##### 



InterOil Corporation
Management Discussion 
and AnalysisFor the Quarter and Six Months Ended June 30, 2007
Dated August 13, 2007
    
    (INTEROIL LOGO)
 TABLE OF CONTENTS
 TABLE OF CONTENTS
    
    
    1OVERVIEW
    
    
    2NON-GAAP MEASURES
    
    
    2LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
    
    
    3BUSINESS ENVIRONMENT
    
    
    4RISK MANAGEMENT
    
    
    4BUSINESS STRATEGY
    
    
    4FINANCIAL RESULTS
    
    
    4QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    9UPSTREAM  QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    9MIDSTREAM REFINING  QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    13MIDSTREAM LIQUEFACTION  QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    18DOWNSTREAM  QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    20CORPORATE  QUARTER AND SIX MONTH PERIOD IN REVIEW
    
    
    24LIQUIDITY AND CAPITAL RESOURCES
    
    
    27CRITICAL ACCOUNTING ESTIMATES
    
    
    33NEW ACCOUNTING STANDARDS
    
    
    33NON-GAAP MEASURES RECONCILIATION
    
    
    34PUBLIC SECURITIES FILINGS
    
    
    35GLOSSARY OF TERMS
    
    
    35
   Management Discussion and Analysis    INTEROIL CORPORATION    1




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OVERVIEW
  Segments
    
    OperationsUpstream
    
    Exploration and Production  Explores and appraises
potential oil and natural gas structures in Papua New
Guinea with a view to commercializing significant
discoveries.Midstream
    
    Refining, Marketing and Liquefaction  Markets the
refined products it produces in Papua New Guinea both
domestically and for export. Since early 2006, our
business plan and operating strategy has evolved to
include as a business objective, the development of an
onshore liquefied natural gas processing facility in Papua
New Guinea.Downstream
    
    Wholesale and Retail Distribution  Distributes
refined products in Papua New Guinea on a wholesale and
retail basis.Corporate
    
    Corporate  Engages in business development and
improvement, common services and management, financing and
treasury, government and investor relations. Common and
integrated costs are recovered from business segments on
an equitable basis. Our Corporate segment results also
include consolidation adjustments.
 NON-GAAP MEASURES
  Management Discussion and Analysis    INTEROIL CORPORATION    2




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LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
 This MD&A contains forward-looking statements as defined in U.S. federal and Canadian
securities laws. Such statements are generally identifiable by the terminology used, such as
may, plans, believes, expects, anticipates, intends, estimates, forecasts,
budgets, targets or other similar wording suggesting future outcomes or statements regarding an
outlook. All statements, other than statements of historical fact, included in or incorporated by
reference in this MD&A are forward-looking statements. Forward-looking statements include, without
limitation, statements regarding our plans for expanding our business segments, business strategy,
contingent liabilities, environmental matters, and plans and objectives for future operations,
future capital and other expenditures. By its very nature, such forward-looking information
requires InterOil to make assumptions that may not materialize or that may not be accurate.
 Each forward-looking statement reflects our current view of future events and is subject to known
and unknown risks, uncertainties and other factors that could cause our actual results to differ
materially from any results expressed or implied by our forward-looking statements. These risks
and uncertainties include, but are not limited to; the exploration and production, the refining and
the distribution businesses are competitive; our refinery has not operated at full capacity for an
extended period of time and our profitability may be materially affected if it is not able to do
so; if we are not able to market all of our refinerys output, we will not be able to operate our
refinery at its full capacity and our financial condition and results of operations may be
materially adversely affected; if our refining margins do not meet our expectations and our
refinery operations are not profitable; we may be required to write down the value of our refinery;
our refinery financial condition may be materially adversely affected if we are unable to obtain
crude feedstocks for our refinery; our refining operations expose us to risks, some of which are
not insured; our hedging activities may incur losses; we may not be successful in our exploration
for oil and gas; if we are unable to renew our petroleum licenses with the Papua New Guinea
government, we may be required to discontinue our exploration activities in Papua New Guinea; our
investments in Papua New Guinea are subject to political, legal and economic risks that could
materially adversely affect their value; new legislative, administrative or judicial actions that
constrain licenses and permits from various government authorities may have a material affect on
the companys operations; weather and unforeseen operating hazards may impact our operating
activities; our significant debt levels and our debt covenants may limit our future flexibility in
obtaining additional financing; our ability to recruit and retain qualified personnel may have a
material adverse effect on our operating results and stock price; Petroleum Independent and
Exploration Corporation can affect our raising of capital through the issuance of common shares or
securities convertible into common shares; compliance with and changes in environmental laws could
adversely affect our performance; you may be unable to enforce your legal rights against us;
changing regulations regarding corporate governance and public disclosure could cause additional
expenses and failure to comply may adversely affect our reputation and the value of our securities;
and the risks described under the heading Risk Factors in our Annual Information Form.
 Although we believe that the assumptions underlying our forward-looking statements are reasonable,
any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the
forward-looking statements included in this MD&A will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the inclusion of such
information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. Some of these and other risks and uncertainties that could
cause actual results to differ materially from such forward-looking statements are more fully
described under the heading Risk Factors in our Annual Information Form for the year ended
December 31, 2006.
 Readers are cautioned that the foregoing list of important factors affecting forward-looking
information is not exhaustive. Furthermore, the forward-looking information contained in this
quarterly report is made as of the date of this report and, except as required by applicable law,
InterOil does not undertake any obligation to update publicly or to revise any of the included
forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information contained in this report is expressly qualified by this cautionary
statement.
 We currently have no production or reserves as defined in Canadian National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities. All information contained in this MD&A
regarding resources are references to undiscovered resources under Canadian National Instrument
51-101, whether stated or not.
 Management Discussion and Analysis    INTEROIL CORPORATION    3




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BUSINESS ENVIRONMENT
   RISK MANAGEMENT
 Risk Factors
 www.sedar.com
 BUSINESS STRATEGY
 www.sedar.com
 FINANCIAL RESULTS
 Summary of Consolidated Financial Results for Quarter and Year to Date ended June 30 2007
   ü
    
    improved refinery margins resulting from optimization efforts and capital works
undertaken during 2006.ü
    
    added Downstream sales volumes resulting from the Shell acquisition.ü
    
    decrease in the accretion expense recognized on the indirect participation interest
liability, which decreases as we meet our obligation to complete the drilling program.ü
    
    recognition of a deferred gain during the period due to signing of the LNG
Shareholders Agreement on July 31, 2007.
  Management Discussion and Analysis    INTEROIL CORPORATION    4




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##### 



ü
    
    expensing of the Elk extended well seismic program.ü
    
    expensing of InterOils share of Midstream liquefaction stream preliminary costs.ü
    
    additional office and administration expenses associated with the inclusion of the Shell business.
  Consolidated - Operating results
    
    Quarter ended June 30,
    
    Six months ended June 30,($ thousands, unless otherwise indicated)
    
    2007(1)
    
    2006
    
    2007(1)
    
    2006Sales and operating revenues
    
    
    139,321
    
    
    
    122,778
    
    
    
    265,239
    
    
    
    231,406Interest revenue
    
    
    545
    
    
    
    721
    
    
    
    1,233
    
    
    
    1,328Other non-allocated revenue
    
    
    673
    
    
    
    910
    
    
    
    964
    
    
    
    1,567Total revenue
    
    
    140,539
    
    
    
    124,409
    
    
    
    267,436
    
    
    
    234,301Cost of sales and operating expenses
    
    
    (127,277
    )
    
    
    (123,676
    )
    
    
    (239,506
    )
    
    
    (233,871
    )Office and administration and other expenses
    
    
    (10,426
    )
    
    
    (9,563
    )
    
    
    (18,192
    )
    
    
    (15,174
    )Foreign exchange gain/(loss)
    
    
    692
    
    
    
    1,149
    
    
    
    228
    
    
    
    92Gain on LNG shareholder agreement
    
    
    6,553
    
    
    
    
    
    
    
    6,553
    
    
    
    Exploration costs
    
    
    (4,518
    )
    
    
    (1,660
    )
    
    
    (7,885
    )
    
    
    (1,663
    )Exploration impairment
    
    
    (6
    )
    
    
    (23
    )
    
    
    (20
    )
    
    
    (265
    )Accretion expense
    
    
    (343
    )
    
    
    (893
    )
    
    
    (684
    )
    
    
    (2,782
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    5,214
    
    
    
    (10,257
    )
    
    
    7,930
    
    
    
    (19,362
    )Depreciation and amortization
    
    
    (3,619
    )
    
    
    (2,862
    )
    
    
    (7,079
    )
    
    
    (5,699
    )Interest expense
    
    
    (4,857
    )
    
    
    (3,610
    )
    
    
    (9,339
    )
    
    
    (6,277
    )Loss from ordinary activities before income
taxes
    
    
    (3,262
    )
    
    
    (16,729
    )
    
    
    (8,488
    )
    
    
    (31,338
    )Income tax expense
    
    
    (47
    )
    
    
    (1,171
    )
    
    
    (545
    )
    
    
    (1,046
    )Non-controlling interest
    
    
    12
    
    
    
    139
    
    
    
    (5
    )
    
    
    260Total net loss(2)
    
    
    (3,297
    )
    
    
    (17,761
    )
    
    
    (9,038
    )
    
    
    (32,124
    )Net loss per share (dollars)
    
    
    (0.11
    )
    
    
    (0.60
    )
    
    
    (0.30
    )
    
    
    (1.09
    )Net loss per diluted share (dollars)
    
    
    (0.11
    )
    
    
    (0.60
    )
    
    
    (0.30
    )
    
    
    (1.09
    )Total assets
    
    
    503,174
    
    
    
    487,138
    
    
    
    503,174
    
    
    
    487,138Total liabilities
    
    
    389,451
    
    
    
    360,000
    
    
    
    389,451
    
    
    
    360,000Cash flows from operations
    
    
    7,812
    
    
    
    (25,231
    )
    
    
    2,832
    
    
    
    (17,064
    )Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell PNG
Limited on October 1, 2006 and information in this table includes the results of the Shell
business for the quarter and six month period.(2)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table.
 Management Discussion and Analysis    INTEROIL CORPORATION    5




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Analysis of Consolidated Quarterly Financial Results Comparing Quarter Ended June 30, 2007 and
2006
  ü
    
    $9.9 million improvement in Gross Margin (sales and operating revenues less cost of
sales and operating expenses) from refinery operations between second quarter of 2007 and
same quarter of 2006 primarily due to the positive impact of revamp and optimization
efforts and lower inventory revaluation of finished products compared to the prior period.ü
    
    $1.2 million improvement in Gross Margin from our Downstream business for second quarter
of 2007 over second quarter of 2006, mainly due to added volumes from the Shell acquisition
and increased domestic demand. The positive impact of higher volumes has been partly offset
by unfavorable IPP price movements compared to prior period.ü
    
    $6.6 million recognition of a deferred gain on the discounted interest rate on the
bridging facility crystallized on signing of the LNG shareholder agreement.ü
    
    $0.5 million lower accretion expense in our Upstream operations as a result of a
decrease in the related indirect participation interest liability. The indirect
participation interest liability decreases as we meet our obligation to complete the
drilling program.ü
    
    $1.8 million increase in net income on timing of intra-group profit eliminated on
consolidation between Midstream and Downstream.ü
    
    $1.0 million decrease in income tax expense for the Downstream segment due to a
reduction in tax provisions relating to 2006 tax returns.
  ü
    
    $2.8 million increase in write offs of exploration costs in our Upstream segment
relating to InterOils portion of Elk geophysics and geology costs, which are expensed as
incurred under the Successful Efforts method of accounting..ü
    
    $2.5 million additional office and administration and other expenses due to the
acquisition and inclusion of the Shell business and expansion of the aviation business.ü
    
    $1.2 million increase in interest expense for the quarter as a result of the $130.0
million bridging facility obtained during the second quarter of 2006.ü
    
    $0.4 million of costs relating to the preliminary stages of a liquefied natural gas
plant project. During the third quarter of 2006, we began evaluating the viability of a gas
liquefaction facility. A Shareholders Agreement was signed on July 31, 2007 by Merrill
Lynch Commodities (Europe) Limited, Pacific LNG Operations Ltd. and InterOil LNG Holdings
Inc. to pursue the project.
 Analysis of Consolidated Year to Date Financial Results Comparing Six Months Ended June 30,
2007 and 2006
  ü
    
    $20.7 million improvement in Gross Margin (sales and operating revenues less cost of
sales and operating expenses) from refinery operations between the first six months of 2007
and the first six months of 2006. This is primarily due to the positive impact of revamp
and optimization efforts and lower inventory revaluation of finished products compared to
prior period.
 Management Discussion and Analysis    INTEROIL CORPORATION   6




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ü
    
    $6.3 million improvement in Gross Margin from our Downstream business for the first six
months of 2007 over the first six months of 2006 mainly due to increased volumes resulting
from the Shell acquisition and increased domestic demand coupled with the a positive effect
on Gross Margin due to IPP price movements over the six month period.ü
    
    $6.6 million recognition of a deferred gain on the discounted interest rate on the
bridging facility crystallized on signing of the LNG shareholder agreement.ü
    
    $2.1 million lower accretion expense in our Upstream operations as a result of a
decrease in the related indirect participation interest liability. The indirect
participation interest liability decreases as we meet our obligation to complete the
drilling program.
  ü
    
    $6.2 million increase in write offs of exploration costs in our Upstream segment
relating to InterOils portion of Elk geophysics and geology costs, which are expensed as
incurred under the Successful Efforts method of accounting..ü
    
    $4.2 million increase in office and administration and other expenses due to the
acquisition and inclusion of the Shell business and expansion of the aviation business.ü
    
    $3.1 million increase in interest expense for the six months as a result of the $130.0
million secured loan financing obtained during the second quarter of 2006.ü
    
    $0.8 million of costs relating to the preliminary stages of a liquefied natural gas
plant project.
 Management Discussion and Analysis    INTEROIL CORPORATION    7




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Summary of Consolidated Quarterly Financial Results for past eight quarters
 Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
  Quarters ended($ thousands unless stated
    
    2007
    
    2006(2), (3)
    
    2005 (adjusted)(1)otherwise) (unaudited)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30Upstream
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404Midstream  Refining and
Marketing
    
    
    114,584
    
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625
    
    
    
    115,273Midstream  Liquefaction
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    93,186
    
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044
    
    
    
    32,449Corporate & Consolidated
    
    
    (67,633
    )
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,979
    )
    
    
    (23,307
    )
    
    
    (18,661
    )Sales and operating revenues
    
    
    140,539
    
    
    
    126,896
    
    
    
    172,776
    
    
    
    110,982
    
    
    
    124,409
    
    
    
    109,892
    
    
    
    125,216
    
    
    
    129,465Upstream
    
    
    (5,836
    )
    
    
    (4,395
    )
    
    
    (1,051
    )
    
    
    (1,337
    )
    
    
    (2,262
    )
    
    
    (2,227
    )
    
    
    (2,362
    )
    
    
    (1,655
    )Midstream  Refining and
Marketing
    
    
    3,775
    
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070Midstream  Liquefaction
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522Corporate & Consolidated
    
    
    4,959
    
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,366
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    5,214
    
    
    
    2,716
    
    
    
    6,541
    
    
    
    1,140
    
    
    
    (10,257
    )
    
    
    (9,103
    )
    
    
    (5,566
    )
    
    
    3,486Upstream
    
    
    (6,174
    )
    
    
    (4,704
    )
    
    
    (1,286
    )
    
    
    (1,540
    )
    
    
    (2,436
    )
    
    
    (2,426
    )
    
    
    (2,452
    )
    
    
    (1,870
    )Midstream  Refining and
Marketing
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068Midstream  Liquefaction
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460Corporate & Consolidated
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,341
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )Net income (loss) per segment
    
    
    (3,297
    )
    
    
    (5,740
    )
    
    
    (3,711
    )
    
    
    (7,553
    )
    
    
    (17,759
    )
    
    
    (14,363
    )
    
    
    (12,165
    )
    
    
    (2,912
    )Net income (loss) per share
(dollars)Per Share  Basic
    
    
    (0.11
    )
    
    
    (0.19
    )
    
    
    (0.13
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.49
    )
    
    
    (0.42
    )
    
    
    (0.10
    )Per Share  Diluted
    
    
    (0.11
    )
    
    
    (0.19
    )
    
    
    (0.13
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.49
    )
    
    
    (0.42
    )
    
    
    (0.10
    )
 (1)
    
    Our comparative quarterly results for all quarters during 2005 and 2006 have been
represented to conform with the presentation adopted at December 31, 2006. Previously,
interest revenue and non-controlling interest were allocated to the Corporate segment.
Amounts associated with these line items are now included in each operating segments result.(2)
    
    Our September 2006 quarterly results have been represented with our Midstream-Liquefaction
segment separated out from the Midstream-Refining and Marketing segment, as the development of
a liquefaction business has become an increasingly important component of our business.(3)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table.
 Management Discussion and Analysis    INTEROIL CORPORATION    8




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QUARTER AND SIX MONTH PERIOD IN REVIEW
  UPSTREAM  QUARTER AND SIX MONTH PERIOD IN REVIEW
 Upstream Business Summary
    Upstream Operating Review
 Second
    
    FirstQuarter of
    
    Quarter of
    
    Year EndedKey Upstream Metrics
    
    2007
    
    2007
    
    Dec 2006Wells spudded (during the period)
    
    
    
    
    
    
    1
    
    
    
    1Total wells drilled in eight well indirect participation interest program
    
    
    3
    
    
    
    3
    
    
    
    3Total drilled (during the period) (feet)
    
    
    4,687
    
    
    
    4,064
    
    
    
    6,087Total spent on seismic acquisition ($ millions)
    
    
    6.6
    
    
    
    4.8
    
    
    
    6.8Total spent on drilling ($ millions)
    
    
    11.3
    
    
    
    6.8
    
    
    
    37.9
   Management Discussion and Analysis    INTEROIL CORPORATION    9




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##### 



Upstream Financial Results for Quarter and Six Months Ended June 30, 2007 and 2006
  Upstream  Operating results
    
    Quarter ended June 30,
    
    Six months ended June 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)Sales and operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest revenue
    
    
    101
    
    
    
    1,750
    
    
    
    289
    
    
    
    2,104Other non-allocated revenue
    
    
    296
    
    
    
    934
    
    
    
    503
    
    
    
    1,540Total revenue
    
    
    397
    
    
    
    2,684
    
    
    
    792
    
    
    
    3,644Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (969
    )
    
    
    (2,491
    )
    
    
    (1,783
    )
    
    
    (3,461
    )Foreign exchange gain/(loss)
    
    
    (397
    )
    
    
    121
    
    
    
    (650
    )
    
    
    38Exploration costs
    
    
    (4,518
    )
    
    
    (1,660
    )
    
    
    (7,886
    )
    
    
    (1,663
    )Exploration impairment
    
    
    (6
    )
    
    
    (24
    )
    
    
    (20
    )
    
    
    (265
    )Accretion expense
    
    
    (343
    )
    
    
    (893
    )
    
    
    (684
    )
    
    
    (2,781
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    (5,836
    )
    
    
    (2,263
    )
    
    
    (10,231
    )
    
    
    (4,488
    )Depreciation and amortization
    
    
    (338
    )
    
    
    (173
    )
    
    
    (648
    )
    
    
    (371
    )Interest expense
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Loss from ordinary activities before income
taxes
    
    
    (6,174
    )
    
    
    (2,437
    )
    
    
    (10,879
    )
    
    
    (4,862
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (6,174
    )
    
    
    (2,437
    )
    
    
    (10,879
    )
    
    
    (4,862
    )
 (1)
    
    Our second quarter and first six months of 2006 segment results have been represented to
conform with the presentation adopted for the year ended 2006. Previously, interest revenue
and non-controlling interest were allocated to the Corporate segment. Amounts associated with
these line items are now included in each operating segments result.
 Analysis of Upstream Financial Results Comparing Quarter Ended June 30, 2007 and 2006
   ü
    
    $2.9 million additional exploration costs expensed in the second quarter of 2007 due to
InterOils portion of Elk geophysics and geology costs, which are expensed as incurred
under the Successful Efforts method of accounting.ü
    
    $1.6 million decrease in interest revenue due to lower cash and cash equivalents
available due to usage of indirect participation interest # 3 investor funds.ü
    
    $0.6 million decrease in other unallocated revenue due to lower third party rental
income from InterOils rig as the rig was used on the extended well program which is
capitalized by InterOil and IPI investors share is only 31.55% of the program.ü
    
    $0.6 million decrease in accretion expense in second quarter of 2007 as a result of a
decrease in the indirect participation interest liability. The indirect participation
liability has decreased as the obligation to complete the drilling program is being met
within the agreed terms.
 Management Discussion and Analysis    INTEROIL CORPORATION    10




---



##### 



ü
    
    $1.5 million decrease in office and administration and other expenses, relating mainly
to lower rig expenses.
 Analysis of Upstream Financial Results Comparing Six Months Ended June 30, 2007 and 2006
   ü
    
    $6.2 million additional exploration costs expensed in the first six months of 2007 due
to InterOils portion of Elk geophysics and geology costs, which are expensed as incurred
under the Successful Efforts method of accounting.ü
    
    $1.8 million decrease in interest revenue due to lower cash and cash equivalents
available on account of usage of indirect participation liability funds.ü
    
    $1.0 million decrease in other unallocated revenue is due to lower third party rental
income from InterOils rig as the rig was used on the extended well program which is
capitalized by InterOil and IPI investors share is only 31.55% of the program.ü
    
    $2.1 million decrease in accretion expense in six months of 2007 as a result of a
decrease in the indirect participation interest liability. The indirect participation
liability has decreased as the obligation to complete the drilling program is within
contract.ü
    
    $1.7 million decrease in office and administration and other expenses relates mainly to
lower rig expenses.ü
    
    $0.2 million decrease in exploration impairment as the majority of the expense in first
quarter of 2006 related to the acquisition of additional interests in our PRL 4 and PRL 5
licenses.
 Management Discussion and Analysis    INTEROIL CORPORATION    11




---



##### 



Upstream Financial Results for Quarter Ended June 30, 2007 and the Preceding Seven Quarters
 Upstream  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-allocated
revenue
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404Total segment revenue
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (969
    )
    
    
    (815
    )
    
    
    (1,300
    )
    
    
    (1,609
    )
    
    
    (2,491
    )
    
    
    (970
    )
    
    
    (742
    )
    
    
    (585
    )Foreign exchange
gain/(loss)
    
    
    (397
    )
    
    
    (253
    )
    
    
    (54
    )
    
    
    78
    
    
    
    121
    
    
    
    (83
    )
    
    
    232
    
    
    
    252Exploration costs
    
    
    (4,518
    )
    
    
    (3,368
    )
    
    
    57
    
    
    
    (52
    )
    
    
    (1,660
    )
    
    
    (3
    )
    
    
    306
    
    
    
    (218
    )Exploration impairment
    
    
    (6
    )
    
    
    (14
    )
    
    
    (117
    )
    
    
    (35
    )
    
    
    (23
    )
    
    
    (242
    )
    
    
    (1,747
    )
    
    
    (117
    )Accretion expense
    
    
    (343
    )
    
    
    (340
    )
    
    
    (342
    )
    
    
    (619
    )
    
    
    (893
    )
    
    
    (1,888
    )
    
    
    (1,265
    )
    
    
    (1,391
    )Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (5,836
    )
    
    
    (4,395
    )
    
    
    (1,051
    )
    
    
    (1,337
    )
    
    
    (2,262
    )
    
    
    (2,227
    )
    
    
    (2,362
    )
    
    
    (1,655
    )Depreciation and
amortization
    
    
    (338
    )
    
    
    (309
    )
    
    
    (233
    )
    
    
    (202
    )
    
    
    (173
    )
    
    
    (198
    )
    
    
    (96
    )
    
    
    (213
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    6
    
    
    
    (2
    )Loss from ordinary
activities before
income taxes
    
    
    (6,174
    )
    
    
    (4,704
    )
    
    
    (1,286
    )
    
    
    (1,540
    )
    
    
    (2,436
    )
    
    
    (2,426
    )
    
    
    (2,452
    )
    
    
    (1,870
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (6,174
    )
    
    
    (4,704
    )
    
    
    (1,286
    )
    
    
    (1,540
    )
    
    
    (2,436
    )
    
    
    (2,426
    )
    
    
    (2,452
    )
    
    
    (1,870
    )
 Management Discussion and Analysis    INTEROIL CORPORATION    12




---



##### 



MIDSTREAM REFINING  QUARTER AND SIX MONTH PERIOD IN REVIEW
 Midstream Refining and Marketing Business Summary
   Midstream Refining and Marketing Operating Review
 Quarters ended
    
    Six months endedJune 30,
    
    June 30,Key Refining and Marketing Metrics
    
    2007
    
    2006
    
    2007
    
    2006Net income/(loss) ($ millions)
    
    ($
    1.1
    )
    
    ($
    13.4
    )
    
    $
    0.4
    
    
    
    ($23.5
    )EBITDA ($ millions)
    
    $
    3.8
    
    
    
    ($8.2
    )
    
    $
    10.1
    
    
    
    ($13.4
    )Throughput (barrels 000) (1)
    
    
    1,557
    
    
    
    1,143
    
    
    
    3,015
    
    
    
    2,403Operating days
    
    
    79
    
    
    
    50
    
    
    
    158
    
    
    
    113Cost of production per barrel(2)
    
    $
    2.80
    
    
    $
    2.90
    
    
    $
    2.52
    
    
    $
    2.97Working capital financing cost per barrel of production(2)
    
    $
    0.71
    
    
    $
    1.24
    
    
    $
    0.71
    
    
    $
    0.98Distillates as percentage of production
    
    
    64
    %
    
    
    58
    %
    
    
    65
    %
    
    
    61
    %
 
 (1)
    
    Total throughput for the period(2)
    
    Our cost of production per barrel and working capital financing cost per barrel have been
calculated based on a notional throughput. Our actual throughput has been adjusted to include
the throughput that would have been necessary to produce the equivalent amount of diesel that
we imported during the period.
 
   Management Discussion and Analysis    INTEROIL CORPORATION    13




---



##### 



Midstream Refining and Marketing Financial Results for Quarter and Six Months Ended June 30,
2007 and 2006
  MidstreamRefining and Marketing - Operating results
    
    Quarter ended June 30,
    
    Six months ended June 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    46,538
    
    
    
    84,823
    
    
    
    94,751
    
    
    
    165,676Inter-segment revenue (2)
    
    
    68,031
    
    
    
    21,870
    
    
    
    122,864
    
    
    
    44,025Interest and other revenue
    
    
    15
    
    
    
    132
    
    
    
    24
    
    
    
    229Total revenue
    
    
    114,584
    
    
    
    106,825
    
    
    
    217,639
    
    
    
    209,930Cost of sales and operating expenses
    
    
    (110,074
    )
    
    
    (112,107
    )
    
    
    (204,915
    )
    
    
    (217,658
    )Office and administration and other expenses
    
    
    (2,324
    )
    
    
    (3,969
    )
    
    
    (4,549
    )
    
    
    (5,696
    )Gain on derivative contracts
    
    
    561
    
    
    
    (8
    )
    
    
    1,015
    
    
    
    (102
    )Foreign exchange gain
    
    
    1,028
    
    
    
    1,071
    
    
    
    921
    
    
    
    108Earnings before interest, taxes,
depreciation and amortization
    
    
    3,775
    
    
    
    (8,188
    )
    
    
    10,111
    
    
    
    (13,418
    )Depreciation and amortization
    
    
    (2,748
    )
    
    
    (2,626
    )
    
    
    (5,465
    )
    
    
    (5,224
    )Interest expense
    
    
    (2,156
    )
    
    
    (2,731
    )
    
    
    (4,247
    )
    
    
    (5,073
    )Loss from ordinary activities before income
taxes
    
    
    (1,129
    )
    
    
    (13,545
    )
    
    
    399
    
    
    
    (23,715
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-controlling interest
    
    
    12
    
    
    
    137
    
    
    
    (5
    )
    
    
    255Total net (loss)/income
    
    
    (1,117
    )
    
    
    (13,408
    )
    
    
    395
    
    
    
    (23,460
    )
 (1)
    
    Our second quarter and first six months of 2006 segment results have been represented to
conform with the presentation adopted for reporting the year ended 2006. Previously, interest
revenue and non-controlling interest were allocated to the Corporate segment. Amounts
associated with these line items are now included in each operating segments result.(2)
    
    Our wholesale and retail distribution business segment acquired the business of Shell Papua
New Guinea Limited in Q4 2006, as a result of which Midstream  Refinery and Marketing
external sales have reduced and inter-segment revenue has increased since Q4 2006.
 Management Discussion and Analysis    INTEROIL CORPORATION    14




---



##### 



Analysis of Midstream Financial Results Comparing Quarter Ended June 30, 2007 and 2006
   ü
    
    An increase in Gross Margin of $9.9 million for the second quarter of 2007 when compared to
the second quarter of 2006 was primarily due to a combination of movements in the following:
  +
    
    Improved yield structure+
    
    Reduced fuel consumption+
    
    Decreased fuel cost+
    
    Improved premiums negotiated on export products+
    
    Decreased direct operating costs+
    
    Increased risk management activity (subject to hedge accounting)
  +
    
    Improved Mean of Platts Singapore (MOPS) Naphtha pricing versus benchmark crude-
    
    Decreased MOPS LSWR pricing versus benchmark crude-
    
    Decreased IPP/Posted pricing versus MOPS benchmark pricing for diesel, jet & gasoline fuels
 ü
    
    $1.6 million decrease in office and administration and other expenses due to a number of factors, including decreased
external consultant costs and decreased repair and maintenance costs, as compared to the same quarter in 2006. The
decrease is also contributed by lower financing charges on crude cargo Letters of Credit raised with BNP Paribas.ü
    
    $0.6 million increase to the gain on derivative contracts due to increased price risk management activity that is
deemed not to be subject to hedge accounting.ü
    
    $0.1 million increase to the depreciation charge was as a result of capital works completed in third quarter 2006 being
depreciated in second quarter 2007ü
    
    $0.6 million decrease in interest expenses due to increased utilization of the cash backing component of our working
capital facility balance, decreased working capital loan balances and reduced interest on OPIC loan balances due to
repayment of capital during 2006.
 Analysis of Midstream Financial Results Comparing Six Months Ended June 30, 2007 and 2006
   ü
    
    An increase in Gross Margin of $20.7 million for the six months ended June 30, 2007 when
compared to the same period in 2006 was primarily due to a combination of movements in the
following:
  +
    
    Improved yield structure+
    
    Reduced fuel consumption+
    
    Decreased fuel cost+
    
    Improved premiums negotiated on export products+
    
    Decreased direct operating costs+
    
    Increased risk management activity (subject to hedge accounting)
 Management Discussion and Analysis    INTEROIL CORPORATION    15




---



##### 



+
    
    Improved MOPS Naphtha pricing versus benchmark crude-
    
    Decreased MOPS LSWR pricing versus benchmark crude-
    
    Decreased IPP/Posted pricing versus MOPS benchmark pricing for diesel, jet & gasoline fuels
 ü
    
    $1.1 million decrease in office and administration and other expenses due to a number of factors, including decreased
external consultant costs and decreased repair and maintenance costs, as compared to the same quarter in 2006. The
decrease is also contributed by lower financing charges on crude cargo Letters of Credit raised with BNP Paribas.ü
    
    $1.1 million increase to the gain on derivative contracts due to increased price risk management activity that is
deemed not to be subject to hedge accounting.ü
    
    $0.8 million increase in foreign exchange gain/loss mainly due to actual foreign currency transaction rates closely
matching rates entered in our accounting system, as a result of changing the source of the rates entered in the
accounting system and negotiating improved rates on our Papua New Guinea kina to United States dollar transactions
during the second half of 2006.ü
    
    $0.2 million increase to the depreciation charge was as a result of capital works completed in third quarter 2006 being
depreciated in the first half of 2007ü
    
    $0.8 million decrease in interest expenses due to increased utilization of the cash backing component of our working
capital facility balance, decreased working capital loan balances and reduced interest on OPIC loan balances due to
repayment of capital during 2006.
 Management Discussion and Analysis    INTEROIL CORPORATION    16




---



##### 



Midstream Financial Results for Quarter Ended June 30, 2007 and the Preceding Seven Quarters
 Operating results
    
    2007
    
    

    2006
    
    
    
    
    2005($ thousands)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30External sales
    
    
    46,538
    
    
    
    48,213
    
    
    
    79,634
    
    
    
    69,901
    
    
    
    84,823
    
    
    
    80,854
    
    
    
    84,891
    
    
    
    96,652Inter-segment revenue
    
    
    68,031
    
    
    
    54,833
    
    
    
    67,894
    
    
    
    24,665
    
    
    
    21,870
    
    
    
    22,155
    
    
    
    23,597
    
    
    
    18,552Interest and other
revenue
    
    
    15
    
    
    
    9
    
    
    
    10
    
    
    
    121
    
    
    
    132
    
    
    
    96
    
    
    
    137
    
    
    
    69Total segment revenue
    
    
    114,584
    
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625
    
    
    
    115,273Cost of sales and
operating expenses
    
    
    (110,074
    )
    
    
    (94,841
    )
    
    
    (138,664
    )
    
    
    (95,052
    )
    
    
    (112,108
    )
    
    
    (105,550
    )
    
    
    (112,480
    )
    
    
    (106,864
    )Office and
administration and
other expenses
    
    
    (2,324
    )
    
    
    (2,225
    )
    
    
    (2,396
    )
    
    
    (2,539
    )
    
    
    (3,969
    )
    
    
    (1,727
    )
    
    
    (1,805
    )
    
    
    (2,653
    )Gain on derivative
contracts
    
    
    561
    
    
    
    454
    
    
    
    2,233
    
    
    
    484
    
    
    
    (8
    )
    
    
    (94
    )
    
    
    576
    
    
    
    (57
    )Foreign exchange
gain/(loss)
    
    
    1,028
    
    
    
    (107
    )
    
    
    433
    
    
    
    4,094
    
    
    
    1,071
    
    
    
    (963
    )
    
    
    (1,249
    )
    
    
    371Earnings before
interest, taxes,
depreciation and
amortization
    
    
    3,775
    
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070Depreciation and
amortization
    
    
    (2,748
    )
    
    
    (2,717
    )
    
    
    (2,806
    )
    
    
    (2,699
    )
    
    
    (2,626
    )
    
    
    (2,598
    )
    
    
    (2,663
    )
    
    
    (2,663
    )Interest expense
    
    
    (2,156
    )
    
    
    (2,091
    )
    
    
    (2,478
    )
    
    
    (3,330
    )
    
    
    (2,731
    )
    
    
    (2,342
    )
    
    
    (2,755
    )
    
    
    (2,321
    )Loss from ordinary
activities before
income taxes
    
    
    (1,129
    )
    
    
    1,528
    
    
    
    3,860
    
    
    
    (4,355
    )
    
    
    (13,545
    )
    
    
    (10,169
    )
    
    
    (11,751
    )
    
    
    1,086Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non- controlling
Interest
    
    
    12
    
    
    
    (17
    )
    
    
    (42
    )
    
    
    46
    
    
    
    137
    
    
    
    117
    
    
    
    129
    
    
    
    (18
    )Total net
income/(loss)
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
 Management Discussion and Analysis    INTEROIL CORPORATION    17




---



##### 



MIDSTREAM LIQUEFACTION  QUARTER AND SIX MONTH PERIOD IN REVIEW
 Midstream Liquefaction Operating Review
     Midstream Liquefaction Financial Results for quarter and six months ended June 30, 2007 and
2006
  MidstreamLiquefaction - Operating results
    
    Quarter ended June 30,
    
    Six months ended June 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest revenue
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Total revenue
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (449
    )
    
    
    
    
    
    
    (771
    )
    
    
    Earnings before interest, taxes,
depreciation and amortization
    
    
    (444
    )
    
    
    
    
    
    
    (766
    )
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary activities before income
taxes
    
    
    (444
    )
    
    
    
    
    
    
    (766
    )
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (444
    )
    
    
    
    
    
    
    (766
    )
    
    
    
 Management Discussion and Analysis INTEROIL CORPORATION 18




---



##### 



(1)
    
    Our liquefaction segment was formed in the third quarter of 2006 and as a result there is
no comparative information for the first six months of 2006. The liquefaction business is in
an early stage of development.
 Analysis of Midstream Liquefaction Financial Results Comparing Quarter and Six Months Ended
June 2007 and 2006
   Midstream Liquefaction Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 MidstreamLiquefaction  Operating results
    
    2007
    
    2006
    
    2005($ thousands)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total segment revenue
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (449
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary
activities before
income taxes
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net income/(loss)
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Management Discussion and Analysis INTEROIL CORPORATION 19




---



##### 



DOWNSTREAM - QUARTER AND SIX MONTH PERIOD IN REVIEW
 Downstream Business Summary
  
   Management Discussion and Analysis INTEROIL CORPORATION 20




---



##### 



Downstream Operating Review
 Quarters ended June 30,
    
    Six months ended June 30,Key Downstream Metrics
    
    2007
    
    2006
    
    2007
    
    2006Net income ($ millions)
    
    $
    2.3
    
    
    $
    2.4
    
    
    $
    4.3
    
    
    $
    2.1EBITDA ($ millions)
    
    $
    2.8
    
    
    $
    3.5
    
    
    $
    5.8
    
    
    $
    3.2Market share (1)
    
    
    72
    %
    
    
    27
    %
    
    
    70
    %
    
    
    26
    %Sales volumes (thousands of liters)(2)
    
    
    131,414
    
    
    
    57,301
    
    
    
    254,084
    
    
    
    101,301Cost of distribution per liter ($  per liter)(3)
    
    $
    0.06
    
    
    $
    0.06
    
    
    $
    0.07
    
    
    $
    0.06
 
 (1)
    
    Market share has been calculated based on domestic purchases of product from the refinery
and only includes the effect of the Shell acquisition from October 1, 2006.(2)
    
    Sales volumes reflect the actual sales volumes achieved for the period and therefore only
include the effect of the Shell acquisition from October 1, 2006.(3)
    
    Cost of distribution per liter includes land based freight costs and operational costs. It
excludes depreciation and interest.
 
  Management Discussion and Analysis INTEROIL CORPORATION 21




---



##### 



Downstream Financial Results for quarter and six months ended June 30, 2007 and 2006
  Downstream - Operating results
    
    Quarter ended June 30,
    
    Six months ended June 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    92,782
    
    
    
    37,955
    
    
    
    170,487
    
    
    
    65,730Inter-segment revenue
    
    
    27
    
    
    
    8
    
    
    
    47
    
    
    
    9Interest and other revenue
    
    
    377
    
    
    
    32
    
    
    
    464
    
    
    
    64Total revenue
    
    
    93,186
    
    
    
    37,995
    
    
    
    170,998
    
    
    
    65,803Cost of sales and operating expenses
    
    
    (87,109
    )
    
    
    (33,447
    )
    
    
    (158,717
    )
    
    
    (60,247
    )Office and administration and other expenses
    
    
    (3,317
    )
    
    
    (989
    )
    
    
    (6,494
    )
    
    
    (2,323
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    2,760
    
    
    
    3,559
    
    
    
    5,787
    
    
    
    3,233Depreciation and amortization
    
    
    (552
    )
    
    
    (89
    )
    
    
    (1,007
    )
    
    
    (151
    )Interest expense
    
    
    66
    
    
    
    (39
    )
    
    
    27
    
    
    
    (78
    )Net income (loss) from ordinary activities
before income taxes
    
    
    2,274
    
    
    
    3,431
    
    
    
    4,807
    
    
    
    3,004Income tax expense
    
    
    (32
    )
    
    
    (1,005
    )
    
    
    (514
    )
    
    
    (861
    )Total net income (loss)
    
    
    2,242
    
    
    
    2,426
    
    
    
    4,293
    
    
    
    2,143
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell Papua
New Guinea Limited in Q4 2006 and as a result the first six months of 2006 balances do not
contain results of Shell operations.(2)
    
    Our second quarter and first six months of 2006 has been represented to conform with the
presentation of results adopted for the year ended December 31, 2006. Previously, interest
revenue and non-controlling interest were allocated to the Corporate segment. Amounts
associated with these line items are now included in each operating segments result.
 Downstream Financial Results Analysis Comparing Quarter Ended June 30, 2007 and 2006
   ü
    
    $1.2 million increase in Gross Margin during the second quarter of 2007 over the same
quarter of 2006 mainly due to increased volumes resulting from the Shell Acquisition and
increased domestic demand, coupled with a net positive effect on Gross Margin due to IPP
price movements as applied to the inventory sold during the quarter. Price changes that
affected the second quarter of 2007 were on average less favorable than in the same period
in 2006.ü
    
    $2.3 million increase in office and administration and other expenses due to a number of
factors including, higher insurance costs as a result of the acquisition and inclusion of
the Shell business. Shell previously self insured their PNG business within their global
structure at a much cheaper cost. Also the Downstream operations incurred higher Corporate
allocations, increased repair and maintenance costs, and increased travel costs.ü
    
    $0.4 million increase in depreciation expense over the same quarter of 2006 related
primarily to the addition of the Shell assets from October 1 and the completion of
construction of the 2 million litre East Sepik tank in the third quarter of 2006.ü
    
    $1.0 million decrease in income tax expense during the quarter due to prior period
adjustments.
 Management Discussion and Analysis INTEROIL CORPORATION 22




---



##### 



Analysis of Downstream Financial Results Comparing Six Months Ended June 30, 2007 and 2006
   ü
    
    $6.3 million increase in Gross Margin during first six months of 2007 over same period
last year was mainly due to added volumes from the Shell acquisition and increased domestic
demand, coupled with a net positive effect on Gross Margin due to IPP price movements as
applied to the inventory sold during the period. Price changes that affected the first six
months of 2007 were on average less favorable than in the same period in 2006.ü
    
    $4.2 million increase in office and administration and other expenses due to a number of
factors including added insurance costs from the acquisition and inclusion of the Shell
business. Shell previously self insured their PNG business within their global structure at
a much cheaper rate. Also the Downstream operations incurred higher Corporate
allocations, increased repairs and maintenance costs, and increased travel costs. During
this period, the business also incurred substantial re-branding costs on the ex Shell
retail, commercial and aviation network assets.ü
    
    $0.9 million increase in depreciation expense over first six months of 2006 related
primarily to the addition of the Shell assets on October 1 and the completion of
construction of the 2 million liter East Sepik tank in the third quarter of 2006.ü
    
    $0.3 million decrease in income tax expense during the period due to prior period
adjustments.
 Downstream Financial Results for Quarter Ended June 30, 2007 and the Preceding Seven Quarters
 Downstream  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Jun 30External sales
    
    
    92,782
    
    
    
    77,705
    
    
    
    90,695
    
    
    
    39,451
    
    
    
    37,955
    
    
    
    27,775
    
    
    
    39,192
    
    
    
    29,933Inter-segment revenue
    
    
    27
    
    
    
    20
    
    
    
    (29
    )
    
    
    43
    
    
    
    8
    
    
    
    
    
    
    
    (437
    )
    
    
    129Interest and other revenue
    
    
    377
    
    
    
    87
    
    
    
    1,324
    
    
    
    33
    
    
    
    32
    
    
    
    32
    
    
    
    289
    
    
    
    (69
    )Total segment revenue
    
    
    93,186
    
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044
    
    
    
    29,993Cost of sales and operating
expenses
    
    
    (87,109
    )
    
    
    (71,608
    )
    
    
    (87,521
    )
    
    
    (35,743
    )
    
    
    (33,447
    )
    
    
    (26,801
    )
    
    
    (34,933
    )
    
    
    (26,382
    )Office and administration
and other expenses
    
    
    (3,317
    )
    
    
    (3,176
    )
    
    
    (3,326
    )
    
    
    (1,830
    )
    
    
    (989
    )
    
    
    (1,333
    )
    
    
    (148
    )
    
    
    (1,061
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (327
    )
    
    
    3,963
    
    
    
    2,550Depreciation and amortization
    
    
    (552
    )
    
    
    (456
    )
    
    
    (537
    )
    
    
    (222
    )
    
    
    (90
    )
    
    
    (62
    )
    
    
    (55
    )
    
    
    (52
    )Interest expense
    
    
    66
    
    
    
    (39
    )
    
    
    (36
    )
    
    
    (38
    )
    
    
    (39
    )
    
    
    (38
    )
    
    
    (44
    )
    
    
    (140
    )Income from ordinary
activities before income
taxes
    
    
    2,274
    
    
    
    2,533
    
    
    
    570
    
    
    
    1,694
    
    
    
    3,430
    
    
    
    (427
    )
    
    
    3,865
    
    
    
    2,358Income tax expense
    
    
    (32
    )
    
    
    (483
    )
    
    
    (997
    )
    
    
    (416
    )
    
    
    (1,004
    )
    
    
    145
    
    
    
    (1,063
    )
    
    
    (569
    )Total net income/(loss)
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,789
 Management Discussion and Analysis INTEROIL CORPORATION 23




---



##### 



CORPORATE  QUARTER AND SIX MONTH PERIOD IN REVIEW
 Corporate Financial Results for Quarter and Six Months Ended June 30, 2007 and 2006
  Quarter ended
    
    Six months endedCorporate  Operating results
    
    June 30,
    
    June 30,($ thousands)
    
    2007
    
    2006(5)
    
    2007
    
    2006(5)External sales elimination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue elimination(1)
    
    
    (68,058
    )
    
    
    (21,878
    )
    
    
    (122,911
    )
    
    
    (44,034
    )Interest revenue
    
    
    424
    
    
    
    (1,194
    )
    
    
    911
    
    
    
    (1,069
    )Other unallocated revenue
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    27Total revenue
    
    
    (67,634
    )
    
    
    (23,095
    )
    
    
    (122,000
    )
    
    
    (45,076
    )Cost of sales and operating expenses elimination(1)
    
    
    69,906
    
    
    
    21,878
    
    
    
    124,126
    
    
    
    44,034Office and administration and other expenses(2)
    
    
    (3,866
    )
    
    
    (2,149
    )
    
    
    (5,651
    )
    
    
    (3,647
    )Gain on LNG shareholder agreement
    
    
    6,553
    
    
    
    
    
    
    
    6,553
    
    
    
    Earnings before interest, taxes, depreciation and amortization
    
    
    4,959
    
    
    
    (3,366
    )
    
    
    3,028
    
    
    
    (4,689
    )Depreciation and amortization(3)
    
    
    20
    
    
    
    26
    
    
    
    42
    
    
    
    47Interest expense(4)
    
    
    (2,768
    )
    
    
    (838
    )
    
    
    (5,120
    )
    
    
    (1,123
    )Income from ordinary activities before income taxes
    
    
    2,211
    
    
    
    (4,178
    )
    
    
    (2,050
    )
    
    
    (5,765
    )Income tax expenses
    
    
    (15
    )
    
    
    (166
    )
    
    
    (29
    )
    
    
    (185
    )Non-controlling interest
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    5Total net income
    
    
    2,196
    
    
    
    (4,341
    )
    
    
    (2,079
    )
    
    
    (5,945
    )
 (1)
    
    Represents the elimination upon consolidation of our refinery sales to other segments and
other minor inter-company product sales and administration service fees.(2)
    
    Includes the elimination of inter-segment administration service fees.(3)
    
    Represents the amortization of a portion of costs capitalized to assets on consolidation.(4)
    
    Includes the elimination of interest accrued between segments.(5)
    
    Our second quarter and first six months of 2006 segment results have been represented to
conform with the presentation of results adopted for the year ended 2006. Previously,
interest revenue and non-controlling interest were allocated to the Corporate segment.
Amounts associated with these line items are now included in each operating segments result.
 Analysis of Corporate Financial Results Comparing Quarter Ended June 30, 2007 and 2006
  ü
    
    $6.6 million gain recognized in the second quarter of 2007, being the deferred gain on
the secured bridging facility recognized on signing of Shareholder Agreement subsequent to
the quarter end.ü
    
    $1.9 million increase in interest expense, primarily relating to the additional
borrowings made under the secured loan facility entered into in May 2006.ü
    
    $1.5 million increase in stock compensation expense recognized in office and
administration and other expensesü
    
    $1.8 million increase in net income during second quarter of 2007 on timing of
intra-group profit eliminated on consolidation between Midstream and Downstream. The
margins generated by the
 Management Discussion and Analysis INTEROIL CORPORATION 24




---



##### 



refinery in the second quarter of 2007 were lower than in the previous two quarters. There
was no such adjustment in the second quarter of 2006 as the refinery started generating
positive gross margins in the fourth quarter of 2006.ü
    
    $1.6 million increase in interest revenue in Corporate segment due to higher cash
holdings within the segment.
 Analysis of Corporate Financial Results Comparing Six Months Ended June 30, 2007 and 2006
  ü
    
    $6.6 million gain recognized in second quarter 2007 being the deferred gain on secured
bridging facility recognized on signing of Shareholder Agreement subsequent to the quarter
end.ü
    
    $4.0 million increase in interest expense primarily relating to the additional
borrowings made under the secured loan facility entered into in May 2006.ü
    
    $2.1 million increase in stock compensation expense recognized in office and
administration and other expenses.ü
    
    $1.2 million increase in net income during six months of 2007 on timing of intra-group
profit eliminated on consolidation between Midstream and Downstream. The margins generated
by the refinery in second quarter of 2007 were lower than the margins in last quarter of
2006. There was no such adjustment in second quarter of 2006 as the refinery started
generating positive gross margins in forth quarter of 2006.ü
    
    $2.0 million increase in interest revenue in Corporate segment due to higher cash
holdings.
 Management Discussion and Analysis INTEROIL CORPORATION 25




---



##### 



Corporate Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Corporate  Operating
    
    2007
    
    2006
    
    2005results ($ thousands)
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30Inter-segment revenue elimination
    
    
    (68,058
    )
    
    
    (54,853
    )
    
    
    (67,864
    )
    
    
    (24,708
    )
    
    
    (21,878
    )
    
    
    (22,154
    )
    
    
    (23,160
    )
    
    
    (18,865
    )Interest revenue
    
    
    424
    
    
    
    487
    
    
    
    457
    
    
    
    554
    
    
    
    (1,194
    )
    
    
    125
    
    
    
    96
    
    
    
    118Other unallocated revenue
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    22
    
    
    
    (23
    )
    
    
    50
    
    
    
    (243
    )
    
    
    86Total segment revenue
    
    
    (67,634
    )
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,981
    )
    
    
    (23,307
    )
    
    
    (18,661
    )Cost of sales and operating
expenses elimination
    
    
    69,906
    
    
    
    54,220
    
    
    
    66,649
    
    
    
    24,708
    
    
    
    21,878
    
    
    
    22,156
    
    
    
    24,240
    
    
    
    17,805Office and administration and
other expenses
    
    
    (3,866
    )
    
    
    (1,785
    )
    
    
    (1,491
    )
    
    
    (1,429
    )
    
    
    (2,149
    )
    
    
    (1,498
    )
    
    
    (1,767
    )
    
    
    (2,595
    )Gain on LNG shareholder agreement
    
    
    6,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before interest,
taxes, depreciation and
amortization
    
    
    4,959
    
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,366
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )Depreciation and amortization
    
    
    20
    
    
    
    21
    
    
    
    22
    
    
    
    24
    
    
    
    26
    
    
    
    21
    
    
    
    116
    
    
    
    (13
    )Interest expense
    
    
    (2,768
    )
    
    
    (2,352
    )
    
    
    (3,131
    )
    
    
    (1,981
    )
    
    
    (838
    )
    
    
    (285
    )
    
    
    (196
    )
    
    
    (90
    )Income from ordinary activities
before income taxes
    
    
    2,211
    
    
    
    (4,262
    )
    
    
    (5,408
    )
    
    
    (2,810
    )
    
    
    (4,178
    )
    
    
    (1,585
    )
    
    
    (914
    )
    
    
    (3,554
    )Income tax expense
    
    
    (15
    )
    
    
    (13
    )
    
    
    (10
    )
    
    
    125
    
    
    
    (166
    )
    
    
    (20
    )
    
    
    20
    
    
    
    (20
    )Non-controlling interest
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    4Total net income/(loss)
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,341
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
 Management Discussion and Analysis INTEROIL CORPORATION 26




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
 Summary of Cash Flows for Quarter and Six Months Ended June 30, 2007 and 2006
 Quarters ended June 30,
    
    Six months ended June 30,($ thousands)
    
    2007
    
    2006
    
    2007
    
    2006Net cash inflows/(outflows) from:Operating
    
    
    7,812
    
    
    
    (25,231
    )
    
    
    2,832
    
    
    
    (17,064
    )Investing
    
    
    (3,126
    )
    
    
    (21,943
    )
    
    
    (10,038
    )
    
    
    (43,299
    )Financing
    
    
    (6,382
    )
    
    
    69,776
    
    
    
    (2,069
    )
    
    
    61,798Net cash movement
    
    
    (1,696
    )
    
    
    22,602
    
    
    
    (9,275
    )
    
    
    1,435Opening cash
    
    
    24,102
    
    
    
    38,435
    
    
    
    31,681
    
    
    
    59,602Closing cash
    
    
    22,406
    
    
    
    61,037
    
    
    
    22,406
    
    
    
    61,037
 Operating Activities
  ü
    
    Our cash provided by operations, prior to changes in non-cash
working capital, improved by $11.8 million. on account of higher
margins from our Midstream and Downstream operations compared to
the prior period.ü
    
    Our changes in non-cash working capital provided cash inflow from
operations of $3.7 million as compared to an outflow of $17.5
million in the same quarter of 2006. These working capital
movements relate to the timing of receipts, payments and inventory
purchases.
  ü
    
    Our cash provided by operations, prior to changes in non-cash
working capital, improved by $18.6 million on account of higher
margins from our Midstream and Downstream operations compared to
the prior period.ü
    
    Our changes in non-cash working capital provided a cash outflow
from operations of $5.7 million as compared to $6.4 million in
same period of 2006. These working capital movements relate to
the timing of receipts, payments and inventory purchases.
 Investing Activities
  ü
    
    $19.7 million on oil and gas exploration expenditure in the second
quarter of 2007 relating to the Elk extended well program versus
$3.9 million in second quarter of 2006 mainly related to drilling
and seismic activities and $6.1 million applied against the
indirect participation interest. The Elk extended well program is
not directly covered by the initial indirect participation
interest contributions. Therefore, we must make separate cash
calls for the IPI investors share of these costs.ü
    
    $16.9 million decrease in our secured cash balances in second
quarter of 2007 versus an increase of $12.3 million in the same
quarter of 2006. Restricted cash movement is influenced by the
amounts outstanding on different facilities within our working
capital facility with BNP Paribas.ü
    
    $2.1 million of proceeds from cash calls to joint venture partners
in relation to the natural gas segment preliminary expenses.
 Management Discussion and Analysis INTEROIL CORPORATION 27




---



##### 



ü
    
    $1.1 million on plant and equipment in the second quarter of 2007
mainly on Downstream projects versus $5.4 million in same quarter
of 2006 which primarily related to revamp and optimization
activities undertaken by the refinery.
  ü
    
    $31.4 million on oil and gas exploration expenditure in six month period of 2007 relating to Elk extended well program
versus $4.4 million in same period of 2006 mainly related to drilling and seismic activities and $17.3 million applied
against indirect participation interest. The Elk extended well program is not directly covered by the initial indirect
participation interest contributions. Therefore, we must make separate cash calls for the IPI investors share of these
costs.ü
    
    $9.9 million of proceeds from cash calls from IPI investors in relation to the Elk extended well programs.ü
    
    $11.2 million decrease in our secured cash balances in six month period of 2007 versus an increase of $9.8 million in
same period of 2006.ü
    
    $2.6 million as final payment in the first six months of 2007 to acquire Shell Papua New Guinea as compared to $4.5m
payment in same period of 2006 as deposit on acquisition of Shell which was effective October 1, 2006.ü
    
    $4.1 million of proceeds from cash calls to joint venture partners in relation to the natural gas segment preliminary
expenses.ü
    
    $1.6 million on plant and equipment in the first six months of 2007 mainly on Downstream projects versus $10.2 million
in same period of 2006 which primarily related to revamp and optimization activities undertaken by the refinery.
 Financing Activities
  ü
    
    $5.0 million of proceeds from Clarion Finanz on entering into an option agreement relating to the Elk well.ü
    
    $11.6 million repayment of the BNP working capital facility as compared to draw downs of $17.3 million during the
second quarter of 2006.
  ü
    
    $5.0 million of proceeds from Clarion Finanz on entering into an option agreement relating to the Elk well.ü
    
    $7.4 million repayment of the BNP working capital facility as compared to draw downs of $7.9 million during the six
month period of 2006.
 Capital Expenditures
 Upstream Capital Expenditures
   ü
    
    $6.6 million for seismic acquisition costs relating to Elk extended well program.ü
    
    $11.3 million on drilling Elk  2 appraisal well as part of the Elk extended well program.ü
    
    Fixed assets and inventory movement made up the balance of the expenditure.
 Management Discussion and Analysis INTEROIL CORPORATION 28




---



##### 



ü
    
    $11.3 million for seismic acquisition costs relating to Elk extended well program.ü
    
    $16.1 million on drilling Elk  2 appraisal well as part of the Elk extended well program.ü
    
    Fixed assets and inventory movement made up the balance of the expenditure.
   Midstream Capital Expenditures
  Downstream Capital Expenditures
  Sources of Capital
 Upstream
  Midstream
   Management Discussion and Analysis INTEROIL CORPORATION 29




---



##### 



Downstream
  Corporate
  Capital Requirements
  Upstream
    Midstream  Refining
  Management Discussion and Analysis INTEROIL CORPORATION 30




---



##### 



Midstream  Liquefaction
  Downstream
  Contractual Obligations and Commitments
  Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MoreContractual obligations
    
    
    
    
    
    than 1
    
    1  2
    
    2  3
    
    3  4
    
    4  5
    
    than 5($ thousands)
    
    Total
    
    year
    
    years
    
    years
    
    years
    
    years
    
    yearsSecured loan obligations
    
    
    200,700
    
    
    
    142,700
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000Accrued financing costs
    
    
    1,450
    
    
    
    1,088
    
    
    
    362
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(1)
    
    
    1,816
    
    
    
    1,518
    
    
    
    298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(2)
    
    
    49,554
    
    
    
    23,294
    
    
    
    21,353
    
    
    
    4,908
    
    
    
    
    
    
    
    
    
    
    
    Petroleum
prospecting and  retention licenses(3)
    
    
    4,184
    
    
    
    824
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    257,705
    
    
    
    169,424
    
    
    
    34,374
    
    
    
    13,908
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000
 (1)
    
    These amounts represent the estimated cost of completing our commitment to drill
exploration wells under our indirect participation interest agreement entered into in July
2003. See Note 16 to our unaudited financial statements for the quarter ended June 30, 2007.(2)
    
    These amounts represent the estimated cost of completing our commitment to drill exploration
wells under our indirect participation interest agreement entered into in February 2005. See
Note 16 to our unaudited financial statements for the quarter ended June 30, 2007.(3)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents the
amount InterOil has committed to spend to its joint venture partners. In addition to this
amount, InterOil must drill an exploration well in Petroleum Prospecting License 237 prior to
the end of March 2009 in order to retain this license. As the cost of drilling this well
cannot be estimated, it is not included within the above table. Off Balance Sheet Arrangements
  Management Discussion and Analysis INTEROIL CORPORATION 31




---



##### 



Transactions with Related Parties
    Share Capital
  Share Capital
    
    Number of SharesBalance December 31, 2005
    
    
    29,163,320Shares issued on exercise of options
    
    
    132,285Shares issued on amendment of indirect participation interest (PNGDV)
    
    
    575,575Balance December 31, 2006
    
    
    29,871,180Shares issued on conversion of indirect participation interest
    
    
    26,667Shares issued on conversion of warrants
    
    
    2,995Balance March 31, 2007
    
    
    29,900,842Shares issued on exercise of options
    
    
    22,000Balance June 30, 2007
    
    
    29,922,842Remaining stock options authorized
    
    
    1,313,750Remaining shares issuable upon exercise of warrants
    
    
    337,252Remaining conversion rights authorized(1)
    
    
    3,306,667Other
    
    
    5,000Balance June 30, 2007 Diluted
    
    
    34,885,511
 (1)
    
    In 2005, we sold indirect participation working interests in our exploration program. Each
of the investors under our indirect participation interest agreement entered into in February
2005 have the right to convert, under certain circumstances, their interest to our common
shares. If 100% of the investors under our indirect participation interest agreement choose
to convert their interests, we would be required to issue an additional 3,306,667 common
shares. Derivative Instruments
  Management Discussion and Analysis INTEROIL CORPORATION 32




---



##### 



CRITICAL ACCOUNTING ESTIMATES
 www.sedar.com.
 NEW ACCOUNTING STANDARDS
  Management Discussion and Analysis INTEROIL CORPORATION 33




---



##### 



NON-GAAP MEASURES RECONCILIATION
  Quarters ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005($ thousands) (unaudited)
    
    2007
    
    



    2006(2) ,(3)



    
    
    (adjusted)(1),(2)Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30Upstream
    
    
    (5,836
    )
    
    
    (4,395
    )
    
    
    (1,051
    )
    
    
    (1,337
    )
    
    
    (2,262
    )
    
    
    (2,227
    )
    
    
    (2,362
    )
    
    
    (1,655
    )Midstream  Refining and Marketing
    
    
    3,775
    
    
    
    6,335
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070Midstream  Liquefaction
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522Corporate & Consolidated
    
    
    4,959
    
    
    
    (1,930
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,366
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    5,214
    
    
    
    2,716
    
    
    
    6,541
    
    
    
    1,140
    
    
    
    (10,257
    )
    
    
    (9,103
    )
    
    
    (5,566
    )
    
    
    3,486Subtract:Upstream
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    (6
    )
    
    
    2Midstream  Refining and Marketing
    
    
    2,156
    
    
    
    2,091
    
    
    
    2,479
    
    
    
    3,329
    
    
    
    2,731
    
    
    
    2,343
    
    
    
    2,756
    
    
    
    2,320Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (67
    )
    
    
    40
    
    
    
    37
    
    
    
    38
    
    
    
    39
    
    
    
    38
    
    
    
    44
    
    
    
    42Corporate & Consolidated
    
    
    2,768
    
    
    
    2,351
    
    
    
    3,131
    
    
    
    1,981
    
    
    
    838
    
    
    
    285
    
    
    
    195
    
    
    
    91Interest expense
    
    
    4,857
    
    
    
    4,482
    
    
    
    5,649
    
    
    
    5,349
    
    
    
    3,609
    
    
    
    2,667
    
    
    
    2,989
    
    
    
    2,455Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream  Refining and Marketing
    
    
    (12
    )
    
    
    17
    
    
    
    42
    
    
    
    (46
    )
    
    
    (137
    )
    
    
    (118
    )
    
    
    (129
    )
    
    
    19Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    32
    
    
    
    483
    
    
    
    996
    
    
    
    416
    
    
    
    1,005
    
    
    
    (144
    )
    
    
    1,062
    
    
    
    965Corporate & Consolidated
    
    
    15
    
    
    
    14
    
    
    
    11
    
    
    
    (126
    )
    
    
    163
    
    
    
    17
    
    
    
    (23
    )
    
    
    16Income taxes & non-controlling interest
    
    
    35
    
    
    
    514
    
    
    
    1,049
    
    
    
    244
    
    
    
    1,031
    
    
    
    (245
    )
    
    
    910
    
    
    
    1,000Upstream
    
    
    338
    
    
    
    309
    
    
    
    233
    
    
    
    202
    
    
    
    173
    
    
    
    198
    
    
    
    96
    
    
    
    213Midstream  Refining and Marketing
    
    
    2,749
    
    
    
    2,717
    
    
    
    2,805
    
    
    
    2,700
    
    
    
    2,626
    
    
    
    2,598
    
    
    
    2,662
    
    
    
    2,663Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    552
    
    
    
    455
    
    
    
    537
    
    
    
    222
    
    
    
    89
    
    
    
    62
    
    
    
    55
    
    
    
    55Corporate & Consolidated
    
    
    (20
    )
    
    
    (21
    )
    
    
    (21
    )
    
    
    (24
    )
    
    
    (26
    )
    
    
    (20
    )
    
    
    (113
    )
    
    
    12Depreciation & amortization
    
    
    3,619
    
    
    
    3,460
    
    
    
    3,554
    
    
    
    3,100
    
    
    
    2,862
    
    
    
    2,838
    
    
    
    2,700
    
    
    
    2,943Upstream
    
    
    (6,174
    )
    
    
    (4,704
    )
    
    
    (1,286
    )
    
    
    (1,540
    )
    
    
    (2,436
    )
    
    
    (2,426
    )
    
    
    (2,452
    )
    
    
    (1,870
    )Midstream  Refining and Marketing
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068Midstream  Liquefaction
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460Corporate & Consolidated
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,341
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )Net income (loss) per segment(1)
    
    
    (3,297
    )
    
    
    (5,740
    )
    
    
    (3,711
    )
    
    
    (7,553
    )
    
    
    (17,759
    )
    
    
    (14,363
    )
    
    
    (12,165
    )
    
    
    (2,912
    )
 Management Discussion and Analysis INTEROIL CORPORATION 34




---



##### 



(1)
    
    Comparative quarterly results for all quarters during 2005 have been adjusted and
re-presented to include the adopted accounting treatment for exploration expenses associated
with our $125 million Indirect Participation Interest Agreement entered into in February 2005
as reviewed by our auditors in the third quarter of 2005. The adjusted results present the
quarterly financial information as if the indirect participation interest accounting policy we
adopted during the third quarter of 2005 had been adopted at the inception of the agreement.
See Note 23 to our unaudited financial statements for the three and nine month periods ended
September 30, 2006 and 2005.(2)
    
    Our comparative quarterly results for all quarters during 2005 and 2006 have been represented
to conform with the presentation adopted at December 31, 2006. Previously, interest revenue
and non-controlling interest were allocated to the Corporate segment. Amounts associated with
these line items are now included in each operating segments result.(3)
    
    Our September 2006 quarterly results have been represented to separate out our
Midstream-Liquefaction segment from the Midstream Refining and Marketing segment. PUBLIC SECURITIES FILINGS
 www.sedar.com www.sec.gov
 GLOSSARY OF TERMS
 Barrel, Bbl (petroleum)
 Condensate
 Crack spread
 EBITDA
 Farmout
 Feedstock
 GAAP
 Gross Margin
 IPP
 Management Discussion and Analysis INTEROIL CORPORATION 35




---



##### 



LNG
 LPG
 LSWR
 Mark-to-market
 MOPS
 Naphtha
 Natural gas
 Natural gas measurements .
 
 PGK
 PPL
 PRL
 Sweet/sour crude
 Management Discussion and Analysis INTEROIL CORPORATION 36