##### 



EXHIBIT 4
 InterOil CorporationRevised Management Discussion and AnalysisFor the Year Ended December 31, 2006October 29, 2007
    
    (INTEROIL LOGO)
 TABLE OF CONTENTS
 Overview
    
    
    3Non-Gaap Measures
    
    
    3Legal Notice  Risk Factors And Forward-Looking Statements
    
    
    4Business Environment
    
    
    5Risk Management
    
    
    8Business Strategy
    
    
    10Financial Results
    
    
    12Year In Review
    
    
    16Midstream Refining And Marketing Year In Review
    
    
    19Midstream Liquefaction Year In Review
    
    
    24Downstream Year In Review
    
    
    25Corporate Year In Review
    
    
    29Liquidity And Capital Resources
    
    
    30Critical Accounting Estimates
    
    
    36New Accounting Standards
    
    
    38Non-Gaap Measures Reconciliation
    
    
    40Statement Regarding Disclosure Controls
    
    
    41Public Securities Filings
    
    
    41Glossary Of Terms
    
    
    41
    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 driver
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
 InterOil is a vertically integrated energy company with business segments through the whole
hydrocarbon supply chain. InterOil is therefore exposed to the usual hydrocarbon production,
refining and marketing business environment and regulatory regime of the hydrocarbon industry.
Following is a summary of the hydrocarbon business environment to which InterOil is exposed.
 Competitive Environment and Regulated Pricing
   Interest Rates
 
    Skill and Resource Scarcity
  Management Discussion and Analysis INTEROIL CORPORATION 5




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Crude Prices
  Refining Margin
 
    Exchange Rates
  Management Discussion and Analysis INTEROIL CORPORATION 6




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Domestic Demand
 
    Impact of Key Factors on Earnings
  Annual Net Earnings ImpactFactor(1)(2)
    
    Change (+)
    
    (thousands of dollars)
    
    ($/share)(3)Change in domestic demand
    
    
    1
    %
    
    
    383
    
    
    
    0.01Change in hydro-skimming margin
    
    $1.00/bbl
    
    
    
    6,655
    
    
    
    0.22Change in IPP pricing margin
for retail and distribution
business
    
    0.01 PGK/litre
    
    
    
    1,815
    
    
    
    0.06Change in LIBOR rate
    
    
    1
    %
    
    
    730
    
    
    
    0.03
 
 (1)
    
    The impact of a change in one factor may be compounded or offset by changes in other factors.
This table does not consider the impact of any inter-relationship among the factors.(2)
    
    The impact of these factors is illustrative and based off of sales and borrowings made during
the 2006 year.(3)
    
    Per share amounts are based on the number of shares outstanding at December 31, 2006. Management Discussion and Analysis INTEROIL CORPORATION 7




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RISK MANAGEMENT
 Risk Factors
 www.sedar.com.
 InterOils Risk Profile
  Business Risks
    Operational Risks
    Management Discussion and Analysis INTEROIL CORPORATION 8




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Market Risks
    Regulatory Risks
   Management Discussion and Analysis INTEROIL CORPORATION 9




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BUSINESS STRATEGY
  Q:
 A:
 Summary of Strategic Priorities
  StrategicPriorities
    
    2006 Progress
    
    2007 InitiativesCapitalize on and
Expand on the
Existing Business
Assets
    
    ü   Completed
refinery optimization
project, which
included the
installation of new
generators and
modifications of the
furnaces and boilers
to improve
reliability and
reduce fuel costs.ü   Secured a
contract to provide
InterOil Power Fuel
to Papua New Guineas
Moitaka Power
Station.
    
    ü   Evaluate
feasibility of
improvements,
modifications and
additional equipment
to improve
flexibility and
profitability of the
refinery.ü   Continue to
seek out potential
markets for InterOil
Power Fuel and
distillate export
opportunities to
increase contribution
to fixed costs.ü    Cost
reduction program
targeting 10%
reduction.
 Management Discussion and Analysis INTEROIL CORPORATION 10




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StrategicPriorities
    
    2006 Progress
    
    2007 InitiativesTarget Acquisitions
and Growth
Opportunities in
Papua New Guinea and
the Surrounding Area
    
    ü   Finalized
the terms of acquisition
for Shell Papua New
Guineas distribution
network. The Shell
Papua New Guinea
business was
transferred to
InterOil on October
1.ü   Examined
other potential
downstream growth
opportunities.ü   Progressed
discussions for
liquefied natural gas
opportunity in Papua
New Guinea with
government and other
potential partners.
    
    ü    Pursue
opportunities to
purchase a business
or assets in the
business of
distributing fuel to
the aviation sector.ü    Pursue other
potential downstream
growth opportunities.ü    Sign a
shareholder agreement
relating to the LNG
opportunity in Papua
New Guinea and begin
taking steps to
advance project.ü    Finalize FEED
decision and
development plans for
LNG project.Position InterOil for
Long-Term Oil and Gas
Business Success
    
    ü   Made
potential gas and
condensate discovery
at Elk location on
existing Petroleum
Prospecting License
238.ü   Conducted
seismic and airborne
gravity and magnetic
surveys on licenses
to expand knowledge
base of existing
prospects and to
identify new
prospects.
    
    ü   Obtain
further information
about the Elk
structure by drilling
the Elk-2 appraisal
well and conducting
100 miles of
appraisal seismic.ü    Conduct
detailed 2D seismic
surveys over the Elk
discovery and lead
on-trend with the Elk
discovery that have
been identified from
seismic data and
airborne
gravity/magnetic
surveys acquired by
the company to date.
 Management Discussion and Analysis INTEROIL CORPORATION 11




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FINANCIAL RESULTS
 Summary of Consolidated Annual Financial Results
 Annual Consolidated Financial Results
  Years ended December 31,Consolidated  Operating results
    
    2006
    
    2005
    
    2004(2)($ thousands, unless otherwise indicated)
    
    (restated)(1)
    
    (restated)Sales and operating revenues
    
    
    511,088
    
    
    
    481,181
    
    
    
    70,644Interest revenue
    
    
    3,224
    
    
    
    1,831
    
    
    
    382Other non-allocated revenue
    
    
    3,748
    
    
    
    528
    
    
    
    196Total revenue
    
    
    518,060
    
    
    
    483,540
    
    
    
    71,222Cost of sales and operating expenses
    
    
    (499,495
    )
    
    
    (467,247
    )
    
    
    (65,344
    )Office and administration and other expenses
    
    
    (24,834
    )
    
    
    (23,296
    )
    
    
    (14,701
    )Exploration costs
    
    
    (6,177
    )
    
    
    (11,009
    )
    
    
    (2,903
    )Exploration impairment
    
    
    (1,647
    )
    
    
    (19,570
    )
    
    
    (35,567
    )Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (14,094
    )
    
    
    (37,582
    )
    
    
    (47,293
    )Depreciation and amortization
    
    
    (12,353
    )
    
    
    (11,037
    )
    
    
    (639
    )Interest expense
    
    
    (17,273
    )
    
    
    (10,987
    )
    
    
    (3,203
    )Loss from ordinary activities before income taxes
    
    
    (43,720
    )
    
    
    (59,606
    )
    
    
    (51,135
    )Income tax expense
    
    
    (2,343
    )
    
    
    (2,832
    )
    
    
    (1,875
    )Non-controlling interest
    
    
    264
    
    
    
    368
    
    
    
    70Total net loss(3)
    
    
    (45,799
    )
    
    
    (62,070
    )
    
    
    (52,940
    )Net loss per share (dollars)
    
    
    (1.55
    )
    
    
    (2.15
    )
    
    
    (2.09
    )Net loss per diluted share (dollars)
    
    
    (1.55
    )
    
    
    (2.15
    )
    
    
    (2.09
    )Total assets
    
    
    505,239
    
    
    
    432,897
    
    
    
    385,842Non current liabilities
    
    
    283,306
    
    
    
    178,968
    
    
    
    101,222Cash flows provided by/(used in) operations
    
    
    2,187
    
    
    
    (22,713
    )
    
    
    (76,864
    )Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
  (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell PNG
Limited on October 1, 2006 and information in this table includes the results of the Shell
business from this date.(2)
    
    Our refinery began commercial operations on January 1, 2005. During 2004 we were still
constructing and commissioning our refinery and the costs associated with the construction and
commissioning of our refinery were capitalized rather than expensed. As a result of our
refinery not having any commercial operations in 2004, our 2004 to 2005 and 2006 results are
not comparable. In addition, our wholesale and retail distribution business segment was
acquired on April 28, 2004 and only operated for eight months during 2004. As a result of our
downstream results not having a full year operations in 2004, our 2004 to 2005 and 2006
results are not comparable.(3)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table. Management Discussion and Analysis INTEROIL CORPORATION 12




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Annual Restated Consolidated Financial Result Analysis
  Consolidated results analysis for year ended December 31, 2006 compared to year ended December 31,
2005
   ü
    
    Lower G&G expenses by $4.8 million in our Upstream segment and lower exploration
impairment of $17.9 million as prior year impairment mainly consisted of Black Bass and
Triceratops prospects which were abandoned in 2005.ü
    
    The refinery operations experienced a gross margin improvement of $0.5 million between
2005 and 2006. Although the gross margin suffered in the first half of 2006 due to shut
down days, the positive impact of the revamp and optimization efforts have resulted in a
net improvement for the year.ü
    
    In addition, the midstream operations experienced a $4.6 million exchange gain in 2006
as compared to a $1.4 million exchange loss in 2005 which partially resulted from the
strengthening of the PGK against the USD. During the year we negotiated improved rates on
our PGK to USD transactions.ü
    
    The refinery experienced higher interest expense in 2006 as a result of market increases
in the cost of crude feedstock being financed, increases in the LIBOR indicator rates and
increases to the volume of inventory on hand during the optimization shutdown.ü
    
    During 2006 we started our midstream liquefaction segment and up to the end of 2006 we
had incurred $0.7 million of costs relating to the preliminary stages of a liquefied
natural gas plant project.ü
    
    Our downstream business had a $0.7 million increase in depreciation expense, primarily
due to the acquisition of Shell Papua New Guinea on October 1, 2006.ü
    
    During the year, we recognized a $0.8 million loss on the impairment of one of our two
barges. One of these barges was sold during the year.ü
    
    Our interest expense for the year has increased as a result of the $130 million secured
loan financing.ü
    
    We incurred a $1.9 million expense relating to the amendment of the PNG Drilling
Ventures indirect participation interest agreement.
 Management Discussion and Analysis INTEROIL CORPORATION 13




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Summary of Consolidated Quarterly Financial Results
 Quarterly Consolidated Financial Results
  Quarters ended
    
    2006 (restated)(1), (2)
    
    2005 (restated)(1),($ thousands unless statedotherwise)
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31Sales and operating revenues
    
    
    172,776
    
    
    
    110,982
    
    
    
    124,409
    
    
    
    109,892
    
    
    
    125,216
    
    
    
    129,465
    
    
    
    125,275
    
    
    
    103,584Upstream
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854
    
    
    
    404
    
    
    
    37
    
    
    
    Midstream  Refining and Marketing
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625
    
    
    
    115,273
    
    
    
    114,717
    
    
    
    98,051Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,808
    
    
    
    39,044
    
    
    
    32,449
    
    
    
    29,993
    
    
    
    23,715Corporate & Consolidated
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,980
    )
    
    
    (23,307
    )
    
    
    (18,661
    )
    
    
    (19,472
    )
    
    
    (18,182
    )Earnings before interest, taxes,
depreciation and amortization (unaudited)
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )
    
    
    (8,192
    )
    
    
    (5,375
    )
    
    
    (4,346
    )Upstream
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )
    
    
    (13,333
    )
    
    
    (1,134
    )
    
    
    (91
    )Midstream  Refining and Marketing
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,230
    )
    
    
    (6,333
    )
    
    
    6,070
    
    
    
    (6,796
    )
    
    
    (3,405
    )Midstream  Liquefaction
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522
    
    
    
    2,550
    
    
    
    584Corporate & Consolidated
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,322
    )
    
    
    (834
    )
    
    
    (3,451
    )
    
    
    5
    
    
    
    (1,434
    )Net income (loss) per segment(4)
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )
    
    
    (14,590
    )
    
    
    (11,371
    )
    
    
    (9,841
    )Upstream
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,548
    )
    
    
    (1,138
    )
    
    
    (96
    )Midstream  Refining and Marketing
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
    
    
    
    (11,839
    )
    
    
    (8,469
    )Midstream  Liquefaction
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460
    
    
    
    1,789
    
    
    
    382Corporate & Consolidated
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
    
    
    (183
    )
    
    
    (1,658
    )Net income (loss) per share(4)(dollars)Per Share  Basic
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )
    
    
    (0.50
    )
    
    
    (0.39
    )
    
    
    (0.36
    )Per Share  Diluted
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )
    
    
    (0.50
    )
    
    
    (0.39
    )
    
    
    (0.36
    )
 
 (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
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 14




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Quarterly Restated Consolidated Financial Results Analysis
 Consolidated results analysis for three Months to December 2006 versus three Months to December
2005
 
  ü
    
    Our upstream operations incurred lower G&G expenses and exploration impairment in fourth
quarter of 2006 as compared to same period of 2005 resulting in an improvement of net loss
by 15.6 million for the segment. The higher exploration impairment in fourth quarter of
2005 related to Triceratops prospects which was plugged and abandoned.ü
    
    The refinery operations experienced a gross margin improvement of $12.9 million between
the 2005 quarter and the 2006 quarter. This is the result of the positive impact of the
revamp and optimization efforts which has resulted in a more profitable product mix in 2006
and lower associated fuel costs for the refinery. In addition, the fourth quarter of 2006
benefited from changes that we negotiated in our low sulphur waxy residue and naphtha sales
contracts.ü
    
    In addition, the midstream operations experienced a $0.4 million exchange gain in 2006
as compared to a $1.2 million exchange loss in 2005 which partially resulted from the
strengthening of the PGK against the USD. During the year we negotiated improved rates on
our PGK and USD transactions.ü
    
    The office and administration and other costs for the fourth quarter of 2006 have
decreased by approximately $1.1 million. This is largely the result of a gain on
derivative instruments that were not subject to hedge accounting.ü
    
    During 2006 we started our midstream liquefaction segment and during the fourth quarter
of 2006 we incurred $0.4 million of costs relating to the preliminary stages of a liquefied
natural gas plant project.ü
    
    Our downstream business had a $3.2 million decrease in its net income for the quarter
over the prior year. This primarily related to product pricing. The IPP dropped from 1.56
PGK (USD $0.50) in September to 1.49 PGK (USD $0.48) at the beginning of January 2007. As
the IPP declined each month, any inventory holdings purchased in preceding periods were
sold at lower IPP prices, resulting in lower margins. The effect of this was compounded by
our acquisition of Shell. Although we gained additional sales volume in the quarter, our
gross margin declined. Sales volumes for our downstream business increased from 655
kilolitres per day in the fourth quarter of 2005 to 1,472 kilolitres per day in the fourth
quarter of 2006.ü
    
    Depreciation associated with our midstream and upstream segment increased as a result of
a full quarter of depreciation being recognized on our rig and exploration warehouse and
also as the result of depreciation being recognized on the capitalized revamp costs.
  www.interoil.com www.sedar.com.
 Management Discussion and Analysis INTEROIL CORPORATION 15




---



##### 



YEAR IN REVIEW
  Upstream Year In Review
 Upstream Business Summary
  Q:
 A:
 Upstream Operating Review
 Key Upstream Metrics
    
    2006
    
    2005Wells drilled
    
    
    1
    
    
    
    2Total wells drilled in eight well indirect participation interest program
    
    
    3
    
    
    
    2Total feet drilled
    
    
    6,087
    
    
    
    12,5972D seismic miles acquired
    
    
    79
    
    
    
    100Airborne gravity and magnetic survey miles acquired
    
    
    6,244
    
    
    
    3,800Total spent on seismic acquisition ($ millions)
    
    
    6.8
    
    
    
    11.0Total spent on drilling ($ millions)
    
    
    37.9
    
    
    
    22.9
  Management Discussion and Analysis INTEROIL CORPORATION 16




---



##### 



Upstream Financial Results
 Years ended December 31,Upstream - Operating results
    
    2006
    
    2005
    
    2004(1)($ thousands)
    
    (restated)
    
    (restated)(1)External sales
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    Other non-allocated revenue
    
    
    5,249
    
    
    
    1,295
    
    
    
    113Total segment revenue
    
    
    5,249
    
    
    
    1,295
    
    
    
    113Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (5,553
    )
    
    
    (1,738
    )
    
    
    (1,648
    )Exploration costs
    
    
    (6,177
    )
    
    
    (11,009
    )
    
    
    (2,903
    )Exploration impairment
    
    
    (1,647
    )
    
    
    (19,570
    )
    
    
    (35,567
    )Impairment expense on barge sale
    
    
    (757
    )
    
    
    
    
    
    
    Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (8,885
    )
    
    
    (31,022
    )
    
    
    (40,005
    )Depreciation and amortization
    
    
    (806
    )
    
    
    (314
    )
    
    
    (13
    )Interest expense
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Loss from ordinary activities before income taxes
    
    
    (9,696
    )
    
    
    (31,336
    )
    
    
    (40,023
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (9,696
    )
    
    
    (31,336
    )
    
    
    (40,023
    )
 (1)
    
    Our 2005 and 2004 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 17




---



##### 



Upstream Restated Financial Results Analysis
   ü
    
    A decrease of $4.8 million in exploration expenses relating to the seismic
program undertaken in 2006 as more G&G costs were incurred at the start of
the eight well exploration program initiated in 2005.ü
    
    A decrease of $17.9 million in exploration impairment is the result of the
drilling and testing costs relating to the Black Bass and Triceratops wells
being expensed in 2005 whereas in 2006 the majority of the expense relates
to the acquisition of additional interests in our PRL 4 and PRL 5 licenses.ü
    
    An increase in other revenues of $3.9 million in 2006 primarily related to
the rental of our company-owned rig being charged against our indirect
participation interest at current market day rents. Because we expense the
costs of owning and maintaining this rig, the amounts charged to the
indirect participation interest liability are recognized as revenue by our
upstream business segment. The increase is also contributed by
intercompany interest revenue of $1.4m received by Upstream from Corporate
on account of the use of IPI funds. The revenue also relates to the
one-time rental of camp facilities and providing logistics support to
another exploration company.ü
    
    An increase of $2.7 million, included in office and administration and
other expenses, related to the costs of owning and maintaining the rig.ü
    
    An increase of $0.8 million for the impairment expense on a barge sale.
The Company sold one of its two barges to a third party during the year.ü
    
    An increase in depreciation expense of $0.5 million in 2006 as a result of
a full year of depreciation being recognized on the rig, offices and
warehouse which were purchased part way through 2005.
 Outlook for 2007
 2007 planned activity
 ü
    
    Drill appraisal well, Elk-2, and exploration well Antelope-1ü
    
    Conduct 100 miles of appraisal seismic over the Elk structureü
    
    Drill one well in PRL 5ü
    
    Re-enter and test the Stanley gas discovery in PRL 4
 Key factors that will affect our 2007 progress
 ü
    
    Results from Elk-2 and Antelope-1ü
    
    Ability to attract and retain staff in a competitive oil and gas industryü
    
    Conclusion of an exploration funding agreement with an industry majorü
    
    Proving sufficient gas reserves to guarantee the liquefaction project
 Management Discussion and Analysis INTEROIL CORPORATION 18




---



##### 



MIDSTREAM REFINING AND MARKETING YEAR IN REVIEW
 Midstream Refining and Marketing Business Summary
   Q:
 A:
 Midstream Refining and Marketing Operating Review
 Key Refining and Marketing Metrics
    
    2006
    
    2005Net income/(loss) ($ millions)
    
    $
    (24.0
    )
    
    $
    (30.9
    )EBITDA ($ millions)
    
    $
    (2.6
    )
    
    $
    (10.5
    )Throughput (barrels per day)(1)
    
    
    19,784
    
    
    
    23,117Cost of production per barrel(2)
    
    $
    3.46
    
    
    $
    3.09Working capital financing cost per barrel of production(2)
    
    $
    1.16
    
    
    $
    0.96Distillates as percentage of production
    
    
    65
    %
    
    
    55
    %
 
 (1)
    
    Throughput per day has been calculated excluding shut down days.(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 year.  Management Discussion and Analysis     INTEROIL CORPORATION     19




---



##### 



Optimization Efforts
  Q:
 A:
 Management Discussion and Analysis     INTEROIL CORPORATION     20




---



##### 



+
    
    Improved yield structure post shutdown+
    
    Decreased fuel consumption post shutdown+
    
    Decreased fuel cost post shutdown+
    
    Improved premiums negotiated on export products
  +
    
    Improved margins on domestic sales of distillates
    
    Decreased margins versus benchmark prices on export sales
    
    Decreasing price environment in second half versus increasing price environment in first half
    
    Decreasing benchmark refining margin (Singapore Tapis Hydroskimming)
 ü
    
    Foreign exchange gains in the second half of 2006 were $4.5 million compared to $0.1 million for the first half of
2006. During the year we negotiated improved rates on our PGK to USD transactions.
 Management Discussion and Analysis     INTEROIL CORPORATION     21




---



##### 



ü
    
    The effect of non-hedge accounted derivatives on earnings increased by $2.7 million from the first half to the second
half of 2006. During the second half of the year we introduced a new derivative instrument into our risk management
program. This instrument, coupled with the technique by which we utilize it, was deemed not to be subject to hedge
accounting and as a result all movements on these derivative contracts are recognized in the statement of operations
below the gross margin level. Realized and unrealized gains from this new risk management instrument are largely
responsible for the $2.7 million movement between the two periods.ü
    
    Borrowing costs increased by $0.7 million in the second half of 2006 due to the combination of increased LIBOR rates
on our working capital facility and increased working capital borrowing requirements as a result of the refinery
holding excess inventory through the shutdown period. These two factors were partially offset by decreased LC fees
and the increased utilization of the cash backing component of our working capital facility. The cash backing allows
us to reduce the cost of our net borrowings.ü
    
    General and administrative expenses decreased by $0.8 million between first and second half of 2006 as a result of
various cost saving initiatives undertaken by the refinery management team and a decrease in legal costs as a result
of the settlement of our dispute with Clough Niugini Limited at the end of the first half of 2006.ü
    
    Depreciation increased by $0.3 million as a direct result of the capital revamp works undertaken during the year.
 Outlook for 2007
 2006 improvements set to show full year benefit in 2007
 ü
    
    Contract premium improvements to export productsü
    
    Improvement to negotiated foreign exchange rates on PGK and USD transactionsü
    
    Improvement to working capital interest ratesü
    
    Improved product yieldsü
    
    Decreased fuel costs
 2007 Initiatives:
 ü
    
    Conduct negotiations to reduce working capital costsü
    
    Implement strategies to further improve foreign exchange ratesü
    
    Reduce direct operating costsü
    
    Eliminate unplanned downtimeü
    
    Expand niche market for InterOil Power Fuelü
    
    Reduce length of working capital cycleü
    
    Seek out and exploit operational and tax planning synergies in conjunction with the newly expanded
downstream business
 Management Discussion and Analysis     INTEROIL CORPORATION     22




---



##### 



Midstream Refining and Marketing Annual Financial Results
 MidstreamRefining and Marketing - Operating results
    
    Years ended December 31,($ thousands)
    
    2006
    
    
    2005(2)
    
    
    2004(1),(2)External sales
    
    
    315,211
    
    
    
    356,327
    
    
    
    26,310Inter-segment revenue
    
    
    136,584
    
    
    
    80,094
    
    
    
    Interest and other revenue
    
    
    360
    
    
    
    245
    
    
    
    (55
    )Total segment revenue
    
    
    452,155
    
    
    
    436,666
    
    
    
    26,255Cost of sales and operating expenses
    
    
    (451,374
    )
    
    
    (436,491
    )
    
    
    (27,686
    )Office and administration and other expenses
    
    
    (10,577
    )
    
    
    (9,747
    )
    
    
    (3,189
    )Gain on derivative contracts
    
    
    2,560
    
    
    
    542
    
    
    
    34Foreign exchange gain/(loss)
    
    
    4,636
    
    
    
    (1,434
    )
    
    
    22Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (2,600
    )
    
    
    (10,464
    )
    
    
    (4,563
    )Depreciation and amortization
    
    
    (10,729
    )
    
    
    (10,598
    )
    
    
    (312
    )Interest expense
    
    
    (10,881
    )
    
    
    (10,162
    )
    
    
    (844
    )Loss from ordinary activities before income taxes
    
    
    (24,210
    )
    
    
    (31,224
    )
    
    
    (5,719
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    Non controlling interest
    
    
    259
    
    
    
    362
    
    
    
    69Total net loss
    
    
    (23,951
    )
    
    
    (30,862
    )
    
    
    (5,650
    )
 
 (1)
    
    Our refinery began commercial operations on January 1, 2005. During 2004 we were still
constructing and commissioning our refinery and the costs associated with the construction and
commissioning of our refinery were capitalized rather than expensed. As a result of our
refinery not having any commercial operations in 2004, our 2004 to 2005 and 2006 results are
not comparable.(2)
    
    Our 2005 and 2004 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. Midstream Refining and Marketing Annual Financial Results Analysis
  ü
    
    An increase to gross margin of $0.5 million for the year was
primarily the result of the revamp improvements made in the second
half of 2006 and price risk management activities over the year.ü
    
    Higher office and administration and other expenses of $0.8
million was due to a number of factors including increased repairs
and maintenance, corporate allocations, travel costs, and
management salaries and contractor costs.ü
    
    An increase to the gain on derivative contracts of $2.0 million
due to increased price risk management activity that is deemed not
to be subject to hedge accounting.ü
    
    An increase in foreign exchange gain/(loss) of $6.1 million was
due to the strengthening of the PGK against USD and negotiating
improved rates on our PGK to USD transactions during 2006.ü
    
    Higher depreciation expense of $0.1 million was due to the
addition of depreciable assets from the refinery revamp program.ü
    
    An increase in interest expense of $0.7 million was due to
increasing LIBOR rates and increased borrowing requirements due to
higher oil prices partially offset by a decrease in line of credit
(LC) fees.
 Management Discussion and Analysis     INTEROIL CORPORATION     23




---



##### 



MIDSTREAM LIQUEFACTION YEAR IN REVIEW
 Q:
 A:
 Midstream Liquefaction Operating Review
   Midstream Liquefaction Annual Financial Results
 MidstreamRefining and Marketing - Operating results
    
    Years ended December 31,($ thousands)
    
    2006
    
    2005(1)
    
    2004(1)External sales
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    Total segment revenue
    
    
    
    
    
    
    
    
    
    
    Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (694
    )
    
    
    
    
    
    
    Earnings before interest, taxes, depreciation
and amortization (unaudited)
    
    
    (694
    )
    
    
    
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary activities before income taxes
    
    
    (694
    )
    
    
    
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (694
    )
    
    
    
    
    
    
    
 
 (1)
    
    Our liquefaction segment was formed in 2006 and as a result there is no comparative
information for 2005 and 2004. The liquefaction segment is in its early stage of development. Management Discussion and Analysis     INTEROIL CORPORATION     25




---



##### 



Midstream Liquefaction Annual Financial Results Analysis
  DOWNSTREAM YEAR IN REVIEW
 Downstream Business Summary
  Q:
 A:
  Management Discussion and Analysis     INTEROIL CORPORATION     25




---



##### 



Downstream Operating Review
 Key Downstream Metrics
    
    2006
    
    2005Net income ($ millions)
    
    $
    3.0
    
    
    $
    6.4EBITDA ($ millions)
    
    $
    6.3
    
    
    $
    9.6Market share (1)
    
    
    67
    %
    
    
    29
    %Sales volumes (millions of liters)(2)
    
    
    291.8
    
    
    
    210.4Cost of distribution per liter ($  per liter)(3)
    
    $
    0.06
    
    
    $
    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.(3)
    
    Cost of distribution per liter includes land based freight costs and operational costs. It
excludes depreciation and interest.  
  Management Discussion and Analysis     INTEROIL CORPORATION     26




---



##### 



Management Discussion and Analysis INTEROIL CORPORATION 27




---



##### 



Downstream Financial Results
 Downstream - Operating results
    
    Years ended December 31,($ thousands)
    
    2006(1)
    
    2005(2)
    
    2004(2),(3)External sales
    
    
    195,877
    
    
    
    124,854
    
    
    
    62,410Inter-segment revenue
    
    
    22
    
    
    
    6
    
    
    
    489Interest and other revenue
    
    
    1,421
    
    
    
    341
    
    
    
    263Total segment revenue
    
    
    197,320
    
    
    
    125,201
    
    
    
    63,162Cost of sales and operating expenses
    
    
    (183,511
    )
    
    
    (110,857
    )
    
    
    (53,159
    )Office and administration and other expenses
    
    
    (7,479
    )
    
    
    (4,725
    )
    
    
    (3,147
    )Earnings before interest, taxes, depreciation and
amortization (unaudited)
    
    
    6,330
    
    
    
    9,619
    
    
    
    6,856Depreciation and amortization
    
    
    (910
    )
    
    
    (204
    )
    
    
    (224
    )Interest expense
    
    
    (152
    )
    
    
    (226
    )
    
    
    (455
    )Income from ordinary activities before income taxes
    
    
    5,268
    
    
    
    9,189
    
    
    
    6,177Income tax expenses
    
    
    (2,273
    )
    
    
    (2,756
    )
    
    
    (1,900
    )Total net income
    
    
    2,995
    
    
    
    6,433
    
    
    
    4,277
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell Papua
New Guinea Limited on October 1, 2006 and contains the results of the Shell business from this
date.(2)
    
    Our 2005 and 2004 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.(3)
    
    Our wholesale and retail distribution business segment was acquired on April 28, 2004 and
only operated for eight months during 2004. As a result of our downstream results not having
a full year of operations in 2004, our 2004 to 2005 and 2006 results are not comparable.
 Downstream Financial Results Analysis
   ü
    
    A decrease to gross margin of $1.6 million for the year 2006 over the year 2005 was most significantly the
result of continuous drops in IPP over the fourth quarter of 2006. The IPP dropped from K1.65 in September
to K1.49 at the beginning of January 2007. As the IPP declined each month, any inventory holdings
purchased in preceding periods were sold at lower IPP prices, resulting in lower margins. The effect of
this was compounded as our acquisition of Shell and its corresponding inventory balance coincided with the
decline in IPP pricing.ü
    
    An increase in office and administration and other expenses of $2.8 million due to a number of factors
including, higher insurance costs as a result of the acquisition of the Shell business and expansion of the
aviation business, higher corporate allocations, increased repairs and maintenance costs, and increased
travel costs.ü
    
    An increase in depreciation expense of $0.7 million over 2005 related primarily to the addition of the Shell
assets on October 1 and the completion of the 2 million litre East Sepik tank project.ü
    
    Our income tax expense as a percentage of income from ordinary activities has increased during 2006 as the
result of a reduction to the future income tax benefit being recognized on the revaluation of the Shell
plant and equipment acquired on October 1.
 Management Discussion and Analysis INTEROIL CORPORATION 28




---



##### 



Outlook for 2007
 2007 capital spending plans
 ü
    
    Upgrades to terminal, depots and aviation sitesü
    
    Aviation upgrade and refueller vehiclesü
    
    New customer base pumps and tankage requirementsü
    
    Finance system software installation
 2007 growth plans:
 ü
    
    Consider commercial bunkering opportunitiesü
    
    Secure contracts to supply new mining and petroleum companiesü
    
    Pursue opportunities in organic growth agriculture sectorü
    
    Explore market opportunities in North Solomons Province, including strategic alliances with key distributors
 CORPORATE YEAR IN REVIEW
 Corporate Restated Annual Financial Results
 Years ended December 31,Corporate - Operating results
    
    2006
    
    2005($ thousands)
    
    (restated)(5)
    
    (restated)
    
    2004External sales elimination
    
    
    
    
    
    
    
    
    
    
    (18,075
    )Inter-segment revenue elimination(1)
    
    
    (136,606
    )
    
    
    (80,101
    )
    
    
    (489
    )Interest revenue
    
    
    (58
    )
    
    
    480
    
    
    
    165Other unallocated revenue
    
    
    
    
    
    
    (1
    )
    
    
    91Total segment revenue
    
    
    (136,664
    )
    
    
    (79,622
    )
    
    
    (18,306
    )Cost of sales and operating expenses elimination(1)
    
    
    135,391
    
    
    
    80,101
    
    
    
    15,500Office and administration and other expenses(2)
    
    
    (6,971
    )
    
    
    (6,193
    )
    
    
    (6,773
    )Earnings before interest, taxes, depreciation and
amortization (unaudited)
    
    
    (8,244
    )
    
    
    (5,714
    )
    
    
    (9,581
    )Depreciation and amortization(3)
    
    
    92
    
    
    
    79
    
    
    
    (90
    )Interest expense(4)
    
    
    (6,235
    )
    
    
    (599
    )
    
    
    (1,899
    )Income from ordinary activities before income taxes
    
    
    (14,387
    )
    
    
    (6,234
    )
    
    
    (11,570
    )Income tax expenses
    
    
    (69
    )
    
    
    (76
    )
    
    
    25Non-controlling interest
    
    
    4
    
    
    
    6
    
    
    
    1Total net income
    
    
    (14,452
    )
    
    
    (6,304
    )
    
    
    (11,544
    )
 (1)
    
    Represents the elimination upon consolidation of our refinery sales to other segments and
other minor inter-company product sales.(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 2005 and 2004 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 29




---



##### 



Corporate Annual Results Analysis
  ü
    
    A decrease of $0.3 million in stock compensation expense recognized in office and
administration and other expenses.ü
    
    An increase in interest expense of $5.6 million primarily relating to the
increased borrowings made under the secured loan facility entered into in May
2006.
 LIQUIDITY AND CAPITAL RESOURCES
 Summary of Cash Flows
 ($ thousands)
    
    2006 (restated)
    
    2005 (restated)
    
    2004Net cash inflows/(outflows) from:Operations
    
    
    2,187
    
    
    
    (22,713
    )
    
    
    (79,767
    )Investing
    
    
    (97,071
    )
    
    
    (64,942
    )
    
    
    (29,024
    )Financing
    
    
    66,964
    
    
    
    118,712
    
    
    
    128,119Net cash movement
    
    
    (27,920
    )
    
    
    31,057
    
    
    
    19,328Opening cash
    
    
    59,601
    
    
    
    28,544
    
    
    
    9,216Closing cash
    
    
    31,681
    
    
    
    59,601
    
    
    
    28,544
 Operating Activities
  ü
    
    Our cash used in operations, prior to changes in non-cash working
capital increased by $4.6 million. This is primarily due to
interest paid on the $130.0 million secured loan facility entered
into in 2006.ü
    
    Our non-cash working capital provided a cash inflow from
operations of $24.8 million in 2006 as compared to contributing
$4.7 million to the cash outflows in 2005. These working capital
movements relate to the timing of receipts, payments and inventory
purchases.
 Investing Activities
  ü
    
    $15.9 million increase in our secured cash balances in 2006 versus an increase of $1.1 million in 2005.ü
    
    $25.8 million, net of cash received, used to acquire Shell Papua New Guinea on October 1.ü
    
    $48.0 million on oil and gas exploration expenditure on Elk prospect in 2006 versus $43.0 million in 2005 mainly
related to drilling and seismic activities on Black Bass and Triceratops prospects.ü
    
    $13.6 million on plant and equipment in 2006 versus $5.6 million in 2005 which is primarily related to the revamp and
optimization activities undertaken by the refinery and the additional diesel tank built by the downstream business in
East Sepik.
 Management Discussion and Analysis INTEROIL CORPORATION 30




---



##### 



Financing Activities
  ü
    
    $125.3 million of net proceeds from our secured loan facility entered into in May 2006.ü
    
    $1.5 million from the issuance of common shares in 2006 as compared to $5.5 million received in 2005.ü
    
    $33.9 million of repayments on the crude import facility in 2006 versus $5.8 million of repayments made in the 2005
period.ü
    
    $21.5 million in repayments of unsecured loans in 2006. These proceeds were received in 2005.
  Capital Expenditures
 Upstream Capital Expenditures
  ü
    
    $33.1 million for the drilling and testing of the Elk-1 exploration well. The Elk-1 well expenditures were higher than
expected as a result of encountering high pressure gas that required significant expenditures to control the well
pressure before we could continue drilling the well. Our drilling progress was impeded for three months.ü
    
    $3.0 million of pre-drill costs on the Elk-2 structure, including site preparation, camp construction, rig mobilization
and supplier standby costs.ü
    
    $1.0 million of demobilization costs from the Triceratops drill site.ü
    
    $5.6 million for seismic acquisition.ü
    
    $1.1 million for airborne gravity survey work.ü
    
    $3.8 million for rig equipment, primarily in relation to increasing the capacity of the mud circulation system.ü
    
    $0.6 million for inventory and other costs includes drilling consumables such as mud, casing and drill bits, as well as
spare parts for all the rig equipment.ü
    
    $0.3 million of pre-drill costs for the Antelope-1 well which includes preliminary site clearing and the construction
of a helicopter pad. We anticipate mobilizing to Antelope-1 wellsite immediately after rig release from Elk-2 well.
The Antelope structure is located approximately 4 miles from of Elk-1 well and 8 miles from the Elk-2 well.
  Midstream Capital Expenditures
  Downstream Capital Expenditures
  Management Discussion and Analysis INTEROIL CORPORATION 31




---



##### 



Sources of Capital
 Upstream
  Midstream
   Downstream
  Corporate
  Capital Requirements
  Upstream
  Management Discussion and Analysis INTEROIL CORPORATION 32




---



##### 



Midstream
  Downstream
  Management Discussion and Analysis INTEROIL CORPORATION 33




---



##### 



Contractual Obligations and Commitments
  Payments Due by PeriodLess
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MoreContractual obligations
    
    
    
    
    
    than 1
    
    1  2
    
    2  3
    
    3  4
    
    4  5
    
    than 5($ thousands)
    
    Total
    
    year
    
    years
    
    years
    
    years
    
    years
    
    yearsSecured loan obligations
    
    
    197,666
    
    
    
    13,500
    
    
    
    130,666
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500Accrued financing costs
    
    
    1,450
    
    
    
    363
    
    
    
    1,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of subsidiary
    
    
    1,771
    
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(1)
    
    
    1,921
    
    
    
    731
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(2)
    
    
    96,861
    
    
    
    
    
    
    
    96,861
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention
licenses(3)
    
    
    5,237
    
    
    
    1,877
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    304,906
    
    
    
    18,242
    
    
    
    233,164
    
    
    
    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
19 to our audited financial statements for the years ended December 31, 2006, 2005 and 2004.(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 December 31, 2006, management estimate that a
further $48,126,000 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
  Transactions with Related Parties
    Management Discussion and Analysis     INTEROIL CORPORATION     34




---



##### 



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 exercise of options
    
    
    Shares issued on conversion of indirect participation interest
    
    
    26,667Balance February 28, 2007
    
    
    29,897,847Remaining stock options authorized
    
    
    1,026,000Remaining shares issuable upon exercise of warrants
    
    
    340,247Remaining conversion rights authorized(1)
    
    
    3,306,667Other
    
    
    5,000Balance February 28, 2007 Diluted
    
    
    34,575,761
 (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     35




---



##### 



CRITICAL ACCOUNTING ESTIMATES
  Income Taxes
  Oil and Gas Properties
  Management Discussion and Analysis     INTEROIL CORPORATION     36




---



##### 



Asset Retirement Obligations
  Environmental Remediation
  Impairment of Long-Lived Assets
  Legal and Other Contingent Matters
  Management Discussion and Analysis     INTEROIL CORPORATION     37




---



##### 



NEW ACCOUNTING STANDARDS
 Comprehensive Income, Financial Instruments and Hedges
  
    
    Section 1530, Comprehensive Income;
    
    Section 3855, Financial Instruments  Recognition and Measurement; and
    
    Section 3865, Hedges.
     Section 1530, Comprehensive Income:
  Statement of Comprehensive Income($ thousands)
    
    Years ended December 31,2006
    
    2005(restated)
    
    (restated)
    
    2004Net Loss
    
    
    (45,799
    )
    
    
    (62,070
    )
    
    
    (52,940
    )Foreign currency translation reserve, net of tax
    
    
    1,015
    
    
    
    14
    
    
    
    463Deferred hedge gain, net of tax
    
    
    
    
    
    
    
    
    
    
    Other Comprehensive Income
    
    
    1,015
    
    
    
    14
    
    
    
    463Comprehensive Income
    
    
    (44,783
    )
    
    
    (62,056
    )
    
    
    (52,477
    )
 Management Discussion and Analysis     INTEROIL CORPORATION     38




---



##### 



Section 3855, Financial Instruments  Recognition and Measurement:
  Section 3865, Hedges:
  Management Discussion and Analysis     INTEROIL CORPORATION     39




---



##### 



NON-GAAP MEASURES RECONCILIATION
  Quarters ended
    
    2006 (restated)(1) ,(2)
    
    2005 (restated)(1)($ thousands) (unaudited)
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31Earnings before interest, taxes,
depreciation and amortization
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )
    
    
    (8,192
    )
    
    
    (5,375
    )
    
    
    (4,346
    )Upstream
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )
    
    
    (13,333
    )
    
    
    (1,134
    )
    
    
    (91
    )Midstream  Refining and Marketing
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,230
    )
    
    
    (6,333
    )
    
    
    6,070
    
    
    
    (6,796
    )
    
    
    (3,405
    )Midstream  Liquefaction
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963
    
    
    
    2,522
    
    
    
    2,550
    
    
    
    584Corporate & Consolidated
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,322
    )
    
    
    (834
    )
    
    
    (3,451
    )
    
    
    5
    
    
    
    (1,434
    )Subtract:Interest expense
    
    
    5,649
    
    
    
    5,349
    
    
    
    3,609
    
    
    
    2,666
    
    
    
    2,989
    
    
    
    2,455
    
    
    
    2,996
    
    
    
    2,547Upstream
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    (6
    )
    
    
    2
    
    
    
    2
    
    
    
    2Midstream  Refining and Marketing
    
    
    2,479
    
    
    
    3,329
    
    
    
    2,731
    
    
    
    2,342
    
    
    
    2,756
    
    
    
    2,320
    
    
    
    2,735
    
    
    
    2,351Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    37
    
    
    
    38
    
    
    
    39
    
    
    
    38
    
    
    
    44
    
    
    
    42
    
    
    
    140
    
    
    
    Corporate & Consolidated
    
    
    3,131
    
    
    
    1,981
    
    
    
    838
    
    
    
    285
    
    
    
    195
    
    
    
    91
    
    
    
    119
    
    
    
    194Income taxes & non-controlling interest
    
    
    1,049
    
    
    
    244
    
    
    
    1,031
    
    
    
    (245
    )
    
    
    910
    
    
    
    1,000
    
    
    
    301
    
    
    
    253Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream  Refining and Marketing
    
    
    42
    
    
    
    (46
    )
    
    
    (137
    )
    
    
    (118
    )
    
    
    (129
    )
    
    
    19
    
    
    
    (333
    )
    
    
    81Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    996
    
    
    
    416
    
    
    
    1,005
    
    
    
    (144
    )
    
    
    1,062
    
    
    
    965
    
    
    
    570
    
    
    
    159Corporate & Consolidated
    
    
    11
    
    
    
    (126
    )
    
    
    163
    
    
    
    17
    
    
    
    (23
    )
    
    
    16
    
    
    
    64
    
    
    
    13Depreciation & amortization
    
    
    3,554
    
    
    
    3,100
    
    
    
    2,862
    
    
    
    2,837
    
    
    
    2,700
    
    
    
    2,943
    
    
    
    2,699
    
    
    
    2,695Upstream
    
    
    233
    
    
    
    202
    
    
    
    173
    
    
    
    198
    
    
    
    96
    
    
    
    213
    
    
    
    2
    
    
    
    3Midstream  Refining and Marketing
    
    
    2,805
    
    
    
    2,700
    
    
    
    2,626
    
    
    
    2,598
    
    
    
    2,662
    
    
    
    2,663
    
    
    
    2,641
    
    
    
    2,632Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    537
    
    
    
    222
    
    
    
    89
    
    
    
    62
    
    
    
    55
    
    
    
    55
    
    
    
    51
    
    
    
    43Corporate & Consolidated
    
    
    (21
    )
    
    
    (24
    )
    
    
    (26
    )
    
    
    (21
    )
    
    
    (113
    )
    
    
    12
    
    
    
    5
    
    
    
    17Net income (loss) per segment(1)
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )
    
    
    (14,590
    )
    
    
    (11,371
    )
    
    
    (9,841
    )Upstream
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
    
    
    (13,548
    )
    
    
    (1,138
    )
    
    
    (96
    )Midstream  Refining and Marketing
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
    
    
    1,068
    
    
    
    (11,839
    )
    
    
    (8,469
    )Midstream  Liquefaction
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
    
    
    
    1,460
    
    
    
    1,789
    
    
    
    382Corporate & Consolidated
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
    
    
    (3,570
    )
    
    
    (183
    )
    
    
    (1,658
    )
 Management Discussion and Analysis      INTEROIL CORPORATION     40




---



##### 



(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.
 STATEMENT REGARDING DISCLOSURE CONTROLS
  PUBLIC SECURITIES FILINGS
 www.sedar.com www.sec.gov
 GLOSSARY OF TERMS
 Barrel, Bbl (petroleum)
 Condensate
 Crack spread
 EBITDA
 Farmout
 Feedstock
 GAAP
 IPF
 Management Discussion and Analysis     INTEROIL CORPORATION     41




---



##### 



IPP
 LNG
 LPG
 LSWR
 Mark-to-market
 Naphtha
 Natural gas
 Natural gas measurements .
 
 PGK
 PPL
 PRL
 Sweet/sour crude
 Management Discussion and Analysis     INTEROIL CORPORATION     42