                                                                           | € 42,236                                                                          |                                    | € 21,951 |          
|                                                             |                                                                           |                                                                                   |                                    |          |          

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 SIX MONTHS ENDED JUNE 30, 2004        (Unaudited)  (Euros in thousands, except for shares and loss per share)

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.

|                       |                                                                                                                                                 | Six Months Ended June 30, |         
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------
|
|
|Net Loss               |                                                                                                                                                 |                           |         
|                       | As reported                                                                                                                                     |                           | € (2,725
|                       | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects |                           | (29     
|                       |                                                                                                                                                 |                           |         
|                       | Pro forma                                                                                                                                       |                           | € (2,754
|                       |                                                                                                                                                 |                           |         
|Basic Loss Per Share   |                                                                                                                                                 |                           |         
|                       | As reported                                                                                                                                     |                           | € (0.16 
|                       |                                                                                                                                                 |                           |         
|                       | Pro forma                                                                                                                                       |                           | € (0.16 
|                       |                                                                                                                                                 |                           |         
|Diluted Loss Per Share |                                                                                                                                                 |                           |         
|                       | As reported                                                                                                                                     |                           | € (0.16 
|                       |                                                                                                                                                 |                           |         
|                       | Pro forma                                                                                                                                       |                           | € (0.16 
|                       |                                                                                                                                                 |                           |         

9

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MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

|                         |                                                                                                                                                 | Three Months Ended June 30, |         
|------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------
|
|
|Net Income               |                                                                                                                                                 |                             |         
|                         | As reported                                                                                                                                     |                             | € 16,241
|                         | Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of any related tax effects |                             | (14     
|                         |                                                                                                                                                 |                             |         
|                         | Pro forma                                                                                                                                       |                             | € 16,227
|                         |                                                                                                                                                 |                             |         
|Basic Income Per Share   |                                                                                                                                                 |                             |         
|                         | As reported                                                                                                                                     |                             | € 0.94  
|                         |                                                                                                                                                 |                             |         
|                         | Pro forma                                                                                                                                       |                             | € 0.94  
|                         |                                                                                                                                                 |                             |         
|Diluted Income Per Share |                                                                                                                                                 |                             |         
|                         | As reported                                                                                                                                     |                             | € 0.57  
|                         |                                                                                                                                                 |                             |         
|                         | Pro forma                                                                                                                                       |                             | € 0.57  
|                         |                                                                                                                                                 |                             |         

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.

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.

10

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MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

Note 3.    Earnings Per Share

Basic
earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during a period. Diluted earnings 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 per share for the
six months and three months ended June 30, 2004 and 2003, respectively:

|                                                      |                            | Six Months Ended June 30, |            | Three Months Ended June 30,
|----------------------------------------------------- | -------------------------- | ------------------------- | ---------- | ---------------------------
|
|
|Income from continuing operations  basic             |                            | € (2,725                  | )          | € (10,049                  
|Interest on convertible notes, net of tax             |                            |                          |            |                           
|                                                      |                            |                           |            |                            
|Income from continuing operations  diluted           |                            | € (2,725                  | )          | € (10,049                  
|                                                      |                            |                           |            |                            
|Weighted average number of common shares outstanding: |                            |                           |            |                            
|                                                      | Basic                      |                           | 17,222,857 |                            
|                                                      | Effect of dilutive shares: |                           |            |                            
|                                                      |                            | Stock options and awards  |            |                           
|                                                      |                            | Convertible notes         |            |                           
|                                                      |                            |                           |            |                            
|                                                      | Diluted                    |                           | 17,222,857 |                            
|                                                      |                            |                           |            |                            
|Income from continuing operations per share:          |                            |                           |            |                            
|                                                      | Basic                      |                           | € (0.16    | )                          
|                                                      |                            |                           |            |                            
|                                                      | Diluted                    |                           | € (0.16    | )                          
|                                                      |                            |                           |            |                            

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

11

---



MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

Note 4.    Stendal Pulp Mill Project

In
August 2002, the Company completed financing arrangements for the design, development, financing, construction and operation of a "greenfield" project to construct and operate a
552,000-tonne softwood kraft pulp mill to be located near Stendal, Germany (the "Stendal Project"). The Stendal Project is being implemented through Zellstoff Stendal GmbH
("Stendal"), an approximately 63.6% owned subsidiary of the Company. Two minority shareholders own approximately 29.4% and 7%, respectively, of the project company. Accordingly, the results of the
subsidiary are consolidated into the results of the Company. The Company currently capitalizes the majority of the expenses and the interest related to the Stendal Project as it is classified as
construction in progress. Certain personnel and other supervisory expenses in respect of staffing and preparing for the start-up and operation of the Stendal mill are expensed.
Construction of the Stendal Project was completed in late July 2004. The Stendal mill will commence to be depreciated when it commences its commercial production. Minority interest on the
balance sheet represents the share capital contribution from the minority shareholders, adjusted for their proportionate share of income and loss.

12

---



MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

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 |   | Paper    |   | Active
Production
Segments |   | Stendal Pulp
Construction
in Progress |   | Corporate,
Other and
Eliminations |   | Consolidated
Total |  
|-------------------------------------------------------------- |  | -------------- | - | -------- | - | -------------------------- | - | ------------------------------------- | - | --------------------------------- | - | ------------------ | -
|Six Months Ended June 30, 2004                                 |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Sales to external customers                                    |  | € 69,226       |   | € 28,542 |   | € 97,768                   |   | €                                    |   | €                                |   | € 97,768           |  
|Transportation and other                                       |  | 6,889          |   | 438      |   | 7,327                      |   | 927                                   |   | (1,256                            | ) | 6,998              |  
|Intersegment net sales                                         |  | 1,179          |   |         |   | 1,179                      |   |                                      |   | (1,179                            | ) |                   |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 77,294         |   | 28,980   |   | 106,274                    |   | 927                                   |   | (2,435                            | ) | 104,766            |  
|Operating costs                                                |  | 54,071         |   | 27,028   |   | 81,099                     |   |                                      |   | (1,243                            | ) | 79,856             |  
|Depreciation and amortization                                  |  | 11,136         |   | 1,141    |   | 12,277                     |   | 12                                    |   | 318                               |   | 12,607             |  
|General and administrative                                     |  | 4,774          |   | 2,711    |   | 7,485                      |   | 5,448                                 |   | 1,171                             |   | 14,104             |  
|Flooding grants, less losses and expenses                      |  |               |   | 669      |   | 669                        |   |                                      |   |                                  |   | 669                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 69,981         |   | 31,549   |   | 101,530                    |   | 5,460                                 |   | 246                               |   | 107,236            |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income from operations                                  |  | 7,313          |   | (2,569   | ) | 4,744                      |   | (4,533                                | ) | (2,681                            | ) | (2,470             | )
|Interest expense                                               |  | (4,392         | ) | (284     | ) | (4,676                     | ) | (168                                  | ) | (510                              | ) | (5,354             | )
|Unrealized net gain (loss) on derivative financial instruments |  | (5,272         | ) |         |   | (5,272                     | ) | 12,300                                |   |                                  |   | 7,028              |  
|Investment income                                              |  | 1,614          |   | (273     | ) | 1,341                      |   | (345                                  | ) | 64                                |   | 1,060              |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income before income taxes and minority interest        |  | € (737         | ) | € (3,126 | ) | € (3,863                   | ) | € 7,254                               |   | € (3,127                          | ) | € 264              |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Six Months Ended June 30, 2003                                 |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Sales to external customers                                    |  | € 62,414       |   | € 28,860 |   | € 91,274                   |   | €                                    |   | €                                |   | € 91,274           |  
|Transportation and other                                       |  | 6,256          |   | 560      |   | 6,816                      |   |                                      |   | 224                               |   | 7,040              |  
|Intersegment net sales                                         |  | 1,545          |   |         |   | 1,545                      |   |                                      |   | (1,545                            | ) |                   |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 70,215         |   | 29,420   |   | 99,635                     |   |                                      |   | (1,321                            | ) | 98,314             |  
|Operating costs                                                |  | 53,756         |   | 24,358   |   | 78,114                     |   |                                      |   | (1,545                            | ) | 76,569             |  
|Depreciation and amortization                                  |  | 10,777         |   | 989      |   | 11,766                     |   | 93                                    |   | 22                                |   | 11,881             |  
|General and administrative                                     |  | 3,977          |   | 2,770    |   | 6,747                      |   | 746                                   |   | 1,122                             |   | 8,615              |  
|Flooding grants, less losses and expenses                      |  |               |   | (1,376   | ) | (1,376                     | ) |                                      |   |                                  |   | (1,376             | )
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 68,510         |   | 26,741   |   | 95,251                     |   | 839                                   |   | (401                              | ) | 95,689             |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income from operations                                  |  | 1,705          |   | 2,679    |   | 4,384                      |   | (839                                  | ) | (920                              | ) | 2,625              |  
|Interest expense                                               |  | (3,983         | ) | (203     | ) | (4,186                     | ) | (8                                    | ) | (457                              | ) | (4,651             | )
|Net gain (loss) on derivative financial instruments            |  | 14,601         |   |         |   | 14,601                     |   | (27,944                               | ) |                                  |   | (13,343            | )
|Impairment of investments                                      |  | (4,441         | ) | (1,070   | ) | (5,511                     | ) |                                      |   |                                  |   | (5,511             | )
|Investment income                                              |  | 777            |   | 328      |   | 1,105                      |   | 406                                   |   | (861                              | ) | 650                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income before income taxes and minority interest        |  | € 8,659        |   | € 1,734  |   | € 10,393                   |   | € (28,385                             | ) | € (2,238                          | ) | € (20,230          | )
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  

13

---



MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

|                                                               |  | Rosenthal
Pulp |   | Paper    |   | Active
Production
Segments |   | Stendal Pulp
Construction
in Progress |   | Corporate,
Other and
Eliminations |   | Consolidated
Total |  
|-------------------------------------------------------------- |  | -------------- | - | -------- | - | -------------------------- | - | ------------------------------------- | - | --------------------------------- | - | ------------------ | -
|Three Months Ended June 30, 2004                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Sales to external customers                                    |  | € 35,286       |   | € 13,249 |   | € 48,535                   |   | €                                    |   | €                                |   | € 48,535           |  
|Transportation and other                                       |  | 3,892          |   | 137      |   | 4,029                      |   | 536                                   |   | (1,256                            | ) | 3,309              |  
|Intersegment net sales                                         |  | 750            |   |         |   | 750                        |   |                                      |   | (750                              | ) |                   |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 39,928         |   | 13,386   |   | 53,314                     |   | 536                                   |   | (2,006                            | ) | 51,844             |  
|Operating costs                                                |  | 26,349         |   | 13,050   |   | 39,399                     |   |                                      |   | (812                              | ) | 38,587             |  
|Depreciation and amortization                                  |  | 5,554          |   | 589      |   | 6,143                      |   | 12                                    |   | 159                               |   | 6,314              |  
|General and administrative                                     |  | 2,665          |   | 1,472    |   | 4,137                      |   | 2,316                                 |   | 648                               |   | 7,101              |  
|Flooding grants, less losses and expenses                      |  |               |   | 416      |   | 416                        |   |                                      |   |                                  |   | 416                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 34,568         |   | 15,527   |   | 50,095                     |   | 2,328                                 |   | (5                                | ) | 52,418             |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income from operations                                  |  | 5,360          |   | (2,141   | ) | 3,219                      |   | (1,792                                | ) | (2,001                            | ) | (574               | )
|Interest expense                                               |  | (1,943         | ) | (139     | ) | (2,082                     | ) | (111                                  | ) | (173                              | ) | (2,366             | )
|Unrealized net gain (loss) on derivative financial instruments |  | (382           | ) |         |   | (382                       | ) | 29,855                                |   |                                  |   | 29,473             |  
|Investment income                                              |  | 629            |   | (278     | ) | 351                        |   | (124                                  | ) | (101                              | ) | 126                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income before income taxes and minority interest        |  | € 3,664        |   | € (2,558 | ) | € 1,106                    |   | € 27,828                              |   | € (2,275                          | ) | € 26,659           |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Three Months Ended June 30, 2003                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|Sales to external customers                                    |  | € 31,029       |   | € 14,012 |   | € 45,041                   |   | €                                    |   | €                                |   | € 45,041           |  
|Transportation and other                                       |  | 2,446          |   | 150      |   | 2,596                      |   |                                      |   | 276                               |   | 2,872              |  
|Intersegment net sales                                         |  | 675            |   |         |   | 675                        |   |                                      |   | (675                              | ) |                   |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 34,150         |   | 14,162   |   | 48,312                     |   |                                      |   | (399                              | ) | 47,913             |  
|Operating costs                                                |  | 23,787         |   | 13,300   |   | 37,087                     |   |                                      |   | (675                              | ) | 36,412             |  
|Depreciation and amortization                                  |  | 5,393          |   | 464      |   | 5,857                      |   | 93                                    |   | 22                                |   | 5,972              |  
|General and administrative                                     |  | 1,905          |   | 1,161    |   | 3,066                      |   | 668                                   |   | 75                                |   | 3,809              |  
|Flooding grants, less losses and expenses                      |  |               |   | 353      |   | 353                        |   |                                      |   |                                  |   | 353                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|                                                               |  | 31,085         |   | 15,278   |   | 46,363                     |   | 761                                   |   | (578                              | ) | 46,546             |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income from operations                                  |  | 3,065          |   | (1,116   | ) | 1,949                      |   | (761                                  | ) | 179                               |   | 1,367              |  
|Interest expense                                               |  | (949           | ) | (111     | ) | (1,060                     | ) | (8                                    | ) | (1,120                            | ) | (2,188             | )
|Net gain (loss) on derivative financial instruments            |  | 12,805         |   |         |   | 12,805                     |   | (17,582                               | ) |                                  |   | (4,777             | )
|Impairment of investments                                      |  | (4,441         | ) | (1,070   | ) | (5,511                     | ) |                                      |   | 5,511                             |   |                   |  
|Investment income                                              |  | 386            |   | 317      |   | 703                        |   | 260                                   |   | (850                              | ) | 114                |  
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  
|(Loss) income before income taxes and minority interest        |  | € 10,865       |   | € (1,979 | ) | € 8,886                    |   | € (18,090                             | ) | € 3,720                           |   | € (5,484           | )
|                                                               |  |                |   |          |   |                            |   |                                       |   |                                   |   |                    |  

The total assets for the Stendal pulp mill under construction were €683,834 and €555,966 as at June 30, 2004 and
December 31, 2003, respectively.

14

---



MERCER INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2004

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

Note 6.    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 six 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 six 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 €5,272 and €382 was recognized in
respect of these derivatives and certain interest rate derivatives previously entered by Rosenthal in the six months and three months ended June 30, 2004, respectively.

In
the first six 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 €13,866 and
€14,028 was recognized in respect of these derivatives in the six months and three months ended June 30, 2004, respectively.

Note 7.    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.

15

---





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 June 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 six and three months ended June 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"), which has an annual production capacity of
approximately 300,000 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.

We
completed construction of the Stendal mill substantially on its planned schedule and budget in late July 2004. Total investment costs in respect of the Stendal project are approximately
€1.0 billion, the majority of which is being 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 will be undergoing extensive
testing and evaluation. Costs, including interest, relating to and during the construction of the Stendal mill were generally capitalized. Costs comprised principally of personnel and other
supervisory expenses in respect of staffing and the start-up and operation of the mill are expensed. See
"Stendal Project Status" below.

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

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

16

---



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 the first half of 2004 due to the relatively weak
U.S. dollar and improving world economies. List prices increased to approximately $600 per tonne in March 2004 and approximately $645 per tonne in June 2004. However, there can be
no assurance that prices will not fall in ensuing months.

Our
financial performance for any reporting period is also impacted by changes in the U.S. dollar to Euro exchange rate and in interest rates. Changes in currency rates affect our 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").

In
the six months ended June 30, 2004, we recorded a net non-cash holding loss of €1.7 million before minority interests on the marked to market valuation of
the Interest Rate Contracts versus a net loss of €28.8 million before minority interests thereon in the prior period of 2003. In the quarter ended June 30, 2004, we
recorded a net non-cash holding gain of €15.8 million before minority interests on the marked to market valuation of the Interest Rate Contracts versus a net loss of
€18.1 million before minority interests thereon in the prior period of 2003.

17

---



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 six and three months ended June 30, 2004, we recognized a net non-cash holding gain of approximately
€8.7 million and €13.7 million, respectively, before minority interests on the Currency Derivatives. In the six and three months ended June 30,
2003, we recognized a net non-cash holding gain of approximately €15.4 million and €13.3 million, respectively, before minority interests on the then
outstanding currency derivatives of Rosenthal. During the prior periods, Stendal did not have any currency derivatives outstanding. See "Quantitative and Qualitative Disclosures about Market Risk".

Since
mid-2003, the U.S. dollar has generally weakened versus the Euro and other major currencies. The weak U.S. dollar has effectively reduced pulp sales realizations in
Europe. However, improving pulp demand resulting from improving American and major European economies and the weak U.S. dollar has led to higher list prices for kraft pulp in Europe. If the
U.S. dollar continues to weaken versus the Euro, we could record 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 second quarter 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 Stendal Interest Rate Swaps 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 Stendal Interest Rate Swaps in future periods when they are marked to market. See "Quantitative and
Qualitative Disclosures about Market Risk".

18

---



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

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

|                              |                  | 2004         |        | 2003    
|----------------------------- | ---------------- | ------------ | ------ | --------
|
|Sales Volume by Product Class |                  |              |        |         
|Pulp(1)                       |                  | 156,334      |        | 148,179 
|Papers                        |                  |              |        |         
|                              | Specialty papers |              | 19,625 |         
|                              | Printing papers  |              | 13,164 |         
|                              |                  |              |        |         
|                              |                  | Total papers |        | 32,789  
|                              |                  |              |        |         
|Total(1)                      |                  | 189,123      |        | 179,188 
|                              |                  |              |        |         
|
|Revenues by Product Class     |                  |              |        |         
|Pulp(1)                       |                  | € 69,226     |        | € 62,414
|Papers                        |                  |              |        |         
|                              | Specialty papers |              | 19,442 |         
|                              | Printing papers  |              | 9,100  |         
|                              |                  |              |        |         
|                              |                  | Total papers |        | 28,542  
|                              |                  |              |        |         
|Total(1)                      |                  | € 97,768     |        | € 91,274
|                              |                  |              |        |         

---

Total revenues for the six months ended June 30, 2004 increased to €104.8 million from €98.3 million in the
comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €97.8 million in the first half of 2004, versus
€91.3 million in the comparative period of 2003.

Costs
of pulp and paper sales in the six months ended June 30, 2004 increased to €90.7 million from €86.5 million in the comparative period of
2003, primarily as a result of increased pulp sales volumes.

For
the first half of 2004, pulp sales increased to €69.2 million from €62.4 million in the same period a year ago. List prices for NBSK pulp in Europe
were approximately €535 ($645) per tonne at the end of the first half of 2004, compared to approximately €484 ($550) per tonne at the end of the first half 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. Increased production volumes due to enhanced operational
efficiency lead to higher pulp revenues. In the current period, pulp sales by volume were 156,334 tonnes, compared to 148,179 tonnes in the comparative period of 2003.

Pulp
sales realizations were €443 per tonne on average in the current period, compared to €421 per tonne in the first half of 2003.

Transportation
and other revenues for the pulp operations were €7.8 million in the period ended June 30, 2004, compared to €6.3 million in the
comparative period of last year.

Cost
of sales and general, administrative and other expenses for the pulp operations increased to €75.4 million in the six months ended June 30, 2004 from
€69.3 million in the comparative period of 2003, primarily as a result of the inclusion of certain non-capitalized expenses of approximately
€5.4 million related to the Stendal mill. Such costs are comprised principally of personnel and other supervisory expenses in respect of staffing and the start-up
and operation of the Stendal mill. As such costs are not directly related to the construction of the Stendal mill, they are not capitalized. We expect the amount of costs relating to the Stendal
project that are expensed to markedly increase as the mill is started up in the third quarter of 2004. On average, per tonne fiber costs for pulp production decreased by approximately 4.2% compared to
the first half of last year. Depreciation for the pulp operations was €11.1 million in the current period, versus €10.9 million in the year ago period.

19

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For
the first half of 2004, our pulp operations generated operating income of €2.8 million, versus operating income of €0.9 million in the year ago
period.

Paper
sales in the first half of 2004 were €28.5 million, compared with €28.9 million in the same period of last year. Sales of specialty papers in the
first half of 2004 were €19.4 million versus €21.6 million in the first half of 2003, primarily as a result of a shift in the product mix. For the current
period, total paper sales volumes were 32,789 tonnes, versus 31,009 tonnes in the first half of last year. On average, prices for specialty papers realized in the current period decreased slightly,
reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 11.0% reflecting generally weak demand.

Cost
of sales and general, administrative and other expenses for the paper operations in the first half of 2004 increased to €30.9 million from
€28.1 million in the comparative period of 2003, primarily as a result of higher paper sales volumes. Depreciation for the paper operations was
€1.1 million in the first half of 2004, compared to €1.0 million in the same period last year.

For
the first half of 2004, our paper operations generated an operating loss of €2.6 million, compared to operating income of €2.7 million in the same
period of last year.

For
the first half of 2004, consolidated general and administrative expenses increased to €14.4 million from €8.7 million in the year ago period,
primarily as a result of the inclusion of certain non-capitalized expenses related to the Stendal mill.

In
the first half of 2004, we reported a loss from operations of €2.5 million, compared to income from operations of €2.6 million in the same period last
year. Interest expense (excluding capitalized interest of €17.5 million relating to the Stendal pulp mill) in the first half of 2004 increased to
€5.4 million from €4.7 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in October 2003.

In
the first half of 2004, we recorded a net non-cash holding loss of €1.7 million before minority interests on the marked to market valuation of the Interest Rate
Contracts versus a net loss of €28.8 million before minority interests thereon in the prior period of 2003. In addition, in the six months ended June 30, 2004, we
recorded a net non-cash holding gain of approximately €8.7 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 non-cash holding gain of
€15.4 million before minority interests on the then outstanding currency derivatives of Rosenthal. Stendal did not have any currency derivatives outstanding in the prior period
of 2003.

In
the first half of 2004, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was €(2.8) million, compared to
€10.4 million in the comparative period of 2003.

20

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Our
results for the current period include an adjustment of €0.4 million relating primarily to the valuation of certain assets at the paper operations made obsolete as a result
of a change in the product mix. 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 of our available-for-sale securities.

We
reported a net loss for the first half of 2004 of €2.7 million, or €0.16 per diluted share, versus a net loss of €10.0 million, or
€0.60 per diluted share, a year ago.

As
the Stendal project is currently under construction and because of its overall size relative to our other facilities, management uses consolidated operating results excluding items relating to the
Stendal project to measure the performance and results of our operating units. Management believes this measure provides meaningful information for it and securityholders on the performance of our
operating facilities for a reporting period. Upon commencement of commercial production, the Stendal project will be evaluated with our other operating units. For the six months ended June 30,
2004, we reported a net loss of €2.7 million or €0.16 per share on a diluted basis. If we had excluded items relating to the Stendal project by adding the loss
of €1.6 million on the Stendal Interest Rate Swaps, general and administrative expenses of €5.5 million related to the Stendal mill and minority interest
of €2.8 million to, and subtracting the gain of €13.9 million on the Stendal Currency Derivatives and other income of €0.4 million
related to the Stendal mill from, the reported net loss of €2.7 million, we would have reported a net loss of €7.2 million or €0.42 per
share on a diluted basis. For the six months ended June 30, 2003, we reported a net loss of €10.0 million or €0.60 per share on a diluted basis. If we had
excluded items relating to the Stendal project by adding the loss of €27.9 million on the Stendal Interest Rate Swaps and general and administrative expenses of
€0.8 million related to the Stendal mill to, and subtracting minority interests of €10.4 million and other income related to the Stendal mill of
€0.4 million from, the reported net loss of €10.0 million, we would have reported net income of €8.0 million or
€0.47 per share on a diluted basis. This measure has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our
results as reported under generally accepted accounting principles in the United States ("GAAP").

We
generated "Operating EBITDA" of €10.1 million in the current period, compared to Operating EBITDA of €14.5 million in the comparative period of 2003.
The decrease from the prior period results is primarily as a result of the inclusion of certain non-capitalized expenses of €5.4 million related to the Stendal mill
in the current period. Operating EBITDA is defined as income (loss) from operations plus depreciation and amortization. Operating EBITDA is calculated by adding depreciation and amortization of
€12.6 million and €11.9 million to the loss from operations of €2.5 million and income from operations of
€2.6 million for the six-month periods ended June 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 is not an actual cash cost, and varies widely from company to company in a manner that management considers largely
independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to
evaluate our financial performance.

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

21

---



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) income from operations and Operating EBITDA for the periods indicated:

|                                   |  | Six Months Ended June 30, |  
|---------------------------------- |  | ------------------------- | -
|
|
|Net loss                           |  | € (2,725                  | )
|Minority interest                  |  | 2,790                     |  
|Income taxes                       |  | 199                       |  
|Interest expense                   |  | 5,354                     |  
|Investment income                  |  | (1,464                    | )
|Derivative financial instruments   |  | (7,028                    | )
|Impairment of investments          |  |                          |  
|Other                              |  | 404                       |  
|                                   |  |                           |  
|(Loss) income from operations      |  | (2,470                    | )
|Add: Depreciation and amortization |  | 12,607                    |  
|                                   |  |                           |  
|Operating EBITDA                   |  | € 10,137                  |  
|                                   |  |                           |  

22

---



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

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

|                              |                  | Three Months Ended June 30,
|----------------------------- | ---------------- | ---------------------------
|
|
|Sales Volume by Product Class |                  |                            
|Pulp(1)                       |                  | 74,841                     
|Papers                        |                  |                            
|                              | Specialty papers |                            
|                              | Printing papers  |                            
|                              |                  |                            
|                              |                  | Total papers               
|                              |                  |                            
|Total(1)                      |                  | 90,224                     
|                              |                  |                            
|
|Revenues by Product Class     |                  |                            
|Pulp(1)                       |                  | € 35,286                   
|Papers                        |                  |                            
|                              | Specialty papers |                            
|                              | Printing papers  |                            
|                              |                  |                            
|                              |                  | Total papers               
|                              |                  |                            
|Total(1)                      |                  | € 48,535                   
|                              |                  |                            

---

Total revenues for the three months ended June 30, 2004 increased to €51.8 million from €47.9 million in
the comparative period of 2003, primarily because of higher pulp sales. Pulp and paper revenues were €48.5 million in the second quarter of 2004, versus
€45.0 million in the comparative period of 2003.

Costs
of pulp and paper sales in the three months ended June 30, 2004 increased to €44.0 million from €41.5 million in the comparative period of
2003, primarily a result of increased pulp sales volumes.

For
the three months ended June 30, 2004, pulp sales increased to €35.3 million from €31.0 million in the same period a year ago. List prices for
NBSK pulp in Europe were approximately €535 ($645) per tonne in the second quarter of 2004, approximately €464 ($580) per tonne in the first quarter of 2004 and
approximately €484 ($550) per tonne in the second 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. Increased production volumes due to enhanced operational efficiency lead to higher pulp revenues. In the current quarter, pulp sales by volume were 74,841 tonnes, compared to
69,700 tonnes in the comparative period of 2003.

Pulp
sales realizations were €471 per tonne on average in the current quarter, compared to €416 per tonne in the first quarter of 2004 and €445 per
tonne in the three months ended June 30, 2003.

Transportation
and other revenues for the pulp operations were €4.4 million in the three months ended June 30, 2004, compared to €2.4 million in
the comparative quarter of last year.

Cost
of sales and general, administrative and other expenses for the pulp operations increased to €36.9 million in the three months ended June 30, 2004 from
€31.8 million in the comparative period of 2003, primarily as a result of the inclusion of certain non-capitalized expenses of approximately
€2.3 million related to the Stendal mill. On average, per tonne fiber costs for pulp production decreased by approximately 2.8% compared to the second quarter of last year.
Depreciation for the pulp operations was €5.6 million in the current quarter, versus €5.5 million in the year ago period.

23

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For
the three months ended June 30, 2004, our pulp operations generated operating income of €3.6 million, versus operating income of €2.3 million
in the year ago period.

Paper
sales in the three months ended June 30, 2004 were €13.2 million, compared with €14.0 million in the same period of last year. Sales of
specialty papers in the three months ended June 30, 2004 were €8.6 million versus €10.5 million in the three months ended June 30, 2003,
primarily as a result of a shift in the product mix. For the current quarter, total paper sales volumes were 15,383 tonnes, versus 15,302 tonnes in the comparative period of last year. On average,
prices for specialty papers realized in the current quarter decreased slightly, reflecting a shift in the product mix. Average prices for our printing papers decreased by approximately 6.0% reflecting
generally weak demand.

Cost
of sales and general, administrative and other expenses for the paper operations in the three months ended June 30, 2004 increased to €15.1 million from
€14.9 million in the comparative quarter of 2003, primarily as a result of higher paper sales volumes. Depreciation for the paper operations was
€0.6 million in the three months ended June 30, 2004, compared to €0.5 million in the same period last year.

For
the three months ended June 30, 2004, our paper operations generated an operating loss of €2.1 million, compared to €1.1 million in the same
period of last year.

For
the three months ended June 30, 2004, consolidated general and administrative expenses increased to €7.3 million from €3.9 million in the year
ago period, primarily as a result of the inclusion of certain non-capitalized expenses related to the Stendal mill.

In
the three months ended June 30, 2004, we reported a loss from operations of €0.6 million, compared to income from operations of €1.4 million in
the same period last year. Interest expense (excluding capitalized interest of €10.4 million relating to the Stendal pulp mill) in the three months ended June 30, 2004
increased to €2.4 million from €2.2 million a year ago, due to higher borrowings resulting primarily from our convertible note issue in
October 2003.

In
the three months ended June 30, 2004, the marked to market valuation of the Interest Rate Contracts resulted in a net non-cash holding gain of approximately
€15.8 million before minority interests, primarily as a result of an increase in long-term interest rates during the period. In the comparable period of 2003, we
recorded a net loss of €18.1 million before minority interests on such Interest Rate Contracts. In addition, in the three months ended June 30, 2004, we recorded a net
non-cash holding gain of approximately €13.7 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 non-cash holding gain of €13.3 million before minority
interests on Rosenthal's then outstanding currency derivatives in the year ago period.

24

---



In
the current quarter, minority interest, representing the two minority shareholders' proportionate interest in the Stendal project, was €(10.2) million, compared to
€6.5 million in the comparative period of 2003.

Our
results for the current period include an adjustment of €0.4 million relating primarily to the valuation of certain assets at the paper operations made obsolete as a result
of a change in the product mix.

We
reported net income for the three months ended June 30, 2004 of €16.2 million, or €0.94 per basic share and €0.57 per diluted share,
versus net income of €0.9 million, or €0.05 per basic and diluted share, a year ago.

If
we had excluded items relating to the Stendal project by subtracting the gain on derivative financial instruments of €15.8 million on the Stendal Interest Rate Swaps,
€14.0 million on the Stendal Currency Derivatives and other income of €0.3 million related to the Stendal mill from, and adding minority interest of
€10.2 million and general and administrative expenses of €2.3 million relating to the Stendal mill to, the reported net income of
€16.2 million, we would have reported a net loss of €1.4 million or €0.08 per share on a diluted basis. For the three months ended
June 30, 2003, we reported net income of €0.9 million or €0.05 per share on a diluted basis. If we had excluded items relating to the Stendal project by
adding the loss on derivative financial instruments of €17.6 million on the Stendal Interest Rate Swaps and general and administrative expenses of
€0.8 million related to the Stendal mill to, and subtracting minority interests of €6.5 million and other income of €0.3 million
related to the Stendal mill from, the reported net loss of €0.9 million, we would have reported net income of €12.4 million or €0.74 per
share on a diluted basis. This measure has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under
GAAP.

We
generated Operating EBITDA of €5.7 million in the current quarter, compared to Operating EBITDA of €7.3 million in the comparative period of 2003. The
decrease from the prior period results is primarily as a result of the inclusion of certain non-capitalized expenses of €2.3 million related to the Stendal mill in
the current period. 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 six months ended June 30, 2004 for additional information relating to Operating EBITDA.

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

|                                   |  | Three Months Ended June 30, |  
|---------------------------------- |  | --------------------------- | -
|
|
|Net income                         |  | € 16,241                    |  
|Minority interest                  |  | 10,199                      |  
|Income taxes                       |  | 219                         |  
|Interest expense                   |  | 2,366                       |  
|Investment income                  |  | (530                        | )
|Derivative financial instruments   |  | (29,473                     | )
|Other                              |  | 404                         |  
|                                   |  |                             |  
|(Loss) income from operations      |  | (574                        | )
|Add: Depreciation and amortization |  | 6,314                       |  
|                                   |  |                             |  
|Operating EBITDA                   |  | € 5,740                     |  
|                                   |  |                             |  

25

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Stendal Project Status

Construction
of the Stendal pulp mill was completed substantially on its planned schedule and budget in the last week of July 2004. Such completion means that the construction and installation
of equipment and works are essentially finished and operational testing, checks and approvals are occurring so that continuous production from the mill can commence. At the end of July 2004,
the mill had all of its requisite permits in place to commence operations and had secured sufficient fiber supplies for the balance of 2004 and into the first quarter of 2005. At July 31, 2004,
the mill had filled in excess of 71% 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 feeding wood chips to the digester at the end of July 2004 and
commenced the initial production of pulp. 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 by the end of the third 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.

During
the start-up period of the Stendal mill, the mill will undergo extensive testing and evaluation to determine whether mechanical completion has occurred and, 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 a two or three-week period in October 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.

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 June 30,
2004 |      | As at December 31,
2003 |     
|----------------------------- |  | ------------------- | ---- | ----------------------- | ----
|
|Financial Position            |  |                     |      |                         |     
|Cash and cash equivalents     |  | € 42,236            |      | € 51,993                |     
|Working capital               |  | (19,762             | )(1) | (48,947                 | )(1)
|Property, plant and equipment |  | 823,017             |      | 745,178                 |     
|Total assets                  |  | 1,045,956           | (2)  | 935,905                 | (2) 
|Long-term liabilities         |  | 752,907             | (3)  | 625,702                 | (3) 
|Shareholders' equity          |  | 129,416             |      | 132,855                 |     

---

At June 30, 2004, our cash and cash equivalents were €42.2 million, compared to €52.0 million at the
December 31, 2003. We also had €20.9 million of cash restricted to pay construction in progress costs payable and €19.1 million of cash restricted
in a debt service account, both related to the Stendal project. In addition, we had €26.9 million of cash restricted in a debt service account relating to the Rosenthal Loan
Facility. At June 30, 2004, we had a working capital deficit of
€19.8 million, primarily because we pre-finance certain governmental grants which we expect to receive under a dedicated tranche of the Stendal Loan Facility but,
under our accounting policies, do not record these grants until they are received, as well as Stendal construction in progress costs payable for which we had not drawn down under such facility. At
June 30, 2004, we qualified for investment grants totaling approximately €100.6 million from the federal and state governments of Germany, of which we expect to receive
€74.1 million in 2004 and the balance subsequently. Approximately €41.3 million of these grants, when received, will be applied to repay the amounts drawn
under the dedicated tranche of the Stendal Loan Facility. The grants are not reported in our income and reduce the cost basis of the assets purchased when they are received. At June 30, 2004,
we had Stendal construction in progress costs payable of €19.8 million which will be paid pursuant to the Stendal Loan Facility in the ordinary course.

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

27

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Operating Activities

Operating
activities in the current period used cash of €3.1 million, compared to providing cash of €7.4 million in the comparative period of 2003. An
increase in receivables used cash of €2.5 million in the current period, compared to €6.5 million in the comparative period of 2003. An increase in
inventories due primarily to the build up of fiber in connection with the start-up of the Stendal mill used cash of €18.0 million in the first six months of 2004,
compared to increased inventories using cash of €4.1 million in the first six months of 2003. An increase in accounts payable and accrued expenses provided cash of
€12.2 million in the current period, compared to €5.1 million in the comparative period of 2003.

Investing Activities

Investing
activities in the six months ended June 30, 2004 used cash of €87.3 million, primarily as a result of the acquisition of properties, net of investment grants,
of which €85.0 million was attributable to the Stendal project, compared to using cash of €88.5 million in the six months ended June 30, 2003, of
which €84.0 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 from the federal and state governments of Germany and had claim expenditures of €100.6 million outstanding as of June 30, 2004, of which
we expect to receive €74.1 million in 2004 and the balance subsequently. We received investment grants totaling €9.5 million with respect to the Stendal
project during the period ended June 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 €80.7 million in the six months ended June 30, 2004. A net increase in indebtedness, primarily related to the Stendal project,
provided cash of €111.2 million. A decrease in construction in progress costs payable used cash of €23.0 million in the current period. An increase in
restricted cash used cash of €7.5 million in the current period. We made principal repayments of €13.2 million in connection with the Rosenthal Loan
Facility in the six months ended June 30, 2004. The balance outstanding under such facility at June 30, 2004, net of cash in a restricted debt service account, was
€151.5 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 €72.7 million in the first six 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 June 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.

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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 six months ended June 30, 2004, we reported a net €2.4 million foreign exchange translation gain and, as a result, the cumulative foreign exchange translation gain
increased to €8.4 million at June 30, 2004 from €6.0 million at December 31, 2003.

Based
upon the exchange rate at June 30, 2004, the U.S. dollar decreased by approximately 5.6% in value against the Euro since June 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.

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 StatesPrivate 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.

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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 the past three calendar
years, list pulp prices have fallen significantly. Although pulp prices have improved overall in 2003 and 2004, we cannot predict the impact of continued economic weakness in most world markets or the
impact of war, terrorist activity or other events on our markets.

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.

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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 unrealized gains and losses 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 June 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
June 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 six and three months ended June 30, 2004 for derivatives that were in effect during
these periods:

|Derivative Instrument           |  | Maturity Date  |  | Notional
Amount |  | Recognized Gain
(Loss) in
Six Months Ended
June 30, 2004 |   | Recognized Gain
(Loss) in
Three Months Ended
June 30, 2004 |  
|------------------------------- |  | -------------- |  | --------------- |  | -------------------------------------------------------- | - | ---------------------------------------------------------- | -
|
|Rosenthal                       |  |                |  |                 |  |                                                          |   |                                                            |  
|Interest Rate Cap Agreements(1) |  | September 2007 |  | $185.5          |  | € (0.1                                                   | ) | € (0.0                                                     | )
|Currency Swap(2)                |  | September 2008 |  | € 111.8         |  | (2.7                                                     | ) | (0.2                                                       | )
|Currency Swap(3)                |  | September 2013 |  | € 72.7          |  | (2.0                                                     | ) | (0.1                                                       | )
|Currency Forward                |  | March 2005     |  | € 40.7          |  | (0.5                                                     | ) | (0.1                                                       | )
|                                |  |                |  |                 |  |                                                          |   |                                                            |  
|                                |  |                |  |                 |  | € (5.3                                                   | ) | € (0.4                                                     | )
|                                |  |                |  |                 |  |                                                          |   |                                                            |  
|Stendal                         |  |                |  |                 |  |                                                          |   |                                                            |  
|Stendal Interest Rate Swaps(4)  |  | October 2017   |  | € 1,084.9       |  | € (1.6                                                   | ) | € 15.8                                                     |  
|Currency Swap(5)                |  | April 2011     |  | € 306.3         |  | 13.8                                                     |   | 14.1                                                       |  
|Currency Forward                |  | March 2005     |  | € 20.6          |  | 0.1                                                      |   | (0.1                                                       | )
|                                |  |                |  |                 |  |                                                          |   |                                                            |  
|                                |  |                |  |                 |  | € 12.3                                                   |   | € 29.8                                                     |  
|                                |  |                |  |                 |  |                                                          |   |                                                            |  

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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

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

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PART 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 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

We
held our annual meeting of shareholders on June 14, 2004. At the meeting, two Class I trustees were elected to our board of trustees, the selection of Deloitte &
Touche LLP as our independent auditors was ratified and our 2004 Stock Incentive Plan was approved.

The
votes cast by shareholders at the meeting as to the election of trustees were as follows:

|                |  | Votes For  |  | Votes Withheld |  | Abstentions and Broker Non-Votes
|--------------- |  | ---------- |  | -------------- |  | --------------------------------
|Eric Lauritzen  |  | 12,166,185 |  | 2,592,806      |  |                                
|Graeme A. Witts |  | 12,123,007 |  | 2,635,984      |  |                                

Jimmy
S.H. Lee, William D. McCartney, Kenneth A. Shields and Guy W. Adams continued their respective terms as trustees.

In
connection with the ratification of the selection of Deloitte & Touche LLP as our independent auditors, shareholders cast 14,735,783 votes in favour of and 20,027 votes against such
ratification, and there were 3,181 abstentions and broker non-votes.

In
connection with the approval of the adoption of our 2004 Stock Incentive Plan, shareholders cast 6,316,490 votes in favour of and 1,845,535 votes against the approval of such plan, and there were
18,727 abstentions and broker non-votes.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

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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 second quarter of 2004:

|Form 8-K dated May 7, 2004   
|-----------------------------
|                             
|                             
|Form 8-K dated April 28, 2004
|                             
|                             
|Form 8-K dated April 27, 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.
|-------------------- |  | -------------------------
|Date: August 9, 2004 |  |                          
|                     |  | By:                      

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