##### 



InterOil Corporation
Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)




---



##### 



InterOil Corporation
Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Table of contents
 Consolidated Balance Sheets
    
    
    1Consolidated Statements of Operations
    
    
    2Consolidated Statements of Cash Flows
    
    
    3Consolidated Statements of Shareholders Equity
    
    
    4Consolidated Statements of Comprehensive Income
    
    
    5Notes to the Consolidated Financial Statements
    
    
    6




---



##### 



InterOil Corporation
Consolidated Balance Sheets
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 As atSeptember 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)AssetsCurrent assets:Cash and cash equivalents (note 6)
    
    
    11,928,674
    
    
    
    31,681,435
    
    
    
    30,597,797Cash restricted (note 8)
    
    
    26,672,843
    
    
    
    29,301,940
    
    
    
    35,652,911Trade receivables (note 9)
    
    
    54,530,040
    
    
    
    67,542,902
    
    
    
    33,353,429Commodity derivative contracts (note 8)
    
    
    
    
    
    
    1,759,575
    
    
    
    1,703,100Other assets
    
    
    2,931,626
    
    
    
    2,954,946
    
    
    
    95,265Inventories (note 10)
    
    
    125,269,818
    
    
    
    67,593,558
    
    
    
    103,125,128Prepaid expenses
    
    
    3,964,060
    
    
    
    880,640
    
    
    
    1,509,444Deposit on business acquisition
    
    
    
    
    
    
    
    
    
    
    30,639,000Total current assets
    
    
    225,297,061
    
    
    
    201,714,996
    
    
    
    236,676,074Cash restricted (note 8)
    
    
    1,229,726
    
    
    
    3,217,284
    
    
    
    3,158,378Deferred financing costs (note 16)
    
    
    
    
    
    
    1,716,757
    
    
    
    1,831,073Plant and equipment (note 11)
    
    
    237,671,816
    
    
    
    242,642,077
    
    
    
    236,989,837Oil and gas properties (note 12)
    
    
    71,205,570
    
    
    
    54,524,347
    
    
    
    44,781,951Future income tax benefit
    
    
    2,251,626
    
    
    
    1,424,014
    
    
    
    1,203,600Total assets
    
    
    537,655,799
    
    
    
    505,239,475
    
    
    
    524,640,913Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    
    129,850,488
    
    
    
    73,310,793
    
    
    
    72,362,650Income tax payable
    
    
    2,775,587
    
    
    
    2,784,576
    
    
    
    3,492,900Commodity derivative contracts (note 8)
    
    
    562,725
    
    
    
    
    
    
    
    Working capital facility  crude feedstock (note 14)
    
    
    27,948,185
    
    
    
    36,873,508
    
    
    
    66,425,433Deferred hedge gain (note 8)
    
    
    
    
    
    
    1,385
    
    
    
    959,687Deferred liquefaction project liability (note 17)
    
    
    
    
    
    
    6,553,080
    
    
    
    5,092,097Current portion of secured loan (note 17)
    
    
    144,187,210
    
    
    
    13,500,000
    
    
    
    Current portion of indirect participation interest  PNGDV (note 18)
    
    
    580,775
    
    
    
    730,534
    
    
    
    1,961,867Total current liabilities
    
    
    305,904,970
    
    
    
    133,753,876
    
    
    
    150,294,634Accrued financing costs (note 17)
    
    
    
    
    
    
    1,087,500
    
    
    
    1,450,000Secured loan (note 17)
    
    
    56,585,403
    
    
    
    184,166,433
    
    
    
    186,053,775Deferred gain on contributions to LNG project (note 13)
    
    
    8,910,293
    
    
    
    
    
    
    
    Indirect participation interest (note 18)
    
    
    96,086,369
    
    
    
    96,861,259
    
    
    
    96,861,259Indirect participation interest  PNGDV (note 18)
    
    
    1,343,719
    
    
    
    1,190,633
    
    
    
    Total liabilities
    
    
    468,830,754
    
    
    
    417,059,701
    
    
    
    434,659,668Non-controlling interest (note 19)
    
    
    5,692,678
    
    
    
    5,759,206
    
    
    
    5,726,684Shareholders equity:Share capital (note 20)
    
    
    235,327,634
    
    
    
    233,889,366
    
    
    
    232,678,088Authorised  unlimitedIssued and outstanding - 29,922,842
(Dec 31, 2006 - 29,871,180)
(Sep 30, 2006 - 29,829,513)Contributed surplus
    
    
    9,148,271
    
    
    
    4,377,426
    
    
    
    4,196,247Warrants (note 22)
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive Income
    
    
    2,374,528
    
    
    
    1,492,869
    
    
    
    1,343,294Conversion options (note 18)
    
    
    19,840,000
    
    
    
    20,000,000
    
    
    
    20,000,000Accumulated deficit
    
    
    (205,677,100
    )
    
    
    (179,476,945
    )
    
    
    (176,100,920
    )Total shareholders equity
    
    
    63,132,367
    
    
    
    82,420,568
    
    
    
    84,254,561Total liabilities and shareholders equity
    
    
    537,655,799
    
    
    
    505,239,475
    
    
    
    524,640,913
 See accompanying notes to the consolidated financial statements. Commitments and contingencies
(note 24)
 
 1




---



##### 



InterOil Corporation
Consolidated Statement of Operations
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006$
    
    $ (Restated)
    
    $
    
    $ (Restated)RevenueSales and operating revenues
    
    
    188,364,862
    
    
    
    109,351,784
    
    
    
    453,603,730
    
    
    
    340,758,419Interest
    
    
    501,034
    
    
    
    1,047,618
    
    
    
    1,734,361
    
    
    
    2,375,543Other
    
    
    1,238,936
    
    
    
    582,819
    
    
    
    2,202,510
    
    
    
    2,149,562190,104,832
    
    
    
    110,982,221
    
    
    
    457,540,601
    
    
    
    345,283,524ExpensesCost of sales and operating expenses
    
    
    180,365,537
    
    
    
    106,087,001
    
    
    
    419,871,316
    
    
    
    339,958,342Administrative and general expenses
    
    
    11,783,354
    
    
    
    5,992,712
    
    
    
    26,893,239
    
    
    
    16,129,026Depreciation and amortization
    
    
    2,958,719
    
    
    
    3,099,858
    
    
    
    10,037,606
    
    
    
    8,799,170Exploration costs, excluding exploration impairment (note 12)
    
    
    4,231,583
    
    
    
    505,479
    
    
    
    12,071,133
    
    
    
    6,226,731Exploration impairment (note 12)
    
    
    505,490
    
    
    
    (30,617
    )
    
    
    525,741
    
    
    
    1,528,495Legal and professional fees
    
    
    2,288,946
    
    
    
    886,676
    
    
    
    4,303,397
    
    
    
    2,803,935Short term borrowing costs
    
    
    4,545,949
    
    
    
    2,444,277
    
    
    
    8,773,023
    
    
    
    6,625,549Long term borrowing costs
    
    
    1,440,860
    
    
    
    3,478,351
    
    
    
    7,621,055
    
    
    
    7,247,211Loss on amendment of indirect participation interest  PNGDV
(note 18)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,851,421Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    Loss on proportionate consolidation of LNG project
    
    
    2,432,652
    
    
    
    
    
    
    
    2,432,652
    
    
    
    Foreign exchange gain
    
    
    (2,011,185
    )
    
    
    (4,402,024
    )
    
    
    (2,239,613
    )
    
    
    (4,493,566
    )208,541,905
    
    
    
    118,061,712
    
    
    
    483,736,469
    
    
    
    386,676,313Loss before income taxes and non-controlling interest
    
    
    (18,437,073
    )
    
    
    (7,079,491
    )
    
    
    (26,195,868
    )
    
    
    (41,392,789
    )Income taxesCurrent
    
    
    (667,939
    )
    
    
    (510,085
    )
    
    
    (826,032
    )
    
    
    (1,453,200
    )Future
    
    
    1,140,996
    
    
    
    218,920
    
    
    
    755,232
    
    
    
    116,268473,057
    
    
    
    (291,165
    )
    
    
    (70,800
    )
    
    
    (1,336,932
    )Loss before non-controlling interest
    
    
    (17,964,016
    )
    
    
    (7,370,656
    )
    
    
    (26,266,668
    )
    
    
    (42,729,721
    )Non-controlling interest (note 20)
    
    
    71,844
    
    
    
    47,241
    
    
    
    66,513
    
    
    
    306,943Net loss
    
    
    (17,892,172
    )
    
    
    (7,323,415
    )
    
    
    (26,200,155
    )
    
    
    (42,422,778
    )Basic loss per share(note 23)
    
    
    (0.60
    )
    
    
    (0.25
    )
    
    
    (0.88
    )
    
    
    (1.44
    )Diluted loss per share(note 23)
    
    
    (0.60
    )
    
    
    (0.25
    )
    
    
    (0.88
    )
    
    
    (1.44
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    29,922,842
    
    
    
    29,802,448
    
    
    
    29,908,847
    
    
    
    29,523,026
 2




---



##### 



InterOil Corporation
Consolidated Statement of Cash Flows
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006$
    
    $ (Restated)
    
    $
    
    $ (Restated)Cash flows provided by (used in):Operating activitiesNet loss
    
    
    (17,892,172
    )
    
    
    (7,323,415
    )
    
    
    (26,200,155
    )
    
    
    (42,422,778
    )Adjustments for non-cash and non-operating transactionsNon-controlling interest
    
    
    (71,844
    )
    
    
    (47,241
    )
    
    
    (66,513
    )
    
    
    (306,943
    )Depreciation and amortization
    
    
    2,958,719
    
    
    
    3,099,858
    
    
    
    10,037,606
    
    
    
    8,799,170Future income tax asset
    
    
    (667,859
    )
    
    
    (241,124
    )
    
    
    (985,299
    )
    
    
    (144,702
    )Fair value adjustment on IPL PNG Ltd. acquisition
    
    
    
    
    
    
    
    
    
    
    (367,935
    )
    
    
    Loss/(Gain) on sale of plant and equipment
    
    
    2,014
    
    
    
    (19,894
    )
    
    
    2,014
    
    
    
    236,499Impairment of plant and equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755,857Amortization of discount on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,891Amortization of deferred financing costs
    
    
    105,260
    
    
    
    6,376
    
    
    
    315,809
    
    
    
    104,717Gain on unsettled hedge contracts
    
    
    (864,200
    )
    
    
    (906,205
    )
    
    
    (911,514
    )
    
    
    (315,485
    )Loss on derivative contracts
    
    
    1,380,125
    
    
    
    177,050
    
    
    
    3,232,425
    
    
    
    48,350Stock compensation expense
    
    
    1,988,809
    
    
    
    600,251
    
    
    
    4,873,685
    
    
    
    1,403,122Inventory revaluation
    
    
    (1,411,022
    )
    
    
    6,269,821
    
    
    
    
    
    
    
    13,342,181Non-cash interest on secured loan facility
    
    
    1,545,302
    
    
    
    1,040,005
    
    
    
    4,579,110
    
    
    
    1,432,383Oil and gas properties expensed
    
    
    4,737,073
    
    
    
    474,862
    
    
    
    12,596,874
    
    
    
    7,755,226Loss on amendment of indirect participation interest -
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,851,421PNGDV
Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    Loss on proportionate consolidation of LNG project
    
    
    2,432,652
    
    
    
    
    
    
    
    2,432,652
    
    
    
    Unrealized foreign exchange gain
    
    
    (2,011,185
    )
    
    
    (4,402,024
    )
    
    
    (2,239,613
    )
    
    
    (4,493,566
    )Change in non-cash operating working capital(Increase)/decrease in trade receivables
    
    
    (3,408,068
    )
    
    
    240,399
    
    
    
    10,901,035
    
    
    
    17,307,156(Increase)/decrease in other assets and prepaid expenses
    
    
    (7,285,403
    )
    
    
    708,551
    
    
    
    (4,344,700
    )
    
    
    44,702(Increase)/decrease in inventories
    
    
    (5,125,537
    )
    
    
    (3,224,608
    )
    
    
    (53,889,112
    )
    
    
    (67,403,431
    )Increase in accounts payable, accrued liabilities
and income tax payable
    
    
    3,919,074
    
    
    
    4,684,764
    
    
    
    26,804,942
    
    
    
    46,050,587(19,668,262
    )
    
    
    1,137,426
    
    
    
    (19,781,769
    )
    
    
    (15,926,643
    )Investing activitiesExpenditure on oil and gas properties
    
    
    (20,276,982
    )
    
    
    (14,078,067
    )
    
    
    (48,678,304
    )
    
    
    (34,309,338
    )Proceeds from IPI cash calls
    
    
    9,490,168
    
    
    
    
    
    
    
    19,356,024
    
    
    
    Expenditure on plant and equipment
    
    
    (1,971,142
    )
    
    
    (2,950,647
    )
    
    
    (3,635,302
    )
    
    
    (13,179,740
    )Expenditure on oil and gas properties applied against
indirect participation interest (note 18)
    
    
    
    
    
    
    1,512,707
    
    
    
    3,327
    
    
    
    Proceeds from PNG LNG cash call
    
    
    2,587,439
    
    
    
    
    
    
    
    6,664,035
    
    
    
    Proceeds received on sale of assets
    
    
    
    
    
    
    50,562
    
    
    
    
    
    
    
    3,797,526Acquisition of subsidiary (note 15)
    
    
    
    
    
    
    
    
    
    
    (2,679,435
    )
    
    
    Proceeds from insurance claim
    
    
    7,000,000
    
    
    
    
    
    
    
    7,000,000
    
    
    
    Deposit on business acquisition
    
    
    
    
    
    
    (26,139,000
    )
    
    
    
    
    
    
    (30,639,000
    )(Increase)/decrease in restricted cash held as security on
borrowings
    
    
    (6,631,026
    )
    
    
    (12,302,122
    )
    
    
    4,616,655
    
    
    
    (22,149,020
    )Change in non-cash working capitalIncrease/(decrease) in accounts payable and accrued
liabilities
    
    
    18,066,581
    
    
    
    12,479
    
    
    
    18,525,609
    
    
    
    (713,699
    )8,265,038
    
    
    
    (53,894,088
    )
    
    
    1,172,609
    
    
    
    (97,193,271
    )Financing activitiesRepayments of unsecured loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,453,132
    )Repayments of secured loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500,000
    )Proceeds from bridging facility, net of transaction costs
    
    
    
    
    
    
    34,257,500
    
    
    
    
    
    
    
    113,713,489Financing fees related to bridging facility
    
    
    
    
    
    
    100,000
    
    
    
    (100,000
    )
    
    
    Proceeds from Clarion Finanz for Elk option agreement
    
    
    2,500,000
    
    
    
    
    
    
    
    7,500,000
    
    
    
    (Repayments of)/proceeds from working capital facility
    
    
    (1,574,141
    )
    
    
    (12,197,693
    )
    
    
    (8,925,323
    )
    
    
    (4,298,889
    )Proceeds from issue of common shares
    
    
    
    
    
    
    158,101
    
    
    
    316,101
    
    
    
    654,436Proceeds from conversion of warrants
    
    
    
    
    
    
    
    
    
    
    65,621
    
    
    
    925,859
    
    
    
    22,317,908
    
    
    
    (1,143,601
    )
    
    
    84,115,904(Decrease)/increase in cash and cash equivalents
    
    
    (10,477,365
    )
    
    
    (30,438,754
    )
    
    
    (19,752,761
    )
    
    
    (29,004,010
    )Cash and cash equivalents, beginning of period
    
    
    22,406,039
    
    
    
    61,036,551
    
    
    
    31,681,435
    
    
    
    59,601,807Cash and cash equivalents, end of period (note 6)
    
    
    11,928,674
    
    
    
    30,597,797
    
    
    
    11,928,674
    
    
    
    30,597,797
 See accompanying notes to the consolidated financial statements
 3




---



##### 



InterOil Corporation
Consolidated Statements of Shareholders Equity
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Nine months ended
    
    Year ended
    
    Nine months endedSeptember 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)Share capitalAt beginning of period
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    223,934,500Issue of capital stock (note 20)
    
    
    1,438,268
    
    
    
    9,954,866
    
    
    
    8,743,588At end of period
    
    
    235,327,634
    
    
    
    233,889,366
    
    
    
    232,678,088Contributed surplusAt beginning of period
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    2,933,586Stock compensation (note 21)
    
    
    4,770,845
    
    
    
    1,443,840
    
    
    
    1,262,661At end of period
    
    
    9,148,271
    
    
    
    4,377,426
    
    
    
    4,196,247WarrantsAt beginning of period
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852Movement for period (note 22)
    
    
    (18,818
    )
    
    
    
    
    
    
    At end of period
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive IncomeAt beginning of period
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    477,443Deferred hedge gain recognised on transition
    
    
    1,385
    
    
    
    
    
    
    
    Deferred hedge (loss)/gain movement for period, net of tax
    
    
    (1,385
    )
    
    
    
    
    
    
    Foreign currency translation adjustment movement for
period, net of tax
    
    
    881,659
    
    
    
    1,015,426
    
    
    
    865,851At end of period
    
    
    2,374,528
    
    
    
    1,492,869
    
    
    
    1,343,294Conversion optionsAt beginning of period
    
    
    20,000,000
    
    
    
    20,000,000
    
    
    
    20,000,000Movement for period (note 18)
    
    
    (160,000
    )
    
    
    
    
    
    
    At end of period
    
    
    19,840,000
    
    
    
    20,000,000
    
    
    
    20,000,000Accumulated deficitAt beginning of period
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )
    
    
    (133,678,142
    )Net loss for period
    
    
    (26,200,155
    )
    
    
    (45,798,803
    )
    
    
    (42,422,778
    )At end of period
    
    
    (205,677,100
    )
    
    
    (179,476,945
    )
    
    
    (176,100,920
    )Shareholders equity at end of period
    
    
    63,132,367
    
    
    
    82,420,568
    
    
    
    84,254,561
 See accompanying notes to the consolidated financial statements
 4




---



##### 



InterOil Corporation
Statements of Comprehensive Income
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006$
    
    $ (Restated)
    
    $
    
    $ (Restated)Net loss
    
    
    (17,892,172
    )
    
    
    (7,323,415
    )
    
    
    (26,200,155
    )
    
    
    (42,422,778
    )Other comprehensive income, net of tax
    
    
    643,412
    
    
    
    682,934
    
    
    
    881,659
    
    
    
    865,851Comprehensive loss
    
    
    (17,248,760
    )
    
    
    (6,640,481
    )
    
    
    (25,318,496
    )
    
    
    (41,556,927
    )
 See accompanying notes to the consolidated financial statements
 5




---



##### 



1. Nature of operations and organization
    2. Restatement of Consolidated financial statements for the quarter and nine months ended September
30, 2006
      6




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2.
    
    Restatement of Consolidated financial statements (contd)
   Restatement to Consolidated Balance Sheet as at September 30, 2006
 September 30, 2006Restated
    
    
    OriginalBalance
    
    
    Balance
    
    
    Adjustments
    
    
    Reference$
    
    
    $
    
    
    $Non-current assetsOil and gas
properties (note
12)
    
    
    44,781,951
    
    
    
    28,044,170
    
    
    
    16,737,781
    
    
    (i), (ii)Current and
Non-current
liabilitiesIndirect
participation
interest (note 18)
    
    
    96,861,259
    
    
    
    49,327,561
    
    
    
    47,533,698
    
    
    (i), (iii), (iv)Indirect
participation
interest  PNGDV
(note 18)
    
    
    1,961,867
    
    
    
    1,749,626
    
    
    
    212,241
    
    
    (vi)Shareholders EquityConversion options
(note 18)
    
    
    20,000,000
    
    
    
    25,475,368
    
    
    
    (5,475,368
    )
    
    (iii)Accumulated deficit
    
    
    (176,100,920
    )
    
    
    (150,568,130
    )
    
    
    (25,532,790
    )
 Restatement to Consolidated Statement of Operations for nine months ended September 30, 2006
 Nine months ended September 30, 2006Restated
    
    OriginalBalance
    
    Balance
    
    Adjustments
    
    Reference$
    
    $
    
    $ExpensesExploration costs,
excluding exploration
impairment (note 12)
    
    
    6,226,731
    
    
    
    1,715,614
    
    
    
    4,511,117
    
    
    (ii)Exploration impairment
(note 12)
    
    
    1,528,495
    
    
    
    299,815
    
    
    
    1,228,680
    
    
    (ii)Accretion expense (note 18)
    
    
    
    
    
    
    3,399,114
    
    
    
    (3,399,114
    )
    
    (iv), (vi)Loss on amendment of
indirect participation
interest  PNGDV (note 18)
    
    
    1,851,421
    
    
    
    1,446,901
    
    
    
    404,520
    
    
    (vi)9,606,647
    
    
    
    6,861,444
    
    
    
    2,745,203Net loss
    
    
    42,422,778
    
    
    
    39,677,575
    
    
    
    2,745,203
  
 (i)
    
    Conveyance accounting under SFAS 19 adopted by the Company from day one under the original
model has been reversed and non-financial liability maintained at initially recognized value
of $105,000,000, being the estimated cost of completing the eight well program, less
transaction costs borne by the investors. The remaining $20,000,000 has been bifurcated and
presented under equity for conversion options under residual basis. Under the revised model,
conveyance accounting will be triggered only on the lapse of conversion option available to
the investors or they elect to participate in the PDL for a successful well. This adjustment
has the effect of increasing the IPI liability and Oil and gas properties from the
superseded balance as at September 30, 2006 by $50,912,656. 7




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Restatement of Consolidated financial statements (contd)
 (ii)
    
    As conveyance accounting is not triggered from day one under the revised model, the Company
will account for the exploration costs relating to the eight well program under successful
efforts accounting policy adopted by the Company as noted under note 3(r)  Oil and gas
properties of the revised consolidated financial statements. All geological and geophysical
(G&G) costs relating to the exploration program will be expensed as incurred and all
drilling costs will be capitalized and assessed for recovery at each period. Under the
earlier model, all costs relating to the eight well exploration program (covered by the IPI
Agreement) was directly offset against the IPI liability and not capitalized to Oil and gas
properties or expensed in InterOils Statement of income. This was based on Managements view
that the conveyance had occurred from day one of the Agreement and these exploration costs
were being expended on behalf of the IPI Investors, reducing the IPI liability in the process.
This adjustment has the effect of increasing the exploration costs, excluding impairment, for
the nine month period ended September 30, 2006 by $4,511,117. The exploration impairment for
the nine month period ended September 30, 2006 increased by $1,228,680. The impact of this
profit and loss adjustment on the exploration costs have the corresponding effect on the Oil
and gas properties carried forward in the balance sheet.
 (iii)
    
    In the superseded financial statements, the conversion option feature in the IPI Agreement
was valued and bifurcated using relative fair value approach based on CICA 3861  Financial
Instruments Disclosure and Presentation. CICA 3861 Para .22 gives the option to value the
components using the relative fair value approach (as adopted earlier) or the residual method
by valuing the easier component first. Based on discussions with the SEC, Management has
adopted an accounting policy change to value the liability component first and assign the
residual value to the equity component. This revised residual basis methodology has been
adopted due to difficulties in reliably estimating the fair value of the equity component
(taking into account all the scenarios in which the values of both the drilling program
interests and common shares could change) and appropriately applying the relative fair value
approach. The non-financial liability has been valued at $105,000,000, being the estimated
expenditures to complete the eight well drilling program (same estimate as disclosed in
December 31, 2005 financials), and the residual value of $20,000,000 has been allocated to
conversion option presented under Shareholders equity. This revision was made as it was
determined that the non-financial liability component was more easily measurable than the
conversion option feature. This adjustment has the effect of increasing the IPI liability and
correspondingly reducing the Conversion options from the superseded balance as at September 30,
2006 by $5,475,368.
 (iv)
    
    As noted above, the Company had, under the original model, bifurcated the non-financial
liability and conversion option feature, and based on this allocation, the initial value of
the non-financial liability did not represent the total expected cash costs to fulfill the
contract. InterOil had drawn comparisons between this situation and the accounting approach
that is adopted with respect to mandatory redeemable securities, where there can also be a
difference between the initial value of the security and the redemption price, and accreted
the non-financial liability upwards to reflect the cost of completion of the eight well
program over the budgeted timeline of the program. Based on the revised model, the liability
is maintained at the undiscounted value and accretion costs are no longer recognized. This
adjustment has the effect of reducing the loss for the nine months ended September 30, 2006 by
$3,206,835. These decreases to the accretion expense have the corresponding effect of
increasing the IPI liability in the balance sheet.
 (v)
    
    When conveyance is triggered on election by the investors to participate in a PDL or when the
investor forfeits the conversion option, conveyance accounting will be applied. This would
entail determination of proceeds for the interests conveyed and the cost of that interest as
represented in the Oil and gas properties in the balance sheet. The difference between
proceeds on conveyance and capitalized costs to the interests conveyed will be recognized as
gain or loss in the Statement of operations following the guidance in paragraphs 47(h) and
47(j) of SFAS 19. There is no impact on the consolidated financial statements for the quarter
and nine months ended September 30, 2006 due to this adjustment as conveyance has not been
triggered based on the revised model.
 (vi)
    
    Management has applied the same methodology on the discounting and accretion expense in
relation to the PNG Drilling Ventures liability and reversed the initial discounting of the
liability on recognition and the related accretion charges. This adjustment has the effect of
increasing the Loss on amendment of Indirect Participation Interest  PNGDV for the nine
month period September 30, 2006 by $404,520 and decreasing the accretion expense by $192,279
resulting in a net income statement impact of increasing the loss for the for the nine month
period ended September 30, 2006 by 212,241. This adjustment also has the corresponding effect
of decreasing the Indirect Participation Interest  PNGDV liability.
 (vii)
    
    The impact of all the above adjustments on the consolidated statement of income for the nine
month period ended September 30, 2006 has been an increase in the loss by $2,745,203 ($0.09
per share). The impact of all the above adjustments on the consolidated statement of income
for the quarter ended September 30, 2006 has been a decrease in the loss by $230,186 ($0.01
per share).
 8




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Restatement of Consolidated financial statements (contd)
 (viii)
    
    In accordance with IPI Agreement, InterOil has made cash calls for the extended well
programs performed on the exploratory wells that form part of the IPI Agreement. These are
additional cash calls made from the IPI investors for their interest in specific extended well
programs undertaken by the Company. These cash calls were shown as a liability when received
and reduced as amounts were spent on the extended well programs. There has been no change to
the accounting treatment of the cash calls as these amounts are received for specific programs
and there is no conversion option feature or any changes to the investor participation
interest due to contributions to these cash calls.
  3. Significant accounting policies
  (a) Basis of preparation
   Principles of consolidation
 PNG LNG Inc.  Conversion to a joint venture
  Other changes
  (b) Changes in accounting policies
 Financial instrument and hedging activities
  
    
    Section 1530, Comprehensive Income;
    
    Section 3251, Equity;
    
    Section 3855, Financial Instruments  Recognition and Measurement; and
    
    Section 3865, Hedges.
 9




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 3. Significant accounting policies (contd)
  Comprehensive Income
  Financial Instruments  Recognition and Measurement
  Derivatives
  Hedge Accounting
    Accounting Changes
  10




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 3. Significant accounting policies (contd)
 (c) Going concern
      (d) Reclassification
  4. Financial Risk Management
   (a) Market risk
 Foreign exchange risk
    11




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 4. Financial Risk Management (contd)
 Price risk
   Product risk
   (b) Credit risk
   (c) Liquidity risk
  (d) Cash flow and fair value interest rate risk
    (e) Geographic risk
  12




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 5. Segmented financial information
     Notes to and forming part of the segment information
   Midstream Refining and
    
    
    Midstream -
    
    
    
    
    
    
    
    
    
    
    ConsolidationQuarter ended September 30, 2007
    
    Upstream
    
    
    Marketing
    
    
    Liquefaction
    
    
    Downstream
    
    
    Corporate
    
    
    adjustments
    
    
    TotalRevenues from external customers
    
    
    
    
    
    
    85,733,041
    
    
    
    
    
    
    
    102,631,821
    
    
    
    
    
    
    
    
    
    
    
    188,364,862Intersegment revenues
    
    
    
    
    
    
    82,989,281
    
    
    
    
    
    
    
    16,133
    
    
    
    2,071,314
    
    
    
    (85,076,728
    )
    
    
    Interest revenue
    
    
    57,789
    
    
    
    15,137
    
    
    
    9,903
    
    
    
    17,624
    
    
    
    9,523,521
    
    
    
    (9,122,940
    )
    
    
    501,034Other revenue
    
    
    1,118,011
    
    
    
    
    
    
    
    
    
    
    
    120,925
    
    
    
    
    
    
    
    
    
    
    
    1,238,936Total segment revenue
    
    
    1,175,800
    
    
    
    168,737,459
    
    
    
    9,903
    
    
    
    102,786,503
    
    
    
    11,594,835
    
    
    
    (94,199,668
    )
    
    
    190,104,832Cost of sales and operating expenses
    
    
    
    
    
    
    166,780,333
    
    
    
    
    
    
    
    96,590,617
    
    
    
    
    
    
    
    (83,005,414
    )
    
    
    180,365,536Office and admin and other expenses
    
    
    1,408,537
    
    
    
    4,851,582
    
    
    
    1,682,537
    
    
    
    3,418,760
    
    
    
    5,546,265
    
    
    
    (2,071,306
    )
    
    
    14,836,375Foreign exchange (gain)/loss
    
    
    45,665
    
    
    
    (1,562,166
    )
    
    
    (790
    )
    
    
    (524,386
    )
    
    
    30,492
    
    
    
    
    
    
    
    (2,011,185
    )Loss on proportionate consolidation
of PNG LNG Inc
    
    
    
    
    
    
    
    
    
    
    2,432,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,432,652Exploration costs, excluding
exploration impairment
    
    
    4,231,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,231,583Exploration impairment
    
    
    505,490
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    505,490Depreciation and amortisation
    
    
    (299,469
    )
    
    
    2,781,380
    
    
    
    
    
    
    
    496,986
    
    
    
    12,329
    
    
    
    (32,507
    )
    
    
    2,958,719Interest expense
    
    
    
    
    
    
    8,155,136
    
    
    
    
    
    
    
    3,320,307
    
    
    
    2,870,233
    
    
    
    (9,122,941
    )
    
    
    5,222,735Total segment expenses
    
    
    5,891,806
    
    
    
    181,006,265
    
    
    
    4,114,399
    
    
    
    103,302,284
    
    
    
    8,459,319
    
    
    
    (94,232,168
    )
    
    
    208,541,905(Loss)/income before income taxes
and non-controlling interest
    
    
    (4,716,006
    )
    
    
    (12,268,806
    )
    
    
    (4,104,496
    )
    
    
    (515,781
    )
    
    
    3,135,516
    
    
    
    32,500
    
    
    
    (18,437,073
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,925
    
    
    
    212,131
    
    
    
    
    
    
    
    473,056Non controlling interest
    
    
    
    
    
    
    69,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,441
    
    
    
    71,845Total net income/(loss)
    
    
    (4,716,006
    )
    
    
    (12,199,402
    )
    
    
    (4,104,496
    )
    
    
    (254,856
    )
    
    
    3,347,647
    
    
    
    34,941
    
    
    
    (17,892,172
    )
 13




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 5. Segmented financial information (contd)
 Quarter ended September 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidation(Restated)
    
    Upstream
    
    
    Midstream
    
    
    Midstream - LNG
    
    
    Downstream
    
    
    Corporate
    
    
    adjustments
    
    
    TotalRevenues from external customers
    
    
    
    
    
    
    69,900,864
    
    
    
    
    
    
    
    39,450,920
    
    
    
    
    
    
    
    
    
    
    
    109,351,784Intersegment revenues
    
    
    
    
    
    
    24,664,998
    
    
    
    
    
    
    
    42,907
    
    
    
    3,024,734
    
    
    
    (27,732,639
    )
    
    
    Interest revenue
    
    
    339,676
    
    
    
    121,349
    
    
    
    
    
    
    
    32,938
    
    
    
    625,823
    
    
    
    (72,168
    )
    
    
    1,047,618Other revenue
    
    
    560,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,617
    
    
    
    
    
    
    
    582,820Total segment revenue
    
    
    899,879
    
    
    
    94,687,211
    
    
    
    
    
    
    
    39,526,765
    
    
    
    3,673,174
    
    
    
    (27,804,807
    )
    
    
    110,982,222Cost of sales and operating expenses
    
    
    
    
    
    
    95,051,873
    
    
    
    
    
    
    
    34,116,405
    
    
    
    
    
    
    
    (24,707,907
    )
    
    
    104,460,371Office and admin and other expenses
    
    
    1,609,203
    
    
    
    2,055,860
    
    
    
    298,015
    
    
    
    3,751,128
    
    
    
    4,093,054
    
    
    
    (2,728,115
    )
    
    
    9,079,144Foreign exchange (gain)/loss
    
    
    (77,734
    )
    
    
    (4,094,124
    )
    
    
    
    
    
    
    (294,466
    )
    
    
    64,300
    
    
    
    
    
    
    
    (4,402,024
    )Exploration costs, excluding
exploration impairment
    
    
    505,479
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    505,479Exploration impairment
    
    
    (30,617
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,617
    )Depreciation and amortisation
    
    
    202,262
    
    
    
    2,699,917
    
    
    
    
    
    
    
    221,557
    
    
    
    8,629
    
    
    
    (32,507
    )
    
    
    3,099,858Interest expense (i)
    
    
    1,349
    
    
    
    3,329,153
    
    
    
    
    
    
    
    38,111
    
    
    
    2,053,056
    
    
    
    (72,167
    )
    
    
    5,349,502(Loss)/income before income taxes
and non-controlling interest
    
    
    (1,310,063
    )
    
    
    (4,355,468
    )
    
    
    (298,015
    )
    
    
    1,694,030
    
    
    
    (2,545,864
    )
    
    
    (264,110
    )
    
    
    (7,079,491
    )Income tax (expense)/benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (416,011
    )
    
    
    124,846
    
    
    
    
    
    
    
    (291,165
    )Non controlling interest
    
    
    
    
    
    
    46,379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    862
    
    
    
    47,241Total net income/(loss)
    
    
    (1,310,063
    )
    
    
    (4,309,089
    )
    
    
    (298,015
    )
    
    
    1,278,019
    
    
    
    (2,421,018
    )
    
    
    (263,248
    )
    
    
    (7,323,415
    )
 Midstream -Refining and
    
    
    Midstream -
    
    
    
    
    
    
    
    
    
    
    ConsolidationNine months ended September 30, 2007
    
    Upstream
    
    
    Marketing
    
    
    Liquefaction
    
    
    Downstream
    
    
    Corporate
    
    
    adjustments
    
    
    TotalRevenues from external customers
    
    
    
    
    
    
    180,484,268
    
    
    
    
    
    
    
    273,119,462
    
    
    
    
    
    
    
    
    
    
    
    453,603,730Intersegment revenues
    
    
    
    
    
    
    205,853,357
    
    
    
    
    
    
    
    62,844
    
    
    
    6,095,162
    
    
    
    (212,011,363
    )
    
    
    Interest revenue
    
    
    347,172
    
    
    
    39,420
    
    
    
    15,336
    
    
    
    20,522
    
    
    
    10,514,246
    
    
    
    (9,202,335
    )
    
    
    1,734,361Other revenue
    
    
    1,620,441
    
    
    
    
    
    
    
    
    
    
    
    582,069
    
    
    
    
    
    
    
    
    
    
    
    2,202,510Total segment revenue
    
    
    1,967,613
    
    
    
    386,377,045
    
    
    
    15,336
    
    
    
    273,784,897
    
    
    
    16,609,408
    
    
    
    (221,213,698
    )
    
    
    457,540,601Cost of sales and operating expenses
    
    
    
    
    
    
    371,695,630
    
    
    
    
    
    
    
    255,307,476
    
    
    
    
    
    
    
    (207,131,790
    )
    
    
    419,871,316Office and admin and other expenses
    
    
    3,192,091
    
    
    
    8,385,243
    
    
    
    2,455,676
    
    
    
    9,940,776
    
    
    
    15,150,245
    
    
    
    (6,095,161
    )
    
    
    33,028,870Foreign exchange (gain)/loss
    
    
    695,534
    
    
    
    (2,482,732
    )
    
    
    (2,097
    )
    
    
    (552,528
    )
    
    
    102,210
    
    
    
    
    
    
    
    (2,239,613
    )Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    
    
    
    
    (6,553,080
    )Loss on proportionate consolidation
of PNG LNG Inc
    
    
    
    
    
    
    
    
    
    
    2,432,652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,432,652Exploration costs, excluding
exploration impairment
    
    
    12,071,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,071,133Exploration impairment
    
    
    525,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525,741Depreciation and amortisation
    
    
    348,242
    
    
    
    8,246,652
    
    
    
    
    
    
    
    1,504,605
    
    
    
    35,629
    
    
    
    (97,522
    )
    
    
    10,037,606Interest expense
    
    
    
    
    
    
    12,401,608
    
    
    
    
    
    
    
    3,293,050
    
    
    
    8,069,521
    
    
    
    (9,202,335
    )
    
    
    14,561,844Total segment expenses
    
    
    16,832,741
    
    
    
    398,246,401
    
    
    
    4,886,231
    
    
    
    269,493,379
    
    
    
    16,804,525
    
    
    
    (222,526,808
    )
    
    
    483,736,469(Loss)/income before income taxes
and non-controlling interest
    
    
    (14,865,128
    )
    
    
    (11,869,356
    )
    
    
    (4,870,895
    )
    
    
    4,291,518
    
    
    
    (195,117
    )
    
    
    1,313,110
    
    
    
    (26,195,868
    )Income tax (expense)/benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (253,717
    )
    
    
    182,916
    
    
    
    
    
    
    
    (70,801
    )Non controlling interest
    
    
    
    
    
    
    64,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,362
    
    
    
    66,514Total net income/(loss)
    
    
    (14,865,128
    )
    
    
    (11,805,204
    )
    
    
    (4,870,895
    )
    
    
    4,037,801
    
    
    
    (12,201
    )
    
    
    1,315,472
    
    
    
    (26,200,155
    )Total assets
    
    
    91,363,808
    
    
    
    350,607,863
    
    
    
    94,787,481
    
    
    
    121,482,643
    
    
    
    452,542,961
    
    
    
    (484,016,225
    )
    
    
    626,768,531
 14




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 5. Segmented financial information (contd)
 Nine months ended September 30,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidation2006 (Restated)
    
    Upstream
    
    
    Midstream
    
    
    Midstream - LNG
    
    
    Downstream
    
    
    Corporate
    
    
    adjustments
    
    
    TotalRevenues from external customers
    
    
    
    
    
    
    235,577,338
    
    
    
    
    
    
    
    105,181,081
    
    
    
    
    
    
    
    
    
    
    
    340,758,419Intersegment revenues
    
    
    
    
    
    
    68,690,096
    
    
    
    
    
    
    
    51,821
    
    
    
    7,018,273
    
    
    
    (75,760,190
    )
    
    
    Interest revenue
    
    
    2,443,853
    
    
    
    350,026
    
    
    
    
    
    
    
    96,718
    
    
    
    1,104,593
    
    
    
    (1,619,647
    )
    
    
    2,375,543Other revenue
    
    
    2,099,802
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,760
    
    
    
    
    
    
    
    2,149,562Total segment revenue
    
    
    4,543,656
    
    
    
    304,617,460
    
    
    
    
    
    
    
    105,329,620
    
    
    
    8,172,626
    
    
    
    (77,379,837
    )
    
    
    345,283,525Cost of sales and operating expenses
    
    
    
    
    
    
    312,709,827
    
    
    
    
    
    
    
    91,110,544
    
    
    
    
    
    
    
    (68,741,917
    )
    
    
    335,078,454Office and admin and other expenses
    
    
    5,070,251
    
    
    
    7,853,798
    
    
    
    298,015
    
    
    
    9,333,627
    
    
    
    12,101,726
    
    
    
    (6,746,518
    )
    
    
    27,910,900Foreign exchange (gain)/loss
    
    
    (115,608
    )
    
    
    (4,201,763
    )
    
    
    
    
    
    
    (301,295
    )
    
    
    125,099
    
    
    
    
    
    
    
    (4,493,567
    )Exploration costs, excluding
exploration impairment
    
    
    6,226,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,226,731Exploration impairment
    
    
    1,528,495
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,528,495Depreciation and amortisation
    
    
    573,157
    
    
    
    7,923,499
    
    
    
    
    
    
    
    372,931
    
    
    
    27,105
    
    
    
    (97,522
    )
    
    
    8,799,170Interest expense (i)
    
    
    4,019
    
    
    
    8,402,419
    
    
    
    
    
    
    
    115,531
    
    
    
    4,723,809
    
    
    
    (1,619,647
    )
    
    
    11,626,131(Loss)/income before income taxes
and non-controlling interest
    
    
    (8,743,390
    )
    
    
    (28,070,320
    )
    
    
    (298,015
    )
    
    
    4,698,282
    
    
    
    (8,805,114
    )
    
    
    (174,233
    )
    
    
    (41,392,789
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,276,860
    )
    
    
    (60,072
    )
    
    
    
    
    
    
    (1,336,932
    )Non controlling interest
    
    
    
    
    
    
    301,389
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,554
    
    
    
    306,943Total net income/(loss)
    
    
    (8,743,390
    )
    
    
    (27,768,931
    )
    
    
    (298,015
    )
    
    
    3,421,422
    
    
    
    (8,865,186
    )
    
    
    (168,679
    )
    
    
    (42,422,778
    )Total assets
    
    
    82,703,311
    
    
    
    344,788,862
    
    
    
    
    
    
    
    83,803,927
    
    
    
    383,366,085
    
    
    
    (370,021,272
    )
    
    
    524,640,913
 6. Cash and cash equivalents
  September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $
    
    $Cash on deposit
    
    
    11,928,674
    
    
    
    31,681,435
    
    
    
    30,597,79711,928,674
    
    
    
    31,681,435
    
    
    
    30,597,797
  15




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 7. Supplemental cash flow information
 Quarter ended
    
    Nine months endedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006$
    
    $
    
    $
    
    $Cash paid during the yearInterest
    
    
    7,649,882
    
    
    
    1,648,663
    
    
    
    11,809,320
    
    
    
    8,199,040Income taxes
    
    
    15,975
    
    
    
    497,566
    
    
    
    42,593
    
    
    
    1,811,005Interest received
    
    
    502,082
    
    
    
    1,169,643
    
    
    
    1,733,639
    
    
    
    2,370,265Non-cash investing and financing activities:Increase in deferred gain on contributions to LNG project
    
    
    8,910,293
    
    
    
    
    
    
    
    8,910,293
    
    
    
    Loss on proportionate consolidation of LNG project
    
    
    2,432,652
    
    
    
    
    
    
    
    2,432,652
    
    
    
    Fair value adjustment on IPL PNG Ltd. acquisition
    
    
    
    
    
    
    
    
    
    
    (367,935
    )
    
    
    Decrease in plant and equipment as a result of impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    755,857(Decrease)/increase in deferred liquefaction project liability
    
    
    
    
    
    
    1,517,532
    
    
    
    (6,553,080
    )
    
    
    5,092,097Increase in share capital from:the exercise of share options
    
    
    
    
    
    
    
    
    
    
    102,840
    
    
    
    140,461the exercise of warrants
    
    
    
    
    
    
    
    
    
    
    18,818
    
    
    
    conversion of indirect participation interest into share capital
    
    
    
    
    
    
    
    
    
    
    934,890
    
    
    
    7,948,691
 8. Financial instruments
 Cash and cash equivalents
   Cash restricted
  September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $
    
    $Cash deposit on working capital facility (4.9%)
    
    
    24,252,843
    
    
    
    29,301,940
    
    
    
    35,652,911Debt reserve for secured loan
    
    
    2,420,000
    
    
    
    
    
    
    
    Cash restricted  Current
    
    
    26,672,843
    
    
    
    29,301,940
    
    
    
    35,652,911Cash deposit on secured loan (3.5%)
    
    
    1,070,905
    
    
    
    647,502
    
    
    
    642,165Debt reserve for secured loan
    
    
    
    
    
    
    2,420,000
    
    
    
    2,368,901Bank term deposits on Petroleum Prospecting Licenses (0.4%)
    
    
    111,789
    
    
    
    107,997
    
    
    
    107,740Cash deposit on office premises (6.2%)
    
    
    47,032
    
    
    
    41,785
    
    
    
    39,572Cash restricted  Non-current
    
    
    1,229,726
    
    
    
    3,217,284
    
    
    
    3,158,37827,902,569
    
    
    
    32,519,224
    
    
    
    38,811,289
  16




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 8. Financial instruments (contd)
    Commodity derivative contracts
     Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell naphtha
    
    175,000
  Derivative
    
    Type
    
    Notional volumes (bbls)Crude swap
    
    Sell crude
    
    50,000Crude swap
    
    Buy crude
    
    100,000Naphtha spread
    
    Sell naphtha
    
    75,000
  9. Trade receivables
   17




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 10. Inventories
 September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $
    
    $Midstream  refining and marketing (crude oil feedstock)
    
    
    53,132,675
    
    
    
    12,795,356
    
    
    
    38,752,643Midstream  refining and marketing (refined petroleum product)
    
    
    30,035,960
    
    
    
    22,329,270
    
    
    
    48,183,651Midstream  refining and marketing (parts inventory)
    
    
    274,307
    
    
    
    46,636
    
    
    
    Downstream (refined petroleum product)
    
    
    41,826,876
    
    
    
    32,422,296
    
    
    
    16,188,834125,269,818
    
    
    
    67,593,558
    
    
    
    103,125,128
   11. Plant and equipment
   Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    Corporate &September 30, 2007
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    249,921,848
    
    
    
    
    
    
    
    42,382,487
    
    
    
    269,475
    
    
    
    293,821,011Deferred project costs and work in progress
    
    
    
    
    
    
    901,614
    
    
    
    1,130,919
    
    
    
    1,383,287
    
    
    
    
    
    
    
    3,415,820Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,893,165
    )
    
    
    (2,893,165
    )Accumulated depreciation and amortisation
    
    
    (213,815
    )
    
    
    (30,009,199
    )
    
    
    
    
    
    
    (26,385,054
    )
    
    
    (63,782
    )
    
    
    (56,671,850
    )Net book value
    
    
    1,033,386
    
    
    
    220,814,263
    
    
    
    1,130,919
    
    
    
    17,380,720
    
    
    
    (2,687,472
    )
    
    
    237,671,816Capital expenditure for nine months ended
Sep 2007
    
    
    
    
    
    
    373,122
    
    
    
    1,130,919
    
    
    
    3,169,217
    
    
    
    122,678
    
    
    
    4,795,936
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2006
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    249,741,042
    
    
    
    
    
    
    
    37,697,458
    
    
    
    146,797
    
    
    
    288,832,498Deferred project costs and work in progress
    
    
    
    
    
    
    723,566
    
    
    
    
    
    
    
    715,653
    
    
    
    
    
    
    
    1,439,219Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,990,688
    )
    
    
    (2,990,688
    )Accumulated depreciation and amortisation
    
    
    (153,455
    )
    
    
    (21,760,341
    )
    
    
    
    
    
    
    (22,697,003
    )
    
    
    (28,153
    )
    
    
    (44,638,952
    )Net book value
    
    
    1,093,746
    
    
    
    228,704,267
    
    
    
    
    
    
    
    15,716,108
    
    
    
    (2,872,044
    )
    
    
    242,642,077Capital expenditure for year ended Dec 2006
    
    
    
    
    
    
    11,948,960
    
    
    
    
    
    
    
    10,543,842
    
    
    
    156,817
    
    
    
    22,649,619
 18




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 11. Plant and equipment (contd)
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    Corporate &September 30, 2006
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    249,856,717
    
    
    
    
    
    
    
    13,164,752
    
    
    
    135,788
    
    
    
    264,404,458Deferred project costs and w ork in progress
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,440,171
    
    
    
    
    
    
    
    2,440,171Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,023,196
    )
    
    
    (3,023,196
    )Accumulated depreciation and amortisation
    
    
    (136,153
    )
    
    
    (18,953,631
    )
    
    
    
    
    
    
    (7,723,801
    )
    
    
    (18,011
    )
    
    
    (26,831,596
    )Net book value
    
    
    1,111,048
    
    
    
    230,903,086
    
    
    
    
    
    
    
    7,881,122
    
    
    
    (2,905,419
    )
    
    
    236,989,837Capital expenditure for nine months ended
Sep 2006
    
    
    
    
    
    
    12,046,029
    
    
    
    
    
    
    
    2,023,815
    
    
    
    145,808
    
    
    
    14,215,652
  12. Oil and gas properties
   September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)Drilling equipment
    
    
    22,256,114
    
    
    
    18,242,972
    
    
    
    16,710,715Petroleum Prospecting License drilling programs at cost
    
    
    48,949,456
    
    
    
    36,281,375
    
    
    
    28,071,23671,205,570
    
    
    
    54,524,347
    
    
    
    44,781,951
   Nine months ended
    
    Year ended
    
    Nine months endedSeptember 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)Exploration costs, excluding exploration impairment
    
    
    12,071,133
    
    
    
    6,176,866
    
    
    
    6,226,731Exploration impairmentCosts incurred in prior years
    
    
    
    
    
    
    
    
    
    
    Costs incurred in current year
    
    
    525,741
    
    
    
    1,647,185
    
    
    
    1,528,495Total exploration impairment
    
    
    525,741
    
    
    
    1,647,185
    
    
    
    1,528,49512,596,874
    
    
    
    7,824,051
    
    
    
    7,755,226
 13. Deferred gain on contributions to LNG Project
  19




---



##### 



InterOil Corporation 
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 13. Deferred gain on contributions to LNG Project (contd)
    14. Working capital facility  crude feedstock
     September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $
    
    $Working capital credit facility
    
    
    170,000,000
    
    
    
    170,000,000
    
    
    
    170,000,000Less amounts included in the working capital facility liability:Short term advances
    
    
    (27,948,185
    )
    
    
    (13,201,940
    )
    
    
    (66,425,433
    )Discounted receivables (note 9)
    
    
    
    
    
    
    (23,671,568
    )
    
    
    (27,948,185
    )
    
    
    (36,873,508
    )
    
    
    (66,425,433
    )Less: other amounts outstanding under the facility:Letters of credit outstanding
    
    
    (63,400,000
    )
    
    
    (79,000,000
    )
    
    
    (46,790,000
    )Bank guarantees on hedging facility
    
    
    (1,500,000
    )
    
    
    (1,500,000
    )
    
    
    (1,500,000
    )Working capital credit facility available for use
    
    
    77,151,815
    
    
    
    52,626,492
    
    
    
    55,284,567
 20




---



##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 14. Working capital facility  crude feedstock (contd)
   15. Acquisition of a subsidiary
 InterOil LNG Holdings Inc.
  IPL PNG Ltd.
     $Cash
    
    
    4,989,895Trade receivables
    
    
    6,288,834Inventory
    
    
    20,429,728Other assets
    
    
    2,190,226Future income tax benefit
    
    
    1,698,224Property, plant and equipment
    
    
    9,713,556Total assets acquired
    
    
    45,310,463Accounts payable and accrued liabilities
    
    
    (11,815,188
    )Net assets acquired
    
    
    33,495,275
 PNG LNG Inc. and Liquid Niugini Gas Ltd
  21




---



##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 16. Related parties
 Petroleum Independent and Exploration Corporation (P.I.E)
  Breckland Limited
  Director fees
  BNP Paribas
  17. Secured loan
 September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $
    
    $Secured loan (OPIC)  current portion
    
    
    18,000,000
    
    
    
    13,500,000
    
    
    
    Secured loan (bridging facility)  current portion
    
    
    126,245,543
    
    
    
    
    
    
    
    Secured loan (bridging facility)  deferred financing costs
    
    
    (58,333
    )
    
    
    
    
    
    
    Total current secured loan
    
    
    144,187,210
    
    
    
    13,500,000
    
    
    
    Secured loan (OPIC)  non current portion
    
    
    58,000,000
    
    
    
    62,500,000
    
    
    
    76,000,000Secured loan (OPIC)  deferred financing costs
    
    
    (1,414,597
    )
    
    
    
    
    
    
    Secured loan (bridging facility)  non current portion
    
    
    
    
    
    
    121,666,433
    
    
    
    110,053,775Total non current secured loan
    
    
    56,585,403
    
    
    
    184,166,433
    
    
    
    186,053,775Total secured loan
    
    
    200,772,612
    
    
    
    197,666,433
    
    
    
    186,053,775
 OPIC Secured Loan
   22




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##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 17. Secured loan (contd)
     Bridging Facility
       23




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##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 18. Indirect participation interests
  Indirect participation interest (IPI)
 September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)Indirect participation interest (IPI)
    
    
    96,086,369
    
    
    
    96,861,259
    
    
    
    96,861,259
      Indirect participation interest  PNGDV
 September 30,
    
    December 31,
    
    September 30,2007
    
    2006
    
    2006$
    
    $ (Restated)
    
    $ (Restated)Current portion
    
    
    580,775
    
    
    
    730,534
    
    
    
    1,961,867Non current portion
    
    
    1,343,719
    
    
    
    1,190,633
    
    
    
    Total indirect participation interest  PNGDV
    
    
    1,924,494
    
    
    
    1,921,167
    
    
    
    1,961,867
  24




---



##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 18. Indirect participation interests (contd)
     Other
  19. Non controlling interest
   25




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##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States dollars)
    
    (INTEROIL LOGO)
 20. Share capital
  Common shares 
 Number of shares
    
    $January 1, 2005
    
    
    28,310,884
    
    
    
    216,813,654Shares issued for debt
    
    
    52,000
    
    
    
    923,000Shares issued on exercise of warrants
    
    
    19,168
    
    
    
    540,346Shares issued on exercise of options
    
    
    781,268
    
    
    
    5,657,500December 31, 2005
    
    
    29,163,320
    
    
    
    223,934,500Shares issued on exercise of options
    
    
    132,285
    
    
    
    2,006,176Shares issued on conversion of indirect participation interest
    
    
    575,575
    
    
    
    7,948,691December 31, 2006
    
    
    29,871,180
    
    
    
    233,889,367Shares issued on exercise of options
    
    
    22,000
    
    
    
    418,940Shares issued on conversion of indirect participation interest
    
    
    26,667
    
    
    
    934,890Shares issued on conversion of warrants
    
    
    2,995
    
    
    
    84,439Septemer 30, 2007
    
    
    29,922,842
    
    
    
    235,327,636
 21. Stock compensation
   Quarter ended September 30,
    
    Nine months ended September 30,2007
    
    2006
    
    2007
    
    2006Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    average
    
    
    
    
    
    averageNumber of
    
    exercise price
    
    Number of
    
    exercise price
    
    Number of
    
    exercise price
    
    Number of
    
    exercise priceStock options outstanding
    
    options
    
    $
    
    options
    
    $
    
    options
    
    $
    
    options
    
    $Outstanding at beginning of
period
    
    
    1,313,750
    
    
    
    24.14
    
    
    
    861,300
    
    
    
    18.55
    
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23Granted
    
    
    
    
    
    
    
    
    
    
    216,450
    
    
    
    16.64
    
    
    
    329,750
    
    
    
    34.32
    
    
    
    544,500
    
    
    
    14.36Exercised
    
    
    
    
    
    
    
    
    
    
    (104,900
    )
    
    
    (5.71
    )
    
    
    (22,000
    )
    
    
    (14.37
    )
    
    
    (90,618
    )
    
    
    (8.19
    )Forfeited
    
    
    (2,500
    )
    
    
    (28.68
    )
    
    
    (40,000
    )
    
    
    (12.00
    )
    
    
    (5,000
    )
    
    
    (18.78
    )
    
    
    (228,500
    )
    
    
    (15.69
    )Expired
    
    
    
    
    
    
    
    
    
    
    (70,200
    )
    
    
    (25.95
    )
    
    
    (5,000
    )
    
    
    (13.50
    )
    
    
    (29,082
    )
    
    
    (12.00
    )Outstanding at end of period
    
    
    1,311,250
    
    
    
    24.13
    
    
    
    862,650
    
    
    
    20.81
    
    
    
    1,311,250
    
    
    
    24.13
    
    
    
    943,100
    
    
    
    20.95
 26




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##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States Dollars)
    
    (INTEROIL LOGO)
 21. Stock compensation (contd)
 Options issued and outstanding
    
    
    
    
    
    Options exercisableRange of exercise
    
    
    
    
    
    Weighted average
    
    Weighted average
    
    
    
    
    
    Weighted averageprices $
    
    Number of options
    
    exercise price $
    
    remaining term (years)
    
    Number of options
    
    exercise price $12.01 to 24.00
    
    
    697,000
    
    
    
    17.96
    
    
    
    3.17
    
    
    
    220,000
    
    
    
    17.9524.01 to 31.00
    
    
    480,250
    
    
    
    28.06
    
    
    
    2.85
    
    
    
    93,000
    
    
    
    29.4031.01 to 41.00
    
    
    44,000
    
    
    
    39.88
    
    
    
    0.65
    
    
    
    
    
    
    
    41.01 to 51.00
    
    
    90,000
    
    
    
    43.22
    
    
    
    1.44
    
    
    
    90,000
    
    
    
    43.221,311,250
    
    
    
    24.13
    
    
    
    2.68
    
    
    
    403,000
    
    
    
    26.24
   Weighted averageRisk free interest rate
    
    
    
    
    
    
    
    
    
    expected life forYear
    
    Period
    
    (%)
    
    Dividend yield
    
    Volatility (%)
    
    options2007
    
    January 1 to Sep 30
    
    
    5
    
    
    
    
    
    
    
    63
    
    
    
    5.02006
    
    October 1 to December 31
    
    
    4.6
    
    
    
    
    
    
    
    65
    
    
    
    5.02006
    
    July 1 to September 30
    
    
    5.1
    
    
    
    
    
    
    
    68
    
    
    
    4.22006
    
    January 1 to June 30
    
    
    4.4
    
    
    
    
    
    
    
    60
    
    
    
    4.82005
    
    July 1 to December 31
    
    
    2.5
    
    
    
    
    
    
    
    55
    
    
    
    3.62005
    
    January 1 to June 30
    
    
    2.5
    
    
    
    
    
    
    
    45
    
    
    
    3.2
 22. Warrants
   23. Loss per share
  27




---



##### 



InterOil Corporation
Notes to Consolidated Financial Statements
(Unaudited, Expressed in United States Dollars)
    
    (INTEROIL LOGO)
 24. Commitments and contingencies
  Less than 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    year
    
    1-2 years
    
    2-3 years
    
    3-4 years
    
    4-5 years
    
    5 years'000
    
    '000
    
    '000
    
    '000
    
    '000
    
    '000
    
    '000Secured loan obligations
    
    
    202,246
    
    
    
    144,246
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000Accrued financing costs
    
    
    1,450
    
    
    
    1,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest  PNGDV (note 16)
    
    
    1,924
    
    
    
    581
    
    
    
    1,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest (note 16) (a)
    
    
    96,086
    
    
    
    
    
    
    
    96,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention licenses (b)
    
    
    4,298
    
    
    
    938
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,004
    
    
    
    147,214
    
    
    
    109,790
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000
  (a)
    
    The liability presented in relation to indirect participation interest is not a cash
commitment and will be resolved once the IPI investors have elected to convert their
interests into a joint venture interest or shares in InterOil Corporation. InterOils
commitment is to complete the eight well
drilling program. As at September 30, 2007, management estimate that a further $47,422,277
will be required to be spent to fulful this commitment.(b)
    
    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 on PPL 237 in the two year period
commencing March 2007. As the cost of drilling this well cannot be estimated, it is not
included within the above table.   25. Subsequent events
  28