##### 



InterOil Corporation
    
    (INTEROIL LOGO)Revised Management Discussion and AnalysisFor the Quarter Ended March 31, 2007 (Unaudited)
October 29, 2007
 TABLE OF CONTENTS
 TABLE OF CONTENTS
    
    
    1OVERVIEW
    
    
    3NON-GAAP MEASURES
    
    
    3LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
    
    
    4BUSINESS ENVIRONMENT
    
    
    5RISK MANAGEMENT
    
    
    5BUSINESS STRATEGY
    
    
    5FINANCIAL RESULTS
    
    
    6QUARTER IN REVIEW
    
    
    9UPSTREAM QUARTER IN REVIEW
    
    
    9MIDSTREAM REFINING AND MARKETING QUARTER IN REVIEW
    
    
    12MIDSTREAM LIQUEFACTION QUARTER IN REVIEW
    
    
    16DOWNSTREAM QUARTER IN REVIEW
    
    
    18CORPORATE QUARTER IN REVIEW
    
    
    21LIQUIDITY AND CAPITAL RESOURCES
    
    
    23CRITICAL ACCOUNTING ESTIMATES
    
    
    28NON-GAAP MEASURES RECONCILIATION
    
    
    30PUBLIC SECURITIES FILINGS
    
    
    31GLOSSARY OF TERMS
    
    
    31
   Management Discussion and Analysis     INTEROIL CORPORATION     1




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Management Discussion and Analysis     INTEROIL CORPORATION     2




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OVERVIEW
  Segments
    
    OperationsUpstream
    
    Exploration and Production  Explores and appraises potential
oil and natural gas structures in Papua New Guinea with a view
to commercializing significant discoveries.Midstream
    
    Refining, Marketing & Liquefaction  Markets the refined
products it produces in Papua New Guinea both domestically and
for export. Since early 2006, our business plan and operating
strategy has evolved to include as a business objective, the
development of an onshore liquefied natural gas processing
facility in Papua New Guinea.Downstream
    
    Wholesale and Retail Distribution  Distributes refined
products in Papua New Guinea on a wholesale and retail basis.Corporate
    
    Corporate  Engages in business development and improvement,
common services and management, financing and treasury,
government and investor relations. Common and integrated costs
are recovered from business segments on an equitable basis. Our
corporate segment results also include consolidation
adjustments.
 NON-GAAP MEASURES
  Management Discussion and Analysis     INTEROIL CORPORATION     3




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LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
 This MD&A contains forward-looking statements as defined in U.S. federal and Canadian securities
laws. Such statements are generally identifiable by the terminology used, such as may, plans,
believes, expects, anticipates, intends, estimates, forecasts, budgets, targets or
other similar wording suggesting future outcomes or statements regarding an outlook. All
statements, other than statements of historical fact, included in or incorporated by reference in
this MD&A are forward-looking statements. Forward-looking statements include, without limitation,
statements regarding our plans for expanding our business segments, business strategy, contingent
liabilities, environmental matters, and plans and objectives for future operations, future capital
and other expenditures. By its very nature, such forward-looking information requires InterOil
to make assumptions that may not materialize or that may not be accurate.
 Each forward-looking statement reflects our current view of future events and is subject to known
and unknown risks, uncertainties and other factors that could cause our actual results to differ
materially from any results expressed or implied by our forward-looking statements. These risks
and uncertainties include, but are not limited to; the exploration and production, the refining and
the distribution businesses are competitive; our refinery has not operated at full capacity for an
extended period of time and our profitability may be materially affected if it is not able to do
so; if we are not able to market all of our refinerys output, we will not be able to operate our
refinery at its full capacity and our financial condition and results of operations may be
materially adversely affected; if our refining margins do not meet our expectations and our
refinery operations are not profitable; we may be required to write down the value of our refinery;
our refinery financial condition may be materially adversely affected if we are unable to obtain
crude feedstocks for our refinery; our refining operations expose us to risks, some of which are
not insured; our hedging activities may incur losses; we may not be successful in our exploration
for oil and gas; if we are unable to renew our petroleum licenses with the Papua New Guinea
government, we may be required to discontinue our exploration activities in Papua New Guinea; our
investments in Papua New Guinea are subject to political, legal and economic risks that could
materially adversely affect their value; new legislative, administrative or judicial actions that
constrain licenses and permits from various government authorities may have a material affect on
the companys operations; weather and unforeseen operating hazards may impact our operating
activities; our significant debt levels and our debt covenants may limit our future flexibility in
obtaining additional financing; our ability to recruit and retain qualified personnel may have a
material adverse effect on our operating results and stock price; Petroleum Independent and
Exploration Corporation can affect our raising of capital through the issuance of common shares or
securities convertible into common shares; compliance with and changes in environmental laws could
adversely affect our performance; you may be unable to enforce your legal rights against us;
changing regulations regarding corporate governance and public disclosure could cause additional
expenses and failure to comply may adversely affect our reputation and the value of our securities;
and the risks described under the heading Risk Factors in our Annual Information Form.
 Although we believe that the assumptions underlying our forward-looking statements are reasonable,
any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the
forward-looking statements included in this MD&A will prove to be accurate. In light of the
significant uncertainties inherent in our forward-looking statements, the inclusion of such
information should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. Some of these and other risks and uncertainties that could
cause actual results to differ materially from such forward-looking statements are more fully
described under the heading Risk Factors in our Annual Information Form for the year ended
December 31, 2006.
 Readers are cautioned that the foregoing list of important factors affecting forward-looking
information is not exhaustive. Furthermore, the forward-looking information contained in this
quarterly report is made as of the date of this report and, except as required by applicable law,
InterOil does not undertake any obligation to update publicly or to revise any of the included
forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information contained in this report is expressly qualified by this cautionary
statement.
 We currently have no production or reserves as defined in Canadian National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities. All information contained in this MD&A
regarding resources are references to undiscovered resources under Canadian National Instrument
51-101, whether stated or not.
 Management Discussion and Analysis     INTEROIL CORPORATION     4




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BUSINESS ENVIRONMENT
  www.sedar.com
 RISK MANAGEMENT
 Risk Factors
 www.sedar.com
 www.sedar.com
 BUSINESS STRATEGY
 www.sedar.com
 Management Discussion and Analysis     INTEROIL CORPORATION     5




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FINANCIAL RESULTS
 Summary of Restated Consolidated Financial Results for Quarter ended March 31 2007
 Consolidated Quarterly Financial Results for First Quarter of, 2007 and 2006
   
    
    improved refinery margins resulting from optimization efforts and capital works undertaken,
    
    increased volumes resulting from the Shell acquisition,
    
    higher downstream margins achieved due to favorable Import Parity Price (IPP) price movement,
    
    decrease in exploration impairment expenses compared to prior year as Elk costs have
been capitalized during the period as compared to impairment expenses on Triceratops
during prior period.
  
    
    higher interest costs on the bridging facility,
    
    higher office and administration due to inclusion of the Shell business.
  Consolidated  Operating results
    
    Quarter ended March 31,($ thousands, unless otherwise indicated)
    
    2007 (restated)(1)
    
    2006 (restated)Sales and operating revenues
    
    
    125,918
    
    
    
    108,629Interest revenue
    
    
    688
    
    
    
    607Other non-allocated revenue
    
    
    290
    
    
    
    656Total revenue
    
    
    126,896
    
    
    
    109,892Cost of sales and operating expenses
    
    
    (112,229
    )
    
    
    (110,195
    )Office and administration and other expenses
    
    
    (7,766
    )
    
    
    (5,611
    )Foreign exchange gain/(loss)
    
    
    (463
    )
    
    
    (1,057
    )Exploration costs
    
    
    (3,322
    )
    
    
    (3,560
    )Exploration impairment
    
    
    (14
    )
    
    
    (1,482
    )Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    3,102
    
    
    
    (12,013
    )Depreciation and amortization
    
    
    (3,460
    )
    
    
    (2,838
    )Interest expense
    
    
    (4,482
    )
    
    
    (2,667
    )Loss from ordinary activities before income taxes
    
    
    (4,840
    )
    
    
    (17,518
    )Income tax expense
    
    
    (497
    )
    
    
    125Non-controlling interest
    
    
    (17
    )
    
    
 120Total net loss(2)
    
    
    (5,354
    )
    
    
    (17,273
    )
 Management Discussion and Analysis     INTEROIL CORPORATION     6




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Consolidated  Operating results
    
    Quarter ended March 31,($ thousands, unless otherwise indicated)
    
    2007 (restated)(1)
    
    2006 (restated)Net loss per share (dollars)
    
    
    (0.18
    )
    
    
    (0.49
    )Net loss per diluted share (dollars)
    
    
    (0.18
    )
    
    
    (0.49
    )Total assets
    
    
    506,427
    
    
    
    412,177Non current liabilities
    
    
    281,767
    
    
    
    178,983Cash flows (used by)/from operations
    
    
    (4,979
    )
    
    
    8,167Cash dividends declared per share
    
    
    
    
    
    
    
 
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell PNG
Limited on October 1, 2006 and information in this table includes the results of the Shell
business for the quarter.(2)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table. Consolidated Quarterly Financial Result Analysis Comparing First Quarter of, 2007 and 2006
  
    
    $10.7 million improvement in Gross Margin (sales and operating revenues less cost of
sales and operating expense) from refinery operations between first quarter of 2007 and
first quarter of 2006. This is primarily due to the positive impact of the revamp and
optimization efforts.
    
    $5.1 million improvement in Gross Margin from our downstream business for first quarter
of 2007 over first quarter of 2006 mainly on account of increased volumes resulting from
the Shell Acquisition and increased domestic demand coupled with the a positive effect on
Gross Margin due to IPP price movements.
    
    $1.5 million decrease in the exploration impairment expenses between the two periods as
Elk costs are being capitalized as compared to Triceratops expenses being impaired and
expensed.
    
    $1.8 million increase in office and administration and other expenses due to the
acquisition and inclusion of the Shell business and expansion of the aviation business.
    
    $0.3 million of costs relating to the preliminary stages of a liquefied natural gas
plant project. During third quarter of 2006 we began investigating the viability of a gas
liquefaction facility.
    
    $2.1 million increase in interest expense for the quarter as a result of the $130
million secured loan financing entered during second quarter of 2006.
    
    $0.6 million increase in income tax expense for the downstream segment.
 Management Discussion and Analysis     INTEROIL CORPORATION     7




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Summary of Consolidated Quarterly Financial Results for past eight quarters
 Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
  Quarters ended($ thousands unless stated otherwise)
    
    2007
    
    2006(1), (2)
    
    2005(1)(restated)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30Upstream
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404
    
    
    
    37Midstream  Refining and Marketing
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625
    
    
    
    115,273
    
    
    
    114,717Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044
    
    
    
    32,449
    
    
    
    29,993Corporate & Consolidated
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,979
    )
    
    
    (23,307
    )
    
    
    (18,661
    )
    
    
    (19,472
    )Sales and operating revenues
    
    
    126,896
    
    
    
    172,776
    
    
    
    110,982
    
    
    
    124,409
    
    
    
    109,892
    
    
    
    125,216
    
    
    
    129,465
    
    
    
    125,275Upstream
    
    
    (4,009
    )
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )
    
    
    (13,333
    )
    
    
    (1,134
    )Midstream  Refining and Marketing
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070
    
    
    
    (6,796
    )Midstream  Liquefaction
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522
    
    
    
    2,550Corporate & Consolidated
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )
    
    
    5Earnings before interest, taxes,
depreciation and amortization
    
    
    3,102
    
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )
    
    
    (8,192
    )
    
    
    (5,375
    )Upstream
    
    
    (4,318
    )
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,548
    )
    
    
    (1,138
    )Midstream  Refining and Marketing
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
    
    
    
    (11,839
    )Midstream  Liquefaction
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460
    
    
    
    1,789Corporate & Consolidated
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
    
    
    (183
    )Net income (loss) per segment(3)
    
    
    (5,354
    )
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )
    
    
    (14,590
    )
    
    
    (11,371
    )Net income (loss) per share(3)(dollars)Per Share  Basic
    
    
    (0.18
    )
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )
    
    
    (0.50
    )
    
    
    (0.39
    )Per Share  Diluted
    
    
    (0.18
    )
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )
    
    
    (0.50
    )
    
    
    (0.39
    )
 
 (1)
    
    Our comparative quarterly results for all quarters during 2005 and 2006 have been represented
to confirm with the presentation adopted at December 31, 2006. Previously, interest revenue
and non-controlling interest were allocated to the corporate segment. Amounts associated with
these line items are now included in each operating segments result.(2)
    
    Our September 2006 quarterly results have been represented to separate out our
Midstream-Liquefaction segment from the Midstream-Refining and Marketing segment as the
development of a liquefaction business has become an increasingly important component of our
business.(3)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table. Management Discussion and Analysis     INTEROIL CORPORATION 8




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




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Upstream Restated Quarterly Financial Results for First Quarter of, 2007 and 2006
  Quarters ended March 31,Upstream  Operating results
    
    2007
    
    2006($ thousands)
    
    (restated)
    
    (restated)(1)External sales
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    Other non-allocated revenue
    
    
    395
    
    
    
    959Total segment revenue
    
    
    395
    
    
    
    959Cost of sales and operating expenses
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (815
    )
    
    
    (970
    )Foreign exchange gain/(loss)
    
    
    (253
    )
    
    
    (83
    )Exploration costs
    
    
    (3,322
    )
    
    
    (3,560
    )Exploration impairment
    
    
    (14
    )
    
    
    (1,482
    )Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (4,009
    )
    
    
    (5,136
    )Depreciation and amortization
    
    
    (309
    )
    
    
    (198
    )Interest expense
    
    
    
    
    
    
    (1
    )Loss from ordinary activities before income taxes
    
    
    (4,318
    )
    
    
    (5,335
    )Income tax expense
    
    
    
    
    
    
    Total net loss
    
    
    (4,318
    )
    
    
    (5,335
    )
 (1)
    
    Our first quarter of 2006 segment results have been represented to confirm with the
presentation adopted in year ended 2006. Previously, interest revenue and non-controlling
interest were allocated to the corporate segment. Amounts associated with these line items
are now included in each operating segments result.
 Upstream Financial Results Analysis Comparing First Quarter of 2007 and 2006
   
    
    $1.5 million decrease in exploration impairment in first quarter of 2007 as Elk costs
are being capitalized as compared to Triceratops expenses being impaired and expensed
during the prior period.
    
    $0.2 million decrease in exploration impairment as the majority of the expense in first
quarter of 2006 related to the acquisition of additional interests in our PRL 4 and PRL 5
licenses.
    
    $0.2 million decrease in office and administration and other expenses relates mainly to
lower rig expenses.
    
    $0.6 million decrease in other unallocated revenue is due to lower rental income from
rig as the rig was used on the extended well program which is capitalized by us and IPI
investors share is only 31.55% of the program. The decrease is also due to lower interest
revenue due to lower cash and cash equivalents available on account of usage of Indirect
participation liability funds.
    
    $0.3 million increase in exploration costs expensed in first quarter of 2007 due to
InterOils portion of ELK Geophysics and Geology costs undertaken as part of the extended
well program being expensed.
 Management Discussion and Analysis     INTEROIL CORPORATION   10




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Upstream Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Upstream  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands) (restated)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-allocated
revenue
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404
    
    
    
    37Total segment revenue
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404
    
    
    
    37Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (815
    )
    
    
    (1,300
    )
    
    
    (1,609
    )
    
    
    (2,491
    )
    
    
    (970
    )
    
    
    (742
    )
    
    
    (585
    )
    
    
    (622
    )Foreign exchange
gain/(loss)
    
    
    (253
    )
    
    
    (54
    )
    
    
    78
    
    
    
    121
    
    
    
    (83
    )
    
    
    232
    
    
    
    252
    
    
    
    132Exploration costs
    
    
    (3,322
    )
    
    
    50
    
    
    
    (505
    )
    
    
    (2,162
    )
    
    
    (3,560
    )
    
    
    (4,648
    )
    
    
    (6,273
    )
    
    
    (401
    )Exploration impairment
    
    
    (14
    )
    
    
    (119
    )
    
    
    30
    
    
    
    (76
    )
    
    
    (1,482
    )
    
    
    (12,160
    )
    
    
    (7,130
    )
    
    
    (280
    )Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (4,009
    )
    
    
    (717
    )
    
    
    (1,106
    )
    
    
    (1,924
    )
    
    
    (5,136
    )
    
    
    (16,464
    )
    
    
    (13,332
    )
    
    
    (1,134
    )Depreciation and
amortization
    
    
    (309
    )
    
    
    (233
    )
    
    
    (202
    )
    
    
    (173
    )
    
    
    (198
    )
    
    
    (96
    )
    
    
    (213
    )
    
    
    (2
    )Interest expense
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    6
    
    
    
    (2
    )
    
    
    (2
    )Loss from ordinary
activities before
income taxes
    
    
    (4,318
    )
    
    
    (953
    )
    
    
    (1,309
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,547
    )
    
    
    (1,138
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (4,318
    )
    
    
    (953
    )
    
    
    (1,309
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,547
    )
    
    
    (1,138
    )
 Management Discussion and Analysis     INTEROIL CORPORATION   11




---



##### 



MIDSTREAM REFINING AND MARKETING QUARTER IN REVIEW
 Midstream Refining and Marketing Business Summary
   Midstream Refining and Marketing Operating Review
 Quarters ended March 31,Key Refining and Marketing Metrics
    
    2007
    
    2006Net income/(loss) ($ millions)
    
    $
    1.5
    
    
    
    ($10.1
    )EBITDA ($ millions)
    
    $
    6.3
    
    
    
    ($5.2
    )Throughput (barrels 000) (1)
    
    
    1,457
    
    
    
    1,259Operating days
    
    
    79
    
    
    
    63Cost of production per barrel(2)
    
    $
    2.23
    
    
    $
    3.04Working capital financing cost per barrel of production(2)
    
    $
    0.72
    
    
    $
    0.71Distillates as percentage of production
    
    
    65
    %
    
    
    64
    %
 
 (1)
    
    Total throughput for the period(2)
    
    Our cost of production per barrel and working capital financing cost per barrel have been
calculated based on a notional throughput. Our actual throughput has been adjusted to include
the throughput that would have been necessary to produce the equivalent amount of diesel that
we imported during the period.
 
   Management Discussion and Analysis     INTEROIL CORPORATION     12




---



##### 



Midstream Refining and Marketing Quarterly Financial Results for First Quarter of, 2007 and 2006
  MidstreamRefining and Marketing  Operating results
    
    Quarters ended March 31,($ thousands)
    
    2007
    
    2006(1)External sales
    
    
    48,213
    
    
    
    80,854Inter-segment revenue
    
    
    54,833
    
    
    
    22,155Interest and other revenue
    
    
    9
    
    
    
    96Total segment revenue
    
    
    103,055
    
    
    
    103,105Cost of sales and operating expenses
    
    
    (94,841
    )
    
    
    (105,550
    )Office and administration and other expenses
    
    
    (2,225
    )
    
    
    (1,727
    )Gain on derivative contracts
    
    
    454
    
    
    
    (94
    )Foreign exchange gain/(loss)
    
    
    (107
    )
    
    
    (963
    )Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    6,336
    
    
    
    (5,229
    )Depreciation and amortization
    
    
    (2,717
    )
    
    
    (2,598
    )Interest expense
    
    
    (2,091
    )
    
    
    (2,342
    )Loss from ordinary activities before income taxes
    
    
    1,528
    
    
    
    (10,169
    )Income tax expense
    
    
    
    
    
    
    Non controlling interest
    
    
    (17
    )
    
    
    117Total net income/(loss)
    
    
    1,511
    
    
    
    (10,052
    )
 (1)
    
    Our first quarter of 2006 segment results have been represented to confirm with the
presentation adopted in 2006. Previously, interest revenue and non-controlling interest were
allocated to the corporate segment. Amounts associated with these line items are now included
in each operating segments result.
 Management Discussion and Analysis     INTEROIL CORPORATION     13




---



##### 



Midstream Financial Results Analysis Comparing First Quarter of 2007 and 2006
   
    
    An increase to Gross Margin of $10.7 million for first quarter 2007 when compared to
first quarter 2006 was primarily due to a combination of movements in the following:
  +
    
    Improved yield structure+
    
    Reduced fuel consumption+
    
    Decreased fuel cost+
    
    Improved premiums negotiated on export products+
    
    Decreased direct operating costs+
    
    Increased risk management activity (subject to hedge accounting)
  +
    
    Improved Mops Naphtha pricing versus benchmark crude−
    
    Decreased Mops LSWR pricing versus benchmark crude−
    
    Decreasing IPP sales price environment (first quarter 2007) versus increasing IPP
sales price environment (first quarter 2006)−
    
    Increasing Tapis purchase price environment (first quarter 2007) versus
decreasing Tapis purchase price environment (first quarter 2006)
 
    
    $0.5 million increase in office and administration and other
expenses due to a number of factors including increased repairs
and maintenance, corporate allocations, travel costs, and
management salaries & contractor costs.
    
    $0.5 million increase to the gain on derivative contracts due to
increased price risk management activity that is deemed not to be
subject to hedge accounting, that resulted in gains.
    
    $0.9 million decrease in foreign exchange loss mainly due to
actual foreign currency transaction rates closely matching rates
entered in our accounting system, as a result of changing the
source of the rates entered in the accounting system and
negotiating improved rates on our Papua New Guinea kina to United
States dollar transactions during second half of 2006.
    
    $0.1 million increase to depreciation charge was as a result of
capital works completed in third quarter 2006 being depreciated in
first quarter 2007
    
    $0.2 million decrease in interest expense due to increased
utilization of the cash backing component of our working capital
facility balance, decreased working capital loan balances and
reduced interest on OPIC loan balances due to repayment of capital
during 2006.
 Management Discussion and Analysis     INTEROIL CORPORATION     14




---



##### 



Midstream  Refining and Marketing Quarterly Financial Results by Quarter for 2007 to date, 2006
and 2005
 Operating results
    
    2007
    
    2006
    
    2005($ thousands)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30External sales
    
    
    48,213
    
    
    
    79,634
    
    
    
    69,901
    
    
    
    84,823
    
    
    
    80,854
    
    
    
    84,891
    
    
    
    96,652
    
    
    
    95,079Inter-segment
revenue
    
    
    54,833
    
    
    
    67,894
    
    
    
    24,665
    
    
    
    21,870
    
    
    
    22,155
    
    
    
    23,597
    
    
    
    18,552
    
    
    
    19,655Interest and other
revenue
    
    
    9
    
    
    
    10
    
    
    
    121
    
    
    
    132
    
    
    
    96
    
    
    
    137
    
    
    
    69
    
    
    
    (17
    )Total segment
revenue
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625
    
    
    
    115,273
    
    
    
    114,717Cost of sales and
operating expenses
    
    
    (94,841
    )
    
    
    (138,664
    )
    
    
    (95,052
    )
    
    
    (112,108
    )
    
    
    (105,550
    )
    
    
    (112,480
    )
    
    
    (106,864
    )
    
    
    (116,958
    )Office and
administration and
other expenses
    
    
    (2,225
    )
    
    
    (2,396
    )
    
    
    (2,539
    )
    
    
    (3,969
    )
    
    
    (1,727
    )
    
    
    (1,805
    )
    
    
    (2,653
    )
    
    
    (2,910
    )Gain on derivative
contracts
    
    
    454
    
    
    
    2,233
    
    
    
    484
    
    
    
    (8
    )
    
    
    (94
    )
    
    
    576
    
    
    
    (57
    )
    
    
    Foreign exchange
gain/(loss)
    
    
    (107
    )
    
    
    433
    
    
    
    4,094
    
    
    
    1,071
    
    
    
    (963
    )
    
    
    (1,249
    )
    
    
    371
    
    
    
    (1,645
    )Earnings before
interest, taxes,
depreciation and
amortization
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070
    
    
    
    (6,796
    )Depreciation and amortization
    
    
    (2,717
    )
    
    
    (2,806
    )
    
    
    (2,699
    )
    
    
    (2,626
    )
    
    
    (2,598
    )
    
    
    (2,663
    )
    
    
    (2,663
    )
    
    
    (2,640
    )Interest expense
    
    
    (2,091
    )
    
    
    (2,478
    )
    
    
    (3,330
    )
    
    
    (2,731
    )
    
    
    (2,342
    )
    
    
    (2,755
    )
    
    
    (2,321
    )
    
    
    (2,735
    )Loss from ordinary
activities before
income taxes
    
    
    1,528
    
    
    
    3,860
    
    
    
    (4,355
    )
    
    
    (13,545
    )
    
    
    (10,169
    )
    
    
    (11,751
    )
    
    
    1,086
    
    
    
    (12,171
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non- controlling
Interest
    
    
    (17
    )
    
    
    (42
    )
    
    
    46
    
    
    
    137
    
    
    
    117
    
    
    
    129
    
    
    
    (18
    )
    
    
    332Total net
income/(loss)
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
    
    
    
    (11,839
    )
 Management Discussion and Analysis     INTEROIL CORPORATION     15




---



##### 



MIDSTREAM LIQUEFACTION QUARTER IN REVIEW
 Midstream Liquefaction Operating Review
    Midstream Liquefaction Quarterly Financial Results
  MidstreamLiquefaction  Operating results
    
    Quarters ended March 31,($ thousands)
    
    2007
    
    2006(1)External sales
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    Total segment revenue
    
    
    
    
    
    
    Cost of sales and operating expenses
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (322
    )
    
    
    Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (322
    )
    
    
    Depreciation and amortization
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    Loss from ordinary activities before income taxes
    
    
    (322
    )
    
    
    Income tax expense
    
    
    
    
    
    
    Total net loss
    
    
    (322
    )
    
    
    
 (1)
    
    Our liquefaction segment was formed in third quarter of 2006 and as a result there is no
comparative information for first quarter of 2006. The liquefaction segment is in its early
stage of development.
 Midstream Liquefaction Quarterly Financial Results Analysis for First Quarter of 2007
  Management Discussion and Analysis     INTEROIL CORPORATION     16




---



##### 



Midstream Liquefaction Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Midstream Liquefaction Operating results
    
    2007
    
    2006
    
    2005($ thousands)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary
activities before
income taxes
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net income/(loss)
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Management Discussion and Analysis     INTEROIL CORPORATION     17




---



##### 



DOWNSTREAM QUARTER IN REVIEW
 Downstream Business Summary
  
   Downstream Operating Review
 Quarters ended March 31,Key Downstream Metrics
    
    2007
    
    2006Net income ($ millions)
    
    $
    2.1
    
    
    
    ($0.3
    )EBITDA ($ millions)
    
    $
    3.0
    
    
    
    ($0.3
    )Market share (1)
    
    
    68
    %
    
    
    27
    %Sales volumes (millions of liters)(2)
    
    
    122.7
    
    
    
    44.6Cost of distribution per liter ($  per liter)(3)
    
    $
    0.03
    
    
    $
    0.05
 
 (1)
    
    Market share has been calculated based on domestic purchases of product from the refinery
during the final quarter of each year.(2)
    
    Sales volumes reflect the actual sales volumes achieved for the year and therefore only
include the effect of the Shell acquisition from October 1, 2006.
 Management Discussion and Analysis     INTEROIL CORPORATION     18




---



##### 



(3)
    
    Cost of distribution per liter includes land based freight costs and operational costs. It
excludes depreciation and interest.
 
  Downstream Quarterly Financial Results for First Quarter of, 2007 and 2006
  Downstream  Operating results
    
    Quarters ended March 31,($ thousands)
    
    2007
    
    2006(1)External sales
    
    
    77,705
    
    
    
    27,775Inter-segment revenue
    
    
    20
    
    
    
    Interest and other revenue
    
    
    87
    
    
    
    32Total segment revenue
    
    
    77,812
    
    
    
    27,807Cost of sales and operating expenses
    
    
    (71,608
    )
    
    
    (26,801
    )Office and administration and other expenses
    
    
    (3,176
    )
    
    
    (1,333
    )Earnings before interest, taxes, depreciation and
amortization (unaudited)
    
    
    3,028
    
    
    
    (327
    )Depreciation and amortization
    
    
    (456
    )
    
    
    (62
    )Interest expense
    
    
    (39
    )
    
    
    (38
    )Income from ordinary activities before income taxes
    
    
    2,533
    
    
    
    (427
    )Income tax expenses
    
    
    (483
    )
    
    
    145Total net income
    
    
    2,050
    
    
    
    (282
    )
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell Papua
New Guinea Limited in Q4 2006 and as a result the first quarter of 2006 balances do not
contain results of Shell operations. Therefore these results are not comparable.(2)
    
    Our first quarter of 2006 has been represented to confirm with the presentation adopted in
year ended December 31, 2006. Previously, interest revenue and non-controlling interest were
allocated to the corporate segment. Amounts associated with these line items are now included
in each operating segments result.
 Management Discussion and Analysis     INTEROIL CORPORATION     19




---



##### 



Downstream Financial Results Analysis Comparing First Quarter of, 2007 and 2006
   
    
    $5.1 million increase in Gross Margin of for first quarter of 2007 over first quarter of
2006 was mainly on account of increased volumes resulting from the Shell Acquisition and
increased domestic demand, coupled with a net positive effect on Gross Margin due to IPP
price movements as applied to existing inventory. Price changes that affected first
quarter 2006 on average were less favorable compared to the same period in 2007.
    
    $1.8 million increase in office and administration and other expenses due to a number of
factors including, higher insurance costs as a result of the acquisition and inclusion of
the Shell business and expansion of the aviation business, higher corporate allocations,
increased repairs and maintenance costs, and increased travel costs.
    
    $0.4 million increase in depreciation expense over first quarter of 2006 related
primarily to the addition of the Shell assets on October 1 and the completion of the 2
million liter East Sepik tank project in third quarter of 2006.
    
    $0.6 million increase in income tax expense during the quarter.
 Downstream Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Downstream  Operatingresults
    
    2007
    

2006
    
    2005($ thousands)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30External sales
    
    
    77,705
    
    
    
    90,695
    
    
    
    39,451
    
    
    
    37,955
    
    
    
    27,775
    
    
    
    39,192
    
    
    
    32,140
    
    
    
    29,933Inter-segment revenue
    
    
    20
    
    
    
    (29
    )
    
    
    43
    
    
    
    8
    
    
    
    
    
    
    
    (437
    )
    
    
    313
    
    
    
    129Interest and other revenue
    
    
    87
    
    
    
    1,324
    
    
    
    33
    
    
    
    32
    
    
    
    32
    
    
    
    289
    
    
    
    (4
    )
    
    
    (69
    )Total segment revenue
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044
    
    
    
    32,449
    
    
    
    29,993Cost of sales and operating
expenses
    
    
    (71,608
    )
    
    
    (87,521
    )
    
    
    (35,743
    )
    
    
    (33,447
    )
    
    
    (26,801
    )
    
    
    (34,933
    )
    
    
    (28,863
    )
    
    
    (26,382
    )Office and administration
and other expenses
    
    
    (3,176
    )
    
    
    (3,326
    )
    
    
    (1,830
    )
    
    
    (989
    )
    
    
    (1,333
    )
    
    
    (148
    )
    
    
    (1,064
    )
    
    
    (1,061
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (327
    )
    
    
    3,963
    
    
    
    2,522
    
    
    
    2,550Depreciation and amortization
    
    
    (456
    )
    
    
    (537
    )
    
    
    (222
    )
    
    
    (90
    )
    
    
    (62
    )
    
    
    (55
    )
    
    
    (55
    )
    
    
    (52
    )Interest expense
    
    
    (39
    )
    
    
    (36
    )
    
    
    (38
    )
    
    
    (39
    )
    
    
    (38
    )
    
    
    (44
    )
    
    
    (42
    )
    
    
    (140
    )Income from ordinary
activities before income
taxes
    
    
    2,533
    
    
    
    570
    
    
    
    1,694
    
    
    
    3,430
    
    
    
    (427
    )
    
    
    3,865
    
    
    
    2,425
    
    
    
    2,358Income tax expense
    
    
    (483
    )
    
    
    (997
    )
    
    
    (416
    )
    
    
    (1,004
    )
    
    
    145
    
    
    
    (1,063
    )
    
    
    (965
    )
    
    
    (569
    )Total net income/(loss)
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460
    
    
    
    1,789
 Management Discussion and Analysis     INTEROIL CORPORATION     20




---



##### 



CORPORATE QUARTER IN REVIEW
 Corporate Restated Quarterly Financial Results for First Quarter of 2007 and 2006
  Quarters ended March 31,Corporate  Operating results
    
    2007
    
    2006($ thousands)
    
    (restated)(5)
    
    (restated)External sales elimination
    
    
    
    
    
    
    Inter-segment revenue elimination(1)
    
    
    (54,853
    )
    
    
    (22,154
    )Interest revenue
    
    
    487
    
    
    
    125Other unallocated revenue
    
    
    
    
    
    
    50Total segment revenue
    
    
    (54,366
    )
    
    
    (21,979
    )Cost of sales and operating expenses elimination(1)
    
    
    54,220
    
    
    
    22,156Office and administration and other expenses(2)
    
    
    (1,785
    )
    
    
    (1,498
    )Earnings before interest, taxes, depreciation and
amortization (unaudited)
    
    
    (1,931
    )
    
    
    (1,321
    )Depreciation and amortization(3)
    
    
    21
    
    
    
    21Interest expense(4)
    
    
    (2,352
    )
    
    
    (285
    )Income from ordinary activities before income taxes
    
    
    (4,262
    )
    
    
    (1,585
    )Income tax expenses
    
    
    (13
    )
    
    
    (20
    )Non-controlling interest
    
    
    
    
    
    
    2Total net income
    
    
    (4,275
    )
    
    
    (1,603
    )
 (1)
    
    Represents the elimination upon consolidation of our refinery sales to other segments and
other minor inter-company product sales and administration service fees.(2)
    
    Includes the elimination of inter-segment administration service fees.(3)
    
    Represents the amortization of a portion of costs capitalized to assets on consolidation.(4)
    
    Includes the elimination of interest accrued between segments.(5)
    
    Our first quarter of 2006 segment results have been represented to confirm with the
presentation adopted in year ended 2006. Previously, interest revenue and non-controlling
interest were allocated to the corporate segment. Amounts associated with these line items
are now included in each operating segments result. Corporate Annual Results Analysis Comparing First Quarter of, 2007 and 2006
  
    
    $2.1 million increase in interest expense primarily relating to the additional
borrowings made under the secured loan facility entered into in May 2006.
    
    $0.6 million increase in stock compensation expense recognized in office &
administration and other expenses.
    
    $0.6 million decrease in net income during first quarter of 2007 due to intra-group
elimination on account of midstream profit included in downstream inventory. There was no
such adjustment in first quarter of 2006 as the refinery started generating profits in
forth quarter of 2006.
 Management Discussion and Analysis     INTEROIL CORPORATION     21




---



##### 



Corporate Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Corporate  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands) (restated)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30Inter-segment revenue
elimination
    
    
    (54,853
    )
    
    
    (67,864
    )
    
    
    (24,708
    )
    
    
    (21,878
    )
    
    
    (22,154
    )
    
    
    (23,160
    )
    
    
    (18,865
    )
    
    
    (19,757
    )Interest revenue
    
    
    487
    
    
    
    457
    
    
    
    554
    
    
    
    (1,194
    )
    
    
    125
    
    
    
    96
    
    
    
    118
    
    
    
    130Other unallocated revenue
    
    
    
    
    
    
    (50
    )
    
    
    22
    
    
    
    (23
    )
    
    
    50
    
    
    
    (243
    )
    
    
    86
    
    
    
    155Total segment revenue
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,981
    )
    
    
    (23,307
    )
    
    
    (18,661
    )
    
    
    (19,472
    )Cost of sales and operating
expenses elimination
    
    
    54,220
    
    
    
    66,649
    
    
    
    24,708
    
    
    
    21,878
    
    
    
    22,156
    
    
    
    24,240
    
    
    
    17,805
    
    
    
    19,861Office and administration
and other expenses
    
    
    (1,785
    )
    
    
    (1,491
    )
    
    
    (1,429
    )
    
    
    (2,553
    )
    
    
    (1,498
    )
    
    
    (1,767
    )
    
    
    (2,595
    )
    
    
    (384
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )
    
    
    5Depreciation and amortization
    
    
    21
    
    
    
    22
    
    
    
    24
    
    
    
    26
    
    
    
    21
    
    
    
    116
    
    
    
    (13
    )
    
    
    (5
    )Interest expense
    
    
    (2,352
    )
    
    
    (3,131
    )
    
    
    (1,981
    )
    
    
    (838
    )
    
    
    (285
    )
    
    
    (196
    )
    
    
    (90
    )
    
    
    (119
    )Income from ordinary
activities before income
taxes
    
    
    (4,262
    )
    
    
    (5,408
    )
    
    
    (2,810
    )
    
    
    (4,582
    )
    
    
    (1,585
    )
    
    
    (914
    )
    
    
    (3,554
    )
    
    
    (119
    )Income tax expense
    
    
    (13
    )
    
    
    (10
    )
    
    
    125
    
    
    
    (166
    )
    
    
    (20
    )
    
    
    20
    
    
    
    (20
    )
    
    
    (64
    )Non-controlling interest
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    1
    
    
    
    4
    
    
    
    Total net income/(loss)
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
    
    
    (183
    )
 Management Discussion and Analysis     INTEROIL CORPORATION     22




---



##### 



LIQUIDITY AND CAPITAL RESOURCES
 Summary of Cash Flows for First Quarter of, 2007 and 2006
 Quarters ended March 31,($ thousands) (restated)
    
    2007
    
    2006Net cash inflows/(outflows) from:Operations
    
    
    (4,979
    )
    
    
    8,167Investing
    
    
    (6,913
    )
    
    
    (21,356
    )Financing
    
    
    4,313
    
    
    
    (7,978
    )Net cash movement
    
    
    (7,579
    )
    
    
    (21,167
    )Opening cash
    
    
    31,681
    
    
    
    59,602Closing cash
    
    
    24,102
    
    
    
    38,435
 Operating Activities
  
    
    Our cash used in operations, prior to changes in non-cash working
capital increased, by $7.4 million. This is primarily due to
reduction in the net loss of $8.6 million, $3.1 million increase
in oil and gas properties expensed and higher non-cash interest on
secured loan facility of $1.5 million during the period. These
increases has been partly offset decrease in inventory revaluation
of $3.9 million, lower impairment of plant and equipment of $0.8m
and lower accretion of discount on indirect participation interest
of $1.5 million.
    
    Our non-cash working capital provided a cash outflow from
operations of $9.4 million in first quarter of 2007 as compared to
contributing $11.1 million to the cash inflows in first quarter of
2006. This change of $20.5 million is primarily attributable to a
decrease in our accounts payable, accrued liabilities and income
tax payable creating a cash outflow of $14.3 million, $30.9
million relating to an increase in inventories and an offsetting
decrease in trade receivables of $23.0 million.
 Investing Activities
  
    
    $11.7 million on oil and gas exploration expenditure in first quarter of 2007 relating to Elk extended well program
versus $0.5 million in first quarter of 2006 mainly related to drilling and seismic activities and $11.2 million
applied against indirect participation interest. The Elk extended well program is not directly covered by the initial
indirect participation interest contributions. Therefore, separate cash calls for the IPI investors share of these
costs have been made.
    
    $9.9 million received from IPI investors for cash calls on Elk extended well program.
    
    $5.6 million increase in our secured cash balances in first quarter of 2007 versus a decrease of $2.5 million in first
quarter of 2006.
    
    $1.8 million as part payment in first quarter of 2007 to acquire Shell Papua New Guinea as compared to $4.5m payment in
first quarter of 2006 as deposit on acquisition of Shell which was effective October 1, 2006.
    
    $0.6 million on plant and equipment in first quarter of 2007 mainly on downstream projects versus $4.8 million in first
quarter of 2006 which is primarily related to the revamp and optimization activities undertaken by the refinery.
 Management Discussion and Analysis     INTEROIL CORPORATION     23




---



##### 




    
    $2.0 million of proceeds from PNG LNG cash call in relation to the natural gas segment preliminary expenses
 Financing Activities
  
    
    $4.2 million of proceeds from the BNP working capital facility as compared to repayment of
$9.4 million during first quarter of 2006.
 Capital Expenditures
 Upstream Capital Expenditures
  
    
    $4.9 million for seismic acquisition costs relating to Elk extended well program
    
    $5.4 million on drilling Elk  2 appraisal well as part of the Elk extended well program
    
    Fixed assets and inventory movement made up rest of the expenditure.
  Midstream Capital Expenditures
  Downstream Capital Expenditures
  Sources of Capital
 Upstream
  Midstream
  Management Discussion and Analysis     INTEROIL CORPORATION     24




---



##### 



Downstream
  Corporate
  Capital Requirements
  Upstream
   Management Discussion and Analysis     INTEROIL CORPORATION     25




---



##### 



Midstream
  Downstream
  Contractual Obligations and Commitments
  Payments Due by PeriodContractual obligations($ thousands)
    
    Total
    
    Lessthan 1 year
    
    1  2years
    
    2  3years
    
    3  4years
    
    4  5 years
    
    More than 5 yearsSecured loan obligations
    
    
    199,174
    
    
    
    13,500
    
    
    
    132,174
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500Accrued financing costs
    
    
    1,450
    
    
    
    725
    
    
    
    725
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of subsidiary
    
    
    863
    
    
    
    863
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(1)
    
    
    1,924
    
    
    
    1,117
    
    
    
    807
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(2)
    
    
    96,086
    
    
    
    
    
    
    
    96,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention
licenses(3)
    
    
    5,237
    
    
    
    1,877
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    304,734
    
    
    
    18,082
    
    
    
    233,153
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500
 (1)
    
    These amounts represent the estimated cost of completing our commitment to drill exploration
wells under our indirect participation interest agreement entered into in July 2003. See Note
18 to our unaudited financial statements for the quarter ended March 31, 2007.(2)
    
    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 March 31, 2007, management estimate that a
further $48,171,000 will be required to be spent to fulful this commitment.(3)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents the
amount InterOil has committed to spend to its joint venture partners. In addition to this
amount, InterOil must drill an exploration well in Petroleum Prospecting License 237 prior to
the end of March 2009 in order to retain this license. As the cost of drilling this well
cannot be estimated, it is not included within the above table. Off Balance Sheet Arrangements
  Management Discussion and Analysis     INTEROIL CORPORATION     26




---



##### 



Transactions with Related Parties
    Share Capital
  Share Capital
    
    Number of SharesBalance December 31, 2005
    
    
    29,163,320Shares issued on exercise of options
    
    
    132,285Shares issued on amendment of indirect participation interest (PNGDV)
    
    
    575,575Balance December 31, 2006
    
    
    29,871,180Shares issued on conversion of indirect participation interest
    
    
    26,667Shares issued on conversion of warrants
    
    
    2,995Balance March 31, 2007
    
    
    29,900,842Remaining stock options authorized
    
    
    1,021000Remaining shares issuable upon exercise of warrants
    
    
    337,252Remaining conversion rights authorized(1)
    
    
    3,306,667Other
    
    
    5,000Balance March 31, 2007 Diluted
    
    
    34,570,761
 
 (1)
    
    In 2005, we sold indirect participation working interests in our exploration program. Some
of the investors under our indirect participation interest agreement entered into in February
2005 have the right to convert, under certain circumstances, their interest to our common
shares. If 100% of the investors under our indirect participation interest agreement choose
to convert their interests, we would be required to issue an additional 3,306,667 common
shares. Derivative Instruments
  Management Discussion and Analysis     INTEROIL CORPORATION     27




---



##### 



Derivative
    
    Type
    
    Notional volumes (bbls)Crude swap
    
    Buy crude
    
    150,000Naphtha swap
    
    Sell Naphtha
    
    250,000
  CRITICAL ACCOUNTING ESTIMATES
  Management
Discussion and Analysis     INTEROIL
CORPORATION




---



##### 



NEW ACCOUNTING STANDARDS
  Management
Discussion and Analysis     INTEROIL CORPORATION




---



##### 



NON-GAAP MEASURES RECONCILIATION
  Quarters ended
    
    2007
    
    2006(1) ,(2)
    
    2005(1)($ thousands) (restated)
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30Upstream
    
    
    (4,009
    )
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )
    
    
    (13,333
    )
    
    
    (1,134
    )Midstream  Refining and
Marketing
    
    
    6,335
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )
    
    
    6,070
    
    
    
    (6,796
    )Midstream  Liquefaction
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522
    
    
    
    2,550Corporate & Consolidated
    
    
    (1,930
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )
    
    
    (3,451
    )
    
    
    5Earnings before interest,
taxes, depreciation and
amortization
    
    
    3,102
    
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )
    
    
    (8,192
    )
    
    
    (5,375
    )Subtract:Upstream
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    (6
    )
    
    
    2
    
    
    
    2Midstream  Refining
and Marketing
    
    
    2,091
    
    
    
    2,479
    
    
    
    3,329
    
    
    
    2,731
    
    
    
    2,343
    
    
    
    2,756
    
    
    
    2,320
    
    
    
    2,735Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    40
    
    
    
    37
    
    
    
    38
    
    
    
    39
    
    
    
    38
    
    
    
    44
    
    
    
    42
    
    
    
    140Corporate & Consolidated
    
    
    2,351
    
    
    
    3,131
    
    
    
    1,981
    
    
    
    838
    
    
    
    285
    
    
    
    195
    
    
    
    91
    
    
    
    119Interest expense
    
    
    4,482
    
    
    
    5,649
    
    
    
    5,349
    
    
    
    3,609
    
    
    
    2,667
    
    
    
    2,989
    
    
    
    2,455
    
    
    
    2,996Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream  Refining
and Marketing
    
    
    17
    
    
    
    42
    
    
    
    (46
    )
    
    
    (137
    )
    
    
    (118
    )
    
    
    (129
    )
    
    
    19
    
    
    
    (333
    )Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    483
    
    
    
    996
    
    
    
    416
    
    
    
    1,005
    
    
    
    (144
    )
    
    
    1,062
    
    
    
    965
    
    
    
    570Corporate & Consolidated
    
    
    14
    
    
    
    11
    
    
    
    (126
    )
    
    
    163
    
    
    
    17
    
    
    
    (23
    )
    
    
    16
    
    
    
    64Income taxes &
non-controlling interest
    
    
    514
    
    
    
    1,049
    
    
    
    244
    
    
    
    1,031
    
    
    
    (245
    )
    
    
    910
    
    
    
    1,000
    
    
    
    301Upstream
    
    
    309
    
    
    
    233
    
    
    
    202
    
    
    
    173
    
    
    
    198
    
    
    
    96
    
    
    
    213
    
    
    
    2Midstream  Refining
and Marketing
    
    
    2,717
    
    
    
    2,805
    
    
    
    2,700
    
    
    
    2,626
    
    
    
    2,598
    
    
    
    2,662
    
    
    
    2,663
    
    
    
    2,641Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    455
    
    
    
    537
    
    
    
    222
    
    
    
    89
    
    
    
    62
    
    
    
    55
    
    
    
    55
    
    
    
    51Corporate & Consolidated
    
    
    (21
    )
    
    
    (21
    )
    
    
    (24
    )
    
    
    (26
    )
    
    
    (20
    )
    
    
    (113
    )
    
    
    12
    
    
    
    5Depreciation & amortization
    
    
    3,460
    
    
    
    3,554
    
    
    
    3,100
    
    
    
    2,862
    
    
    
    2,838
    
    
    
    2,700
    
    
    
    2,943
    
    
    
    2,699Upstream
    
    
    (4,318
    )
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,548
    )
    
    
    (1,138
    )Midstream  Refining and
Marketing
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
    
    
    
    (11,839
    )Midstream  Liquefaction
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460
    
    
    
    1,789Corporate & Consolidated
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
    
    
    (183
    )Net income (loss) per segment
    
    
    (5,354
    )
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )
    
    
    (14,590
    )
    
    
    (11,371
    )
 Management
Discussion and Analysis     INTEROIL
CORPORATION




---



##### 



(1)
    
    Our comparative quarterly results for all quarters during 2005 and 2006 have been represented
to conform with the presentation adopted at December 31, 2006. Previously, interest revenue
and non-controlling interest were allocated to the corporate segment. Amounts associated with
these line items are now included in each operating segments result.(2)
    
    Our September 2006 quarterly results have been represented to separate out our
Midstream-Liquefaction segment from the Midstream Refining and Marketing segment. PUBLIC SECURITIES FILINGS
 www.sedar.com www.sec.gov
 GLOSSARY OF TERMS
 Barrel, Bbl (petroleum)
 Condensate
 Crack spread
 EBITDA
 Farmout
 Feedstock
 GAAP
 Gross Margin
 IPP
 Management
Discussion and Analysis     INTEROIL
CORPORATION




---



##### 



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