Exhibit 99.1

INTRODUCTION

     The Financial Statements and Supplementary Data from Mercer International Inc.’s (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2009 (the “2008 Form 10-K”) included in this Exhibit 99.1 have been revised to reflect, for all periods presented, the retrospective adoption, effective January 1, 2009, of Financial Accounting Standards Board Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51 (“FAS 160”).

     FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, previously referred to as minority interest. Among other matters, FAS 160 requires that noncontrolling interests be reported within the equity section of the balance sheet and that the amounts of consolidated net income or loss and consolidated comprehensive income or loss attributable to the parent company and the non-controlling interests be clearly presented separately in the consolidated financial statements. Also, pursuant to FAS 160, where appropriate, losses will be allocated to noncontrolling interests even when that allocation may result in a deficit equity balance. While the accounting provisions of FAS 160 are being applied prospectively beginning January 1, 2009, the presentation and disclosure requirements are being applied retrospectively. Upon adoption of FAS 160, the Company reclassified minority interests in its consolidated balance sheet from other noncurrent liabilities to the equity section. Additionally, the Company changed the way noncontrolling interests are presented within the consolidated statement of operations such that the statement of operations reflects results attributable to both the Company’s interests and noncontrolling interests. The results attributable to the Company’s interests did not change upon adoption of FAS 160.

     The adoption of FAS 160 was previously reflected in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and June 30, 2009 and filed with the SEC on May 1, 2009 and July 31, 2009, respectively (collectively, the “2009 Form 10-Qs”).

     The Company has included the entire text of the affected sections. No sections of the 2008 Form 10-K other than as identified above are being revised by this filing. Information in the 2008 Form 10-K is generally stated as of December 31, 2008 and this filing does not reflect any subsequent information or events other than the adoption of the accounting pronouncements and the reclassification of certain prior year amounts to conform to the current presentation. Without limitation of the foregoing, this filing does not purport to update the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2008 Form 10-K for any information, uncertainties, transactions, risks, events or trends occurring, or known to management. More current information is included in the Company’s other filings with the SEC. The financial information contained herein should be read in conjunction with the 2008 Form 10-K, the 2009 Form 10-Qs and the Company’s other filings with the SEC. Other filings contain important information regarding events, developments and updates to certain events and expectations of the Company that have occurred since the filing of the 2008 Form 10-K and the 2009 Form 10-Qs.

ITEM 8. Financial Statements and Supplementary Data.

INDEPENDENT AUDITORS’ REPORT

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

          We have completed integrated audits of Mercer International Inc.’s 2008 and 2007 consolidated financial statements and of its internal control over financial reporting as at December 31, 2008. Our opinions, based on our audits, are presented below.

Consolidated financial statements

          We have audited the accompanying consolidated balance sheets of Mercer International Inc. as at December 31, 2008 and December 31, 2007, and the related consolidated statement of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the years in the two year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

          We conducted our audits of the Company’s financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

          In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the years then ended in accordance with accounting principles generally accepted in the United States.

          The financial statements of the Company as at December 31, 2006 and for the year then ended were audited by other auditors whose report dated February 28, 2007 expressed an unqualified opinion on those financial statements.

Internal control over financial reporting

          We have also audited Mercer International Inc.’s internal control over financial reporting as at December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

          We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

          A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

          In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the COSO.

/s/  PricewaterhouseCoopers LLP

Chartered Accountants
March 2, 2009 except as to Note 21 which is as of October 19, 2009
Vancouver, Canada

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

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

          We have audited the accompanying consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows of Mercer International Inc. and subsidiaries (the “Company”) for the year ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

          In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Mercer International Inc. and subsidiaries for the year ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

          As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, effective January 1, 2006. In addition, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R), effective December 31, 2006.

          As discussed in Note 21 to the consolidated financial statements, the accompanying 2006 financial statements have been retrospectively adjusted for the adoption of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, effective January 1, 2009.

/s/  Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, Canada
February 28, 2007, except as to Note 21 which is as of October 19, 2009

CONSOLIDATED BALANCE SHEETS
(In thousands of Euros, except per share data)

		December 31,
		2008				2007
ASSETS
Current assets
Cash and cash equivalents (Note 2)		€	42,452			€	84,848
Cash, restricted (Note 2)			13,000				—
Receivables (Note 3)			100,158				89,890
Note receivable, current portion			642				5,896
Inventories (Note 4)			98,457				103,610
Prepaid expenses and other			4,192				6,015
Total current assets			258,901				290,259
Long-term assets
Cash, restricted (Note 2)			—				33,000
Property, plant and equipment (Note 5)			881,704				933,258
Investments			419				96
Deferred note issuance and other costs			4,011				5,303
Deferred income tax (Note 9)			3,036				6,299
Note receivable, less current portion			3,529				3,977
			892,699				981,933
Total assets		€	1,151,600			€	1,272,192
LIABILITIES
Current liabilities
Accounts payable and accrued expenses (Note 6)		€	87,517			€	87,000
Pension and other post-retirement benefit obligations, current portion (Note 8)			510				493
Debt, current portion (Note 7)			16,500				34,023
Total current liabilities			104,527				121,516
Long-term liabilities
Debt, less current portion (Note 7)			837,918				836,879
Unrealized interest rate derivative losses (Note 14)			47,112				21,885
Pension and other post-retirement benefit obligations (Note 8)			12,846				19,983
Capital leases and other (Note 15)			11,267				8,999
Deferred income tax (Note 9)			5,827				7,315
			914,970				895,061
Total liabilities			1,019,497				1,016,577
EQUITY
Shareholders’ equity
Share capital (Note 10)			202,844				202,844
Paid-in capital			299				134
Retained earnings (deficit)			(35,046	)			37,419
Accumulated other comprehensive income			(1,872	)			36,265
Total shareholders’ equity			166,225				276,662
Noncontrolling interest (deficit) (Note 21)			(34,122	)			(21,047	)
Total equity			132,103				255,615
Total liabilities and shareholders’ equity		€	1,151,600			€	1,272,192
Commitments and contingencies (Note 16)
Subsequent events (Note 19)

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

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of Euros, except per share data)

		For the Years Ended December 31,
		2008				2007				2006
Revenues:
Pulp revenue		€	689,320			€	704,391			€	623,977
Energy revenue			30,971				22,904				20,922
			720,291				727,295				644,899
Costs and expenses:
Operating costs			626,933				575,238				477,526
Operating depreciation and amortization			55,484				56,400				55,834
			37,874				95,657				111,539
Selling, general and administrative expenses			30,158				30,714				34,644
(Sale) purchase of emission allowances			(5,613	)			(4,643	)			(15,609	)
Operating income from continuing operations			13,329				69,586				92,504
Other income (expense)
Interest expense			(65,756	)			(71,400	)			(91,931	)
Investment income (loss)			(1,174	)			4,453				6,090
Foreign exchange gain (loss) on debt			(4,234	)			10,958				15,245
Realized gain (loss) on derivative instruments (Note 14)			—				6,820				(3,510	)
Unrealized gain (loss) on derivative instruments (Note 14)			(25,228	)			13,537				109,358
Total other income (expense)			(96,392	)			(35,632	)			35,252
Income (loss) from continuing operations before income taxes			(83,063	)			33,954				127,756
Income tax benefit (provision) (Note 9)
Current			(501	)			(2,170	)			(584	)
Deferred			(1,976	)			(8,144	)			(56,859	)
Net income (loss) from continuing operations after income taxes			(85,540	)			23,640				70,313
Net income (loss) from discontinued operations after income taxes			—				(210	)			(6,032	)
Net income (loss)			(85,540	)			23,430				64,281
Less: net loss (income) attributable to noncontrolling interest			13,075				(1,251	)			(1,071	)
Net income (loss) attributable to common shareholders		€	(72,465	)		€	22,179			€	63,210
Net income (loss) per share attributable to common shareholders, basic (Note 12)
Continuing operations		€	(2.00	)		€	0.62			€	2.08
Discontinued operations			—				(0.01	)			(0.18	)
		€	(2.00	)		€	0.61			€	1.90
Net income (loss) per share attributable to common shareholders, diluted (Note 12)
Continuing operations		€	(2.00	)		€	0.58			€	1.72
Discontinued operations			—				—				(0.14	)
		€	(2.00	)		€	0.58			€	1.58

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands of Euros)

		For the Years Ended December 31,
		2008				2007				2006
Net income (loss)		€	(85,540	)		€	23,430			€	64,281
Other comprehensive income (loss)
Foreign currency translation adjustment			(41,876	)			29,214				(3,730	)
FASB 158 pension income (expense)			4,079				(809	)			—
Unrealized gains (losses) on securities arising during the year			(340	)			95				171
Other comprehensive income (loss)			(38,137	)			28,500				(3,559	)
Total comprehensive income (loss)			(123,677	)			51,930				60,722
Comprehensive loss (income) attributable to noncontrolling interest			13,075				(1,251	)			(1,071	)
Comprehensive income (loss) attributable to common shareholders		€	(110,602	)		€	50,679			€	59,651

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands of Euros)

																										Accumulated Other
		Common Shares																				Comprehensive Income (Loss)
										Amount												Foreign				Defined				Unrealized
										Paid in								Retained				Currency				Benefit				Gains
		Number				Par				Excess of				Paid-in				Earnings				Translation				Pension				(Losses) on								Shareholders’
		of Shares				Value				Par Value				Capital				(Deficit)				Adjustments				Plans				Securities				Total				Equity
Balance at December 31, 2005			33,169,140			€	25,448			€	156,138			€	14			€	(47,970	)		€	15,615			€	(331	)		€	(171	)		€	15,113			€	148,743
Shares issued on exercise of stock options			60,000				41				251				—				—				—				—				—				—				292
Shares issued on grants of restricted stock			45,000				32				297				—				—				—				—				—				—				329
Shares of restricted stock cancelled			(9,999	)			(7	)			(57	)			—				—				—				—				—				—				(64	)
Shares issued on repurchase of notes			2,201,035				1,447				12,052				—				—				—				—				—				—				13,499
Stock compensation expense			—				—				—				140				—				—				—				—				—				140
Adjustment to initially apply FASB Statement No. 158, net of tax			—				—				—				—				—				—				(3,789	)			—				(3,789	)			(3,789	)
Net income			—				—				—				—				63,210				—				—				—				—				63,210
Other comprehensive income (loss)			—				—				—				—				—				(3,730	)			—				171				(3,559	)			(3,559	)
Balance at December 31, 2006			35,465,176			€	26,961			€	168,681			€	154			€	15,240			€	11,885			€	(4,120	)		€	—			€	7,765			€	218,801
Shares issued on exercise of stock options			56,666				43				261				—				—				—				—				—				—				304
Shares issued on grants of restricted stock			21,000				15				145				—				—				—				—				—				—				160
Shares issued on repurchase of notes			742,185				557				6,181				—				—				—				—				—				—				6,738
Stock compensation expense			—				—				—				(20	)			—				—				—				—				—				(20	)
Net income			—				—				—				—				22,179				—				—				—				—				22,179
Other comprehensive income (loss)			—				—				—				—				—				29,214				(809	)			95				28,500				28,500
Balance at December 31, 2007			36,285,027			€	27,576			€	175,268			€	134			€	37,419			€	41,099			€	(4,929	)		€	95			€	36,265			€	276,662
Shares issued on grants of restricted stock			21,000				—				—				61				—				—				—				—				—				61
Shares issued on grants of performance stock			116,460				—				—				29				—				—				—				—				—				29
Stock compensation expense			—				—				—				75				—				—				—				—				—				75
Net loss			—				—				—				—				(72,465	)			—				—				—				—				(72,465	)
Other comprehensive income (loss)			—				—				—				—				—				(41,876	)			4,079				(340	)			(38,137	)			(38,137	)
Balance at December 31, 2008			36,422,487			€	27,576			€	175,268			€	299			€	(35,046	)		€	(777	)		€	(850	)		€	(245	)		€	(1,872	)		€	166,225

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

MERCER INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Euros)

		For the Years Ended December 31,
		2008				2007				2006
Cash flows from (used in) operating activities
Net income (loss) attributable to common shareholders		€	(72,465	)		€	22,179			€	63,210
Adjustments to reconcile net income (loss) attributable to common shareholders to cash flows from operating activities
Unrealized (gain) loss on derivatives			25,228				(13,537	)			(109,358	)
Unrealized foreign exchange (gain) loss on debt			4,234				(10,958	)			(15,245	)
Operating depreciation and amortization			55,484				56,400				56,085
Non-operating amortization			278				258				269
Loss (gain) on sale of assets			(765	)			179				5,957
Noncontrolling interest			(13,075	)			1,251				1,071
Income from equity investee			—				—				(1,206	)
Deferred income taxes			1,976				8,144				56,859
Stock compensation expense			264				243				541
Pension and other post-retirement expense			1,981				1,806				1,638
Pension and other post-retirement benefit funding			(2,739	)			(2,021	)			(1,941	)
Inventory provisions			11,272				—				—
Other			(123	)			2,048				1,438
Changes in current assets and liabilities
Receivables			(14,811	)			(11,890	)			(7,381	)
Inventories			(13,331	)			(38,703	)			7,364
Accounts payable and accrued expenses			1,240				3,303				(9,305	)
Other			3,486				447				(773	)
Net cash from (used in) operating activities			(11,866	)			19,149				49,223
Cash flows from (used in) investing activities
Cash, restricted			20,000				24,000				(25,388	)
Purchase of property, plant and equipment(3)			(25,704	)			(4,864	)			(32,937	)
Proceeds on sale of property, plant and equipment			2,000				881				1,765
Note receivable			5,708				4,954				(6,870	)
Proceeds from available-for-sale securities			—				—				1,184
Net cash from (used in) investing activities			2,004				24,971				(62,246	)
Cash flows from (used in) financing activities
Repayment of notes payable and debt			(34,023	)			(26,719	)			(87,911	)
Repayment of capital lease obligations			(3,312	)			(5,562	)			(4,091	)
Proceeds from investment grants			266				1,236				9,101
Issuance of common shares			—				305				556
Proceeds from borrowings of notes payable and debt			5,837				—				78,100
Proceeds from noncontrolling shareholders			—				—				5,463
Decrease in construction costs payable			—				—				(240	)
Net cash from (used in) financing activities			(31,232	)			(30,740	)			978
Effect of exchange rate changes on cash and cash equivalents			(1,302	)			1,664				(1,698	)
Net increase (decrease) in cash and cash equivalents			(42,396	)			15,044				(13,743	)
Cash and cash equivalents, beginning of year (1)			84,848				69,804				83,547
Cash and cash equivalents, end of year (2)		€	42,452			€	84,848			€	69,804
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		€	60,652			€	73,318			€	84,382
Income taxes			1,100				452				1,304
Supplemental schedule of non-cash investing and financing activities:
Acquisition of production and other equipment under capital lease obligations		€	5,318			€	2,110			€	3,301
Property, plant and equipment on acquisition of 7% interest in Stendal			—				—				8,067
Acquisition of notes receivable on sale of paper assets			—				—				11,321
Increase (decrease) in accounts payable relating to investing activities			2,627				—				—

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

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Background

Mercer International Inc. (“Mercer Inc.” or the “Company”) is a Washington corporation and the Company’s shares of common stock are quoted and listed for trading on the NASDAQ Global Market and the Toronto Stock Exchange, respectively. The Company converted its corporate form from a Washington business trust to a corporation effective March 1, 2006 without effecting any changes to its business, management, accounting practices, assets or liabilities.

Mercer Inc. operates three pulp manufacturing facilities in Canada and Germany, and is the second largest producer of market northern bleached softwood kraft, or “NBSK”, pulp in the world.

In these consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.

Basis of Presentation

These consolidated financial statements contained herein include the accounts of the Company and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). All significant inter-company balances and transactions have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgement is required in determining the accounting for, among other things, the accounting for doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ from these estimates, and changes in these estimates are recorded when known.

Cash and Cash Equivalents

Cash and cash equivalents include cash held in bank accounts and highly liquid money market investments with original maturities of three months or less.

Investments

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

Investments in entities where the Company has equity investments in publicly traded companies in which it has less than 20% of the voting interest and in which it does not exercise significant influence are classified as available-for-sale securities. These securities are reported as long-term investments at fair values; based upon quoted market prices, with the unrealized gains or losses included in accumulated other comprehensive income as a separate component of shareholders’ equity, until realized. If a loss in value in available-for-sale securities is considered to be other than temporary, the loss is recognized in the determination of net income. The cost of all securities sold is based on the specific identification method to determine realized gains or losses.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

Inventories

Inventories of pulp and logs and wood chips are valued at the lower of cost, using the weighted-average cost method, or net realizable value. Other materials and supplies are valued at the lower of cost and replacement cost. Cost includes labor, materials and production overhead and is determined by using the average cost method. Inventories include both roundwood (logs) and wood chips. These inventories are located both at the pulp mill and at various locations. In accordance with industry practice, physical inventory counts utilize standardized techniques to estimate quantities of roundwood and wood chip inventory volumes. These techniques historically have provided reasonable estimates of such inventories.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation of buildings and production equipment is based on the estimated useful lives of the assets and is computed using the straight-line method. Buildings are depreciated over 10 to 50 years and production and other equipment primarily over 25 years.

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset. As a result of current market conditions, the Company undertook a long-lived asset impairment review and concluded that no impairment losses were incurred in 2008.

The costs of major rebuilds, replacements and those expenditures that substantially increase the useful lives of existing property, plant, and equipment are capitalized, as well as interest costs associated with major capital projects until ready for their intended use. The cost of repairs and maintenance performed on manufacturing facilities, composed of labor, materials and other incremental costs, is charged to operations as incurred.

Leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the present value of the minimum lease payments. Capital leases are depreciated over the lease term. Operating lease payments are recognized as an expense in the Consolidated Statement of Operations on a straight line basis over the lease term.

The Company provides for asset retirement obligations when there are legislated or contractual bases for those obligations. Obligations are recorded as a liability at fair value, with a corresponding increase to property, plant, and equipment, and are amortized over the remaining useful life of the related assets. The liability is accreted using a risk free interest rate. As at December 31, 2008, the Company recorded €2,182 of asset retirement obligations.

The Company’s obligations for the proper removal and disposal of asbestos products from the Company’s mills meets the definition of a conditional asset retirement obligation as found in the Financial Accounting Standards Board Statement Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”). Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout its older facilities. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to estimate the fair value of its asbestos removal and disposal obligation.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

Government Grants

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

Deferred Note Issuance Costs

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

Pensions

The Company maintains a defined benefit pension plan for its salaried employees at its Celgar mill which is funded and non-contributory. The cost of the benefits earned by the salaried employees is determined using the projected benefit method pro rated on services. The pension expense reflects the current service cost, the interest on the unfunded liability and the amortization over the estimated average remaining service life of the employees of (i) the unfunded liability and (ii) experience gains or losses.

In accordance with the provisions of Statement of Financial Accounting Standards No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statement No. 87, 88, 106 and 132R (“FAS 158”), the Company recognizes the net funded status of the plan.

Effective December 31, 2008, the defined benefit pension plan will be closed to new members and the defined benefit service accrual will cease. Members will begin to accrue benefits under a new defined contribution plan effective January 1, 2009. The contributions to the new plan will be charged against earnings, in the Consolidated Statement of Operations.

In addition, hourly-paid employees at the Celgar mill are covered by a multi-employer defined contribution pension plan for which contributions are charged against earnings in the Consolidated Statement of Operations.

Foreign Operations and Currency Translation

The Company translates foreign assets and liabilities of its subsidiaries, other than those denominated in Euros, at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the average rate of exchange throughout the year. Transaction gains and losses related to net assets primarily located in Canada are recognized as unrealized foreign currency translation adjustments within comprehensive income (loss) in shareholders’ equity, until all of the investment in the subsidiaries is sold or liquidated. The translation adjustments do not recognize the effect of income tax because the Company expects to reinvest the amounts indefinitely in operations. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in “Costs and expenses” in the Consolidated Statement of Operations, which amounted to €4,597, €(7,452) and €(1,059) for the years ended December 31, 2008, 2007 and 2006, respectively.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

Revenue and Related Cost Recognition

The Company recognizes revenue from product sales, transportation and other when persuasive evidence of an arrangement exists, the sales price is fixed or determinable, title of ownership and risk of loss have passed to the customer and collectability is reasonably assured. Sales are reported net of discounts and allowances.

Amounts charged to customers for shipping and handling are recognized as revenue. Shipping and handling costs incurred by the Company are included in “Operating costs”.

During 2008, the Company has increased its focus on the production and sale of surplus electricity. Accordingly, management no longer considers this activity to be a by-product and, commencing in 2008, the Company began reporting revenue from sales of surplus electricity as “Energy revenue” in the Consolidated Statement of Operations. In previous years, these revenues were being reported within “Operating costs”. Consequently, the presentation in the Consolidated Statement of Operations has been revised for the Company’s energy sales. Energy revenues are recognized as customers are invoiced at agreed upon rates and when collection is reasonably assured. These revenues include an estimate of the value of electricity consumed by customers in the year but billed subsequent to year end. Customer bills are based on meter readings that indicate electricity consumption. This activity does not meet the tests to be considered an operating segment, as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“FAS 131”).

Environmental Conservation

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

Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (“FAS 123(R)”) on January 1, 2006. This statement requires the Company to recognize the cost of employee services received in exchange for the Company’s equity instruments. Under FAS 123(R), the Company is required to record compensation expense over an award’s vesting period based on the award’s fair value. The Company elected to adopt FAS 123(R) on a modified prospective basis; accordingly, the financial statements for periods prior to January 1, 2006 do not include compensation cost calculated under the fair value method. Stock based compensation expense has been recorded in “Selling, general, and administrative expenses” on the Consolidated Statement of Operations.

The fair value of performance stock awards is re-measured at each balance sheet date. The cumulative effect of the change in fair value is recognized in the period of the change as an adjustment to compensation cost. The Company estimates forfeitures of performance stock awards based on management’s expectations and recognizes compensation cost only for those awards expected to vest. Estimated forfeitures are adjusted to actual experience as needed.

The fair value of restricted stock awards are determined by multiplying the market price of a share of Mercer common shares on the grant date by the number of units.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

Taxes on Income

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

Derivative Financial Instruments

The Company enters into derivative financial instruments, including foreign currency forward contracts and swaps, electricity forward contracts, and interest rate swaps, caps and forward rate agreements, to limit exposures to changes in foreign currency exchange rates, energy prices, and interest rates. These derivative instruments are not designated as hedging instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“FAS 133”) and, accordingly, any change in the marked-to-market fair value is recognized as either a gain or loss on derivative financial instruments in the Consolidated Statement of Operations.

Net Income (Loss) Per Share

Basic net income (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted income (loss) per share is calculated to give effect to all potentially dilutive common shares outstanding (computed under basic EPS) applying the “Treasury Stock” method. Outstanding stock options, restricted stock, awards such as restricted stock awards with performance conditions (known as “performance stock”), and convertible notes represent the only potentially dilutive effects on the Company’s weighted average shares. See Note 12-Net Income (Loss) Per Share.

Reclassifications

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

Recently Implemented Accounting Standards

Noncontrolling Interests

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“FAS 160”). FAS 160 establishes accounting and reporting standards for entities that have equity investments that are not attributable directly to the parent, called noncontrolling interests or minority interests. Specifically, FAS 160 states where and how to report noncontrolling interests in the consolidated statements of financial position and operations, how to account for changes in noncontrolling interests and provides disclosure requirements. The provisions of FAS 160 are effective for the Company’s year beginning on or after December 15, 2008. The Company adopted FAS 160 on January 1, 2009, and as a result the Company retrospectively applied the presentation and disclosure requirements to its financial statements. See Note 21 – Noncontrolling Interest.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”), which provides a consistent definition of fair value that focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over company-specific inputs, and expands disclosures regarding fair value measurements. It is applicable whenever another standard requires or permits assets or liabilities to be measured at fair value, but it does not expand the use of fair value to any new circumstances. FAS 157 is effective for financial assets and financial liabilities and for non-financial assets and non-financial liabilities that are remeasured at least annually for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The effect of the adoption of FAS 157 on January 1, 2008 was not material and no adjustment to accumulated deficit was required. Refer to Note 14 for more information. On February 12, 2008, the Financial Accounting Standards Board (“FASB”) Staff issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which defers the effective date of FAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP 157-2 defers the effective date of FAS 157 to fiscal years beginning after November 15, 2008, for items within the scope of FSP 157-2. The provisions of FAS 157 have not been applied to non-financial assets and liabilities, such as asset retirement obligations.

Determining the Fair Value of a Financial Asset when the market for that Asset is not active

In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP 157-3”), which clarifies the application of FAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective immediately upon issuance, including prior periods for which financial statements have not been issued. The application of FSP 157-3 had no impact on the Company’s financial statements or disclosures.

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 effective January 1, 2008, the impact of which was not material.

Accounting for Uncertainty in Income Taxes

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FAS 109, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 9-Income Taxes.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies (continued)

New Accounting Standards

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“FAS 141(R)”). FAS 141(R) establishes how an entity accounts for identifiable assets acquired, liabilities assumed, and any noncontrolling interests acquired, how to account for goodwill acquired and determines what disclosures are required as part of a business combination. FAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, early adoption is prohibited. The Company is currently evaluating FAS 141(R) to determine the impact it will have, if any, on any future acquisitions.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS 161 requires enhanced disclosures about how and why companies use derivatives, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. Consequently, FAS 161 will be effective for the Company’s quarter ended March 31, 2009. The Company is in the process of determining the impact, if any, the adoption of FAS 161 will have on its financial statement disclosures.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets (“FAS 142”). FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is reviewing FSP 142-3 and is unable to estimate the impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). FAS 162 defines the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. The provisions of FAS 162 are effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is in the process of determining the impact, if any, the adoption of FAS 162 will have on its financial statements and disclosures.

In May 2008, the FASB issued FASB Staff Position APB 14-1 Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Settlement) (“FSP 14-1”). FSP 14-1 states that convertible debt instruments that are within its scope are required to be separated into both a debt component and an equity component. In addition, any debt discount is to be accreted to interest expense over the expected life of the debt. The provisions of FSP 14-1 are effective for financial statements issued for fiscal years beginning after December 15, 2008, and implementation is generally required to be retrospective. Early adoption is not permitted. The Company is in the process of determining the impact, if any, the adoption of FSP 14-1 will have on its financial statements and disclosures.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 2. Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash includes restricted cash for debt service reserves as required under debt agreements (Note 7(a)). The Company maintains cash balances in foreign financial institutions in excess of insured limits.

		December 31,
		2008				2007
Cash and cash equivalents		€	42,452			€	84,848
Cash, restricted		€	13,000			€	33,000

Note 3. Receivables

		December 31,
		2008				2007
Sale of pulp (net of allowance of €614 and €626, respectively)		€	85,120			€	81,913
Value added tax			3,433				2,673
Other			11,605				5,304
		€	100,158			€	89,890

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

Other relates to non-trade receivables that are individually not material.

Note 4. Inventories

		December 31,
		2008				2007
Raw materials		€	38,225			€	38,045
Finished goods			37,881				43,127
Work in process and other			22,351				22,438
		€	98,457			€	103,610

As at December 31, 2008, the Company recorded provisions totaling approximately €4,200 (2006 and 2007 – nil) against finished goods inventories. In addition, the Company recorded provisions totaling approximately €7,100 (2007 and 2006 – nil) against raw material inventories. The provisions were primarily the result of the decline in the US dollar price of NBSK pulp. The provisions against finished goods and raw material inventories are included in “Operating costs”.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 5. Property, Plant and Equipment

		December 31,
		2008				2007
Land		€	24,661			€	24,538
Buildings			125,046				125,369
Production equipment and other			1,061,991				1,070,202
			1,211,698				1,220,109
Less: Accumulated depreciation			(329,994	)			(286,851	)
		€	881,704			€	933,258

Included in production equipment and other is equipment under capital leases which had gross amounts of €17,682 and €17,765, and accumulated depreciation of €6,837 and €9,005, respectively, as at December 31, 2008 and 2007. During the years 2008, 2007 and 2006, production equipment and other totaling €5,318, €3,286 and €3,301, respectively, was acquired under capital lease obligations.

Certain of the assets at the Celgar mill are subject to a lien registered for the benefit of a government revenue agency. The lien was registered pursuant to a property transfer tax dispute that is currently before the courts. See Note 16-Commitments and Contingencies.

Note 6. Accounts Payable and Accrued Expenses

		December 31,
		2008				2007
Trade payables		€	31,140			€	37,245
Accounts payable and other			4,559				3,097
Accrued expenses			31,181				25,752
Accrued interest			17,202				17,437
Capital leases, current portion			3,435				3,469
		€	87,517			€	87,000

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 7. Debt

Certain of the Company’s debt agreements were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to other important qualifications and exceptions. As at December 31, 2008, the Company was in compliance with the terms of the indenture.

Debt consists of the following:

		December 31,
		2008				2007
Note payable to bank, included in a total credit facility of €827,950 to finance the construction related to the Stendal pulp mill (a)		€	531,073			€	565,096
Senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured (b) (Note 11)			222,718				212,285
Subordinated convertible notes due October 2010, interest at 8.5% accrued and payable semi-annually (c) (Note 11)			48,319				46,056
Credit agreement with a syndicate of banks with respect to a revolving credit facility of C$40 million (d)			18,186				15,248
Loan payable to the noncontrolling shareholder of the Stendal pulp mill (e) (Note 21)			34,122				32,217
Credit agreement with bank with respect to a revolving credit facility of €40 million (f)			—				—
			854,418				870,902
Less: current portion			(16,500	)			(34,023	)
Debt, less current portion		€	837,918			€	836,879

The Company made scheduled principal repayments under these facilities of €34,023 in 2008, and expects the principle repayments to be €16,500 in 2009 pursuant to an amendment to the Stendal credit facility as noted in Note 19 – Subsequent Events. As of December 31, 2008, the principal maturities of debt are as follows:

Matures		Amount
2009		€	16,500
2010			80,421
2011			23,167
2012			24,583
2013			262,718
Thereafter			447,029
		€	854,418

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 7. Debt (continued)

(a)		Note payable to bank, included in a total credit facility of €827,950 to finance the construction related to the Stendal pulp mill, interest at rates varying from Euribor plus 0.90% to Euribor plus 1.85% (rates on amounts of borrowing at December 31, 2008 range from 6.19% to 6.42%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the assets of the Stendal pulp mill, and at December 31, 2008, restricted cash amounting to €13,000, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to €516,073 of outstanding principal balance, subject to a debt service reserve account required to pay amounts due in the following twelve months under the terms of credit facility; payment of dividends is only permitted if certain cash flow requirements are met. See Note 19 Subsequent Events.
(b)		In February 2005, the Company issued $310 million of senior notes due February 2013, interest at 9.25% accrued and payable semi-annually, unsecured. On or after February 15, 2009, the Company may redeem all or a part of the notes at redemption prices (expressed as a percentage of principal amount) equal to 104.63% for the twelve month period beginning on February 15, 2009, 102.31% for the twelve month period beginning on February 15, 2010, and 100.00% beginning on February 15, 2011 and at any time thereafter, plus accrued and unpaid interest.
(c)		As at December 31, 2008, the subordinated convertible notes had approximately $67.3 million of principal outstanding. The subordinated convertible notes are due October 2010, bear interest at 8.5% accrued and payable semi-annually, are convertible at any time by the holder into common shares of the Company at $7.75 per share and are unsecured. The Company may redeem for cash all or a portion of these notes at any time on or after October 15, 2008 at 100% of the principal amount of the notes plus accrued and unpaid interest up to the redemption date. The holders of the convertible notes will have the option to require the Company to purchase for cash all or a portion of the notes not previously redeemed upon a specified change of control at a price equal to 100% of the principal.
(d)		Credit agreement with respect to a revolving credit facility of C$40 million, on a three year term. Borrowings under the credit agreement are secured by pulp mill inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 2.25% or Canadian prime plus 0.50%. U.S. dollar denominated amounts bear interest at LIBOR plus 2.25% or U.S. base plus 0.50%. As at December 31, 2008, this facility was drawn by C$31 million and was accruing interest at a rate of approximately 3.90%. The credit agreement matures May 19, 2009, but is subject to a one-year extension at the Company’s request. On January 23, 2009, the Company was granted a one-year extension pursuant to the terms of the credit agreement. The extension carries the same general terms and matures May 19, 2010.
(e)		Loan payable to the noncontrolling shareholder of Stendal pulp mill bears interest at 7%, and is payable semi-annually beginning March 2007. The loan payable is unsecured, subordinated to all liabilities of the Stendal pulp mill, and is due in 2017. The balance includes principal and accrued interest.
(f)		Credit agreement with respect to a revolving credit facility of €40,000. Borrowings under the credit agreement are secured by pulp mill inventory and receivables. Borrowings under the credit agreement bear interest at Euribor plus 1.55%. As at December 31, 2008, this facility was undrawn.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 8. Pension and Other Post-Retirement Benefit Obligations

Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and German pulp mills.

The largest component of this obligation is with respect to the Celgar mill which maintains defined benefit pension plans and post-retirement benefits plans for certain employees (“Celgar Plans”). Pension benefits are based on employee’s earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements.

Effective December 31, 2008, the defined benefit plan will be closed to new members. In addition, the defined benefit service accrual will cease on December 31, 2008, and members will begin to accrue benefits under a new defined contribution plan effective January 1, 2009.

Information about the Celgar Plans, in aggregate for the year ended December 31, 2008 is as follows:

		2008
						Other
						Post-Retirement
						Benefit
		Pension				Obligations				Total
Change in benefit obligation
Benefit obligation, December 31, 2007		€	27,832			€	16,137			€	43,969
Service cost			789				501				1,290
Interest cost			1,356				800				2,156
Benefit payments			(1,417	)			(381	)			(1,798	)
Past service cost (credit)			973				(1,152	)			(179	)
Actuarial (gains) losses			(5,557	)			(3,442	)			(8,999	)
Foreign currency exchange rate changes			(3,948	)			(2,166	)			(6,114	)
Benefit obligation, December 31, 2008			20,028				10,297				30,325
Reconciliation of fair value of plan assets
Fair value of plan assets, December 31, 2007			23,903				—				23,903
Actual returns			(4,084	)			—				(4,084	)
Contributions			2,077				381				2,458
Benefit payments			(1,417	)			(381	)			(1,798	)
Foreign currency exchange rate changes			(3,381	)			—				(3,381	)
Fair value of plan assets, December 31, 2008			17,098				—				17,098
Funded status, December 31, 2008		€	(2,930	)		€	(10,297	)		€	(13,227	)(1)
Components of the net benefit cost recognized
Service cost		€	789			€	501			€	1,290
Interest cost			1,356				800				2,156
Expected return on plan assets			(1,542	)			—				(1,542	)
Amortization of recognized items			(6	)			83				77
Net benefit costs		€	597			€	1,384			€	1,981

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)

Information about the Celgar Plans, in aggregate for the year ended December 31, 2007 is as follows:

		2007
						Other
						Post-Retirement
						Benefit
		Pension				Obligations				Total
Change in benefit obligation
Benefit obligation, December 31, 2006		€	25,990			€	13,867			€	39,857
Service cost			840				473				1,313
Interest cost			1,363				741				2,104
Benefit payments			(1,593	)			(323	)			(1,916	)
Actuarial (gains) losses			(481	)			442				(39	)
Foreign currency exchange rate changes			1,713				937				2,650
Benefit obligation, December 31, 2007			27,832				16,137				43,969
Reconciliation of fair value of plan assets
Fair value of plan assets, December 31, 2006			21,993				—				21,993
Actual returns			351				—				351
Contributions			1,698				323				2,021
Benefit payments			(1,593	)			(323	)			(1,916	)
Foreign currency exchange rate changes			1,454				—				1,454
Fair value of plan assets, December 31, 2007			23,903				—				23,903
Funded status, December 31, 2007		€	(3,929	)		€	(16,137	)		€	(20,066	)(1)
Components of the net benefit cost recognized
Service cost		€	840			€	473			€	1,313
Interest cost			1,363				741				2,104
Expected return on plan assets			(1,673	)			—				(1,673	)
Amortization of recognized items			—				62				62
Net benefit costs		€	530			€	1,276			€	1,806

The Company anticipates that it will make contributions to the pension plan of approximately €841 in 2009. Estimated future benefit payments under the Celgar Plans are as follows:

		Amount
2009		€	1,765
2010			1,871
2011			1,963
2012			2,073
2013			2,197
2014 – 2018			13,108

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)

During the year ended December 31, 2008, the Company recognized €4,079 in other comprehensive income (2007 – loss of €809, 2006 – loss of €3,789). As at December 31, 2008, the pension related accumulated other comprehensive income balance of €850 (2007 – €4,929) is a result of net actuarial losses. The Celgar Plans do not have any net transition asset or obligation recognized as a reclassification adjustment of other comprehensive income. The amount included in other comprehensive income which is expected to be recognized in 2009 is approximately €89 of net actuarial gains. There are no plan assets that are expected to be returned to the Company in 2008.

Investment Objective:

The investment objective for the Celgar Plans is to sufficiently diversify invested plan assets to maintain a reasonable level of risk without imprudently sacrificing the return on the invested funds. To achieve this objective, asset allocation targets have been established by asset class as summarized below. Reviews of the investment objectives, key assumptions and the independent investment management are performed periodically.

Summary of key assumptions:

		December 31,
		2008				2007
Benefit obligations
Discount rate			7.25	%			5.25	%
Rate of compensation increase			2.75	%			3.00	%
Net benefit cost for year ended
Discount rate			5.25	%			5.00	%
Rate of compensation increase			3.00	%			3.00	%
Expected rate of return on plan assets			7.00	%			7.25	%
Assumed health care cost trend rate at
Initial health care cost trend rate			12.00	%			12.00	%
Annual rate of decline in trend rate			1.00	%			1.00	%
Ultimate health care cost trend rate			4.50	%			5.00	%
Medical services plan premiums trend rate			2.50	%			2.50	%

The expected rate of return on plan assets is a management estimate based on, among other factors, historical long-term returns, expected asset mix and active management premium.

A one-percentage point change in assumed health care cost trend rate would have the following effect on the post-retirement benefit obligations:

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 8. Pension and Other Post-Retirement Benefit Obligations (continued)

		December 31, 2008						December 31, 2007
		1% increase		1% decrease				1% increase		1% decrease
Effect on total service and interest rate components		€       235		€	(178	)		€     212		€	(160	)
Effect on post-retirement benefit obligation		€    1,598		€	(1,251	)		€  2,252		€	(1,762	)

Asset allocation of funded plans:

		Target				2008				2007
Equity securities			50-70	%			61	%			59	%
Debt securities			30-45	%			36	%			34	%
Cash and cash equivalents			0-10	%			3	%			7	%
							100	%			100	%

Note 9. Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no adjustment in the liability for unrecognized tax benefits.

As at the adoption date of January 1, 2007, the Company had approximately €18,600 of total gross unrecognized tax benefits, at December 31, 2008, that balance is €3,400, substantially all of which would affect the Company’s effective tax rate if recognized. Currently, the Company does not believe that any of its unrecognized tax benefits will change significantly in the next fiscal year. However, this belief could change as tax years are examined by taxing authorities, the timing of those examinations, if any, are uncertain at this time. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		2008				2007
Balance at January 1		€	4,000			€	4,400
Additions – current year tax positions			—				200
Reductions – prior year tax positions			(3,200	)			(300	)
Lapse of statute of limitations			—				(300	)
Settlements			—				—
Balance at December 31		€	800			€	4,000

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the year ended December 31, 2008, the Company recognized approximately €200 in penalties and interest. The Company had €200 for the payment of interest and penalties accrued at December 31, 2008.

The Company and/or one or more of its subsidiaries files income tax returns in the United States, Germany and Canada. The Company is generally not subject to U.S., German or Canadian income tax examinations for tax years before 2004, 2005 and 2004, respectively.

The provision for current income taxes consists entirely of non-U.S. taxes for the years ended December 31, 2008, 2007 and 2006, respectively.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 9. Income Taxes (continued)

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

		Year Ended December 31,
		2008				2007				2006
U.S. Federal statutory rates		34%				34%				34%
U.S. Federal statutory rates on (income) loss from continuing operations before income tax and noncontrolling interest		€	28,241			€	(11,544	)		€	(43,437	)
Tax differential on foreign income (loss)			(2,966	)			2,902				(4,070	)
Effect of foreign earnings			(17,800	)			—				—
Valuation allowance			(5,530	)			15,021				(16,145	)
Other			(4,422	)			(16,693	)			6,209
		€	(2,477	)		€	(10,314	)		€	(57,443	)
Comprised of:
Current		€	(501	)		€	(2,170	)		€	(584	)
Deferred			(1,976	)			(8,144	)			(56,859	)
		€	(2,477	)		€	(10,314	)		€	(57,443	)

Deferred income tax assets and liabilities are composed of the following:

		December 31,
		2008				2007
German tax loss carryforwards		€	67,930			€	50,725
U.S. tax loss carryforwards			5,909				19,934
Canadian tax loss carryforwards			4,924				2,497
Basis difference between income tax and financial reporting with respect to operating pulp mills			(17,118	)			(6,354	)
Derivative financial instruments			13,227				6,144
Long-term debt			(1,726	)			(2,736	)
Payables and accrued expenses			(780	)			148
Reserve for deferred pension liability			2,079				18
Capital leases			531				652
Other			956				1,149
			75,932				72,177
Valuation allowance			(78,723	)			(73,193	)
Net deferred tax (liability) asset		€	(2,791	)		€	(1,016	)
Comprised of:
Deferred income tax asset		€	3,036			€	6,299
Deferred income tax liability			(5,827	)			(7,315	)
		€	(2,791	)		€	(1,016	)

The Company is subject to income tax audits on a continuing basis which may result in changes to the amounts in the above table. Due to this and other uncertainties regarding future amounts of taxable income in Germany, Canada and the United States, the Company has provided a valuation allowance for the majority of its deferred tax assets relating to tax losses carried forward for income tax purposes.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 9. Income Taxes (continued)

The Company’s German tax loss carryforward amount includes corporate and trade tax losses totaling approximately €405,900 at December 31, 2008. The Company’s U.S. loss carryforwards amount is approximately €52,800 at December 31, 2008, which will expire in the tax years ending 2011 through 2028, if not used. The Company’s Canadian tax loss carryforward amount is approximately €16,400 at December 31, 2008 which will begin to expire in the tax year ending 2026, if not used. Management is generally unable to conclude that these losses are more likely than not to be utilized, under current circumstances, and accordingly has fully reserved any resulting potential tax benefit that is not expected to be realized in 2009 or 2010.

Income (loss) from foreign source continuing operations amounted to €(42,788), €(4,030) and €115,305 for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are intended to be indefinitely reinvested in operations.

Note 10. Shareholders’ Equity

In December 2006, the Company purchased and cancelled an aggregate of approximately $15.25 million principal amount of the Company’s subordinated convertible notes in exchange for 2,201,035 common shares of the Company.

In March 2007, the Company converted a note payable to a third party to 742,185 common shares. The conversion was based on the 20-trading day average closing price of the Company’s common shares at March 30, 2007.

Common shares

The Company has authorized 200,000,000 common shares (2007 – 200,000,000) with a par value of $1 per share. As at December 31, 2008, the Company had 36,422,487 (2007 – 36,285,027) common shares issued and outstanding.

Preferred shares

The Company has authorized 50,000,000 preferred shares (2007 – 50,000,000) with U.S. $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at December 31, 2008, no preferred shares had been issued by the Company.

Note 11. Stock-Based Compensation

The Company had a non-qualified stock option plan which provided for options to be granted to officers and employees to acquire a maximum of 3,600,000 common shares including options for 130,000 shares to directors who are not officers or employees. This plan expired in 2008 but unexercised options that were previously granted under this plan remain outstanding. The Company also has a stock incentive plan which provides for options, stock appreciation rights and restricted stock to be awarded to employees and outside directors to a maximum of 1,000,000 common shares. During 2008, the Company implemented a new form of stock-based compensation called performance stock under its existing stock incentive plan.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 11. Stock-Based Compensation (continued)

Performance Stock

Grants of performance stock comprise rights to receive stock at a future date that are contingent on the Company and the grantee achieving certain performance objectives. During the year ended December 31, 2008, potential stock based performance awards totaled 570,614 shares, which cliff vest on December 31, 2010. Expense recognized for the year was €96 (2007 — nil).

The fair value of performance stock is determined based upon the number of shares granted and the quoted price of the Company’s stock. Performance stock generally cliff vest three years from the grant date. As at December 31, 2008, no performance stock had vested. There were no performance stock awards cancelled during the year.

As at December 31, 2008, the total remaining unrecognized compensation cost associated with the performance stock totaled approximately €340 which will be amortized over their remaining vesting period.

Restricted Stock

The fair value of restricted stock is determined based upon the number of shares granted and the quoted price of the Company’s stock on the date of grant. Restricted stock generally vests over two years. Expense is recognized on a straight-line basis over the vesting period. Expense recognized for the years ended December 31, 2008, 2007 and 2006 was €168, €312 and €401, respectively.

As at December 31, 2008, the total remaining unrecognized compensation cost related to restricted stock amounted to €45, which will be amortized over their remaining vesting period.

During the year ended December 31, 2008, there were restricted stock awards of 21,000 shares (2007 - 21,000; 2006 - 45,000) granted to independent directors and officers of the Company and no restricted stock was cancelled during the year (2007 - nil; 2006 - 9,999).

As at December 31, 2008, the total number of restricted stock outstanding was 232,685 (2007 - 211,685; 2006 - 190,686), of which 21,000 had not vested.

MERCER INTERNATIONAL INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Euros, except per share data)

Note 11. Stock-Based Compensation (continued)

Stock Options

The following table summarizes the status of the Company’s stock options during 2008, 2007 and 2006:

		Number				Weighted Average
		of Options				Exercise Price
						(In U.S. Dollars)
Outstanding at December 31, 2005			1,185,000			$	6.71
Exercised			(60,000	)			6.38
Outstanding at December 31, 2006			1,125,000				6.69
Exercised			(56,666	)			7.10
Cancelled			(5,000	)			7.92
Expired			(135,000	)			8.50
Outstanding at December 31, 2007 and 2008			928,334			$	6.44