##### Table of Contents



InterOil Corporation
Revised Consolidated Financial Statements
(Expressed in United States dollars)Years ended December 31, 2006, 2005 and 2004
    
    (INTEROIL LOGO)
 1




---



##### 



InterOil Corporation
Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
  Table of contents
 Managements Report
    
    
    1Auditors Report to the Shareholders
    
    
    4Revised Consolidated Balance Sheets
    
    
    6Revised Consolidated Statements of Operations
    
    
    7Revised Consolidated Statements of Cash Flows
    
    
    8Revised Consolidated Statements of Shareholders Equity
    
    
    9Notes to the Revised Consolidated Financial Statements
    
    
    10Revised Reconciliation to accounting principles generally accepted in the United States
    
    
    39
 2




---



##### Table of Contents



InterOil Corporation
Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 
 MANAGEMENTS REPORT
          1




---



##### Table of Contents



InterOil Corporation
Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
   -
    
    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. The remaining $20,000,000 has been bifurcated and
presented under equity for conversion options under residual basis. Under the revised
model adopted, 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 from the
superseded balance as at December 31, 2006 by $51,259,148 (2005  $31,774,513).
 -
    
    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. 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 would result in higher exploration expenses and exploration
impairment in both financial years, 2006 and 2005, relating to G&G costs and exploration
impairment relating to Black Bass and Triceratops prospects. This adjustment has the
effect of increasing the exploration costs for the year ended December 31, 2006 by
$4,519,195 (2005  $11,009,434) and exploration impairment for the year ended December
31, 2006 by $1,230,262 (2005  $17,425,644).
 -
    
    Management has adopted an accounting policy change to use residual value approach
and value the liability component first and assign the residual value to the equity
component. The 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 adjustment has the effect of increasing
the IPI liability from the superseded balance as at December 31, 2006 by $5,475,368 (2005
  $5,475,368).
 -
    
    For U.S. GAAP reporting, the Company has opted to utilize the scope exception under
SFAS 133 Para 10(f) for derivatives that serve as impediments to sales accounting. This
will result in non-financial liability maintained at full value of $125,000,000 less the
transaction costs. This adjustment has the effect of increasing the IPI liability from
the superseded balance as at December 31, 2006 by $27,249,587 (2005  $27,249,587). The
IPI liability balance will also be impacted by the revaluation of the conversion option
noted below.
 -
    
    As a result of adopting the revised model, the conversion option will no longer be
bifurcated and revalued under U.S. GAAP. This will result in the reversal of all
revaluations performed at each period end for U.S. GAAP reporting. This adjustment will
have the impact of reducing the U.S. GAAP loss for year ended December 31, 2006 by
$19,755,017 (2005  increase the loss by $4,279,284). This adjustment will also have the
corresponding effect on IPI liability balance carried forward in the balance sheet.
 -
    
    Under Canadian GAAP, should the conversion option be exercised by an investor, the
non-financial liability and conversion option feature relating to that investor would be
transferred to share capital for the number of shares issued. Under U.S. GAAP, should
the conversion option be exercised by an investor, only the non-financial liability
relating to that investor would be transferred to share capital as the conversion option
is no longer bifurcated. There were no exercise of the conversion
option to InterOil shares during the financial years ended December 31, 2006 and 2005.
 2




---



##### Table of Contents



InterOil Corporation
Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 -
    
    As noted above, the Company had, under the original model, bifurcated the
non-financial liability and equity 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 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 full value and accretion costs are no longer recognized. This adjustment
has the effect of reducing the loss for the year ended December 31, 2006 by $3,514,368
(2005  $5,647,491).
 -
    
    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 by $404,520 (2005  nil) and decreasing the accretion expense by
$226,886 (2005  nil) resulting in a net income statement impact of increasing the loss
for the for the year ended December 31, 2006 by $177,634 (2005  nil). These adjustments
have the corresponding effect of increasing the Indirect Participation Interest  PNGDV
liability as at December 31, 2006 by the net amount.
 -
    
    When conveyance is triggered on election by the investors to participate in a
Production Development Licence (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 years ended December
31, 2006 and 2005 due to this adjustment as conveyance has not yet occurred under the
revised model during these years.
 -
    
    The net receipt of funds from IPI investors as part of the IPI#3 Agreement
amounting to $116,861,259 was previously disclosed as part of proceeds from investing
activities in the Statement of Cash flows. This has now been revised and the amount
disclosed as proceeds from financing activities.
 -
    
    Under Canadian GAAP, the impact of all the above adjustments on the consolidated
statement of income for the years ended December 31, 2006 and 2005 has been an increase
in the loss by $2,412,723 ($0.08 per share) and $22,787,587 ($0.79 per share)
respectively.
 -
    
    Under U.S. GAAP, the impact of all the above adjustments on the consolidated
statement of income for the years ended December 31, 2006 and 2005 has been an decrease
in the loss by $17,342,294 ($0.59 per share) and increase in the loss by $27,066,871
($0.94 per share) respectively.
 -
    
    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,
i.e. Black Bass and Triceratops. 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.
   Phil Mulacek
    
    Collin VisaggioChief Executive Officer
    
    Chief Financial Officer
 3




---



##### Table of Contents



INDEPENDENT AUDIT REPORT TO THE SHAREHOLDERS OF INTEROIL CORPORATION
      
 4




---



##### Table of Contents



AUDITORS REPORT TO THE SHAREHOLDERS
     
 5




---



##### Table of Contents



InterOil CorporationRevised Consolidated Balance Sheets
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 As atDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$ (Restated)
    
    
    $ (Restated)
    
    
    $AssetsCurrent assets:Cash and cash equivalents (note 6)
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398Cash restricted (note 8)
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Trade receivables (note 9)
    
    
    67,542,902
    
    
    
    49,958,973
    
    
    
    58,698,069Commodity derivative contracts (note 8)
    
    
    1,759,575
    
    
    
    1,482,798
    
    
    
    503,500Other assets
    
    
    2,954,946
    
    
    
    1,011,195
    
    
    
    806,123Inventories (note 10)
    
    
    67,593,558
    
    
    
    44,087,484
    
    
    
    27,916,902Prepaid expenses
    
    
    880,640
    
    
    
    638,216
    
    
    
    190,135Total current assets
    
    
    201,714,996
    
    
    
    173,232,689
    
    
    
    132,156,254Cash restricted (note 8)
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    102,096Deferred financing costs (note 18)
    
    
    1,716,757
    
    
    
    1,256,816
    
    
    
    1,311,488Plant and equipment (note 11)
    
    
    242,642,077
    
    
    
    237,399,148
    
    
    
    244,363,355Oil and gas properties (note 12)
    
    
    54,524,347
    
    
    
    19,738,927
    
    
    
    6,605,360Future income tax benefit (note 13)
    
    
    1,424,014
    
    
    
    1,058,898
    
    
    
    1,303,631Total assets
    
    
    505,239,475
    
    
    
    432,896,531
    
    
    
    385,842,184Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    
    73,310,793
    
    
    
    26,005,034
    
    
    
    26,328,544Income tax payable
    
    
    2,784,576
    
    
    
    3,900,459
    
    
    
    2,881,398Working capital facility  crude feedstock (note 14)
    
    
    36,873,508
    
    
    
    70,724,322
    
    
    
    76,520,541Deferred hedge gain (note 8)
    
    
    1,385
    
    
    
    1,016,998
    
    
    
    537,358Business combination financing (note 15)
    
    
    
    
    
    
    
    
    
    
    12,123,106Unsecured loan (note 17)
    
    
    
    
    
    
    21,453,132
    
    
    
    Due to related parties (note 16)
    
    
    
    
    
    
    
    
    
    
    1,056,251Deferred liquefaction project liability (note 18)
    
    
    6,553,080
    
    
    
    
    
    
    
    Current portion of secured loan (note 18)
    
    
    13,500,000
    
    
    
    9,000,000
    
    
    
    9,000,000Current portion of indirect participation interest  PNGDV (note 19)
    
    
    730,534
    
    
    
    
    
    
    
    Total current liabilities
    
    
    133,753,876
    
    
    
    132,099,945
    
    
    
    128,447,198Accrued financing costs (note 18)
    
    
    1,087,500
    
    
    
    921,109
    
    
    
    863,329Secured loan (note 18)
    
    
    184,166,433
    
    
    
    71,500,000
    
    
    
    76,000,000Indirect participation interest (note 19)
    
    
    96,861,259
    
    
    
    96,861,259
    
    
    
    13,749,852Indirect participation interest  PNGDV (note 19)
    
    
    1,190,633
    
    
    
    9,685,830
    
    
    
    10,608,830Total liabilities
    
    
    417,059,701
    
    
    
    311,068,143
    
    
    
    229,669,209Non-controlling interest (note 20)
    
    
    5,759,206
    
    
    
    6,023,149
    
    
    
    6,404,262Shareholders equity:Share capital (note 21)
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    216,813,654Authorised  unlimitedIssued and outstanding - 29,871,180
(Dec 31, 2005 - 29,163,320)
(Dec 31, 2004 - 28,310,884)Contributed surplus
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    1,841,776Warrants (note 23)
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227Foreign currency translation adjustment
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    463,200Conversion options (note 19)
    
    
    20,000,000
    
    
    
    20,000,000
    
    
    
    Accumulated deficit
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )
    
    
    (71,608,144
    )Total shareholders equity
    
    
    82,420,568
    
    
    
    115,805,239
    
    
    
    149,768,713Total liabilities and shareholders equity
    
    
    505,239,475
    
    
    
    432,896,531
    
    
    
    385,842,184
 See accompanying notes to the consolidated financial statements. Commitments and
contingencies (note 25)
 On behalf of the Board  Phil Mulacek, Director Christian
Vinson, Director
 6




---



##### Table of Contents



InterOil
CorporationRevised Consolidated Statement of
Operations(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$ (Restated)
    
    
    $ (Restated)
    
    
    $RevenueSales and operating revenues
    
    
    511,087,934
    
    
    
    481,180,645
    
    
    
    70,644,486Interest
    
    
    3,223,995
    
    
    
    1,830,808
    
    
    
    382,461Other
    
    
    3,747,603
    
    
    
    528,270
    
    
    
    196,337518,059,532
    
    
    
    483,539,723
    
    
    
    71,223,284ExpensesCost of sales and operating expenses
    
    
    499,494,540
    
    
    
    467,246,990
    
    
    
    65,344,516Administrative and general expenses
    
    
    20,728,618
    
    
    
    14,672,793
    
    
    
    7,831,550Depreciation and amortization
    
    
    12,352,672
    
    
    
    11,036,550
    
    
    
    639,075Exploration costs, excluding exploration impairment (note 12)
    
    
    6,176,866
    
    
    
    11,009,434
    
    
    
    2,903,313Exploration impairment (note 12)
    
    
    1,647,185
    
    
    
    19,570,073
    
    
    
    35,566,761Legal and professional fees
    
    
    3,937,517
    
    
    
    3,606,415
    
    
    
    3,573,727Short term borrowing costs
    
    
    8,478,540
    
    
    
    8,855,857
    
    
    
    4,705,190Long term borrowing costs
    
    
    11,856,872
    
    
    
    6,351,337
    
    
    
    1,401,256Loss on amendment of indirect participation interest  PNGDV (note 19)
    
    
    1,851,421
    
    
    
    
    
    
    
    Foreign exchange loss/(gain)
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    392,805561,779,421
    
    
    
    543,146,039
    
    
    
    122,358,193Loss before income taxes and non-controlling interest
    
    
    (43,719,889
    )
    
    
    (59,606,316
    )
    
    
    (51,134,909
    )Income taxesCurrent
    
    
    (1,232,487
    )
    
    
    (2,605,265
    )
    
    
    (2,538,410
    )Future
    
    
    (1,110,386
    )
    
    
    (226,729
    )
    
    
    663,347(2,342,873
    )
    
    
    (2,831,994
    )
    
    
    (1,875,063
    )Loss before non-controlling interest
    
    
    (46,062,762
    )
    
    
    (62,438,310
    )
    
    
    (53,009,972
    )Non-controlling interest (note 20)
    
    
    263,959
    
    
    
    368,312
    
    
    
    70,091Net loss
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )
    
    
    (52,939,881
    )Basic loss per share (note 21)
    
    
    (1.55
    )
    
    
    (2.15
    )
    
    
    (2.09
    )Diluted loss per share(note 21)
    
    
    (1.55
    )
    
    
    (2.15
    )
    
    
    (2.09
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575
 See accompanying notes to the consolidated financial statements
 7




---



##### Table of Contents



InterOil
CorporationRevised Consolidated Statement of
Cash Flows(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$ (Restated)
    
    
    $ (Restated)
    
    
    $Cash flows provided by (used in):Operating activitiesNet (loss) (note 5)
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )
    
    
    (52,939,881
    )Adjustments for non-cash transactionsNon-controlling interest
    
    
    (263,959
    )
    
    
    (381,113
    )
    
    
    (70,091
    )Depreciation and amortization
    
    
    12,352,672
    
    
    
    11,036,550
    
    
    
    639,075Future income tax asset
    
    
    1,333,108
    
    
    
    244,733
    
    
    
    (663,347
    )Loss/(gain) on sale of other assets
    
    
    
    
    
    
    
    
    
    
    (94,260
    )Loss/(gain) on sale of plant and equipment
    
    
    263,945
    
    
    
    (95,053
    )
    
    
    Impairment of plant and equipment
    
    
    755,857
    
    
    
    
    
    
    
    Amortization of discount on debt
    
    
    28,891
    
    
    
    161,255
    
    
    
    604,045Amortization of deferred financing costs
    
    
    219,033
    
    
    
    154,672
    
    
    
    268,873Debt conversion settlement expense  debentures (note 23)
    
    
    
    
    
    
    
    
    
    
    77,589Interest expense forfeited by debenture holders
    
    
    
    
    
    
    
    
    
    
    998,438Loss/(gain) on unsettled hedge contracts
    
    
    (71,875
    )
    
    
    119,200
    
    
    
    33,858Gain on derivative contracts
    
    
    (1,220,500
    )
    
    
    (585,000
    )
    
    
    Stock compensation expense
    
    
    1,976,072
    
    
    
    1,668,896
    
    
    
    1,209,921Inventory revaluation
    
    
    
    
    
    
    355,215
    
    
    
    1,508,334Oil and gas properties expensed
    
    
    7,824,051
    
    
    
    30,579,507
    
    
    
    38,470,074Loss on amendment of indirect participation interest  PNGDV
    
    
    1,851,421
    
    
    
    
    
    
    
    Unrealized foreign exchange loss/(gain)
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    392,805Non-cash interest on secured loan facility
    
    
    2,926,025
    
    
    
    
    
    
    
    Change in non-cash operating working capital(Increase)/decrease in trade receivables
    
    
    (6,663,218
    )
    
    
    8,751,789
    
    
    
    (49,224,125
    )(Increase) in commodity derivative contracts
    
    
    
    
    
    
    (33,858
    )
    
    
    (Increase)/decrease in other assets and prepaid expenses
    
    
    4,051
    
    
    
    (653,153
    )
    
    
    982,014Decrease/ (increase) in inventories
    
    
    2,642,493
    
    
    
    (16,515,467
    )
    
    
    (23,240,590
    )Increase in accounts payable, accrued liabilities
and income tax payable
    
    
    28,773,008
    
    
    
    3,752,531
    
    
    
    4,183,6642,187,462
    
    
    
    (22,712,704
    )
    
    
    (76,863,604
    )Investing activitiesExpenditure on oil and gas properties
    
    
    (47,990,758
    )
    
    
    (43,023,990
    )
    
    
    (22,057,419
    )Expenditure on plant and equipment
    
    
    (13,585,792
    )
    
    
    (5,575,194
    )
    
    
    (38,947,904
    )Proceeds received on sale of assets
    
    
    3,770,080
    
    
    
    112,229
    
    
    
    405,353Redemption of short-term investments
    
    
    
    
    
    
    
    
    
    
    24,723,572Acquisition of subsidiary net of cash received (note 15)
    
    
    (25,820,515
    )
    
    
    
    
    
    
    4,631,904Repayment of business combination financing
    
    
    
    
    
    
    (12,226,581
    )
    
    
    (Increase) in restricted cash held as security on borrowings
    
    
    (15,856,955
    )
    
    
    (1,063,046
    )
    
    
    (15,501,806
    )Change in non-cash working capitalIncrease/(decrease) in accounts payable and accrued liabilities
    
    
    2,412,621
    
    
    
    (3,165,756
    )
    
    
    4,094,594(97,071,319
    )
    
    
    (64,942,338
    )
    
    
    (42,651,706
    )Financing activitiesRepayments of secured loan
    
    
    (4,500,000
    )
    
    
    (4,500,000
    )
    
    
    Proceeds from indirect participation interest
    
    
    
    
    
    
    103,111,405
    
    
    
    13,749,852Proceeds from secured loan, net of transaction costs
    
    
    125,293,488
    
    
    
    
    
    
    
    2,000,000Net proceeds from senior convertible debentures and warrants
    
    
    
    
    
    
    
    
    
    
    41,740,234Proceeds from conversion options
    
    
    
    
    
    
    
    
    
    
    3,235,000Proceeds from related party borrowings
    
    
    
    
    
    
    
    
    
    
    1,775,565(Repayments) to related parties
    
    
    
    
    
    
    (1,056,251
    )
    
    
    (2,198,065
    )Proceeds from unsecured borrowings
    
    
    
    
    
    
    21,453,132
    
    
    
    5,100,000Repayments of unsecured borrowings
    
    
    (21,453,132
    )
    
    
    
    
    
    
    (5,100,000
    )Proceeds from/(repayments of) working capital facility
    
    
    (33,850,814
    )
    
    
    (5,796,219
    )
    
    
    76,520,541Proceeds from issue of common shares
    
    
    1,473,943
    
    
    
    5,500,384
    
    
    
    2,020,31666,963,485
    
    
    
    118,712,451
    
    
    
    138,843,443Increase/(decrease) in cash and cash equivalents
    
    
    (27,920,372
    )
    
    
    31,057,409
    
    
    
    19,328,133Cash and cash equivalents, beginning of period
    
    
    59,601,807
    
    
    
    28,544,398
    
    
    
    9,216,265Cash and cash equivalents, end of period (note 6)
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398
 See accompanying notes to the consolidated financial statements
 See note 5 for non cash financing and investing activities
 8




---



##### Table of Contents



InterOil
CorporationRevised Consolidated Statements
of Shareholders Equity(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$ (Restated)
    
    
    $ (Restated)
    
    
    $Share capitalAt beginning of period
    
    
    223,934,500
    
    
    
    216,813,654
    
    
    
    157,449,200Adjustment to reflect change in accounting for employee stock options (note 3(t))
    
    
    
    
    
    
    
    
    
    
    92,434Issue of capital stock (note 21)
    
    
    9,954,866
    
    
    
    7,120,846
    
    
    
    59,272,020At end of period
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    216,813,654Contributed surplusAt beginning of period
    
    
    2,933,586
    
    
    
    1,841,776
    
    
    
    540,222Adjustment to reflect change in accounting for employee stock options (note 3(t))
    
    
    
    
    
    
    
    
    
    
    645,216Stock compensation (note 22)
    
    
    1,443,840
    
    
    
    1,091,810
    
    
    
    656,338At end of period
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    1,841,776WarrantsAt beginning of period
    
    
    2,137,852
    
    
    
    2,258,227
    
    
    
    Movement for period (note 23)
    
    
    
    
    
    
    (120,375
    )
    
    
    2,258,227At end of period
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227Foreign currency translation adjustmentAt beginning of period
    
    
    477,443
    
    
    
    463,200
    
    
    
    Movement for period, net of tax
    
    
    1,015,426
    
    
    
    14,243
    
    
    
    463,200At end of period
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    463,200Conversion optionsAt beginning of period
    
    
    20,000,000
    
    
    
    
    
    
    
    Movement for period (note 19)
    
    
    
    
    
    
    20,000,000
    
    
    
    At end of period
    
    
    20,000,000
    
    
    
    20,000,000
    
    
    
    Accumulated deficitAt beginning of period
    
    
    (133,678,142
    )
    
    
    (71,608,144
    )
    
    
    (11,031,402
    )Adjustment to reflect change in accounting for employee stock options (note 3(t))
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Adjustment to cummulative debentures conversion expense (note 23)
    
    
    
    
    
    
    
    
    
    
    (6,899,211
    )Net (loss) for period
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )
    
    
    (52,939,881
    )At end of period
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )
    
    
    (71,608,144
    )Shareholders equity at end of period
    
    
    82,420,568
    
    
    
    115,805,239
    
    
    
    149,768,713
 See accompanying notes to the consolidated financial statements
 9




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 1. Nature of operations and organization
    2.
    
    Restatement of Consolidated financial statements for the year ended December 31, 2006 and
2005
      10




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 2.
    
    Restatement of Consolidated financial statements for the year ended December 31, 2006 and
2005 (contd)
   Restatement to Consolidated Balance Sheets
 December 31, 2006
    
    December 31, 2005Original
    
    
    
    
    
    Restated
    
    Original
    
    
    
    
    
    RestatedBalance
    
    Adjustments
    
    Balance
    
    Balance
    
    Adjustments
    
    Balance
    
    Reference$
    
    $
    
    $
    
    $
    
    $
    
    $Non-current assetsOil and gas properties (note 12)
    
    
    37,449,734
    
    
    
    17,074,613
    
    
    
    54,524,347
    
    
    
    16,399,492
    
    
    
    3,339,435
    
    
    
    19,738,927
    
    
    (i), (ii)Current and Non-current liabilitiesIndirect participation interest (note 19)
    
    
    49,288,602
    
    
    
    47,572,657
    
    
    
    96,861,259
    
    
    
    65,258,869
    
    
    
    31,602,390
    
    
    
    96,861,259
    
    
    (i), (iii), (iv)Indirect participation interest  PNGDV
(note 19)
    
    
    1,743,533
    
    
    
    177,634
    
    
    
    1,921,167
    
    
    
    9,685,830
    
    
    
    
    
    
    
    9,685,830
    
    
    (vi)Shareholders EquityConversion options (note 19)
    
    
    25,475,368
    
    
    
    (5,475,368
    )
    
    
    20,000,000
    
    
    
    25,475,368
    
    
    
    (5,475,368
    )
    
    
    20,000,000
    
    
    (iii)Accumulated deficit (Refer Restatement to
Consolidated Statement of Operations
below)
    
    
    (154,276,635
    )
    
    
    (25,200,310
    )
    
    
    (179,476,945
    )
    
    
    (110,890,555
    
    
    
    )      (22,787,587
    )
    
    
    (133,678,142
    )
 Restatement to Consolidated Statement of Operations
 Year ended December 31, 2006
    
    Year ended December 31, 2005Original
    
    
    
    
    
    Restated
    
    Original
    
    
    
    
    
    RestatedBalance
    
    Adjustments
    
    Balance
    
    Balance
    
    Adjustments
    
    Balance
    
    Reference$
    
    $
    
    $
    
    $
    
    $
    
    $ExpensesExploration costs, excluding exploration
impairment (note 12)
    
    
    1,657,671
    
    
    
    4,519,195
    
    
    
    6,176,866
    
    
    
    
    
    
    
    11,009,434
    
    
    
    11,009,434
    
    
    (ii)Exploration impairment (note 12)
    
    
    416,923
    
    
    
    1,230,262
    
    
    
    1,647,185
    
    
    
    2,144,429
    
    
    
    17,425,644
    
    
    
    19,570,073
    
    
    (ii)Accretion expense (note 19)
    
    
    3,741,254
    
    
    
    (3,741,254
    )
    
    
    
    
    
    
    5,647,491
    
    
    
    (5,647,491
    )
    
    
    
    
    
    (iv), (vi)Loss on amendment of indirect participation
interest  PNGDV (note 19)
    
    
    1,446,901
    
    
    
    404,520
    
    
    
    1,851,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (vi)Total restated expenses
    
    
    7,262,749
    
    
    
    2,412,723
    
    
    
    9,675,472
    
    
    
    7,791,920
    
    
    
    22,787,587
    
    
    
    30,579,507Net loss
    
    
    43,386,080
    
    
    
    2,412,723
    
    
    
    45,798,803
    
    
    
    39,282,411
    
    
    
    22,787,587
    
    
    
    62,069,998
 11




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 2.
    
    Restatement of Consolidated financial statements for the year ended December 31, 2006 and
2005 (contd)
 (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. 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
December 31, 2006 by $51,259,148 (2005  $31,774,513).
 (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. 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 results in higher
exploration expenses and exploration impairment in both financial years, 2006 and 2005,
relating to G&G costs and exploration impairment relating to Black Bass and Triceratops
prospects. This adjustment has the effect of increasing the exploration costs for the year
ended December 31, 2006 by $4,519,195 (2005  $11,009,434) and exploration impairment for the
year ended December 31, 2006 by $1,230,262 (2005  $17,425,644). These increases to the
exploration costs have the corresponding effect of reducing the Oil and gas properties
carried forward in the balance sheet from the superseded balance (and the adjustments noted
above in (i)) as at December 31, 2006 and 2005 by $34,184,535 and $28,434,078 respectively.
 (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 that 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 December 31,
2006 by $5,475,368 (2005  $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 year ended December 31, 2006 by
$3,514,368 (2005  $5,647,491).These decreases to the accretion expenses have the corresponding effect of increasing the IPI
liability in the balance sheet as at December 31, 2006 and 2005 from the superseded balance by
$9,161859 and $5,647,491 respectively.
 (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 years ended December 31, 2006 and
2005 due to this adjustment as conveyance has not been triggered based on this revised model
during these years.
 12




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 2.
    
    Restatement of Consolidated financial statements for the year ended December 31, 2006 and
2005 (contd)(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 by $404,520
(2005  nil) and decreasing the accretion expense by $226,886 (2005  nil) resulting in a net
income statement impact of increasing the loss for the for the year ended December 31, 2006 by
$177,634 (2005  nil). These adjustments have the corresponding effect of increasing the
Indirect Participation Interest  PNGDV liability as at December 31, 2006 by the net amount.(vii)
    
    The impact of all the above adjustments on the consolidated statement of income for the
years ended December 31, 2006 and 2005 has been an increase in the loss by $2,412,723 ($0.08
per share) and $22,787,587 ($0.79 per share) respectively.(viii)
    
    The net receipt of funds from IPI investors as part of the IPI#3 Agreement amounting to
$116,861,259 was previously disclosed as part of proceeds from investing activities in the
Statement of Cash flows. This has now been revised and the amount disclosed as proceeds from
financing activities in the respective years.(ix)
    
    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, i.e. Black Bass and
Triceratops. 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.
  Significant accounting policies
  (a) Basis of preparation
   (b) Principles of consolidation
    13




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3. Significant accounting policies (contd)
   (c) Going concern
    (d) Segment reporting
  a.
    
    that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other segment of
the same enterprise),b.
    
    whose operating results are regularly reviewed by the Companys management to make
decisions about resources to be allocated to the segment and assess its performance, andc.
    
    for which discrete financial information is available.
  (e) Foreign currency translation
 Functional and presentation currency
  Group companies
   14




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3.
    
    Significant accounting policies (contd)(f)
    
    Revenue recognition
  Revenue from midstream operations :
   Revenue from downstream operations:
  Interest income:
  (g) Income tax
    (h) Acquisitions of assets
    (i) Impairment of assets
  15




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3.
    
    Significant accounting policies (contd)
   (j)
    
    Cash and cash equivalents
  (k)
    
    Restricted cash
  (l)
    
    Trade receivables
   (m)
    
    Inventory
 Raw materials and stores and finished goods
  Crude oil and refined petroleum products
  (n)
    
    Assets held for sale
     16




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3.
    
    Significant accounting policies (contd)(o)
    
    Derivative financial instruments
        (p)
    
    Deferred financing costs
  (q)
    
    Plant and equipment
 Refinery assets
    17




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3. Significant accounting policies (contd)
  Other assets
  Downstream
    
    
    0% - 25
    %Midstream
    
    
    1% - 33
    %Upstream
    
    
    4% - 100
    %Corporate
    
    
    13% - 33
    %
  Leased assets
   Asset retirement obligations
  Environmental remediation
  Disposal of property, plant and equipment
  (r) Oil and gas properties
  
 18




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 3.
    
    Significant accounting policies (contd)(s)
    
    Accounts payable and accrued liabilities
  (t) Employee entitlements
 Wages and salaries, and annual leave
  Long Service Leave
  Retirement benefit obligations
  Stock-based compensation
   Profit-sharing and bonus plans
  (u) Earnings per share
 Basic earnings per share
  Diluted earnings per share
  (v) Reclassification
  19




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 4. Financial Risk Management
   (a) Market risk
 Foreign exchange risk
    Price risk
   Product risk
   (b) Credit risk
   (c) Liquidity risk
  (d) Cash flow and fair value interest rate risk
  20




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 4. Financial Risk Management (contd)
   (e) Geographic risk
  5. Segmented financial information (Restated)
      Notes to and forming part of the segment information
   21




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 5. Segmented financial information (Restated) (contd)
 Year ended December 31, 2006 (Restated)
    
    Upstream
    
    Midstream -Refining andMarketing
    
    Midstream -Liquefaction
    
    Downstream
    
    Corporate
    
    Consolidationadjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    315,211,130
    
    
    
    
    
    
    
    195,876,804
    
    
    
    
    
    
    
    
    
    
    
    511,087,934Intersegment revenues
    
    
    
    
    
    
    136,583,916
    
    
    
    
    
    
    
    22,480
    
    
    
    8,669,933
    
    
    
    (145,276,329
    )
    
    
    Interest revenue
    
    
    2,820,888
    
    
    
    360,319
    
    
    
    
    
    
    
    100,750
    
    
    
    1,601,491
    
    
    
    (1,659,453
    )
    
    
    3,223,995Other revenue
    
    
    2,427,816
    
    
    
    
    
    
    
    
    
    
    
    1,319,787
    
    
    
    
    
    
    
    
    
    
    
    3,747,603Total segment revenue
    
    
    5,248,704
    
    
    
    452,155,365
    
    
    
    
    
    
    
    197,319,821
    
    
    
    10,271,424
    
    
    
    (146,935,782
    )
    
    
    518,059,532Cost of sales and operating expenses
    
    
    
    
    
    
    451,374,165
    
    
    
    
    
    
    
    183,511,182
    
    
    
    
    
    
    
    (135,390,806
    )
    
    
    499,494,541Office and admin and other expenses
    
    
    6,370,436
    
    
    
    8,017,245
    
    
    
    694,416
    
    
    
    7,671,208
    
    
    
    15,378,963
    
    
    
    (8,552,604
    )
    
    
    29,579,664Foreign exchange (gain)/loss
    
    
    (61,423
    )
    
    
    (4,635,878
    )
    
    
    (219
    )
    
    
    (192,433
    )
    
    
    145,142
    
    
    
    
    
    
    
    (4,744,811
    )Exploration costs, excluding exploration impairment
    
    
    6,176,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,176,866Exploration impairment
    
    
    1,647,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,647,185Depreciation and amortisation
    
    
    806,142
    
    
    
    10,729,546
    
    
    
    
    
    
    
    909,767
    
    
    
    37,247
    
    
    
    (130,030
    )
    
    
    12,352,672Interest expense
    
    
    5,428
    
    
    
    10,880,779
    
    
    
    
    
    
    
    151,730
    
    
    
    7,894,820
    
    
    
    (1,659,453
    )
    
    
    17,273,304Total segment expenses
    
    
    14,944,634
    
    
    
    476,365,857
    
    
    
    694,197
    
    
    
    192,051,454
    
    
    
    23,456,172
    
    
    
    (145,732,893
    )
    
    
    561,779,421(Loss)/income before income taxes and
non-controlling
interest
    
    
    (9,695,930
    )
    
    
    (24,210,492
    )
    
    
    (694,197
    )
    
    
    5,268,367
    
    
    
    (13,184,748
    )
    
    
    (1,202,889
    )
    
    
    (43,719,889
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,273,773
    )
    
    
    (69,100
    )
    
    
    
    
    
    
    (2,342,873
    )Non controlling interest
    
    
    
    
    
    
    259,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,790
    
    
    
    263,959Total net income/(loss)
    
    
    (9,695,930
    )
    
    
    (23,951,323
    )
    
    
    (694,197
    )
    
    
    2,994,594
    
    
    
    (13,253,848
    )
    
    
    (1,198,099
    )
    
    
    (45,798,803
    )Total assets
    
    
    85,335,500
    
    
    
    325,351,819
    
    
    
    (683,582
    )
    
    
    98,722,803
    
    
    
    393,700,711
    
    
    
    (397,187,776
    )
    
    
    505,239,475
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2005 (Restated)
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    356,326,763
    
    
    
    
    
    
    
    124,853,882
    
    
    
    
    
    
    
    
    
    
    
    481,180,645Intersegment revenues
    
    
    
    
    
    
    80,094,501
    
    
    
    
    
    
    
    6,202
    
    
    
    5,345,017
    
    
    
    (85,445,720
    )
    
    
    Interest revenue
    
    
    1,011,511
    
    
    
    244,157
    
    
    
    
    
    
    
    95,317
    
    
    
    686,718
    
    
    
    (206,895
    )
    
    
    1,830,808Other revenue
    
    
    283,634
    
    
    
    496
    
    
    
    
    
    
    
    245,760
    
    
    
    30,509
    
    
    
    (32,129
    )
    
    
    528,270Total segment revenue
    
    
    1,295,145
    
    
    
    436,665,917
    
    
    
    
    
    
    
    125,201,161
    
    
    
    6,062,244
    
    
    
    (85,684,744
    )
    
    
    483,539,723Cost of sales and operating expenses
    
    
    
    
    
    
    436,490,554
    
    
    
    
    
    
    
    110,857,139
    
    
    
    
    
    
    
    (80,100,703
    )
    
    
    467,246,990Office and admin and other expenses
    
    
    2,426,909
    
    
    
    9,204,613
    
    
    
    
    
    
    
    4,724,568
    
    
    
    11,608,822
    
    
    
    (5,465,658
    )
    
    
    22,499,254Foreign exchange (gain)/loss
    
    
    (689,084
    )
    
    
    1,434,498
    
    
    
    
    
    
    
    843
    
    
    
    50,333
    
    
    
    
    
    
    
    796,590Exploration costs, excluding exploration impairment
    
    
    11,009,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,009,434Exploration impairment
    
    
    19,570,073
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,570,073Depreciation and amortisation
    
    
    314,467
    
    
    
    10,598,134
    
    
    
    
    
    
    
    204,247
    
    
    
    49,732
    
    
    
    (130,030
    )
    
    
    11,036,550Interest expense
    
    
    
    
    
    
    10,161,899
    
    
    
    
    
    
    
    225,450
    
    
    
    806,694
    
    
    
    (206,895
    )
    
    
    10,987,148Total segment expenses
    
    
    32,631,799
    
    
    
    467,889,698
    
    
    
    
    
    
    
    116,012,247
    
    
    
    12,515,581
    
    
    
    (85,903,286
    )
    
    
    543,146,039(Loss)/income before income taxes and
non-controlling
interest
    
    
    (31,336,654
    )
    
    
    (31,223,781
    )
    
    
    
    
    
    
    9,188,914
    
    
    
    (6,453,337
    )
    
    
    218,542
    
    
    
    (59,606,316
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,755,845
    )
    
    
    (76,149
    )
    
    
    
    
    
    
    (2,831,994
    )Non controlling interest
    
    
    
    
    
    
    362,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,172
    
    
    
    368,312Total net income/(loss)
    
    
    (31,336,654
    )
    
    
    (30,861,641
    )
    
    
    
    
    
    
    6,433,069
    
    
    
    (6,529,486
    )
    
    
    224,714
    
    
    
    (62,069,998
    )Total assets
    
    
    78,926,578
    
    
    
    314,904,035
    
    
    
    
    
    
    
    47,342,109
    
    
    
    317,227,597
    
    
    
    (325,503,788
    )
    
    
    432,896,531
 22




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 5. Segmented financial information (Restated) (contd)
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2004
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    26,309,547
    
    
    
    
    
    
    
    62,410,291
    
    
    
    
    
    
    
    (18,075,352
    )
    
    
    70,644,486Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489,111
    
    
    
    3,787,944
    
    
    
    (4,277,055
    )
    
    
    Interest revenue
    
    
    151,780
    
    
    
    8,761
    
    
    
    
    
    
    
    56,896
    
    
    
    165,024
    
    
    
    
    
    
    
    382,461Other revenue
    
    
    (39,267
    )
    
    
    (63,031
    )
    
    
    
    
    
    
    205,836
    
    
    
    92,799
    
    
    
    
    
    
    
    196,337Total segment revenue
    
    
    112,513
    
    
    
    26,255,277
    
    
    
    
    
    
    
    63,162,134
    
    
    
    4,045,767
    
    
    
    (22,352,407
    )
    
    
    71,223,284Cost of sales and operating expenses
    
    
    
    
    
    
    27,685,347
    
    
    
    
    
    
    
    53,158,737
    
    
    
    
    
    
    
    (15,499,568
    )
    
    
    65,344,516Office and admin and other expenses
    
    
    1,649,191
    
    
    
    3,167,216
    
    
    
    
    
    
    
    3,146,905
    
    
    
    10,538,730
    
    
    
    (3,766,608
    )
    
    
    14,735,434Exchange (Gain)/loss
    
    
    
    
    
    
    (34,121
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,121
    )Exploration costs, excluding exploration impairment
    
    
    2,903,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,903,313Exploration impairment
    
    
    35,566,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,566,761Depreciation and amortisation
    
    
    12,510
    
    
    
    311,986
    
    
    
    
    
    
    
    224,214
    
    
    
    90,365
    
    
    
    
    
    
    
    639,075Interest expense
    
    
    4,932
    
    
    
    843,888
    
    
    
    
    
    
    
    455,368
    
    
    
    1,899,027
    
    
    
    
    
    
    
    3,203,215Total segment expenses
    
    
    40,136,707
    
    
    
    31,974,316
    
    
    
    
    
    
    
    56,985,224
    
    
    
    12,528,122
    
    
    
    (19,266,176
    )
    
    
    122,358,193(Loss)/income before income taxes and
non-controlling
interest
    
    
    (40,024,194
    )
    
    
    (5,719,039
    )
    
    
    
    
    
    
    6,176,910
    
    
    
    (8,482,355
    )
    
    
    (3,086,231
    )
    
    
    (51,134,909
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,899,803
    )
    
    
    24,740
    
    
    
    
    
    
    
    (1,875,063
    )Non controlling interest
    
    
    
    
    
    
    68,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130
    
    
    
    70,091Total net income/(loss)
    
    
    (40,024,194
    )
    
    
    (5,650,078
    )
    
    
    
    
    
    
    4,277,107
    
    
    
    (8,457,615
    )
    
    
    (3,085,101
    )
    
    
    (52,939,881
    )Total assets
    
    
    21,570,219
    
    
    
    310,941,494
    
    
    
    
    
    
    
    34,436,144
    
    
    
    211,530,962
    
    
    
    (192,636,636
    )
    
    
    385,842,184
 6. Cash and cash equivalents
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash on deposit
    
    
    31,681,435
    
    
    
    59,597,724
    
    
    
    24,224,523Bank term deposits- Papua New Guinea kina deposits
    
    
    
    
    
    
    
    
    
    
    4,315,513- Australian dollar deposits
    
    
    
    
    
    
    4,083
    
    
    
    4,36231,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398
 23




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 7. Supplemental cash flow information
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash paid during the yearInterest
    
    
    8,548,552
    
    
    
    13,373,832
    
    
    
    1,444,006Income taxes
    
    
    2,306,218
    
    
    
    1,656,985
    
    
    
    1,914,459Interest received
    
    
    3,154,380
    
    
    
    1,800,062
    
    
    
    671,479Non-cash investing and financing activities:Deferred financing costs included in accounts payable and accrued liabilities
    
    
    500,000
    
    
    
    100,000
    
    
    
    Accrued financing costs and deferred financing costs
    
    
    
    
    
    
    
    
    
    
    834,439Increase in additional paid up capital as a result of a change in accounting
policy for
stock based compensation (3(t))
    
    
    
    
    
    
    
    
    
    
    645,216Decrease in plant and equipment as a result of impairment
    
    
    755,857
    
    
    
    
    
    
    
    Deferred liquefaction project liability
    
    
    6,553,080
    
    
    
    
    
    
    
    Increase in share capital from:the exercise of share options
    
    
    532,232
    
    
    
    577,086
    
    
    
    646,216the exercise of warrants
    
    
    
    
    
    
    120,375
    
    
    
    change in accounting policy for stock based compensation (note 3(t))
    
    
    
    
    
    
    
    
    
    
    92,434transfer of deferred transaction costs on conversion of the debenture
    
    
    
    
    
    
    
    
    
    
    (3,093,734
    )transfer of carrying value of debentures to share capital on conversion of the
securities
    
    
    
    
    
    
    
    
    
    
    42,890,448conversion of indirect participation interest into share capital
    
    
    7,948,691
    
    
    
    923,000
    
    
    
    9,226,260shares issued to induce conversion of debentures
    
    
    
    
    
    
    
    
    
    
    6,976,800transaction costs being attributed to share capital transaction
    
    
    
    
    
    
    
    
    
    
    300,000Movement in accumulated deficit as a result of the inducement paid on conversion
of
the debentures
    
    
    
    
    
    
    
    
    
    
    (6,899,211
    )
  8. Financial instruments
 Cash and cash equivalents
   24




---



##### Table of Contents



InterOil CorporationNotes to Revised Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 8. Financial instruments (contd)
 Cash restricted
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash deposit on working capital facility (5.0%)
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Cash restricted  Current
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Cash deposit on secured loan (3.9%)
    
    
    647,502
    
    
    
    106,267
    
    
    
    Debt reserve for secured loan
    
    
    2,420,000
    
    
    
    
    
    
    
    Bank term deposits on Petroleum Prospecting Licenses (0.8%)
    
    
    107,997
    
    
    
    103,786
    
    
    
    102,096Cash deposit on office premises (4.5%)
    
    
    41,785
    
    
    
    
    
    
    
    Cash restricted  Non-current
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    102,09632,519,224
    
    
    
    16,662,269
    
    
    
    15,599,223
     Commodity derivative contracts
     25




---



##### Table of Contents



InterOil CorporationNotes to Revised Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 8. Financial instruments (contd)
  Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell Naphtha
    
    175,000
  Derivative
    
    Type
    
    Notional volumes (bbls)Crude swap
    
    Sell crude
    
    300,000Crude swap
    
    Buy crude
    
    250,000Jet kerosene crack spread swap
    
    Sell jet kerosene/buy crude
    
    249,999
  Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell naphtha
    
    50,000Naphtha crack spread swap
    
    Sell naphtha/buy crude
    
    50,000
 9. Trade receivables
   10. Inventories
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Midstream  refining and marketing (crude oil feedstock)
    
    
    12,795,356
    
    
    
    5,019,580
    
    
    
    3,971,982Midstream  refining and marketing (refined petroleum product)
    
    
    22,329,270
    
    
    
    25,967,357
    
    
    
    16,396,975Midstream  refining and marketing (parts inventory)
    
    
    46,646
    
    
    
    
    
    
    
    Downstream (refined petroleum product)
    
    
    32,422,296
    
    
    
    13,100,547
    
    
    
    7,547,94567,593,568
    
    
    
    44,087,484
    
    
    
    27,916,902
   26




---



##### Table of Contents



InterOil CorporationNotes to Revised Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 11. Plant and equipment
   Corporate &December 31, 2006
    
    Upstream
    
    Midstream
    
    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
    
    
    
    
    
    
    11,948,960
    
    
    
    10,543,842
    
    
    
    156,817
    
    
    
    22,649,619
 Corporate &December 31, 2005
    
    Upstream
    
    Midstream
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    5,657,125
    
    
    
    238,078,544
    
    
    
    12,164,417
    
    
    
    331,183
    
    
    
    256,231,269Deferred project costs and work in progress
    
    
    
    
    
    
    1,987,085
    
    
    
    1,386,488
    
    
    
    
    
    
    
    3,373,573Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,120,718
    )
    
    
    (3,120,718
    )Accumulated depreciation and amortisation
    
    
    (308,378
    )
    
    
    (11,245,748
    )
    
    
    (7,332,042
    )
    
    
    (198,808
    )
    
    
    (19,084,976
    )Net book value
    
    
    5,348,747
    
    
    
    228,819,881
    
    
    
    6,218,863
    
    
    
    (2,988,343
    )
    
    
    237,399,148Capital expenditure
    
    
    
    
    
    
    3,284,108
    
    
    
    1,902,334
    
    
    
    95,782
    
    
    
    5,282,224
 Corporate &December 31, 2004
    
    Upstream
    
    Midstream
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    5,659,248
    
    
    
    236,551,876
    
    
    
    10,875,211
    
    
    
    263,217
    
    
    
    253,349,552Deferred project costs and work in progress
    
    
    
    
    
    
    
    
    
    
    949,924
    
    
    
    
    
    
    
    949,924Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,002,214
    )
    
    
    (2,002,214
    )Accumulated depreciation and amortisation
    
    
    (19,792
    )
    
    
    (419,629
    )
    
    
    (7,317,596
    )
    
    
    (176,890
    )
    
    
    (7,933,907
    )Net book value
    
    
    5,639,456
    
    
    
    236,132,247
    
    
    
    4,507,539
    
    
    
    (1,915,887
    )
    
    
    244,363,355Capital expenditure
    
    
    1,131
    
    
    
    40,532,990
    
    
    
    1,320,644
    
    
    
    83,920
    
    
    
    41,938,685
   27




---



##### Table of Contents



InterOil CorporationNotes to Revised Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 12. Oil and gas properties (Restated)
   December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ Restated)
    
    $Drilling equipment
    
    
    18,242,972
    
    
    
    15,100,860
    
    
    
    5,353,471Petroleum Prospecting License drilling programs at cost
    
    
    36,281,375
    
    
    
    4,638,067
    
    
    
    1,251,88954,524,347
    
    
    
    19,738,927
    
    
    
    6,605,360
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Exploration costs, excluding exploration impairment
    
    
    6,176,866
    
    
    
    11,009,434
    
    
    
    2,903,313Exploration impairmentCosts incurred in prior years
    
    
    
    
    
    
    2,059,367
    
    
    
    16,576,982Costs incurred in current year
    
    
    1,647,185
    
    
    
    17,510,706
    
    
    
    18,989,779Total exploration impairment
    
    
    1,647,185
    
    
    
    19,570,073
    
    
    
    35,566,7617,824,051
    
    
    
    30,579,507
    
    
    
    38,470,074
 13. Income taxes (Restated)
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $(Loss) before income taxes and non controlling interest
    
    
    (43,719,889
    )
    
    
    (59,606,317
    )
    
    
    (51,134,909
    )Statutory income tax rate
    
    
    35.10
    %
    
    
    35.10
    %
    
    
    35.12
    %Computed tax (benefit)
    
    
    (15,345,681
    )
    
    
    (20,921,817
    )
    
    
    (17,958,580
    )Effect on income tax of:Losses in foreign jurisdictions not deductible
    
    
    251,639
    
    
    
    2,834,689
    
    
    
    2,273,530Non-deductible stock compensation expense
    
    
    693,601
    
    
    
    585,783
    
    
    
    424,924Gains and losses on foreign exchange
    
    
    (1,687,001
    )
    
    
    268,843
    
    
    
    58,659Tax rate differential in foreign jurisditions
    
    
    1,103,122
    
    
    
    696,307
    
    
    
    (341,613
    )Over provision for tax in prior years
    
    
    (51,632
    )
    
    
    (113,950
    )
    
    
    (42,874
    )Tax losses for which no future tax benefit has been brought to account
    
    
    12,166,624
    
    
    
    8,390,975
    
    
    
    2,696,330Temporary differences for which no future tax benefit has been brought to account
    
    
    3,124,836
    
    
    
    11,104,170
    
    
    
    14,552,726Temporary differences brought to account on acquisition of subsidiary
    
    
    1,135,181
    
    
    
    (34,902
    )
    
    
    (488,027
    )Other  net
    
    
    952,183
    
    
    
    21,896
    
    
    
    699,9882,342,872
    
    
    
    2,831,994
    
    
    
    1,875,063
 28




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 13. Income taxes (Restated) (contd)
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Future tax assetsTemporary differencesPlant and equipment
    
    
    3,030,479
    
    
    
    2,665,173
    
    
    
    2,263,654Exploration expenditure
    
    
    41,870,390
    
    
    
    26,940,837
    
    
    
    11,541,022Other  net
    
    
    122,713
    
    
    
    99,833
    
    
    
    127,24045,023,582
    
    
    
    29,705,843
    
    
    
    13,931,916Losses carried forward
    
    
    27,754,495
    
    
    
    15,390,109
    
    
    
    4,850,38072,778,077
    
    
    
    45,095,952
    
    
    
    18,782,296Less valuation allowance
    
    
    (71,354,064
    )
    
    
    (44,037,054
    )
    
    
    (17,478,665
    )1,424,013
    
    
    
    1,058,898
    
    
    
    1,303,631
     14. Working capital facility  crude feedstock
    29




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 14. Working capital facility  crude feedstock (contd)
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Working capital credit facility
    
    
    170,000,000
    
    
    
    150,000,000
    
    
    
    100,000,000Less amounts included in the working capital facility liability:Short term advances
    
    
    (13,201,940
    )
    
    
    (47,527,408
    )
    
    
    (63,485,637
    )Discounted receivables (note 9)
    
    
    (23,671,568
    )
    
    
    (23,196,914
    )
    
    
    (13,034,904
    )(36,873,508
    )
    
    
    (70,724,322
    )
    
    
    (76,520,541
    )Less: other amounts outstanding under the facility:Letters of credit outstanding
    
    
    (79,000,000
    )
    
    
    (33,765,000
    )
    
    
    (14,000,000
    )Hedging facility
    
    
    (1,500,000
    )
    
    
    (1,500,000
    )
    
    
    Working capital credit facility available for use
    
    
    52,626,492
    
    
    
    44,010,678
    
    
    
    9,479,459
   15. Acquisition of a subsidiary
 IPL PNG Ltd.
    30




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 15. Acquisition of a subsidiary (contd)
  $Cash
    
    
    4,989,895Trade receivables
    
    
    6,288,834Inventory
    
    
    20,429,728Other assets
    
    
    2,190,226Future income tax benefit
    
    
    1,698,224Property, plant and equipment
    
    
    8,799,691Total assets acquired
    
    
    44,396,598Accounts payable and accrued liabilities
    
    
    (11,815,188
    )Net assets acquired
    
    
    32,581,410
  PNG LNG Inc. and Liquid Niugini Gas Ltd
  Direct Employment Services Company and SPI InterOil Holdings Limited
    InterOil Products Limited
    31




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 15. Acquisition of a subsidiary (contd)
  $Cash
    
    
    5,859,517Trade receivables
    
    
    8,241,400Inventory
    
    
    6,759,089Other assets
    
    
    1,614,249Future income tax benefit
    
    
    640,284Property, plant and equipment
    
    
    3,180,530Total assets acquired
    
    
    26,295,069Accounts payable and accrued liabilities
    
    
    (13,399,720
    )Net assets acquired
    
    
    12,895,349
  16. Related parties
 Petroleum Independent and Exploration Corporation (P.I.E)
    Breckland Limited
  Direct Employment Services Company (DESC)
  32




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 16. Related parties (contd)
 Director fees
  BNP Paribas
  17. Unsecured loan
   18. Secured loan
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Secured loan (OPIC)  current portion
    
    
    13,500,000
    
    
    
    9,000,000
    
    
    
    9,000,000Secured loan (OPIC)  non current portion
    
    
    62,500,000
    
    
    
    71,500,000
    
    
    
    76,000,000Secured loan (bridging facility)  non current portion
    
    
    121,666,433
    
    
    
    
    
    
    
    Total non current secured loan
    
    
    184,166,433
    
    
    
    71,500,000
    
    
    
    76,000,000Total secured loan
    
    
    197,666,433
    
    
    
    80,500,000
    
    
    
    85,000,000
 OPIC Secured Loan
    33




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 18. Secured loan (contd)
    Bridging Facility
       19. Indirect participation interests (Restated)
 Indirect participation interest (IPI)
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Indirect participation interest (IPI)
    
    
    96,861,259
    
    
    
    96,861,259
    
    
    
    13,749,852
   34




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 19. Indirect participation interests (Restated) (contd)
      Indirect participation interest  PNGDV (Restated)
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Current portion
    
    
    730,534
    
    
    
    
    
    
    
    Non current portion
    
    
    1,190,633
    
    
    
    9,685,830
    
    
    
    10,608,830Total indirect participation interest  PNGDV
    
    
    1,921,167
    
    
    
    9,685,830
    
    
    
    10,608,830
    35




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 19. Indirect participation interests (Restated) (contd)
  Other
  20. Non controlling interest
   21. Share capital
  Common shares 
 Number of shares
    
    $January 1, 2004
    
    
    24,815,961
    
    
    
    157,449,200Shares issued for debt
    
    
    3,184,828
    
    
    
    56,698,121Shares issued on exercise of options
    
    
    310,095
    
    
    
    2,666,333December 31, 2004
    
    
    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
    
    
    
    2,006,175Shares issued on amendment of indirect participation interest  PNGDV
    
    
    575,575
    
    
    
    7,948,691December 31, 2006
    
    
    29,871,180
    
    
    
    233,889,366
 36




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 22. Stock compensation
   December 31, 2006
    
    December 31, 2005
    
    December 31, 2004Number of
    
    Weighted average
    
    Number of
    
    Weighted average
    
    Number of
    
    Weighted averageStock options outstanding
    
    options
    
    exercise price $
    
    options
    
    exercise price $
    
    options
    
    exercise price $Outstanding at beginning of year
    
    
    746,800
    
    
    
    22.23
    
    
    
    1,162,322
    
    
    
    9.91
    
    
    
    1,363,265
    
    
    
    7.55Granted
    
    
    725,500
    
    
    
    15.87
    
    
    
    516,450
    
    
    
    25.82
    
    
    
    224,460
    
    
    
    26.30Exercised
    
    
    (132,285
    )
    
    
    (11.14
    )
    
    
    (781,322
    )
    
    
    (6.50
    )
    
    
    (310,095
    )
    
    
    (6.52
    )Forfeited
    
    
    (285,433
    )
    
    
    (18.01
    )
    
    
    (74,000
    )
    
    
    (13.11
    )
    
    
    (100,308
    )
    
    
    (25.28
    )Expired
    
    
    (41,082
    )
    
    
    (15.36
    )
    
    
    (76,650
    )
    
    
    (26.01
    )
    
    
    (15,000
    )
    
    
    (8.00
    )Outstanding at end of year
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23
    
    
    
    1,162,322
    
    
    
    9.91
 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 $5.01 to 8.00
    
    
    10,000
    
    
    
    5.27
    
    
    
    0.39
    
    
    
    10,000
    
    
    
    5.2713.01 to 24.00
    
    
    714,000
    
    
    
    18.03
    
    
    
    3.63
    
    
    
    150,000
    
    
    
    18.8424.00 to 31.00
    
    
    289,500
    
    
    
    27.44
    
    
    
    1.93
    
    
    
    77,500
    
    
    
    30.271,013,500
    
    
    
    20.59
    
    
    
    2.97
    
    
    
    237,500
    
    
    
    22.00
   Weighted averageRisk free interest rate
    
    
    
    
    
    
    
    
    
    expected life forYear
    
    Period
    
    (%)
    
    Dividend yield
    
    Volatility (%)
    
    options2006
    
    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
    
    
    
    3.22004
    
    January 1 to December 31
    
    
    2.5
    
    
    
    
    
    
    
    45
    
    
    
    3.8
 37




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 23. Debentures and warrants
   24. Loss per share
  25. Commitments and contingencies
  Less than 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More than 5Total
    
    year
    
    1-2 years
    
    2-3 years
    
    3-4 years
    
    4-5 years
    
    years000
    
    000
    
    000
    
    000
    
    000
    
    000
    
    000Secured loan obligations
    
    
    197,666
    
    
    
    13,500
    
    
    
    130,666
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500Accrued financing costs
    
    
    1,450
    
    
    
    363
    
    
    
    1,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of subsidiary  IPL PNG Ltd
    
    
    1,771
    
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest  PNGDV (note 19)
    
    
    1,921
    
    
    
    731
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest (note 19) (a)
    
    
    96,861
    
    
    
    
    
    
    
    96,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention licenses (b)
    
    
    5,237
    
    
    
    1,877
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,906
    
    
    
    18,242
    
    
    
    233,164
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500
 (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 December 31, 2006,
management estimate that a further $48,126,000 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.
    26. Subsequent events
  38




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
  Restatement of Consolidated financial statements for the year ended December 31, 2006 and 2005
   Restatement to Consolidated Balance Sheets
 December 31, 2006
    
    December 31, 2005
    
    Canadian
    
    U.S.Original
    
    
    
    
    
    Restated
    
    Original
    
    
    
    
    
    Restated
    
    GAAP
    
    GAAPBalance
    
    Adjustments
    
    Balance
    
    Balance
    
    Adjustments
    
    Balance
    
    Reference
    
    Reference$
    
    $
    
    $
    
    $
    
    $
    
    
    
    
    
    $ (Note 2)
    
    (below)Non-current assetsOil and gas properties (note 12)
    
    
    37,449,734
    
    
    
    17,074,613
    
    
    
    54,524,347
    
    
    
    16,399,492
    
    
    
    3,339,435
    
    
    
    19,738,927
    
    
    (i), (ii)Current and Non-current liabilitiesIndirect participation interest (note 19)
    
    
    74,763,970
    
    
    
    42,097,289
    
    
    
    116,861,259
    
    
    
    86,454,953
    
    
    
    30,406,306
    
    
    
    116,861,259
    
    
    (i), (iii), (iv)
    
    (i), (ii)Indirect participation interest  PNGDV (note 19)
    
    
    1,743,533
    
    
    
    177,634
    
    
    
    1,921,167
    
    
    
    9,685,830
    
    
    
    
    
    
    
    9,685,830
    
    
    (vi)Shareholders EquityAccumulated deficit (Refer Restatement to
Consolidated Statement of Operations below )
    
    
    (187,776,004
    )
    
    
    (9,724,577
    )
    
    
    (197,500,581
    )
    
    
    (125,375,528
    )
    
    
    (27,066,871
    )
    
    
    (152,442,399
    )
 39




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 Restatement to Consolidated Statement of Operations
 Year ended December 31, 2006
    
    Year ended December 31, 2005
    
    Canadian
    
    U.S.Original
    
    
    
    
    
    Restated
    
    Original
    
    
    
    
    
    Restated
    
    GAAP
    
    GAAPBalance
    
    Adjustments
    
    Balance
    
    Balance
    
    Adjustments
    
    Balance
    
    Reference
    
    Reference$
    
    $
    
    $
    
    $
    
    $
    
    $
    

    (Note 2)
    
    (below)ExpensesExploration costs, excluding exploration
impairment (note 12)
    
    
    1,657,671
    
    
    
    4,519,195
    
    
    
    6,176,866
    
    
    
    
    
    
    
    11,009,434
    
    
    
    11,009,434
    
    
    (ii)Exploration impairment (note 12)
    
    
    416,923
    
    
    
    1,230,262
    
    
    
    1,647,185
    
    
    
    2,144,429
    
    
    
    17,425,644
    
    
    
    19,570,073
    
    
    (ii)Accretion expense (note 19)
    
    
    3,741,254
    
    
    
    (3,741,254
    )
    
    
    
    
    
    
    5,647,491
    
    
    
    (5,647,491
    )
    
    
    
    
    
    (iv), (vi)Loss on amendment of indirect participation
interest  PNGDV (note 19)
    
    
    1,446,901
    
    
    
    404,520
    
    
    
    1,851,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (vi)Loss/(gain) on revaluation of conversion options
    
    
    19,755,017
    
    
    
    (19,755,017
    )
    
    
    
    
    
    
    (4,279,284
    )
    
    
    4,279,284
    
    
    
    
    
    
    
    
    
    
    (ii)Total restated expenses
    
    
    27,017,766
    
    
    
    (17,342,294
    )
    
    
    9,675,472
    
    
    
    3,512,636
    
    
    
    27,066,871
    
    
    
    30,579,507Net loss
    
    
    62,400,476
    
    
    
    (17,342,294
    )
    
    
    45,058,182
    
    
    
    34,971,620
    
    
    
    27,066,871
    
    
    
    62,038,491
  (i)
    
    Under U.S. GAAP, the conversion option feature in the IPI Agreement was valued and bifurcated
on day one as a result of adopting the allocation method for the hybrid instrument required by
DIG issue B6 Allocating the Basis of a Hybrid Instrument to the Host Contract and the
Embedded Derivative. Based on the revised model agreed with the SEC, the conversion option
will no longer be bifurcated as Company has opted to utilize the scope exception under SFAS
133 Para 10(f) for derivatives that serve as impediments to sales accounting. This will
result in non-financial liability maintained at full value of $125,000,000 less the
transaction costs. This adjustment has the effect of increasing the IPI liability from the
superseded balance as at December 31, 2006 by $27,249,587 (2005  $27,249,587). The IPI
liability balance will also be impacted by the revaluation of the conversion option noted
below.
 (ii)
    
    The conversion option feature in superseded financial statements had also resulted in GAAP
differences between Canadian and U.S. GAAP as under U.S. GAAP the fair value of the option was
treated as a separate liability (rather than equity under Canadian GAAP which was not
revalued) which had to be revalued to fair value at each period end. As a result of adopting
the revised model, the conversion option will no longer be bifurcated and revalued under US
GAAP. The revised model does not bifurcate the conversion option feature under U.S. GAAP
resulting in reversal of all revaluations performed at each period end. This adjustment will
have the impact of reducing the US GAAP loss for year ended December 31, 2006 by $19,755,017
(2005  increase the loss by $4,279,284). This adjustment will also have the corresponding
effect on IPI liability balance carried forward in the balance sheet. The IPI liability
balance as at December 31, 2006 will decrease by $15,475,733, and as at December 2005 will
increase by $4,279,284 from the superseded balances due to this adjustment.
 (iii)
    
    Under U.S. GAAP, the impact of all the adjustments as explained under Note 2 and noted above
on the consolidated statement of income for the years ended December 31, 2006 and 2005 has
been an decrease in the loss by $17,342,294 ($0.59 per share) and increase in the loss by
$27,066,871 ($0.94 per share) respectively. The difference between this U.S. GAAP and
Canadian GAAP impact to statement of income is the reversal of revaluations as explained above
which has reduced the US GAAP loss for year ended December 31, 2006 by $19,755,017 (2005 -
increase the loss by $4,279,284).
 40




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 Consolidated statements of operations (Restated)
  Year endedDecember 31, 2006
    
    December 31, 2005
    
    December 31, 2004$ (Restated)
    
    $ (Restated)
    
    $Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPRevenueSales and operating revenues (1)
    
    
    511,087,934
    
    
    
    511,189,438
    
    
    
    481,180,645
    
    
    
    481,180,645
    
    
    
    70,644,486
    
    
    
    121,974,268Interest income
    
    
    3,223,995
    
    
    
    
    
    
    
    1,830,808
    
    
    
    
    
    
    
    382,461
    
    
    
    Other income
    
    
    3,747,603
    
    
    
    
    
    
    
    528,270
    
    
    
    
    
    
    
    196,337
    
    
    
    518,059,532
    
    
    
    511,189,438
    
    
    
    483,539,723
    
    
    
    481,180,645
    
    
    
    71,223,284
    
    
    
    121,974,268ExpensesCost of sales and operating expenses
(excluding
depreciation shown below) (1)
    
    
    499,494,540
    
    
    
    499,584,532
    
    
    
    467,246,990
    
    
    
    467,400,576
    
    
    
    65,344,516
    
    
    
    129,871,126Administrative and general expenses (1), (2)
    
    
    20,728,618
    
    
    
    20,762,574
    
    
    
    14,672,793
    
    
    
    14,687,717
    
    
    
    7,831,550
    
    
    
    8,081,740Depreciation and amortization (1)
    
    
    12,352,672
    
    
    
    11,591,513
    
    
    
    11,036,550
    
    
    
    10,836,696
    
    
    
    639,075
    
    
    
    1,462,953Exploration costs, excluding exploration
impairment
    
    
    6,176,866
    
    
    
    6,176,866
    
    
    
    11,009,434
    
    
    
    11,009,434
    
    
    
    2,903,313
    
    
    
    2,903,313Exploration impairment
    
    
    1,647,185
    
    
    
    1,647,185
    
    
    
    19,570,073
    
    
    
    19,570,073
    
    
    
    35,566,761
    
    
    
    35,566,761Legal and professional fees (1)
    
    
    3,937,517
    
    
    
    3,937,517
    
    
    
    3,606,415
    
    
    
    3,606,415
    
    
    
    3,573,727
    
    
    
    3,655,631Short term borrowing costs
    
    
    8,478,540
    
    
    
    8,478,540
    
    
    
    8,855,857
    
    
    
    8,855,857
    
    
    
    4,705,190
    
    
    
    4,705,190Long term borrowing costs (1)
    
    
    11,856,872
    
    
    
    11,856,872
    
    
    
    6,351,337
    
    
    
    6,351,337
    
    
    
    1,401,256
    
    
    
    1,897,029Debt conversion expense (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,976,800Loss on amendment of indirect participation
interest -PNGDV
    
    
    1,851,421
    
    
    
    1,851,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange loss/(gain) (2)
    
    
    (4,744,810
    )
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    796,590
    
    
    
    392,805
    
    
    
    392,805Non-controlling interest (7)
    
    
    (263,959
    )
    
    
    (265,865
    )
    
    
    (368,312
    )
    
    
    (368,475
    )
    
    
    (70,091
    )
    
    
    (265,624
    )Interest income
    
    
    
    
    
    
    (3,223,995
    )
    
    
    
    
    
    
    (1,830,808
    )
    
    
    
    
    
    
    (382,461
    )Other income
    
    
    
    
    
    
    (3,747,603
    )
    
    
    
    
    
    
    (528,270
    )
    
    
    
    
    
    
    (196,337
    )561,515,462
    
    
    
    553,904,747
    
    
    
    542,777,727
    
    
    
    540,387,142
    
    
    
    122,288,102
    
    
    
    194,668,926Loss before income taxes
    
    
    (43,455,930
    )
    
    
    (42,715,309
    )
    
    
    (59,238,004
    )
    
    
    (59,206,497
    )
    
    
    (51,064,818
    )
    
    
    (72,694,658
    )Income tax expense (3)
    
    
    (2,342,873
    )
    
    
    (2,342,873
    )
    
    
    (2,831,994
    )
    
    
    (2,831,994
    )
    
    
    (1,875,063
    )
    
    
    (1,875,063
    )Loss before cumulative effect of accounting change
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )
    
    
    (62,069,998
    )
    
    
    (62,038,491
    )
    
    
    (52,939,881
    )
    
    
    (74,569,721
    )Cumulative effect of accounting change (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Net loss
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )
    
    
    (62,069,998
    )
    
    
    (62,038,491
    )
    
    
    (52,939,881
    )
    
    
    (75,307,371
    )
 41




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
  Year endedDecember 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Net loss as shown in the Canadian GAAP financial statements
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )
    
    
    (52,939,881
    )Description of items having the effect of increasing reported incomeDecrease in depreciation and amortization due to difference in date of commencement of
operations of refinery (1)
    
    
    761,159
    
    
    
    199,854
    
    
    
    Decrease in non-controlling interest expense (7)
    
    
    1,907
    
    
    
    163
    
    
    
    195,533Decrease in administrative and general expenses from ineffective portion of hedges (2)
    
    
    
    
    
    
    22,456
    
    
    
    Increase in sales as a result of items being ineligible for capitalization due to difference in
date
of commencement of operations of refinery(1)
    
    
    
    
    
    
    
    
    
    
    51,329,782Increase in sales from ineffective portion of hedges (2)
    
    
    101,504
    
    
    
    
    
    
    
    Description of items having the effect of decreasing reported incomeIncrease in depreciation and amortization due to difference in date of commencement of
operations of refinery (1)
    
    
    
    
    
    
    
    
    
    
    (823,878
    )Increase in cost of sales and operating expenses as a result of items being ineligible for
capitalization due to difference in date of commencement of operations of refinery (1)
    
    
    
    
    
    
    (153,586
    )
    
    
    (64,526,610
    )Increase in cost of sales from ineffective portion of hedges (2)
    
    
    (89,992
    )
    
    
    
    
    
    
    Increase in administrative and general expenses from ineffective portion of hedges (2)
    
    
    (33,956
    )
    
    
    
    
    
    
    Increase in administrative and general expenses as a result of items being ineligible for
capitalization due to difference in date of commencement of operations of refinery (1)
    
    
    
    
    
    
    (37,380
    )
    
    
    (250,190
    )Increase in legal and professional fees as a result of items being ineligible for capitalization
due to difference in date of commencement of operations of refinery (1)
    
    
    
    
    
    
    
    
    
    
    (81,904
    )Increase in long term borrowing costs as a result of items being ineligible for capitalization
due
to difference in date of commencement of operations of refinery (1)
    
    
    
    
    
    
    
    
    
    
    (495,773
    )Debt conversion expense (5)
    
    
    
    
    
    
    
    
    
    
    (6,976,800
    )Cumulative effect of accounting change relating to stock compensation (4)
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Net loss according to US GAAP
    
    
    (45,058,182
    )
    
    
    (62,038,491
    )
    
    
    (75,307,371
    )
 Statements of comprehensive income/(loss), net of tax (Restated)
 Year endedDecember 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$ (Restated)
    
    $ (Restated)
    
    $Net loss in accordance with U.S. GAAP, net of tax
    
    
    (45,058,182
    )
    
    
    (62,038,491
    )
    
    
    (75,307,371
    )Foreign currency translation reserve, net of tax
    
    
    1,015,426
    
    
    
    14,243
    
    
    
    463,200Deferred hedge gain, net of tax
    
    
    (993,153
    )
    
    
    457,184
    
    
    
    537,358Total other comprehensive income, net of tax
    
    
    22,273
    
    
    
    471,427
    
    
    
    1,000,558Comprehensive loss, net of tax
    
    
    (45,035,909
    )
    
    
    (61,567,064
    )
    
    
    (74,306,813
    )
 Statements of cash flows
  42




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 Statements of accumulated other comprehensive income, net of tax (AOCI)
 TotalaccumulatedForeign currency
    
    
    
    
    
    othertranslation
    
    Deferred hedge
    
    comprehensivereserve
    
    gain
    
    incomeAOCI balance as of December 31, 2003
    
    
    
    
    
    
    
    
    
    
    Current period change
    
    
    463,200
    
    
    
    537,358
    
    
    
    1,000,558AOCI balance as of December 31, 2004
    
    
    463,200
    
    
    
    537,358
    
    
    
    1,000,558Current period change
    
    
    14,243
    
    
    
    457,184
    
    
    
    471,427AOCI balance as of December 31, 2005
    
    
    477,443
    
    
    
    994,542
    
    
    
    1,471,985Current period change
    
    
    1,015,426
    
    
    
    (993,153
    )
    
    
    22,273AOCI balance as of December 31, 2006
    
    
    1,492,869
    
    
    
    1,389
    
    
    
    1,494,258
 Per share amounts (Restated)
   Weighted average number of shares on which earnings per share
    
    Year ended December 31,calculations are based in accordance with U.S. GAAP
    
    2006
    
    2005
    
    2004Basic
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575Net income/(loss) per share in accordance with U.S. GAAP
    
    (Restated)
    
    (Restated)Basic
    
    
    (1.52
    )
    
    
    (2.15
    )
    
    
    (2.97
    )Diluted
    
    
    (1.52
    )
    
    
    (2.15
    )
    
    
    (2.97
    )
 Consolidated balance sheets (Restated)
 December 31, 2006
    
    December 31, 2005
    
    December 31, 2004(Restated)
    
    (Restated)Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPCurrent assets
    
    
    201,714,996
    
    
    
    201,714,996
    
    
    
    173,232,689
    
    
    
    173,232,689
    
    
    
    132,258,350
    
    
    
    132,258,350Oil and gas properties
    
    
    54,524,347
    
    
    
    54,524,347
    
    
    
    19,738,927
    
    
    
    19,738,927
    
    
    
    6,605,360
    
    
    
    6,605,360Capital assets (1), (2)
    
    
    242,642,077
    
    
    
    231,175,281
    
    
    
    237,399,148
    
    
    
    225,171,193
    
    
    
    244,363,355
    
    
    
    232,496,306Deferred financing costs
    
    
    1,716,757
    
    
    
    1,716,757
    
    
    
    1,256,816
    
    
    
    1,256,816
    
    
    
    1,311,488
    
    
    
    1,311,488Restricted Cash
    
    
    3,217,284
    
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    210,053
    
    
    
    
    
    
    
    Future income tax benefit (3)
    
    
    1,424,014
    
    
    
    1,424,014
    
    
    
    1,058,898
    
    
    
    1,058,898
    
    
    
    1,303,631
    
    
    
    1,303,631Total assets
    
    
    505,239,475
    
    
    
    493,772,679
    
    
    
    432,896,531
    
    
    
    420,668,576
    
    
    
    385,842,184
    
    
    
    373,975,135Current liabilities (2), (6)
    
    
    133,753,876
    
    
    
    133,752,491
    
    
    
    132,099,945
    
    
    
    131,082,948
    
    
    
    142,197,050
    
    
    
    141,659,692Accrued financing costs
    
    
    1,087,500
    
    
    
    1,087,500
    
    
    
    921,109
    
    
    
    921,109
    
    
    
    863,329
    
    
    
    863,329Long term debt (6)
    
    
    282,218,325
    
    
    
    302,218,325
    
    
    
    178,047,089
    
    
    
    198,047,089
    
    
    
    86,608,830
    
    
    
    86,608,830Non-controlling interest (7)
    
    
    5,759,206
    
    
    
    5,416,831
    
    
    
    6,023,149
    
    
    
    5,682,695
    
    
    
    6,404,262
    
    
    
    6,063,971Shareholders equity (1) (2) (4) (5) (6)
    
    
    82,420,568
    
    
    
    51,297,532
    
    
    
    115,805,239
    
    
    
    84,934,735
    
    
    
    149,768,713
    
    
    
    138,779,313Total liabilities and shareholders equity
    
    
    505,239,475
    
    
    
    493,772,679
    
    
    
    432,896,531
    
    
    
    420,668,576
    
    
    
    385,842,184
    
    
    
    373,975,135
 (1)
    
    OperationsThe Company determined that refinery operations commenced under U.S. GAAP at December 1,
2004, which is the date management assessed that construction of the refinery was
substantially complete and ready for its intended use. The Company ceased capitalization of
certain costs to the refinery project at this date and recognized one months results from
sales, related costs of sales and operating expenses and administrative and general expenses
in the statement of operations for the year ended December 31, 2004.
 43




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 As disclosed in note 3(q) in the consolidated financial statements, operations commenced on
January 1, 2005 under Canadian GAAP. Therefore, the Company continued to capitalize
December 2004s results to the refinery project. Due to the difference in the cost basis of
the refinery, the depreciation expense recorded under U.S. GAAP differs from that recorded
under Canadian GAAP during 2005.In the prior year, in addition to recognizing December 2004s results in the statement of
operations, one month of depreciation expense was also recorded under U.S. GAAP for the
refinery during 2004. The useful life for the
refinery under U.S. GAAP is the same as that disclosed under Canadian GAAP in note 3(q) in
the consolidated financial statements.(2)
    
    Derivative instruments and hedgingThe Company accounts for derivatives and hedging activities in accordance with FASB
Statement No. 133, Accounting for Derivative Instruments and Certain Hedging Activities,
as amended (SFAS No. 133), which requires that all derivative instruments be recorded on
the balance sheet at their respective fair values.The Canadian Institute of Chartered Accountants issued Accounting Guideline 13 Hedging
Relationships (AcG-13), which became effective January 1, 2004. This guideline was
issued to align certain accounting principles under Canadian GAAP with SFAS No. 133,
including hedge documentation and assessing hedge effectiveness. The Company adopted the
hedge accounting provisions in AcG-13 and SFAS No. 133 in respect of the commodity forward
contracts it transacted beginning in July 2004. Under Canadian GAAP, the Company includes
hedges which are unsettled at period end in current liabilities based on a marked to market
calculation. Under SFAS No. 133 the marked to market amount for the unsettled hedges is
included in other comprehensive income to the extent that they are effective. The
ineffective portion is expensed. Details of hedge accounting is disclosed in notes 3(o) and
8 in the consolidated financial statements of the Company for the year ended December 31,
2006.(3)
    
    Income tax effect of adjustmentsThe income tax effect of U.S. GAAP adjustments was a reduction to the future tax asset of
$259,957 (2005  reduction of $11,059) for the year ended December 31, 2006 due to an
decrease in the loss carry-forwards. A corresponding decrease in the valuation allowance
was recorded. No income tax expense was recorded in the years ended December 31, 2006, 2005
and 2004 due to the tax holiday period in Papua New Guinea through five years after the
refinery commences operations.(4)
    
    Stock based compensationAt January 1, 2004, the Company adopted the provisions of CICA 3870 in respect of the
employee stock-based awards, which resulted in recognition of compensation expense for such
awards under Canadian GAAP on a basis consistent with the fair value provisions of SFAS No.
123. As disclosed in note 3(t) to the consolidated financial statements, the Company
retroactively applied the fair value method to all employee stock options granted on or
after January 1, 2002, without restatement to prior years.This is not consistent with the modified prospective transition method allowed for a
voluntary change to the fair value method under FASB Statement No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123 (SFAS No. 148). The modified prospective method requires retroactive consideration
of all employee stock awards granted, modified or settled on or after January 1, 1995. The
Company did not adjusted for this GAAP difference as there were no options granted, modified
or settled between January 1, 1995 and January 1, 2002 that would have materially impacted
net income for the years ended December 31, 2005, 2004 and 2003.The cumulative effect of this change in accounting principle of $737,650 was recorded to
opening accumulated deficit under Canadian GAAP. This is required to be disclosed as a
cumulative change in accounting principle in the statement of operations under U.S. GAAP.
 44




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 (5)
    
    Debt conversion expenseAs disclosed in note 23 in the consolidated financial statements, 100% of the convertible
debentures were converted before December 31, 2004. The Company issued an additional
180,000 shares to induce conversion before the end of the year. Under Canadian GAAP, the
fair value of these shares was recorded as an increase in share capital of $6,976,800 with
offsetting adjustments to retained earnings of $6,899,211 and a conversion expense of
$77,589.FASB Statement No. 84, Induced Conversions of Convertible Debt requires an expense to be
recorded when convertible debt is converted under an inducement. The Company recognized the
entire fair value of the inducement shares of $6,976,800 as a conversion expense under U.S.
GAAP.(6)
    
    Indirect participation interestAs disclosed in note 2 in the consolidated financial statements, the Company entered into an
indirect participation interest agreement in exchange for proceeds of $125,000,000. Under
Canadian GAAP, this amount was apportioned between non financial liabilities and equity.
Under U.S. GAAP, Company has not bifurcated the amount as the Company has opted to utilize
the scope exception under SFAS 133 Para 10(f) for derivatives that serve as impediments to
sales accounting.(7)
    
    Non controlling interestThe non-controlling interest movements are the result of the U.S. GAAP adjustments relating
to the midstream operations described in points 1 to 4 above.
 Acquisition of InterOil Products Limited (IPL)
    InterOil
    
    IPL (1)
    
    Pro formaTwelve months ended December 31, 2004
    
    (audited)
    
    (unaudited)
    
    (unaudited)Sales and operating revenue  Canadian GAAP
    
    
    70,644,486
    
    
    
    27,317,000
    
    
    
    97,961,486Sales and operating revenue  US GAAP
    
    
    121,974,268
    
    
    
    27,317,000
    
    
    
    149,291,268Net profit/(loss)  Canadian GAAP
    
    
    (52,939,881
    )
    
    
    2,350,000
    
    
    
    (50,589,881
    )Net profit/(loss)  U.S. GAAP
    
    
    (75,307,371
    )
    
    
    2,350,000
    
    
    
    (72,957,371
    )Basic loss per share (cents per share)Canadian GAAP (2)
    
    
    (208
    )
    
    
    
    
    
    
    (199
    )U.S. GAAP (3)
    
    
    (297
    )
    
    
    
    
    
    
    (287
    )Diluted loss per share (cents per share)Canadian GAAP (2)
    
    
    (208
    )
    
    
    
    
    
    
    (199
    )U.S. GAAP (3)
    
    
    (297
    )
    
    
    
    
    
    
    (287
    )
 45




---



##### Table of Contents



InterOil Corporation
Notes to Revised Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTER OIL LOGO)
 27. Reconciliation to accounting principles generally accepted in the United States (Restated)
(contd)
 InterOil
    
    IPL (1)
    
    Pro formaTwelve months ended December 31, 2003
    
    (audited)
    
    (unaudited)
    
    (unaudited)Sales and operating revenue  Canadian and U.S. GAAP
    
    
    
    
    
    
    69,897,000
    
    
    
    69,897,000Net profit/(loss)  Canadian GAAP
    
    
    (3,517,569
    )
    
    
    6,474,000
    
    
    
    2,956,431Net profit  U.S. GAAP
    
    
    4,435,965
    
    
    
    6,474,000
    
    
    
    10,909,965Basic earnings/(loss) per share (cents per share)Canadian GAAP (2)
    
    
    (15
    )
    
    
    
    
    
    
    14U.S. GAAP (3)
    
    
    20
    
    
    
    
    
    
    
    49Diluted earnings/(loss) per share (cents per share)Canadian GAAP (2)
    
    
    (15
    )
    
    
    
    
    
    
    13U.S. GAAP (3)
    
    
    18
    
    
    
    
    
    
    
    45
 (1)
    
    Financial data for the year ended December 31, 2004 represents results for the period from
January 1, 2004 to April 28, 2004, the effective date the Company gained control of IPL, and
is derived from the unaudited management accounts of IPL. Financial data for the year ended
December 31, 2003 represents the actual results for the year ended December 31, 2003.
 (2)
    
    The weighted average number of shares used in the earnings per share information is
consistent with that used under Canadian GAAP for the respective periods.
 (3)
    
    The weighted average number of shares used in the earnings per share information is
consistent with that used under U.S. GAAP for the respective periods.
 Recent Accounting Pronouncements
 Fair value measurements
  Accounting for uncertainty in income taxes
  Accounting for certain hybrid financial instruments
  46