##### 



InterOil Corporation
Management Discussion and
AnalysisFor the Quarter and Nine Months Ended
September 30, 2007 (Unaudited) Dated November 13, 2007
    
    (INTER OIL LOGOP)
 TABLE OF CONTENTS
 TABLE OF CONTENTS
    
    
    1OVERVIEW
    
    
    2NON-GAAP MEASURES
    
    
    2LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
    
    
    3BUSINESS ENVIRONMENT
    
    
    4RISK MANAGEMENT
    
    
    4BUSINESS STRATEGY
    
    
    4FINANCIAL RESULTS
    
    
    5QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    9UPSTREAM  QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    9MIDSTREAM REFINING  QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    15MIDSTREAM LIQUEFACTION  QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    20DOWNSTREAM  QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    23CORPORATE  QUARTER AND NINE MONTH PERIOD IN REVIEW
    
    
    27LIQUIDITY AND CAPITAL RESOURCES
    
    
    29CRITICAL ACCOUNTING ESTIMATES
    
    
    36NEW ACCOUNTING STANDARDS
    
    
    36NON-GAAP MEASURES RECONCILIATION
    
    
    37PUBLIC SECURITIES FILINGS
    
    
    38GLOSSARY OF TERMS
    
    
    38
   Management Discussion and Analysis      INTEROIL CORPORATION       1




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




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LEGAL NOTICE  RISK FACTORS AND FORWARD-LOOKING STATEMENTS
 This MD&A contains forward-looking statements as defined in U.S. federal and Canadian securities
laws. Such statements are generally identifiable by the terminology used, such as may, plans,
believes, expects, anticipates, intends, estimates, forecasts, budgets, targets or
other similar wording suggesting future outcomes or statements regarding an outlook. All
statements, other than statements of historical fact, included in or incorporated by reference in
this MD&A are forward-looking statements. Forward-looking statements include, without limitation,
statements regarding our plans for expanding our business segments, business strategy, contingent
liabilities, environmental matters, and plans and objectives for future operations, future capital
and other expenditures. By its very nature, such forward-looking information requires InterOil
to make assumptions that may not materialize or that may not be accurate.
 Each forward-looking statement reflects our current view of future events and is subject to known
and unknown risks, uncertainties and other factors that could cause our actual results to differ
materially from any results expressed or implied by our forward-looking statements. These risks
and uncertainties include, but are not limited to; the exploration and production, the refining and
the distribution businesses are competitive; our refinery has not operated at full capacity for an
extended period of time and our profitability may be materially affected if it is not able to do
so; if we are not able to market all of our refinerys output, we will not be able to operate our
refinery at its full capacity and our financial condition and results of operations may be
materially adversely affected; if our refining margins do not meet our expectations and our
refinery operations are not profitable; we may be required to write down the value of our refinery;
our refinerys 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
our 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; 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 Amended Annual Information Form for the year
ended December 31, 2006.
 Readers are cautioned that the foregoing list of important factors affecting forward-looking
information is not exhaustive. Furthermore, the forward-looking information contained in this
quarterly report is made as of the date of this report and, except as required by applicable law,
InterOil does not undertake any obligation to update publicly or to revise any of the included
forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information contained in this report is expressly qualified by this cautionary
statement.
 We currently have no production or reserves as defined in Canadian National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities. All information contained in this MD&A
regarding resources are references to undiscovered resources under Canadian National Instrument
51-101, whether stated or not.
 Management Discussion and Analysis      INTEROIL CORPORATION       3




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BUSINESS ENVIRONMENT
  www.sedar.com
 RISK MANAGEMENT
 Risk Factors
 www.sedar.com
 BUSINESS STRATEGY
 www.sedar.com
 Management Discussion and Analysis      INTEROIL CORPORATION       4




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FINANCIAL RESULTS
 Summary of Consolidated Financial Results for the Quarter and Nine month ended September 30, 2007
   ü seismic costs in relation to the Elk extended well seismic program.ü expense related to our share of LNG Project preliminary costs.ü additional office and administration expenses associated with the LNG Project and
higher share compensation 
   expense.
  ü improved refinery margins due to reduced fuel and operating costs and improved
margins on export products.ü added Downstream sales volumes resulting from the Shell acquisition.
   ü improved refinery margins resulting from optimization efforts and capital works
undertaken during 2006.ü added Downstream sales volumes resulting from the Shell acquisition.ü recognition of a deferred gain during the period due to signing of the LNG
Shareholders Agreement on July 31, 2007.
  ü seismic costs in relation to the Elk extended well seismic program.ü expense related to our share of LNG Project preliminary costs.ü additional office and administration expenses associated with the LNG Project and
higher share compensation     expense.
  Management Discussion and Analysis      INTEROIL CORPORATION       5




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##### 



Quarter ended Sept 30,
    
    Nine months ended Sept 30,Consolidated - Operating results
    
    2007(1)
    
    2006
    
    2007(1)
    
    2006($ thousands, unless otherwise indicated)
    
    
    
    
    
    (restated)
    
    
    
    
    
    (restated)Sales and operating revenues
    
    
    188,365
    
    
    
    109,352
    
    
    
    453,604
    
    
    
    340,758Interest revenue
    
    
    501
    
    
    
    1,048
    
    
    
    1,734
    
    
    
    2,375Other non-allocated revenue
    
    
    1,239
    
    
    
    583
    
    
    
    2,203
    
    
    
    2,150Total revenue
    
    
    190,105
    
    
    
    110,982
    
    
    
    457,541
    
    
    
    345,283Cost of sales and operating expenses
    
    
    (180,366
    )
    
    
    (104,460
    )
    
    
    (419,871
    )
    
    
    (335,078
    )Office and administration and other expenses
    
    
    (14,836
    )
    
    
    (9,079
    )
    
    
    (33,029
    )
    
    
    (27,911
    )Foreign exchange gain/(loss)
    
    
    2,011
    
    
    
    4,402
    
    
    
    2,240
    
    
    
    4,494Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    6,553
    
    
    
    Loss on proportionate consolidation of LNG Project
    
    
    (2,432
    )
    
    
    
    
    
    
    (2,432
    )
    
    
    Exploration costs
    
    
    (4,232
    )
    
    
    (505
    )
    
    
    (12,071
    )
    
    
    (6,227
    )Exploration impairment
    
    
    (505
    )
    
    
    (31
    )
    
    
    (526
    )
    
    
    (1,528
    )Earnings before interest, taxes, depreciation and
amortization
    
    
    (10,255
    )
    
    
    1,370
    
    
    
    (1,595
    )
    
    
    (20,967
    )Depreciation and amortization
    
    
    (2,959
    )
    
    
    (3,100
    )
    
    
    (10,038
    )
    
    
    (8,799
    )Interest expense
    
    
    (5,223
    )
    
    
    (5,350
    )
    
    
    (14,562
    )
    
    
    (11,626
    )Loss from ordinary activities before income taxes
    
    
    (18,437
    )
    
    
    (7,079
    )
    
    
    (26,195
    )
    
    
    (41,392
    )Income tax expense
    
    
    473
    
    
    
    (291
    )
    
    
    (71
    )
    
    
    (1,337
    )Non-controlling interest
    
    
    72
    
    
    
    47
    
    
    
    66
    
    
    
    307Total net loss
    
    
    (17,892
    )
    
    
    (7,323
    )
    
    
    (26,200
    )
    
    
    (42,422
    )Net loss per share (dollars)
    
    
    (0.60
    )
    
    
    (0.25
    )
    
    
    (0.88
    )
    
    
    (1.44
    )Net loss per diluted share (dollars)
    
    
    (0.60
    )
    
    
    (0.25
    )
    
    
    (0.88
    )
    
    
    (1.44
    )Total assets
    
    
    626,769
    
    
    
    524,641
    
    
    
    626,769
    
    
    
    524,641Total liabilities
    
    
    557,943
    
    
    
    434,660
    
    
    
    557,943
    
    
    
    434,660Cash flows from operations
    
    
    (19,668
    )
    
    
    1,137
    
    
    
    (19,782
    )
    
    
    (15,927
    )Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Our wholesale and retail distribution business segment acquired the business of Shell PNG
Limited on October 1, 2006 and information in this table includes the results of the Shell
business for the quarter and nine month period. Analysis of Consolidated Quarterly Financial Results Comparing the Quarters Ended September 30,
2007 and 2006
  ü
    
    $3.7 million increase in exploration costs in our Upstream segment relating to our
portion of Elk geophysics and geology costs, which are expensed as incurred under the
Successful Efforts method of accounting.
 ü
    
    $5.7 million additional office and administration and other expenses associated with the
LNG Project, derivative losses and higher share compensation expense.
 ü
    
    $2.4 million loss on proportionate consolidation of the LNG Project due to higher
contributions made by InterOil than the percentage shareholding in the LNG project. This
loss will be recouped as the
 Management Discussion and Analysis      INTEROIL CORPORATION       6




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##### 



shareholding between the Joint Venture partners are equalized by the initial $200.0 million
of cash calls to be funded by Merrill Lynch Commodities (Europe) Limited and Pacific LNG
Operations Ltd.
 ü
    
    $2.4 million decrease in foreign exchange gain compared to the prior year quarter.
  ü
    
    $2.4 million improvement in Gross Margin (sales and operating revenues less cost of
sales and operating expenses) from refinery operations between third quarter of 2007 and
same quarter of 2006 primarily due to reduced fuel and operating costs and improved margins
on export products.
 ü
    
    $0.7 million improvement in Gross Margin from our Downstream business for third quarter
of 2007 over third quarter of 2006, mainly due to added volumes from the Shell acquisition
and increased domestic demand. The positive impact of higher volumes has been partly offset
by unfavorable IPP price movements compared to prior period.
 Analysis of Consolidated Year to Date Financial Results Comparing the Nine Months Ended September
30, 2007 and 2006
  ü
    
    $23.1 million improvement in Gross Margin (sales and operating revenues less cost of
sales and operating expenses) from refinery operations between the first nine months of
2007 and the same period of 2006. This is primarily due to the positive impact of revamp
and optimization efforts and improved margins on export products.
 ü
    
    $3.8 million improvement in Gross Margin from our Downstream business for the first nine
months of 2007 over the same period of 2006 mainly due to increased volumes resulting from
the Shell acquisition and increased domestic demand coupled with a positive effect on Gross
Margin due to IPP price movements over the nine month period.
 ü
    
    $6.6 million recognition of a deferred gain on the discounted interest rate on the
bridging facility crystallized on signing of the LNG shareholder agreement.
 ü
    
    $1.0 million decrease in exploration impairment as compared to the prior year as
Triceratops costs were expensed in 2006 due to impairment.
  ü
    
    $5.8 million increase in exploration costs in our Upstream segment relating to our
portion of Elk geophysics and geology costs, which are expensed as incurred under the
Successful Efforts method of accounting.
 ü
    
    $5.1 million additional office and administration and other expenses associated with the
LNG Project, derivative losses and higher share compensation expense.
 ü
    
    $2.4 million loss on proportionate consolidation of the LNG Project due to higher
contributions made by InterOil than the percentage shareholding in the LNG project. This
loss will be recouped as the shareholding between the Joint Venture partners are equalized
by the initial $200.0 million of cash calls funded by Merrill Lynch Commodities (Europe)
Limited and Pacific LNG Operations Ltd.
 ü
    
    $2.9 million increase in interest expense for the nine months as a result of the $130.0
million secured loan financing obtained during the second quarter of 2006.
 ü
    
    $2.3 million decrease in foreign exchange gain compared to the prior year period.
 Management Discussion and Analysis      INTEROIL CORPORATION       7




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Summary of Consolidated Quarterly Financial Results for Past Eight Quarters
 Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
  Quarters ended($ thousands unless stated
    
    2007
    
    2006(2), (3)
    
    2005(1)otherwise) (restated)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31Upstream
    
    
    1,176
    
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854Midstream  Refining and
Marketing
    
    
    168,737
    
    
    
    114,584
    
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625Midstream  Liquefaction
    
    
    10
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    102,786
    
    
    
    93,186
    
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044Corporate & Consolidated
    
    
    (82,605
    )
    
    
    (67,633
    )
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,979
    )
    
    
    (23,307
    )Sales and operating revenues
    
    
    190,105
    
    
    
    140,539
    
    
    
    126,896
    
    
    
    172,776
    
    
    
    110,982
    
    
    
    124,409
    
    
    
    109,892
    
    
    
    125,216Upstream
    
    
    (5,015
    )
    
    
    (5,492
    )
    
    
    (4,009
    )
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )Midstream  Refining and
Marketing
    
    
    (1,332
    )
    
    
    3,775
    
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )Midstream  Liquefaction
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    3,301
    
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963Corporate & Consolidated
    
    
    (3,105
    )
    
    
    4,959
    
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    (10,255
    )
    
    
    5,557
    
    
    
    3,102
    
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )Upstream
    
    
    (4,716
    )
    
    
    (5,831
    )
    
    
    (4,318
    )
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )Midstream  Refining and
Marketing
    
    
    (12,199
    )
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )Midstream  Liquefaction
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (255
    )
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802Corporate & Consolidated
    
    
    3,382
    
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )Net income (loss) per segment
    
    
    (17,892
    )
    
    
    (2,954
    )
    
    
    (5,354
    )
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )Net income (loss) per share
(dollars)Per Share  Basic
    
    
    (0.60
    )
    
    
    (0.10
    )
    
    
    (0.18
    )
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )Per Share  Diluted
    
    
    (0.60
    )
    
    
    (0.10
    )
    
    
    (0.18
    )
    
    
    (0.11
    )
    
    
    (0.25
    )
    
    
    (0.60
    )
    
    
    (0.59
    )
    
    
    (0.90
    )
 (1)
    
    Our comparative quarterly results for all quarters during 2005 and 2006 have been represented
to conform with the presentation adopted at December 31, 2006. Previously, interest revenue
and non-controlling interest were allocated to the Corporate segment. Amounts associated with
these line items are now included in each operating segments result.(2)
    
    Our September 2006 quarterly results have been represented with our Midstream-Liquefaction
segment separated out from the Midstream-Refining and Marketing segment, as the development of
a liquefaction business has become an increasingly important component of our business. Management Discussion and Analysis      INTEROIL CORPORATION       8




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QUARTER AND NINE MONTH PERIOD IN REVIEW
  UPSTREAM  QUARTER AND NINE MONTH PERIOD IN REVIEW
 Upstream Business Summary
    
    
    15.0% working interest in PPL 244, located offshore in the Gulf of Papua, operated by
Talisman Energy Inc.
    
    43.1% working interest in Petroleum Retention License (PRL) 4, operated by Austral
Pacific Energy Limited
    
    28.6% working interest in PRL 5, operated by Santos Asia Pacific Pty Ltd.
 Upstream Operating Review
 Third
    
    Second
    
    FirstQuarter of
    
    Quarter of
    
    Quarter of
    
    Year EndedKey Upstream Metrics
    
    2007
    
    2007
    
    2007
    
    Dec 2006Wells spudded in the period
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Cumulative IPWI wells drilled
    
    
    3
    
    
    
    3
    
    
    
    3
    
    
    
    3Total footage drilled in the period
    
    
    2,148
    
    
    
    4,687
    
    
    
    4,064
    
    
    
    6,087Total spent on 2D seismic (millions)
    
    $
    6.2
    
    
    $
    6.6
    
    
    $
    4.8
    
    
    $
    6.8Total spent on drilling (millions)
    
    $
    6.8
    
    
    $
    11.3
    
    
    $
    6.8
    
    
    $
    37.9
 Elk-1 Well Control Insurance Claim
   Management Discussion and Analysis      INTEROIL CORPORATION       9




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Elk-2 Drilling & Testing
    
    
    Wireline logs, consisting of conventional lithology, porosity and resistivity tools, as
well as sonic and Formation Micro Image (FMI) logs to assess the extent and size of
fractures were acquired in the open hole interval from 7,410 feet (2,258 meters) to 10,876
feet (3,315 meters).
    
    Full diameter conventional cores were acquired in two intervals
    
    A total of 97 rotary side wall cores were acquired throughout the reservoir interval
    
    Wellbore seismic was completed including:-
 o
    
    Two zero offset Velocity Seismic Profiles (VSPs) including an initial
look ahead survey at 7,410 feet (2,259 meters).o
    
    Two walk away VSPs shot simultaneously with surface acquisition of two
Elk seismic lines to correlate drilled depth to seismic times and enable correlation
of well logs with seismic data.
  Results
      Management Discussion and Analysis      INTEROIL CORPORATION       10




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Elk Appraisal Seismic
        Forward Plan
  
    
    Spudding a third Elk well in November. This well is planned as an 8,125 foot (2,500
meter) test of the Elk fractured limestone structure and is located 0.9 miles (1.5
kilometers) south of Elk-1. Although this is our third Elk well, this well is called Elk-4,
as the Elk-3 designation was reserved for the planned side track of Elk-2, which has been
deferred.
    
    Participating in a non-operated, 26 mile (43 kilometer) 2D seismic program over the
Stanley gas/condensate discovery in Petroleum Retention License 4 (PRL 4) license. Our
interest in this license is 43.1%.
 Management Discussion and Analysis      INTEROIL CORPORATION       11




---



##### 



Upstream Financial Results for Quarter and Nine Months Ended September 30, 2007 and 2006
  Quarter ended Sep 30,
    
    Nine months ended Sep 30,Upstream - Operating results
    
    2007(1)
    
    2006
    
    2007(1)
    
    2006($ thousands)
    
    
    
    
    
    (restated)
    
    
    
    
    
    (restated)Sales and operating revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest revenue
    
    
    58
    
    
    
    340
    
    
    
    347
    
    
    
    2,444Other non-allocated revenue
    
    
    1,118
    
    
    
    560
    
    
    
    1,620
    
    
    
    2,100Total revenue
    
    
    1,176
    
    
    
    900
    
    
    
    1,967
    
    
    
    4,544Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (1,408
    )
    
    
    (1,609
    )
    
    
    (3,192
    )
    
    
    (5,070
    )Foreign exchange gain/(loss)
    
    
    (45
    )
    
    
    78
    
    
    
    (695
    )
    
    
    116Exploration costs
    
    
    (4,232
    )
    
    
    (505
    )
    
    
    (12,071
    )
    
    
    (6,227
    )Exploration impairment
    
    
    (505
    )
    
    
    31
    
    
    
    (526
    )
    
    
    (1,528
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    (5,015
    )
    
    
    (1,106
    )
    
    
    (14,517
    )
    
    
    (8,165
    )Depreciation and amortization
    
    
    299
    
    
    
    (202
    )
    
    
    (348
    )
    
    
    (573
    )Interest expense
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (4
    )Loss from ordinary activities before income
taxes
    
    
    (4,716
    )
    
    
    (1,310
    )
    
    
    (14,865
    )
    
    
    (8,743
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (4,716
    )
    
    
    (1,310
    )
    
    
    (14,865
    )
    
    
    (8,743
    )
 (1)
    
    Our third quarter and first nine months of 2006 segment results have been represented to
conform with the presentation adopted for the year ended 2006. Previously, interest revenue
and non-controlling interest were allocated to the Corporate segment. Amounts associated with
these line items are now included in each operating segments result. Analysis of Upstream Financial Results Comparing Quarter Ended September 30, 2007 and 2006
   ü
    
    $3.7 million additional exploration costs expensed in the third quarter of 2007 due to
our portion of Elk geophysics and geology costs, which are expensed as incurred under the
Successful Efforts method of accounting.
 ü
    
    $0.5 million additional exploration impairment due to the write off of cash calls paid
by us for seismic and exploratory activities in PRL # 4 & 5 conducted by the joint venture
operator.
 ü
    
    $0.6 million increase in other unallocated revenue due to higher third party rental
income from our 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.
 Management Discussion and Analysis      INTEROIL CORPORATION       12




---



##### 



Analysis of Upstream Financial Results Comparing the Nine Months Ended September 30, 2007 and 2006
   ü
 ü
 ü
 ü
 ü
 Management Discussion and Analysis INTEROIL CORPORATION 13




---



##### 



Upstream Financial Results for Quarter Ended September 30, 2007 and the Preceding Seven Quarters
 Upstream  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands) (restated)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-allocated
revenue
    
    
    1,176
    
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854Total segment revenue
    
    
    1,176
    
    
    
    397
    
    
    
    395
    
    
    
    705
    
    
    
    900
    
    
    
    2,684
    
    
    
    959
    
    
    
    854Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (1,408
    )
    
    
    (969
    )
    
    
    (815
    )
    
    
    (1,300
    )
    
    
    (1,609
    )
    
    
    (2,491
    )
    
    
    (970
    )
    
    
    (742
    )Foreign exchange
gain/(loss)
    
    
    (45
    )
    
    
    (397
    )
    
    
    (253
    )
    
    
    (54
    )
    
    
    78
    
    
    
    121
    
    
    
    (83
    )
    
    
    232Exploration costs
    
    
    (4,232
    )
    
    
    (4,518
    )
    
    
    (3,322
    )
    
    
    50
    
    
    
    (505
    )
    
    
    (2,162
    )
    
    
    (3,560
    )
    
    
    (4,648
    )Exploration impairment
    
    
    (505
    )
    
    
    (6
    )
    
    
    (14
    )
    
    
    (119
    )
    
    
    30
    
    
    
    (76
    )
    
    
    (1,482
    )
    
    
    (12,160
    )Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (5,015
    )
    
    
    (5,493
    )
    
    
    (4,009
    )
    
    
    (717
    )
    
    
    (1,106
    )
    
    
    (1,924
    )
    
    
    (5,136
    )
    
    
    (16,464
    )Depreciation and
amortization
    
    
    299
    
    
    
    (338
    )
    
    
    (309
    )
    
    
    (233
    )
    
    
    (202
    )
    
    
    (173
    )
    
    
    (198
    )
    
    
    (96
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    6Loss from ordinary
activities before
income taxes
    
    
    (4,716
    )
    
    
    (5,831
    )
    
    
    (4,318
    )
    
    
    (953
    )
    
    
    (1,309
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (4,716
    )
    
    
    (5,831
    )
    
    
    (4,318
    )
    
    
    (953
    )
    
    
    (1,309
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )
 Management Discussion and Analysis INTEROIL CORPORATION 14




---



##### 



MIDSTREAM REFINING  QUARTER AND NINE MONTH PERIOD IN REVIEW
 Midstream Refining and Marketing Business Summary
   Midstream Refining and Marketing Operating Review
 Quarters ended
    
    Nine months endedSep 30,
    
    Sep 30,Key Refining and Marketing Metrics
    
    2007
    
    2006
    
    2007
    
    2006Net income/(loss) ($ millions)
    
    $
    (12.2
    )
    
    $
    (4.3
    )
    
    $
    (11.8
    )
    
    $
    (27.8
    )EBITDA ($ millions)
    
    $
    (1.3
    )
    
    $
    1.6
    
    
    $
    8.8
    
    
    $
    (11.7
    )Throughput (barrels 000) (1)
    
    
    1,494
    
    
    
    1,294
    
    
    
    4,509
    
    
    
    3,697Operating days
    
    
    71
    
    
    
    75
    
    
    
    229
    
    
    
    188Cost of production per barrel(2)
    
    $
    2.12
    
    
    $
    4.13
    
    
    $
    2.38
    
    
    $
    3.27Working capital financing cost per barrel of production(2)
    
    $
    0.91
    
    
    $
    1.83
    
    
    $
    0.78
    
    
    $
    1.20Distillates as percentage of production
    
    
    65
    %
    
    
    70
    %
    
    
    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 15




---



##### 



Midstream Refining and Marketing Financial Results for the Quarter and Nine Months Ended September
30, 2007 and 2006
  MidstreamRefining and Marketing - Operating results
    
    Quarter ended Sep 30,
    
    Nine months ended Sep 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    85,733
    
    
    
    69,901
    
    
    
    180,484
    
    
    
    235,577Inter-segment revenue (2)
    
    
    82,989
    
    
    
    24,665
    
    
    
    205,853
    
    
    
    68,690Interest and other revenue
    
    
    15
    
    
    
    121
    
    
    
    39
    
    
    
    350Total revenue
    
    
    168,737
    
    
    
    94,687
    
    
    
    386,377
    
    
    
    304,617Cost of sales and operating expenses
    
    
    (166,780
    )
    
    
    (95,052
    )
    
    
    (371,695
    )
    
    
    (312,710
    )Office and administration and other expenses
    
    
    (2,383
    )
    
    
    (2,539
    )
    
    
    (6,932
    )
    
    
    (8,214
    )(Loss)/gain on derivative contracts
    
    
    (2,468
    )
    
    
    484
    
    
    
    (1,453
    )
    
    
    361Foreign exchange gain
    
    
    1,562
    
    
    
    4,094
    
    
    
    2,483
    
    
    
    4,202Earnings before interest, taxes,
depreciation and amortization
    
    
    (1,332
    )
    
    
    1,674
    
    
    
    8,779
    
    
    
    (11,744
    )Depreciation and amortization
    
    
    (2,781
    )
    
    
    (2,699
    )
    
    
    (8,246
    )
    
    
    (7,923
    )Interest expense
    
    
    (8,155
    )
    
    
    (3,330
    )
    
    
    (12,401
    )
    
    
    (8,402
    )Loss from ordinary activities before income
taxes
    
    
    (12,268
    )
    
    
    (4,355
    )
    
    
    (11,869
    )
    
    
    (28,070
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-controlling interest
    
    
    69
    
    
    
    46
    
    
    
    64
    
    
    
    301Total net (loss)/income
    
    
    (12,199
    )
    
    
    (4,309
    )
    
    
    (11,805
    )
    
    
    (27,769
    )
 Management Discussion and Analysis INTEROIL CORPORATION 16




---



##### 



(1)
    
    Our third quarter and first nine months of 2006 segment results have been represented to
conform with the presentation adopted for reporting the year ended 2006. Previously, interest
revenue and non-controlling interest were allocated to the Corporate segment. Amounts
associated with these line items are now included in each operating segments result.(2)
    
    Our wholesale and retail distribution business segment acquired the business of Shell Papua
New Guinea Limited in Q4 2006, as a result of which Midstream  Refinery and Marketing
external sales have reduced and inter-segment revenue has increased since Q4 2006.
 Analysis of Midstream Financial Results Comparing the Quarters Ended September 30, 2007 and 2006
   ü
  + Reduced fuel consumption+ Decreased fuel cost+ Improved premiums negotiated on LSWR exports+ Decreased direct operating costs- Risk management activity (subject to hedge accounting)
  + Improved Mean of Platts Singapore (MOPS) Naphtha pricing versus benchmark crude+ Marginally improved MOPS LSWR pricing versus benchmark crude- Decreased IPP/Posted pricing versus MOPS benchmark pricing for diesel, jet & gasoline fuels
 ü
 ü
 ü
 ü
 Analysis of Midstream Financial Results Comparing the Nine Months Ended September 30, 2007 and 2006
   ü   An increase in Gross Margin of $23.1 million for the nine months ended September
30, 2007 when compared to the same period in 2006 was primarily due to a
combination of movements in the following:
  + Improved yield structure
 Management Discussion and Analysis INTEROIL CORPORATION 17




---



##### 



+ Reduced fuel consumption+ Decreased fuel cost+ Improved premiums negotiated on export products+ Decreased direct operating costs- Risk management activity (subject to hedge accounting)
  + Improved MOPS Naphtha pricing versus benchmark crude- Decreased MOPS LSWR pricing versus benchmark crude- Decreased IPP/Posted pricing versus MOPS benchmark pricing for diesel, jet & gasoline fuels
 ü
 ü
 ü
 ü
 ü
 Management Discussion and Analysis INTEROIL CORPORATION 18




---



##### 



Midstream Financial Results for the Quarter Ended September 30, 2007 and the Preceding Seven Quarters
 Operating results
    
    2007
    
    2006
    
    2005($ thousands)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31External sales
    
    
    85,733
    
    
    
    46,538
    
    
    
    48,213
    
    
    
    79,634
    
    
    
    69,901
    
    
    
    84,823
    
    
    
    80,854
    
    
    
    84,891Inter-segment
revenue
    
    
    82,989
    
    
    
    68,031
    
    
    
    54,833
    
    
    
    67,894
    
    
    
    24,665
    
    
    
    21,870
    
    
    
    22,155
    
    
    
    23,597Interest and other
revenue
    
    
    15
    
    
    
    15
    
    
    
    9
    
    
    
    10
    
    
    
    121
    
    
    
    132
    
    
    
    96
    
    
    
    137Total segment
revenue
    
    
    168,737
    
    
    
    114,584
    
    
    
    103,055
    
    
    
    147,538
    
    
    
    94,687
    
    
    
    106,825
    
    
    
    103,105
    
    
    
    108,625Cost of sales and
operating expenses
    
    
    (166,780
    )
    
    
    (110,074
    )
    
    
    (94,841
    )
    
    
    (138,664
    )
    
    
    (95,052
    )
    
    
    (112,108
    )
    
    
    (105,550
    )
    
    
    (112,480
    )Office and
administration and
other expenses
    
    
    (2,383
    )
    
    
    (2,324
    )
    
    
    (2,225
    )
    
    
    (2,396
    )
    
    
    (2,539
    )
    
    
    (3,969
    )
    
    
    (1,727
    )
    
    
    (1,805
    )(Loss)/gain on
derivative
contracts
    
    
    (2,468
    )
    
    
    561
    
    
    
    454
    
    
    
    2,233
    
    
    
    484
    
    
    
    (8
    )
    
    
    (94
    )
    
    
    576Foreign exchange
gain/(loss)
    
    
    1,562
    
    
    
    1,028
    
    
    
    (107
    )
    
    
    433
    
    
    
    4,094
    
    
    
    1,071
    
    
    
    (963
    )
    
    
    (1,249
    )Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (1,332
    )
    
    
    3,775
    
    
    
    6,336
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )Depreciation and
amortization
    
    
    (2,781
    )
    
    
    (2,748
    )
    
    
    (2,717
    )
    
    
    (2,806
    )
    
    
    (2,699
    )
    
    
    (2,626
    )
    
    
    (2,598
    )
    
    
    (2,663
    )Interest expense
    
    
    (8,155
    )
    
    
    (2,156
    )
    
    
    (2,091
    )
    
    
    (2,478
    )
    
    
    (3,330
    )
    
    
    (2,731
    )
    
    
    (2,342
    )
    
    
    (2,755
    )Loss from ordinary
activities before
income taxes
    
    
    (12,268
    )
    
    
    (1,129
    )
    
    
    1,528
    
    
    
    3,860
    
    
    
    (4,355
    )
    
    
    (13,545
    )
    
    
    (10,169
    )
    
    
    (11,751
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non- controlling
Interest
    
    
    69
    
    
    
    12
    
    
    
    (17
    )
    
    
    (42
    )
    
    
    46
    
    
    
    137
    
    
    
    117
    
    
    
    129Total net
income/(loss)
    
    
    (12,199
    )
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )
 Management Discussion and Analysis INTEROIL CORPORATION 19




---



##### 



MIDSTREAM LIQUEFACTION  QUARTER AND NINE MONTH PERIOD IN REVIEW
 Midstream Liquefaction Operating Review
     Management Discussion and Analysis INTEROIL CORPORATION 20




---



##### 



Midstream Liquefaction Financial Results for the Quarter and Nine Months Ended September 30, 2007
and 2006
  MidstreamLiquefaction - Operating results
    
    Quarter ended Sep 30,
    
    Nine months ended Sep 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest revenue
    
    
    10
    
    
    
    
    
    
    
    15
    
    
    
    Total revenue
    
    
    10
    
    
    
    
    
    
    
    15
    
    
    
    Cost of sales and operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    (1,682
    )
    
    
    (298
    )
    
    
    (2,454
    )
    
    
    (298
    )Loss on proportionate consolidation of PNG
LNG Inc.
    
    
    (2,432
    )
    
    
    
    
    
    
    (2,432
    )
    
    
    Earnings before interest, taxes,
depreciation and amortization
    
    
    (4,104
    )
    
    
    (298
    )
    
    
    (4,871
    )
    
    
    (298
    )Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary activities before income
taxes
    
    
    (4,104
    )
    
    
    (298
    )
    
    
    (4,871
    )
    
    
    (298
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net loss
    
    
    (4,104
    )
    
    
    (298
    )
    
    
    (4,871
    )
    
    
    (298
    )
 (1)
    
    Our liquefaction segment was formed in the third quarter of 2006. The liquefaction business
is in an early stage of development.
 Analysis of Midstream Liquefaction Financial Results Comparing the Quarter and Nine Months Ended
September 2007 and 2006
   Management
Discussion and Analysis INTEROIL CORPORATION 21




---



##### 



Midstream Liquefaction Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Midstream Liquefaction- Operating results
    
    2007
    
    2006
    
    2005($ thousands)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31External sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue
    
    
    10
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total segment revenue
    
    
    10
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost of sales and
operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Office and
administration and
other expenses
    
    
    (1,682
    )
    
    
    (449
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Loss on proportionate
consolidation of PNG
LNG Inc.
    
    
    (2,432
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before
interest, taxes,
depreciation and
amortization
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Depreciation and
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss from ordinary
activities before
income taxes
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total net income/(loss)
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    
 Management Discussion and Analysis INTEROIL CORPORATION 22




---



##### 



DOWNSTREAM  QUARTER AND NINE MONTH PERIOD IN REVIEW
 Downstream Business Summary
  
   Management Discussion and Analysis INTEROIL CORPORATION 23




---



##### 



Downstream Operating Review
 Quarters ended Sep 30,
    
    Nine months ended Sep 30,Key Downstream Metrics
    
    2007
    
    2006
    
    2007
    
    2006Net income/(loss) ($ millions)
    
    
    ($0.3
    )
    
    $
    1.3
    
    
    $
    4.0
    
    
    $
    3.4EBITDA ($ millions)
    
    $
    3.3
    
    
    $
    2.0
    
    
    $
    9.1
    
    
    $
    5.2Market share (1)
    
    
    69
    %
    
    
    26
    %
    
    
    70
    %
    
    
    26
    %Sales volumes (000 of liters)(2)
    
    
    141,926
    
    
    
    54,418
    
    
    
    406,854
    
    
    
    156,320Cost of distribution per liter ($  per liter)(3)
    
    $
    0.02
    
    
    $
    0.06
    
    
    $
    0.02
    
    
    $
    0.06
 (1)
    
    Market share has been calculated based on domestic purchases of product from the refinery and
only includes the effect of the Shell acquisition from October 1, 2006.(2)
    
    Sales volumes reflect the actual sales volumes achieved for the period and therefore only
include the effect of the Shell acquisition from October 1, 2006.(3)
    
    Cost of distribution per liter includes land based freight costs and operational costs. It
excludes depreciation and interest.
 
  Management Discussion and Analysis INTEROIL CORPORATION 24




---



##### 



Downstream Financial Results for the quarter and Nine Months Ended September 30, 2007 and 2006
  Downstream - Operating results
    
    Quarter ended Sep 30,
    
    Nine months ended Sep 30,($ thousands)
    
    2007
    
    2006(1)
    
    2007
    
    2006(1)External sales
    
    
    102,632
    
    
    
    39,451
    
    
    
    273,119
    
    
    
    105,181Inter-segment revenue
    
    
    16
    
    
    
    43
    
    
    
    63
    
    
    
    52Interest and other revenue
    
    
    138
    
    
    
    32
    
    
    
    602
    
    
    
    97Total revenue
    
    
    102,787
    
    
    
    39,527
    
    
    
    273,785
    
    
    
    105,329Cost of sales and operating expenses
    
    
    (96,591
    )
    
    
    (34,116
    )
    
    
    (255,307
    )
    
    
    (91,110
    )Office and administration and other expenses
    
    
    (2,894
    )
    
    
    (3,456
    )
    
    
    (9,388
    )
    
    
    (9,032
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    3,301
    
    
    
    1,953
    
    
    
    9,089
    
    
    
    5,186Depreciation and amortization
    
    
    (497
    )
    
    
    (221
    )
    
    
    (1,504
    )
    
    
    (373
    )Interest expense
    
    
    (3,320
    )
    
    
    (38
    )
    
    
    (3,293
    )
    
    
    (115
    )Net income (loss) from ordinary activities
before income taxes
    
    
    (516
    )
    
    
    1,694
    
    
    
    4,291
    
    
    
    4,698Income tax expense
    
    
    261
    
    
    
    (416
    )
    
    
    (253
    )
    
    
    (1,277
    )Total net income (loss)
    
    
    (255
    )
    
    
    1,278
    
    
    
    4,038
    
    
    
    3,421
 (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 nine months of 2006 balances do not
contain results of Shell operations.(2)
    
    Our third quarter and first nine months of 2006 has been represented to conform with the
presentation of results adopted for the year ended December 31, 2006. Previously, interest
revenue and non-controlling interest were allocated to the Corporate segment. Amounts
associated with these line items are now included in each operating segments result.
 Downstream Financial Results Analysis Comparing Quarter Ended September 30, 2007 and 2006
   ü
    
    $3.2 million increase in interest expense over the previous period due to interest
charges from Corporate to Downstream during the quarter on intercompany loans mainly
relating to funding provided for BP and Shell acquisition.ü
    
    $0.7 million decrease in income tax expense during the third quarter of 2007 on lower
earnings and future tax adjustments.ü
    
    $0.7 million increase in Gross Margin during the third quarter of 2007 over the same
quarter of 2006 mainly due to increased volumes resulting from the Shell Acquisition and
increased domestic demand, coupled with a net positive effect on Gross Margin due to IPP
price movements as applied to the inventory sold during the quarter.
 Management Discussion and Analysis INTEROIL CORPORATION 25




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##### 



Analysis of Downstream Financial Results Comparing the Nine Months Ended September 30, 2007 and
2006
   ü
    
    $3.8 million increase in Gross Margin in nine months ended September 30, 2007 over same
period last year was mainly due to added volumes from the Shell acquisition and increased
domestic demand, coupled with a net positive effect on Gross Margin due to IPP price
movements as applied to the inventory sold during the period.ü
    
    $0.4 million increase in office and administration and other expenses due to a number of
factors including added insurance costs from the acquisition and inclusion of the Shell
business. Also the Downstream operations incurred higher Corporate allocations, increased
repairs and maintenance costs, and increased travel costs.ü
    
    $1.1 million increase in depreciation expense over the nine months ended September 30,
2006 related primarily to the addition of the Shell assets on October 1, 2006.ü
    
    $3.2 million increase in interest expense over the previous period due to interest
charges from Corporate to Downstream during the quarter on intercompany loans mainly
relating to funding provided for the BP and Shell acquisitions.
 Downstream Financial Results for Quarter Ended September 30, 2007 and the Preceding Seven Quarters
 Downstream  Operatingresults
    
    2007
    
    2006
    
    2005($ thousands)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31External sales
    
    
    102,632
    
    
    
    92,782
    
    
    
    77,705
    
    
    
    90,695
    
    
    
    39,451
    
    
    
    37,955
    
    
    
    27,775
    
    
    
    39,192Inter-segment revenue
    
    
    16
    
    
    
    27
    
    
    
    20
    
    
    
    (29
    )
    
    
    43
    
    
    
    8
    
    
    
    
    
    
    
    (437
    )Interest and other revenue
    
    
    138
    
    
    
    377
    
    
    
    87
    
    
    
    1,324
    
    
    
    33
    
    
    
    32
    
    
    
    32
    
    
    
    289Total segment revenue
    
    
    102,787
    
    
    
    93,186
    
    
    
    77,812
    
    
    
    91,990
    
    
    
    39,527
    
    
    
    37,995
    
    
    
    27,807
    
    
    
    39,044Cost of sales and operating
expenses
    
    
    (96,591
    )
    
    
    (87,109
    )
    
    
    (71,608
    )
    
    
    (87,521
    )
    
    
    (35,743
    )
    
    
    (33,447
    )
    
    
    (26,801
    )
    
    
    (34,933
    )Office and administration
and other expenses
    
    
    (2,894
    )
    
    
    (3,317
    )
    
    
    (3,176
    )
    
    
    (3,326
    )
    
    
    (1,830
    )
    
    
    (989
    )
    
    
    (1,333
    )
    
    
    (148
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    3,301
    
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (327
    )
    
    
    3,963Depreciation and amortization
    
    
    (497
    )
    
    
    (552
    )
    
    
    (456
    )
    
    
    (537
    )
    
    
    (222
    )
    
    
    (90
    )
    
    
    (62
    )
    
    
    (55
    )Interest expense
    
    
    (3,320
    )
    
    
    66
    
    
    
    (39
    )
    
    
    (36
    )
    
    
    (38
    )
    
    
    (39
    )
    
    
    (38
    )
    
    
    (44
    )Income from ordinary
activities before income
taxes
    
    
    (516
    )
    
    
    2,274
    
    
    
    2,533
    
    
    
    570
    
    
    
    1,694
    
    
    
    3,430
    
    
    
    (427
    )
    
    
    3,865Income tax expense
    
    
    261
    
    
    
    (32
    )
    
    
    (483
    )
    
    
    (997
    )
    
    
    (416
    )
    
    
    (1,004
    )
    
    
    145
    
    
    
    (1,063
    )Total net income/(loss)
    
    
    (255
    )
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802
 Management Discussion and Analysis INTEROIL CORPORATION 26




---



##### 



CORPORATE  QUARTER AND NINE MONTH PERIOD IN REVIEW
 Corporate Restated Financial Results for Quarter and the Nine Months Ended September 30, 2007 and
2006
  Quarter ended
    
    Nine months endedCorporate - Operating results
    
    Sep 30,
    
    Sep 30,($ thousands)
    
    2006
    
    2007
    
    2006
    
    2007(restated)(5)
    
    (restated)(5)External sales elimination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Inter-segment revenue elimination(1)
    
    
    (83,005
    )
    
    
    (24,708
    )
    
    
    (205,916
    )
    
    
    (68,742
    )Interest revenue
    
    
    401
    
    
    
    553
    
    
    
    1,312
    
    
    
    (515
    )Other unallocated revenue
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    50Total revenue
    
    
    (82,604
    )
    
    
    (24,133
    )
    
    
    (204,604
    )
    
    
    (69,207
    )Cost of sales and operating expenses elimination(1)
    
    
    83,005
    
    
    
    24,708
    
    
    
    207,132
    
    
    
    68,742Office and administration and other expenses(2)
    
    
    (3,506
    )
    
    
    (1,429
    )
    
    
    (9,157
    )
    
    
    (5,480
    )Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    6,553
    
    
    
    Earnings before interest, taxes, depreciation and amortization
    
    
    (3,105
    )
    
    
    (853
    )
    
    
    (77
    )
    
    
    (5,945
    )Depreciation and amortization(3)
    
    
    20
    
    
    
    24
    
    
    
    61
    
    
    
    70Interest expense(4)
    
    
    6,253
    
    
    
    (1,981
    )
    
    
    1,133
    
    
    
    (3,104
    )Income from ordinary activities before income taxes
    
    
    3,168
    
    
    
    (2,810
    )
    
    
    1,118
    
    
    
    (8,979
    )Income tax expenses
    
    
    212
    
    
    
    125
    
    
    
    183
    
    
    
    (60
    )Non-controlling interest
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    6Total net income
    
    
    3,382
    
    
    
    (2,684
    )
    
    
    1,303
    
    
    
    (9,033
    )
 (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 third quarter and first nine months of 2006 segment results have been represented to
conform with the presentation of results adopted for the year ended 2006. Previously,
interest revenue and non-controlling interest were allocated to the Corporate segment.
Amounts associated with these line items are now included in each operating segments result.
 Analysis of Corporate Financial Results Comparing Quarter Ended September 30, 2007 and 2006
  ü
    
    $8.1 million increase in net interest revenue less interest expenses mainly on account
of interest costs recharged to other streams relating to the bridging facility of $130.0
million at market rates. This recharge was done retrospectively for the nine month period
in the current quarter.ü
    
    $2.1 million increase in office and administration expenses mainly relating to non-cash
stock compensation expense recognized during the quarter.
 Management Discussion and Analysis INTEROIL CORPORATION 27




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##### 



Analysis of Corporate Financial Results Comparing the Nine Months Ended September 30, 2007 and 2006
  ü
    
    $6.6 million gain recognized being the deferred gain on secured bridging facility
realized on signing of PNG LNG Inc. Shareholder Agreement.ü
    
    $6.1 million increase in net interest revenue less interest expenses mainly on account
of interest costs recharged to other streams relating to the Bridging facility of $130.0
million at market rates.ü
    
    $1.2 million increase in net income on realization of intra-group profit eliminated on
consolidation between Midstream and Downstream during prior year end. .ü
    
    $3.7 million increase in office and administration expenses mainly relating to non-cash
stock compensation expense recognized during the period.
 Corporate Consolidated Quarterly Financial Results by Quarter for 2007 to date, 2006 and 2005
 Corporate - Operating results
    
    2007
    
    2006
    
    2005($ thousands) (restated)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31Inter-segment revenue
elimination
    
    
    (83,005
    )
    
    
    (68,058
    )
    
    
    (54,853
    )
    
    
    (67,864
    )
    
    
    (24,708
    )
    
    
    (21,878
    )
    
    
    (22,154
    )
    
    
    (23,160
    )Interest revenue
    
    
    401
    
    
    
    424
    
    
    
    487
    
    
    
    457
    
    
    
    554
    
    
    
    (1,194
    )
    
    
    125
    
    
    
    96Other unallocated revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    22
    
    
    
    (23
    )
    
    
    50
    
    
    
    (243
    )Total segment revenue
    
    
    (82,604
    )
    
    
    (67,634
    )
    
    
    (54,366
    )
    
    
    (67,457
    )
    
    
    (24,132
    )
    
    
    (23,095
    )
    
    
    (21,981
    )
    
    
    (23,307
    )Cost of sales and operating
expenses elimination
    
    
    83,005
    
    
    
    69,906
    
    
    
    54,220
    
    
    
    66,649
    
    
    
    24,708
    
    
    
    21,878
    
    
    
    22,156
    
    
    
    24,240Office and administration
and other expenses
    
    
    (3,506
    )
    
    
    (3,866
    )
    
    
    (1,785
    )
    
    
    (1,491
    )
    
    
    (1,429
    )
    
    
    (2,553
    )
    
    
    (1,498
    )
    
    
    (1,767
    )Gain on LNG shareholder
agreement
    
    
    
    
    
    
    6,553
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before interest,
taxes, depreciation and
amortization
    
    
    (3,105
    )
    
    
    4,959
    
    
    
    (1,931
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )Depreciation and amortization
    
    
    20
    
    
    
    20
    
    
    
    21
    
    
    
    22
    
    
    
    24
    
    
    
    26
    
    
    
    21
    
    
    
    116Interest expense
    
    
    6,253
    
    
    
    (2,768
    )
    
    
    (2,352
    )
    
    
    (3,131
    )
    
    
    (1,981
    )
    
    
    (838
    )
    
    
    (285
    )
    
    
    (196
    )Income from ordinary
activities before income
taxes
    
    
    3,168
    
    
    
    2,211
    
    
    
    (4,262
    )
    
    
    (5,408
    )
    
    
    (2,810
    )
    
    
    (4,582
    )
    
    
    (1,585
    )
    
    
    (914
    )Income tax expense
    
    
    212
    
    
    
    (15
    )
    
    
    (13
    )
    
    
    (10
    )
    
    
    125
    
    
    
    (166
    )
    
    
    (20
    )
    
    
    20Non-controlling interest
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    1Total net income/(loss)
    
    
    3,382
    
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )
 Management Discussion and Analysis INTEROIL CORPORATION 28




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##### 



LIQUIDITY AND CAPITAL RESOURCES
 Summary of Cash Flows for Quarter and Nine Months Ended September 30, 2007 and 2006
 Quarters ended Sep 30,
    Nine months ended Sep 30,($ thousands)
    
    2007
    
    2006
    
    2007
    
    2006(restated)
    
    
    
    
    
    (restated)Net cash inflows/(outflows) from:Operating
    
    
    (19,668
    )
    
    
    1,137
    
    
    
    (19,781
    )
    
    
    (15,927
    )Investing
    
    
    8,265
    
    
    
    (53,894
    )
    
    
    1,172
    
    
    
    (97,193
    )Financing
    
    
    926
    
    
    
    22,318
    
    
    
    (1,143
    )
    
    
    84,116Net cash movement
    
    
    (10,477
    )
    
    
    (30,439
    )
    
    
    (19,752
    )
    
    
    (29,004
    )Opening cash
    
    
    22,406
    
    
    
    61,037
    
    
    
    31,681
    
    
    
    59,602Closing cash
    
    
    11,929
    
    
    
    30,598
    
    
    
    11,929
    
    
    
    30,598
 Operating Activities
  ü
    
    Our net cash outflow, prior to changes in non-cash working
capital, increased by $6.5 million on account of lower
contributions from our Midstream and Downstream operations
compared to the prior period.ü
    
    Our changes in non-cash working capital resulted in a cash outflow
from operations of $11.9 million as compared to an inflow of $2.4
million in the same quarter of 2006. These working capital
movements relate to the timing of receipts, payments and inventory
purchases, along with the increasing price environment.
  ü
    
    Our cash provided by operations, prior to changes in non-cash
working capital, improved by $12.7 million on account of higher
margins from our Midstream and Downstream operations compared to
the prior period.
üOur changes in non-cash working capital provided a cash outflow
from operations of $20.5 million as compared to $4.0 million in
same period of 2006. These working capital movements relate to
the timing of receipts, payments and inventory purchases, along
with the increasing price environment.
 Investing Activities
  ü
    
    $20.3 million on oil and gas exploration expenditure in the third quarter of 2007 relating to the Elk extended well
program versus $14.1 million in third quarter of 2006 related to drilling and seismic activities. The Elk extended
well program is not directly covered by the initial indirect participation interest contributions. Therefore, separate
cash calls are made of the IPI investors share of these costs.ü
    
    $9.5 million of proceeds from cash calls from IPI investors in relation to the Elk extended well programs. There were
no cash calls received during the same period in 2006.ü
    
    $7.0 million received on settlement of the insurance claim for Elk well blowout.ü
    
    $6.6 million increase in our secured cash balances in third quarter of 2007 versus an increase of $12.3 million in the
same quarter of 2006. Restricted cash movement is influenced by the amounts outstanding on different facilities within
our working capital facility with BNP Paribas.
 Management Discussion and Analysis INTEROIL CORPORATION 29




---



##### 



ü
    
    $2.5 million of proceeds from cash calls to joint venture partners in relation to the natural gas segment.ü
    
    $2.0 million on plant and equipment in the third quarter of 2007 mainly on LNG project deferred costs proportionately
consolidated and Downstream projects. The $2.9 million in same quarter of 2006 primarily related to revamp and
optimization activities undertaken by the refinery.ü
    
    $18.1 million increase in accounts payables relating mainly to the exploration program and the LNG Project.
  ü
    
    $48.7 million on oil and gas exploration expenditure in nine months ended September 30, 2007 relating to Elk extended
well program versus $34.3 million in same period of 2006 related to drilling and seismic activities The Elk extended
well program is not directly covered by the initial indirect participation interest contributions. Therefore, we must
make separate cash calls for the IPI investors share of these costs.ü
    
    $7.0 million received on settlement of the insurance claim for Elk well blowout.ü
    
    $19.4 million of proceeds from cash calls from IPI investors in relation to the Elk extended well programs.ü
    
    $4.6 million decrease in our secured cash balances in nine month s ended September 30, 2007 versus an increase of $22.1
million in same period of 2006.ü
    
    $2.6 million as final payment in 2007 to acquire Shell Papua New Guinea as compared to $30.6 million payment in same
period of 2006 as deposit on acquisition of Shell which was effective October 1, 2006.ü
    
    $6.7 million of proceeds from cash calls to joint venture partners in relation to the natural gas segment preliminary
expenses.ü
    
    $3.6 million on plant and equipment in the first nine months of 2007 mainly on LNG project deferred costs
proportionately consolidated and Downstream projects versus $13.2 million in same period of 2006 which primarily
related to revamp and optimization activities undertaken by the refinery.
 Financing Activities
  ü
    
    $2.5 million of proceeds from Clarion Finanz on entering into an option agreement relating to the Elk well.ü
    
    $1.6 million repayment of the BNP working capital facility as compared to $12.1 million during the same period of 2006.ü
    
    During the third quarter of 2006, $34.6 million was received as further draw down of the bridging facility.
  ü
    
    $7.5 million of proceeds from Clarion Finanz on entering into an option agreement relating to the Elk well.ü
    
    $8.9 million repayment of the BNP working capital facility as compared to $4.3 million during the same period of 2006.ü
    
    During the nine months ending September 2006, $113.7 million was received as draw down from bridging facility, and
$21.5 million and $4.5 million repaid of the unsecured and secured loans respectively.
 Management Discussion and Analysis INTEROIL CORPORATION 30




---



##### 



Capital Expenditures
 Upstream Capital Expenditures
   ü
    
    $6.2 million for seismic acquisition costs relating to Elk extended well program.ü
    
    $6.8 million on drilling Elk  2 appraisal well as part of the Elk extended well program.ü
    
    Fixed assets and inventory movement made up the balance of the expenditure.
  ü
    
    $17.5 million for seismic acquisition costs relating to Elk extended well program.ü
    
    $20.0 million on drilling Elk  2 appraisal well as part of the Elk extended well program.ü
    
    Fixed assets and inventory movement made up the balance of the expenditure.
   Midstream Capital Expenditures
  Downstream Capital Expenditures
  Sources of Capital
 Upstream
   Management Discussion and Analysis INTEROIL CORPORATION 31




---



##### 



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




---



##### 



Midstream  Refining
  Midstream  Liquefaction
  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
    
    
    202,246
    
    
    
    144,246
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000Accrued financing costs
    
    
    1,450
    
    
    
    1,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(1)
    
    
    1,924
    
    
    
    581
    
    
    
    1,344
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest(2)
    
    
    96,086
    
    
    
    
    
    
    
    96,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention
licenses(3)
    
    
    4,298
    
    
    
    938
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    306,004
    
    
    
    147,214
    
    
    
    109,790
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    22,000
 (1)
    
    These amounts represent the estimated cost of completing our commitment to drill exploration
wells under our indirect participation interest agreement entered into in July 2003. See Note
18 to our unaudited financial statements for the quarter ended September 30, 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 September 30, 2007, management estimate that
a further $47,422,277 will be required to be spent to fulfill 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
    Share Capital
  Management Discussion and Analysis INTEROIL CORPORATION 34




---



##### 



Share Capital
    
    Number of SharesBalance December 31, 2005
    
    
    29,163,320Shares issued on exercise of options
    
    
    132,285Shares issued on amendment of indirect participation interest (PNGDV)
    
    
    575,575Balance December 31, 2006
    
    
    29,871,180Shares issued on conversion of indirect participation interest
    
    
    26,667Shares issued on conversion of warrants
    
    
    2,995Balance March 31, 2007
    
    
    29,900,842Shares issued on exercise of options
    
    
    22,000Balance June 30, 2007 and September 30, 2007
    
    
    29,922,842Remaining stock options authorized
    
    
    1,311,750Remaining shares issuable upon exercise of warrants
    
    
    337,252Remaining conversion rights authorized(1)
    
    
    3,306,667Other
    
    
    5,000Balance September 30, 2007 Diluted
    
    
    34,883,511
 (1)
    
    In 2005, we sold indirect participation working interests in our exploration program. Each
of the investors under our indirect participation interest agreement entered into in February
2005 have the right to convert, under certain circumstances, their interest to our common
shares. If 100% of the investors under our indirect participation interest agreement choose
to convert their interests, we would be required to issue an additional 3,306,667 common
shares.
 Derivative Instruments
    Management Discussion and Analysis INTEROIL CORPORATION       35




---



##### 



Derivative
    
    Type
    
    Notional volumes (bbls)Crude swap
    
    Sell crude
    
    50,000Crude swap
    
    Buy crude
    
    100,000Naphtha spread
    
    Sell naphtha
    
    75,000
   CRITICAL ACCOUNTING ESTIMATES
 www.sedar.com
 NEW ACCOUNTING STANDARDS
  Management Discussion and Analysis INTEROIL CORPORATION       36




---



##### 



NON-GAAP MEASURES RECONCILIATION
  Quarters ended
    
    2007
    
    2006(1) ,(2)
     
    2005(1)($ thousands) (restated)
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31
    
    Dec 31Upstream
    
    
    (5,015
    )
    
    
    (5,492
    )
    
    
    (4,009
    )
    
    
    (719
    )
    
    
    (1,107
    )
    
    
    (1,922
    )
    
    
    (5,136
    )
    
    
    (16,464
    )Midstream  Refining and
Marketing
    
    
    (1,332
    )
    
    
    3,775
    
    
    
    6,335
    
    
    
    9,144
    
    
    
    1,674
    
    
    
    (8,188
    )
    
    
    (5,229
    )
    
    
    (6,333
    )Midstream  Liquefaction
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    3,301
    
    
    
    2,760
    
    
    
    3,028
    
    
    
    1,143
    
    
    
    1,954
    
    
    
    3,559
    
    
    
    (326
    )
    
    
    3,963Corporate & Consolidated
    
    
    (3,105
    )
    
    
    4,959
    
    
    
    (1,930
    )
    
    
    (2,299
    )
    
    
    (853
    )
    
    
    (3,770
    )
    
    
    (1,321
    )
    
    
    (834
    )Earnings before interest,
taxes, depreciation and
amortization
    
    
    (10,255
    )
    
    
    5,557
    
    
    
    3,102
    
    
    
    6,873
    
    
    
    1,370
    
    
    
    (10,323
    )
    
    
    (12,014
    )
    
    
    (19,668
    )Subtract:Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    (6
    )Midstream  Refining
and Marketing
    
    
    8,155
    
    
    
    2,156
    
    
    
    2,091
    
    
    
    2,479
    
    
    
    3,329
    
    
    
    2,731
    
    
    
    2,343
    
    
    
    2,756Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    3,320
    
    
    
    (67
    )
    
    
    40
    
    
    
    37
    
    
    
    38
    
    
    
    39
    
    
    
    38
    
    
    
    44Corporate & Consolidated
    
    
    (6,252
    )
    
    
    2,768
    
    
    
    2,351
    
    
    
    3,131
    
    
    
    1,981
    
    
    
    838
    
    
    
    285
    
    
    
    195Interest expense
    
    
    5,223
    
    
    
    4,857
    
    
    
    4,482
    
    
    
    5,649
    
    
    
    5,349
    
    
    
    3,609
    
    
    
    2,667
    
    
    
    2,989Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream  Refining
and Marketing
    
    
    (69
    )
    
    
    (12
    )
    
    
    17
    
    
    
    42
    
    
    
    (46
    )
    
    
    (137
    )
    
    
    (118
    )
    
    
    (129
    )Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (261
    )
    
    
    32
    
    
    
    483
    
    
    
    996
    
    
    
    416
    
    
    
    1,005
    
    
    
    (144
    )
    
    
    1,062Corporate & Consolidated
    
    
    (214
    )
    
    
    15
    
    
    
    14
    
    
    
    11
    
    
    
    (126
    )
    
    
    163
    
    
    
    17
    
    
    
    (23
    )Income taxes &
non-controlling interest
    
    
    (544
    )
    
    
    35
    
    
    
    514
    
    
    
    1,049
    
    
    
    244
    
    
    
    1,031
    
    
    
    (245
    )
    
    
    910Upstream
    
    
    (299
    )
    
    
    338
    
    
    
    309
    
    
    
    233
    
    
    
    202
    
    
    
    173
    
    
    
    198
    
    
    
    96Midstream  Refining
and Marketing
    
    
    2,781
    
    
    
    2,749
    
    
    
    2,717
    
    
    
    2,805
    
    
    
    2,700
    
    
    
    2,626
    
    
    
    2,598
    
    
    
    2,662Midstream  Liquefaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    497
    
    
    
    552
    
    
    
    455
    
    
    
    537
    
    
    
    222
    
    
    
    89
    
    
    
    62
    
    
    
    55Corporate & Consolidated
    
    
    (20
    )
    
    
    (20
    )
    
    
    (21
    )
    
    
    (21
    )
    
    
    (24
    )
    
    
    (26
    )
    
    
    (20
    )
    
    
    (113
    )Depreciation & amortization
    
    
    2,959
    
    
    
    3,619
    
    
    
    3,460
    
    
    
    3,554
    
    
    
    3,100
    
    
    
    2,862
    
    
    
    2,838
    
    
    
    2,700Upstream
    
    
    (4,716
    )
    
    
    (5,831
    )
    
    
    (4,318
    )
    
    
    (954
    )
    
    
    (1,310
    )
    
    
    (2,098
    )
    
    
    (5,335
    )
    
    
    (16,554
    )Midstream  Refining and
Marketing
    
    
    (12,199
    )
    
    
    (1,117
    )
    
    
    1,511
    
    
    
    3,818
    
    
    
    (4,309
    )
    
    
    (13,408
    )
    
    
    (10,052
    )
    
    
    (11,622
    )Midstream  Liquefaction
    
    
    (4,104
    )
    
    
    (444
    )
    
    
    (322
    )
    
    
    (396
    )
    
    
    (298
    )
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (255
    )
    
    
    2,242
    
    
    
    2,050
    
    
    
    (427
    )
    
    
    1,278
    
    
    
    2,426
    
    
    
    (282
    )
    
    
    2,802Corporate & Consolidated
    
    
    3,382
    
    
    
    2,196
    
    
    
    (4,275
    )
    
    
    (5,420
    )
    
    
    (2,684
    )
    
    
    (4,745
    )
    
    
    (1,603
    )
    
    
    (893
    )Net income (loss) per segment
    
    
    (17,892
    )
    
    
    (2,954
    )
    
    
    (5,354
    )
    
    
    (3,379
    )
    
    
    (7,323
    )
    
    
    (17,825
    )
    
    
    (17,272
    )
    
    
    (26,267
    )
 Management Discussion and Analysis INTEROIL CORPORATION       37




---



##### 



(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       38




---



##### 



LNG
 LPG
 LSWR
 Mark-to-market
 MOPS
 Naphtha
 Natural gas
 Natural gas measurements .
 
 PGK
 PPL
 PRL
 Sweet/sour crude
 Management Discussion and Analysis INTEROIL CORPORATION       39