TABLE OF CONTENTS
 FORWARD-LOOKING STATEMENTS
    
    
    2OIL AND GAS DISCLOSURES
    
    
    3INTRODUCTION
    
    
    4INDUSTRY TRENDS AND KEY EVENTS
    
    
    4RISK FACTORS
    
    
    6BUSINESS STRATEGY
    
    
    7OPERATIONAL HIGHLIGHTS
    
    
    7SELECTED ANNUAL FINANCIAL INFORMATION AND HIGHLIGHTS
    
    
    9YEAR AND QUARTER IN REVIEW
    
    
    13LIQUIDITY AND CAPITAL RESOURCES
    
    
    20CRITICAL ACCOUNTING ESTIMATES
    
    
    27NEW ACCOUNTING STANDARDS
    
    
    28NON-GAAP MEASURES AND RECONCILIATION
    
    
    30PUBLIC SECURITIES FILINGS
    
    
    31DISCLOSURE CONTROLS AND PROCEDURES
    
    
    32GLOSSARY OF TERMS
    
    
    32
    Management Discussion and Analysis INTEROIL CORPORATION      1




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FORWARD-LOOKING STATEMENTS
   
    
    the inherent uncertainty of oil and gas exploration activities;
    
    potential effects of oil and gas price declines;
    
    the uncertain outcome of our negotiations with the Papua New Guinea government to
determine the price at which our refined products may be sold;
    
    the availability of crude feedstock at economic rates;
    
    the ability to meet maturing indebtedness;
    
    the uncertainty in our ability to attract capital;
    
    general economic conditions and illiquidity in financial and credit markets
    
    interest rate risk;
    
    the impact of competition
    
    losses from our hedging activities;
    
    inherent limitations in all control systems, and misstatements due to error that may
occur and not be detected;
    
    fluctuations in currency exchange rates;
    
    the recruitment and retention of qualified personnel;
    
    the availability and cost of drilling rigs, oilfield equipment, and other oilfield
exploration services;
    
    our ability to finance the development of our LNG facility;
    
    our ability to timely construct and commission our LNG facility;
    
    the margins for our refined products;
    
    the inability of our refinery to operate at full capacity;
    
    difficulties in marketing our refinerys output;
    
    exposure to certain uninsured risks stemming from our refining operations;
    
    weather conditions and unforeseen operating hazards;
    
    political, legal and economic risks in Papua New Guinea;
    
    compliance with and changes in foreign governmental laws and regulations, including
environmental laws;
    
    landowner claims;
    
    the uncertainty in being successful in pending lawsuits and other proceedings;
    
    law enforcement difficulties;
    
    the impact of legislation regulating emissions of greenhouse gases on current and
potential markets for our products;
    
    stock price volatility; and
    
    contractual defaults.
  Management Discussion and Analysis INTEROIL CORPORATION      2




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OIL AND GAS DISCLOSURES
  www.interoil.com www.sec.gov.
  Management Discussion and Analysis INTEROIL CORPORATION      3




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INTRODUCTION
  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  Produces refined petroleum products at Napa Napa in
Port Moresby, Papua New Guinea for the domestic market and for
export.
Liquefaction  Developing an onshore liquefied natural gas
processing facility in Papua New Guinea.Downstream
    
    Wholesale and Retail Distribution  Markets and distributes
refined petroleum products domestically in Papua New Guinea on
a wholesale and retail basis.Corporate
    
    Corporate  Provides support to the other business segments by
engaging in business development and improvement activities and
providing general and administrative services and management,
undertakes financing and treasury activities, and is
responsible for government and investor relations. General and
administrative and integrated costs are recovered from business
segments on an equitable basis. Our corporate segment results
also include consolidation adjustments.
 
 INDUSTRY TRENDS AND KEY EVENTS
 Competitive Environment and Regulated Pricing
   Management Discussion and Analysis INTEROIL CORPORATION 4




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Credit Crisis and Financing Arrangements
      Crude Prices
   Management Discussion and Analysis INTEROIL CORPORATION 5




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Refining Margin
   Domestic Demand
   Interest Rates
  Skill and Resource Scarcity
  Exchange Rates
  
 RISK FACTORS
 Risk Factors www.sedar.com
 Management Discussion and Analysis INTEROIL CORPORATION 6




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BUSINESS STRATEGY
  
    
    Developing our position as a business operator in Papua New Guinea
    
    Enhance the refining and distribution business in Papua New Guinea
    
    Maximizing the value of our exploration assets
    
    Building an export liquefaction gas business in Papua New Guinea
    
    Positioning ourselves for long term success
 Business Strategy www.sedar.com
 
 OPERATIONAL HIGHLIGHTS
 Summary of operational highlights
  Upstream
 
    
    On May 1, 2008, the Elk-4A well flowed natural gas and gas liquids to surface confirming
a discovery in the Antelope structure. Elk-4 well was completed as a potential producer
and completion work ended on August 31, 2008.
    
    On May 5, 2008, an Indirect Participation Interest (IPI) investor waived conversion
rights to 546,667 of our common shares under the IPI agreement.
    
    On June 1, 2008, we sold our 28.56% interest in Petroleum Retention License No. (PRL) 5
for $5.0 million and our 43.13% interest in PRL 4 for $1.5 million.
    
    On June 4, 2008, we appointed an independent engineering firm to evaluate the Elk and
Antelope fields in accordance with National Instrument 51-101 Standards of Disclosure for
Oil and Gas Activities. Their evaluation, in compliance with National Instrument 51-101,
is provided in the Annual Information Form for the year ended December 31, 2008.
    
    On August 15, 2008, an IPI investor converted its 3.375% indirect participation interest
into 450,000 common shares.
    
    On September 4, 2008, the Elk-4 well flowed gas at a rate equivalent to 105 mmscf per
day. Based on our drill stem test results of 18bbl/mmcfd, this equates to a rate of 1,890
bbl/day of condensate.
    
    On September 23, 2008, an IPI investor waived conversion rights to 150,000 of our common
 shares under the IPI agreement.
    
    Antelope-1 well was spudded on October 15, 2008.
    
    On October 30, 2008 Petromin PNG Holdings Limited entered into an agreement to acquire a
20.5% interest in the Elk/Antelope field on behalf of the Papua New Guinea Government.
    
    In December 2008, we submitted applications for the extension of our PPL 238, 237 and
236 licenses for a second term. These licenses were expiring in March 2009.
    
    Subsequent to year end, on March 2, 2009, Antelope-1 well flowed gas at a rate
equivalent to 382 mmscf per day with 5,000 bbl/day of condensate for a total 68,700 barrels
of oil equivalent per day.
    
    Subsequent to year end, on March 5, 2009, all three licenses have been re-issued for a
five year term covering what we believe the most prospective 50% of the acreage on these
licenses.
 Management Discussion and Analysis INTEROIL CORPORATION       7




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Midstream  Refining
 
    
    Net income was $4.7 million for fiscal year 2008 which is the first year of profitable
operations for the refinery.
    
    Refining operations had a gross margin of $6.3 million and EBITDA, a non-GAAP measure,
of $25.6 million for the year.
    
    Total refinery throughput was 22,034 barrels per operating day compared with 19,713
barrels per operating day in 2007.
    
    BNP Paribas working capital facility was increased by $20.0 million to $190.0 million as
part of current year renewal process.
 Midstream  Liquefaction
 
    
    Net loss was $7.9 million during the year ended December 31, 2008, being our share of
expenses incurred by the PNG LNG Inc. Joint Venture during the year on progressing the LNG
Project.
    
    In late October 2008, certain steps were taken with a view to ensuring that offtake
arrangements for the proposed LNG plant were able to be negotiated with industry-based
entities.
    
    Subsequent to year ended December 31, 2008, InterOil LNG Holdings Inc. and Pacific LNG
Operations Ltd, acquired equal share of Merrill Lynchs interest in the Joint Venture
Company. Following this transaction, Merrill Lynch does not own any interest in the LNG
project and have agreed to release all of their outstanding claims relating to the joint
venture.
    
    Negotiations on a project agreement with the Papua New Guinea government were
progressed.
    
    Progressed engineering design activities for the proposed liquefaction plant.
 Downstream
 
    
    Downstream operations net loss was $1.2 million for the year, principally as a result of
a $4.3 million inventory write down due to a rapid decrease in product prices following
crude price movements.
    
    Downstream operations generated gross margin of $19.9 million and EBITDA of $5.8 million
for the year ended December 31, 2008.
    
    Total Downstream sales volumes were 548.0 million liters in 2008, compared with 556.4
million liters in 2007.
    
    We secured a PGK 150.0 million (approximately $57.5 million) combined revolving working
capital facility from Bank of South Pacific Limited and Westpac Bank PNG Limited.
 Corporate
 
    
    On May 5, 2008, we converted $60.0 million of the expiring $130.0 million bridging
facility into common shares and repaid the balance of $70.0 million on May 12, 2008 with
funds raised from the issuance of $95.0 million of 8% subordinated convertible debentures.
    
    In July and August 2008, all $15.0 million worth of issued Series A preference shares
were converted into 517,777 common shares.
    
    In July and August 2008, $15.0 million of 8% debentures were converted into 600,000
common shares.
    
    In August 2008, we filed an omnibus shelf prospectus with the Ontario Securities
Commission and a corresponding registration statement on Form F-10/A with the United States
Securities and Exchange Commission which will enable us to issue, from time to time up to
an aggregate of $200.0 million of debt securities, common shares, preferred shares,
warrants or a combination thereof in one or more offerings.
    
    In November 2008, $1.0 million of 8% debentures were converted into 41,000 common shares.
 Management Discussion and Analysis INTEROIL CORPORATION      8




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SELECTED ANNUAL FINANCIAL INFORMATION AND HIGHLIGHTS
 Consolidated Results for the year ended December 31, 2008 compared to year ended December 31, 2007
and 2006
 Consolidated - Operating results
    
    Year ended December 31,($ thousands, except per share data)
    
    2008
    
    
    
    2007
    
    
    
    2006Sales and operating revenues
    
    
    915,579
    
    
    
    
    625,526
    
    
    
    
    511,088Interest revenue
    
    
    932
    
    
    
    
    2,180
    
    
    
    
    3,224Other non-allocated revenue
    
    
    3,216
    
    
    
    
    2,667
    
    
    
    
    3,748Total revenue
    
    
    919,727
    
    
    
    
    630,373
    
    
    
    
    518,060Cost of sales and operating expenses
    
    
    (888,623
    )
    
    
    
    (573,609
    )
    
    
    
    (499,495
    )Office and administration and other expenses
    
    
    (42,814
    )
    
    
    
    (36,196
    )
    
    
    
    (27,395
    )Derivative gain/(loss)
    
    
    24,039
    
    
    
    
    (7,272
    )
    
    
    
    2,560Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    6,553
    
    
    
    
    Exploration costs
    
    
    (996
    )
    
    
    
    (13,305
    )
    
    
    
    (6,177
    )Exploration impairment
    
    
    (108
    )
    
    
    
    (1,243
    )
    
    
    
    (1,647
    )Gain on sale of oil and gas properties assets
    
    
    11,235
    
    
    
    
    
    
    
    
    
    Earnings before interest, taxes, depreciation and amortization
(non-GAAP measure)(1)
    
    
    22,460
    
    
    
    
    5,301
    
    
    
    
    (14,094
    )Depreciation and amortization
    
    
    (14,143
    )
    
    
    
    (13,024
    )
    
    
    
    (12,353
    )Interest expense
    
    
    (20,032
    )
    
    
    
    (20,005
    )
    
    
    
    (17,273
    )Loss before income taxes and non-controlling interest
    
    
    (11,715
    )
    
    
    
    (27,728
    )
    
    
    
    (43,720
    )Income tax expense
    
    
    (81
    )
    
    
    
    (1,207
    )
    
    
    
    (2,343
    )Non-controlling interest
    
    
    (1
    )
    
    
    
    22
    
    
    
    
    264Net loss
    
    
    (11,797
    )
    
    
    
    (28,913
    )
    
    
    
    (45,799
    )Loss per share (dollars) (basic)
    
    
    (0.35
    )
    
    
    
    (0.96
    )
    
    
    
    (1.55
    )Loss per share (dollars) (diluted)
    
    
    (0.35
    )
    
    
    
    (0.96
    )
    
    
    
    (1.55
    )Total assets
    
    
    591,843
    
    
    
    
    537,815
    
    
    
    
    505,239Total liabilities
    
    
    364,704
    
    
    
    
    441,712
    
    
    
    
    417,060Total long-term liabilities
    
    
    208,224
    
    
    
    
    174,966
    
    
    
    
    283,306Gross margin(2)
    
    
    26,956
    
    
    
    
    51,917
    
    
    
    
    11,593Cash flows (used in)/provided by operating activities(3)
    
    
    15,586
    
    
    
    
    (31,620
    )
    
    
    
    2,187U.S. GAAP net profit (loss)(4)
    
    
    (3,943
    )
    
    
    
    (19,205
    )
    
    
    
    (45,058
    )
 (1)
    
    Earnings before interest, taxes, depreciation and
amortization, or EBITDA, is a non-GAAP measure and is
reconciled to Canadian GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    Gross Margin is a non-GAAP measure and is sales and operating revenues less cost of sales
and operating expenses.(3)
    
    Refer to Liquidity and Capital Resources  Summary of Cash Flows for detailed cash flow
analysis.(4)
    
    We are not presenting all the U.S. GAAP information in this MD&A. Readers should review note
29  Reconciliation to the generally accepted accounting principles in the United States to
the audited financial statements for the year ended December 31, 2008 for the reconciliation
of the Canadian GAAP and U.S. GAAP information. Analysis of Financial Condition Comparing Year Ended December 31, 2008 and 2007
  Management Discussion and Analysis INTEROIL CORPORATION 9




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Analysis of Consolidated Cash Flows Comparing Year Ended December 31, 2008 and 2007
     Analysis of Consolidated Financial Results Comparing Year and Quarter Ended December 31, 2008 and
2007
  Management Discussion and Analysis INTEROIL CORPORATION      10




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Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)$17.1
    
    
    
    ($31.5
    )
    
    Net profit/(loss) variance for
the comparative periods
primarily due to:Ø
    
    
    ($25.0
    )
    
    
    ($61.3
    )
    
    Decrease in gross margin due
to negative effects of IPP
movements due to fall in crude
prices, and the associated
timing and margin risk. Part
of these margin declines have
been offset by the gains from
non-hedge accounted
derivatives noted below.
The results for the quarter
and year ended December 31,
2008 also included an
inventory write-down of $8.4
million. No write-downs were
necessary for the same periods
in 2007.Ø
    
    
    $31.3
    
    
    
    $29.1
    
    
    Increase in gains from
derivative transactions that
were not hedge accounted.Ø
    
    
    ($5.4
    )
    
    
    $1.0
    
    
    Increase in office and
administration and other
expenses during the year
primarily due to higher legal
consulting expenses on account
of capital raisings and legal
opinions in relation to the
Merrill Lynch arbitration,
higher employee expenses due
to increase in employees and
wage increases, higher share
compensation expense, higher
rig repairs and maintenance
expenses and an increase in
insurance costs.Ø
    
    
    ($1.2
    )
    
    
    ($4.8
    )
    
    Increase in office and
administration and other
expenses due to lower foreign
exchange gains with lower
appreciation of PGK against
USD compared to prior periods.Ø
    
    
    $6.5
    
    
    
    
    
    
    Gain on sale of our interest
in PRL4 and PRL5 to Horizon
Oil Limited in June 2008.
 Management Discussion and Analysis INTEROIL CORPORATION 11




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Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)Ø
    
    
    $4.7
    
    
    
    
    
    
    Gain from conveyance
accounting following decisions
by two IPI investors decision
to waive their conversion
rights under the IPI
agreement.Ø
    
    
    $12.3
    
    
    
    $0.2
    
    
    Higher exploration costs
expensed during prior periods
as the Elk seismic program was
being conducted; the costs of
which were expensed as
incurred under the successful
efforts method of accounting.Ø
    
    
    ($6.6
    )
    
    
    
    
    
    One-time gain recognized in
2007 on the signing of the LNG
Shareholders Agreement in
relation to the discounted
interest rate received on the
bridging facility from Merrill
Lynch.Ø
    
    
    $1.1
    
    
    
    $5.3
    
    
    Lower income tax expense
primarily in Downstream
operations in the quarter due
to lower profits.
 Summary of Consolidated Quarterly Financial Results for Past Eight Quarters
  Quarters ended
    
    2008
    
    
    
    2007($ thousands except per share
    
    
    
    
    
    
    Sep-30
    
    
    
    Jun-30
    
    
    
    Mar-31
    
    
    
    Dec-31
    
    
    
    Sep-30
    
    
    
    Jun-30
    
    
    
    Mar-31data)
    
    Dec-31
    
    
    
    (restated)
    
    
    
    (restated)
    
    
    
    (restated)
    
    
    
    (restated)
    
    
    
    (restated)
    
    
    
    (restated)
    
    
    
    (restated)Upstream
    
    
    487
    
    
    
    
    698
    
    
    
    
    895
    
    
    
    
    618
    
    
    
    
    579
    
    
    
    
    1,176
    
    
    
    
    397
    
    
    
    
    395Midstream  Refining
    
    
    194,617
    
    
    
    
    216,750
    
    
    
    
    197,864
    
    
    
    
    176,973
    
    
    
    
    137,509
    
    
    
    
    168,737
    
    
    
    
    114,584
    
    
    
    
    103,055Midstream  Liquefaction
    
    
    23
    
    
    
    
    35
    
    
    
    
    19
    
    
    
    
    13
    
    
    
    
    26
    
    
    
    
    10
    
    
    
    
    5
    
    
    
    
    Downstream
    
    
    128,540
    
    
    
    
    172,528
    
    
    
    
    140,467
    
    
    
    
    116,048
    
    
    
    
    118,495
    
    
    
    
    102,786
    
    
    
    
    93,186
    
    
    
    
    77,812Corporate and Consolidated
    
    
    (105,100
    )
    
    
    
    (126,280
    )
    
    
    
    (94,231
    )
    
    
    
    (101,238
    )
    
    
    
    (83,776
    )
    
    
    
    (82,605
    )
    
    
    
    (67,633
    )
    
    
    
    (54,366
    )Sales and operating revenues
    
    
    218,567
    
    
    
    
    263,731
    
    
    
    
    245,014
    
    
    
    
    192,414
    
    
    
    
    172,833
    
    
    
    
    190,104
    
    
    
    
    140,539
    
    
    
    
    126,896Upstream
    
    
    (2,483
    )
    
    
    
    231
    
    
    
    
    10,164
    
    
    
    
    (1,135
    )
    
    
    
    (3,128
    )
    
    
    
    (5,015
    )
    
    
    
    (5,492
    )
    
    
    
    (4,009
    )Midstream  Refining
    
    
    (13,976
    )
    
    
    
    17,516
    
    
    
    
    16,329
    
    
    
    
    5,724
    
    
    
    
    9,589
    
    
    
    
    (1,332
    )
    
    
    
    3,775
    
    
    
    
    6,336Midstream  Liquefaction
    
    
    (2,501
    )
    
    
    
    (1,570
    )
    
    
    
    (1,784
    )
    
    
    
    (1,636
    )
    
    
    
    (797
    )
    
    
    
    (4,104
    )
    
    
    
    (444
    )
    
    
    
    (322
    )Downstream
    
    
    (7,244
    )
    
    
    
    610
    
    
    
    
    7,893
    
    
    
    
    4,529
    
    
    
    
    3,627
    
    
    
    
    3,301
    
    
    
    
    2,760
    
    
    
    
    3,028Corporate and Consolidated
    
    
    (2,639
    )
    
    
    
    27
    
    
    
    
    (5,248
    )
    
    
    
    (347
    )
    
    
    
    (2,394
    )
    
    
    
    (3,105
    )
    
    
    
    4,959
    
    
    
    
    (1,931
    )Earnings before interest, taxes,
depreciation and amortization
(1)
    
    
    (28,843
    )
    
    
    
    16,814
    
    
    
    
    27,354
    
    
    
    
    7,135
    
    
    
    
    6,897
    
    
    
    
    (10,255
    )
    
    
    
    5,558
    
    
    
    
    3,102Upstream
    
    
    (4,003
    )
    
    
    
    (1,039
    )
    
    
    
    9,188
    
    
    
    
    (1,993
    )
    
    
    
    (3,736
    )
    
    
    
    (4,893
    )
    
    
    
    (6,008
    )
    
    
    
    (4,524
    )Midstream  Refining
    
    
    (19,490
    )
    
    
    
    12,660
    
    
    
    
    11,344
    
    
    
    
    202
    
    
    
    
    2,990
    
    
    
    
    (12,199
    )
    
    
    
    (1,117
    )
    
    
    
    1,511Midstream  Liquefaction
    
    
    (2,597
    )
    
    
    
    (1,677
    )
    
    
    
    (1,909
    )
    
    
    
    (1,728
    )
    
    
    
    (877
    )
    
    
    
    (4,157
    )
    
    
    
    (444
    )
    
    
    
    (322
    )Downstream
    
    
    (5,901
    )
    
    
    
    (886
    )
    
    
    
    3,383
    
    
    
    
    2,198
    
    
    
    
    670
    
    
    
    
    (255
    )
    
    
    
    2,242
    
    
    
    
    2,050Corporate and Consolidated
    
    
    (2,238
    )
    
    
    
    169
    
    
    
    
    (6,405
    )
    
    
    
    (1,075
    )
    
    
    
    (1,760
    )
    
    
    
    3,612
    
    
    
    
    2,373
    
    
    
    
    (4,069
    )Net profit/(loss) per segment
    
    
    (34,229
    )
    
    
    
    9,227
    
    
    
    
    15,601
    
    
    
    
    (2,396
    )
    
    
    
    (2,713
    )
    
    
    
    (17,892
    )
    
    
    
    (2,954
    )
    
    
    
    (5,354
    )Net profit/(loss) per share (dollars)Per Share  Basic
    
    
    (0.96
    )
    
    
    
    0.26
    
    
    
    
    0.48
    
    
    
    
    (0.08
    )
    
    
    
    (0.09
    )
    
    
    
    (0.60
    )
    
    
    
    (0.10
    )
    
    
    
    (0.18
    )Per Share  Diluted
    
    
    (0.96
    )
    
    
    
    0.22
    
    
    
    
    0.40
    
    
    
    
    (0.08
    )
    
    
    
    (0.09
    )
    
    
    
    (0.60
    )
    
    
    
    (0.10
    )
    
    
    
    (0.18
    )
 (1)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure and is
reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    During Q4 2008, the Company has transferred notional interest cost from Corporate segment to
the Upstream and Midstream  Liquefaction segments to reflect a more accurate view of its
segment results. The prior period comparatives have been reclassified to conform to the
current classification. Management Discussion and Analysis INTEROIL CORPORATION      12




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##### 



YEAR AND QUARTER IN REVIEW
  UPSTREAM  YEAR AND QUARTER IN REVIEW
 Upstream  Operating results
    
    Year ended December 31,($ thousands, unless otherwise indicated)
    
    2008
    
    
    2007 (restated)Other non-allocated revenue
    
    
    2,697
    
    
    
    
    2,547Total revenue
    
    
    2,697
    
    
    
    
    2,547Office and administration and other expenses
    
    
    (6,051
    )
    
    
    
    (5,643
    )Exploration costs
    
    
    (996
    )
    
    
    
    (13,305
    )Exploration impairment
    
    
    (108
    )
    
    
    
    (1,243
    )Gain on sale of oil and gas properties
    
    
    11,235
    
    
    
    
    Earnings before interest, taxes, depreciation and amortization
(non-GAAP measure)(1)
    
    
    6,777
    
    
    
    
    (17,644
    )Depreciation and amortization
    
    
    (597
    )
    
    
    
    (483
    )Interest expense (2)
    
    
    (4,027
    )
    
    
    
    (1,034
    )Profit/(loss) before income taxes and non-controlling interest
    
    
    2,153
    
    
    
    
    (19,161
    )Income tax expense
    
    
    
    
    
    
    
    Net profit/(loss)
    
    
    2,153
    
    
    
    
    (19,161
    )
 (1)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure and is
reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    During the year, the Company has transferred notional interest cost from Corporate segment to
the Upstream and Midstream  Liquefaction segments to reflect a more accurate view of its
segment results. The prior year comparatives have been reclassified to conform to the current
classification. The entire interest expense in this segment relates to this notional interest
cost transferred from Corporate segment.
 Analysis of Upstream Financial Results Comparing Quarter and Year Ended December 31, 2008 and 2007
  Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)$21.3
    
    
    
    ($0.3
    )
    
    Net profit/(loss) variance for the comparative periods primarily due to:Ø
    
    
    $6.5
    
    
    
    
    Gain on sale of our
interest in PRL4
and PRL5 to Horizon
in June 2008.Ø
    
    
    $4.7
    
    
    
    
    Gain from
conveyance
accounting
following the
decisions by two
IPI investors to
waive their
conversion rights
under the IPI
agreement.Ø
    
    
    $12.3
    
    
    
    $0.2
    
    
    Lower exploration
costs expensed
during current
periods as the Elk
seismic program was
completed in the
prior period; costs
relating to the
seismic program
were expensed as
incurred under the
successful efforts
method of
accounting.Ø
    
    
    $1.1
    
    
    
    $0.7
    
    
    Lower exploration
impairment during
current period.
Prior year expense
related mainly to
the write off of
cash calls paid by
us for seismic and
exploratory
activities in PRL 4
and 5 conducted by
the joint venture operator.
 Ø
    
    
    ($3.0
    )
    
    
    ($0.9
    )
    
    Higher interest
expense due to an
increase in the
inter-company loan
balances from
Corporate segment.
 Management Discussion and Analysis   INTEROIL CORPORATION       13




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##### 



MIDSTREAM REFINING  QUARTER AND YEAR IN REVIEW
 Midstream Refining  Operating results
    
    Year ended December 31,($ thousands, unless otherwise indicated)
    
    2008
    
    
    2007External sales
    
    
    358,896
    
    
    
    
    233,869Inter-segment revenue
    
    
    427,218
    
    
    
    
    289,947Interest and other revenue
    
    
    90
    
    
    
    
    70Total segment revenue
    
    
    786,204
    
    
    
    
    523,886Cost of sales and operating expenses
    
    
    (779,832
    )
    
    
    
    (495,059
    )Office and administration and other expenses
    
    
    (4,817
    )
    
    
    
    (3,188
    )Derivative gain/(loss)
    
    
    24,039
    
    
    
    
    (7,272
    )Earnings before interest, taxes, depreciation and
amortization (non-GAAP measure)(1)
    
    
    25,594
    
    
    
    
    18,367Depreciation and amortization
    
    
    (10,969
    )
    
    
    
    (10,405
    )Interest expense
    
    
    (9,908
    )
    
    
    
    (16,798
    )Profit/(loss) before income taxes and non-controlling interest
    
    
    4,717
    
    
    
    
    (8,836
    )Income tax expense
    
    
    
    
    
    
    
    Non-controlling interest
    
    
    
    
    
    
    
    21Net profit/(loss)
    
    
    4,717
    
    
    
    
    (8,815
    )Gross Margin(2)
    
    
    6,282
    
    
    
    
    28,757
 (1)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure
and is reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    Gross Margin is a non-GAAP measure and is external sales and inter-segment revenue less
cost of sales and operating expenses.
 Midstream Refining Operating Review
 Quarter ended
    
    
    Year endedDecember 31,
    
    
    December 31,Key Refining Metrics
    
    2008
    
    2007
    
    
    2008
    
    2007Throughput (barrels per day)(1)
    
    
    21,206
    
    
    
    19,646
    
    
    
    
    22,034
    
    
    
    19,713Cost of production per barrel(2)
    
    $
    2.45
    
    
    $
    3.03
    
    
    
    $
    2.97
    
    
    $
    2.54Working capital financing cost per barrel of
production(2)
    
    $
    0.57
    
    
    $
    0.98
    
    
    
    $
    1.01
    
    
    $
    0.83Distillates as percentage of production
    
    
    53.60
    %
    
    
    63.70
    %
    
    
    
    56.00
    %
    
    
    60.05
    %
 (1)
    
    Throughput per day has been calculated excluding shut down days. During 2008 and 2007, the
refinery was shut down for 101 days and 71 days, respectively.(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       14




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##### 



Analysis of Midstream Refining Financial Results Comparing the Year and Quarter Ended December 31,
2008 and 2007
   Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)$13.5
    
    
    
    ($22.5
    )
    
    Net profit/(loss) variance for the comparative periods primarily due to:Ø
    
    
    ($22.5
    )
    
    
    ($47.6
    )
    
    Change in Gross Margin was due to the following contributing
factors:- Decreasing feedstock price environment resulting in lower product prices- Available crude feedstock composition resulted in poorer refining yield structure+ Full year 2008 utilizing revised IPP pricing formula vs. one month in fourth quarter
2007.+ Improved Naphtha premium in contract+ Improved distillate margins+ Improved low sulphur waxy residue margins in fourth

quarter 2008We estimate that the fall in crude prices in the fourth quarter
of 2008 reduced the gross margins of our refinery operations by
approximately $45.9 million. This includes a year end
inventory revaluation of $4.2 million.Ø
    
    
    $31.3
    
    
    
    $29.1
    
    
    Increase in derivative gains from non-hedge accounted contracts.Ø
    
    
    $ 6.9
    
    
    
    $1.6
    
    
    Reduction in interest expense as a result of a decrease in
inter-company loans (due to transfer of certain loans to
investments) and installment repayments made on OPIC loan
balance.Ø
    
    
    ($0.6
    )
    
    
    ($5.2
    )
    
    Reduction in foreign exchange gains due to the currency
fluctuations between PGK and the U.S. Dollar. This item is
included within the office and administration and other
expenses classification in the table above.
 Management Discussion and Analysis   INTEROIL CORPORATION       15




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##### 



MIDSTREAM LIQUEFACTION  YEAR AND QUARTER IN REVIEW
 Midstream Liquefaction  Operating results
    
    Year ended December 31,($ thousands, unless otherwise indicated)
    
    2008
    
    
    2007 (restated)Interest and other revenue
    
    
    91
    
    
    
    
    41Total segment revenue
    
    
    91
    
    
    
    
    41Office and administration and other expenses
    
    
    (7,582
    )
    
    
    
    (5,708
    )Earnings before interest, taxes, depreciation and
amortization (non-GAAP measure)(1)
    
    
    (7,491
    )
    
    
    
    (5,667
    )Depreciation and amortization
    
    
    (69
    )
    
    
    
    (16
    )Interest expense (2)
    
    
    (241
    )
    
    
    
    (105
    )Loss before income taxes and non-controlling interest
    
    
    (7,801
    )
    
    
    
    (5,788
    )Income tax expense
    
    
    (110
    )
    
    
    
    (13
    )Net loss
    
    
    (7,911
    )
    
    
    
    (5,801
    )
 (1)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure and is
reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    During the year, the Company has transferred notional interest cost from Corporate segment to
the Upstream and Midstream  Liquefaction segments to reflect a more accurate view of its
segment results. The prior year comparatives have been reclassified to conform to the current
classification. The entire interest expense in this segment relates to this notional interest
cost transferred from Corporate segment.
 Analysis of Midstream Liquefaction Financial Results Comparing the Years and Quarters Ended
December 31, 2008 and 2007
      Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)($2.1
    )
    
    
    ($1.7
    )
    
    Net profit/(loss)
variance for the
comparative periods
primarily due to:Ø
    
    
    ($5.1
    )
    
    
    ($1.6
    )
    
    Increased office
and administration
and other expenses,
excluding the loss
on proportionate
consolidation
explained below,
mainly due to
professional fees
incurred in
negotiations with
the Government of
Papua New Guinea on
the LNG Project
Agreement and work
on drafting the
engineering,
procurement and
commissioning
contract for the
LNG project.
Employee and
general
administration
costs have also
increased during
2008 with increased
activity on the
Project.
 Management Discussion and Analysis   INTEROIL CORPORATION       16




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##### 



Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)Ø
    
    $
    3.2
    
    
    
    ($0.1
    )
    
    Relates to the loss
on proportionate
consolidation of
PNG LNG Inc.
recognized
initially of $2.4
million on signing
of the Shareholders
Agreement in 2007.
These losses and
any subsequent
losses incurred
will be recouped
during the period
as the other JV
partners equalize
their JV interest
through payment of
cash calls. $0.8
million of these
losses were
recouped in 2008.
 DOWNSTREAM YEAR AND QUARTER IN REVIEW
 Downstream  Operating results
    
    Year ended December 31,($ thousands, unless otherwise indicated)
    
    2008
    
    2007External sales
    
    
    556,683
    
    
    
    391,657Inter-segment revenue
    
    
    185
    
    
    
    81Interest and other revenue
    
    
    715
    
    
    
    541Total segment revenue
    
    
    557,583
    
    
    
    392,279Cost of sales and operating expenses
    
    
    (536,920
    )
    
    
    (368,803
    )Office and administration and other expenses
    
    
    (14,876
    )
    
    
    (10,759
    )Earnings before interest, taxes, depreciation and
amortization (non-GAAP measure)(1)
    
    
    5,787
    
    
    
    12,717Depreciation and amortization
    
    
    (2,571
    )
    
    
    (2,205
    )Interest expense
    
    
    (4,838
    )
    
    
    (4,438
    )Profit/(loss) before income taxes and non-controlling
interest
    
    
    (1,622
    )
    
    
    6,074Income tax expense
    
    
    414
    
    
    
    (1,366
    )Net profit/(loss)
    
    
    (1,208
    )
    
    
    4,708Gross Margin(2)
    
    
    19,948
    
    
    
    22,935
 (1)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure and is
reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(2)
    
    Gross Margin is a non-GAAP measure and is external sales and inter-segment revenue less
cost of sales and operating expenses.
 Downstream Operating Review
 Quarter Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,Key Downstream Metrics
    
    2008
    
    2007
    
    
    2008
    
    2007Sales volumes (millions of liters)
    
    
    151.4
    
    
    
    151.5
    
    
    
    
    548.0
    
    
    
    556.4Cost of distribution per liter ($
per liter)(1)
    
    $
    0.07
    
    
    $
    0.06
    
    
    
    $
    0.06
    
    
    $
    0.06
 (1)
    
    Cost of distribution per liter includes land based freight costs and operational costs. It
excludes depreciation and interest.
 Analysis of Downstream Financial Results Comparing the Years and Quarters Ended December 31, 2008
and 2007
  Management Discussion and Analysis   INTEROIL CORPORATION       17




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##### 



Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)($5.9
    )
    
    
    ($6.6
    )
    
    Net profit/(loss) variance for the comparative periods
primarily due to:Ø
    
    
    ($2.8
    )
    
    
    ($14.5
    )
    
    We estimate that the fall in IPP in the last quarter of 2008
reduced the gross margins of our Downstream operations by
approximately $6.4 million. This includes a net realizable
value write down of $4.3 million on our year end finished
products inventory held by our distribution operations.Ø
    
    
    ($4.1
    )
    
    
    $3.9
    
    
    Increase in office and administration and other expenses for
the full year mainly due to higher Corporate allocations and
Midstream recharges for storage facilities. The quarterly
expense decreased compared to prior period due to reduced
trade receivables provisions and rationalization of overhead
costs following the Shell acquisition.Ø
    
    
    ($0.4
    )
    
    
    ($1.0
    )
    
    Increase in interest expense charged on inter-company loans
from Corporate.Ø
    
    
    $1.8
    
    
    
    $5.4
    
    
    Reduction in income tax expense due to lower operating profits.
 CORPORATE YEAR AND QUARTER IN REVIEW
 Corporate  Operating results
    
    Year ended December 31,($ thousands, unless otherwise indicated)
    
    2008
    
    
    2007 (restated)Inter-segment revenue elimination (1)
    
    
    (427,404
    )
    
    
    
    (290,028
    )Interest revenue
    
    
    555
    
    
    
    
    1,648Other non-allocated revenue
    
    
    
    
    
    
    
    Total revenue
    
    
    (426,849
    )
    
    
    
    (288,380
    )Cost of sales and operating expenses elimination (1)
    
    
    428,128
    
    
    
    
    290,253Office and administration and other expenses (2)
    
    
    (9,486
    )
    
    
    
    (10,897
    )Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    6,553Earnings before interest, taxes, depreciation and
amortization (non-GAAP measure)(3)
    
    
    (8,207
    )
    
    
    
    (2,471
    )Depreciation and amortization (4)
    
    
    64
    
    
    
    
    83Interest expense (5) (6)
    
    
    (1,018
    )
    
    
    
    2,371Loss before income taxes and non-controlling interest
    
    
    (9,161
    )
    
    
    
    (17
    )Income tax expense
    
    
    (386
    )
    
    
    
    171Non-controlling interest
    
    
    (1
    )
    
    
    
    2Net profit/(loss)
    
    
    (9,548
    )
    
    
    
    156Gross Margin(7)
    
    
    724
    
    
    
    
    225
 (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)
    
    Earnings before interest, taxes, depreciation and amortization is a non-GAAP measure and is
reconciled to GAAP in the section to this document entitled Non-GAAP measures and
reconciliation.(4)
    
    Represents the amortization of a portion of costs capitalized to assets on consolidation.
 Management Discussion and Analysis   INTEROIL CORPORATION       18




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##### 



(5)
    
    Includes the elimination of interest accrued between segments.(6)
    
    During the year, the Company has transferred notional interest cost from Corporate segment to
the Upstream and Midstream  Liquefaction segments to reflect a more accurate view of its
segment results. The prior year comparatives have been reclassified to conform to the current
classification.(7)
    
    Gross Margin is a non-GAAP measure and is inter-segment revenue elimination less cost of
sales and operating expenses and represents elimination upon consolidation of our refinery
sales to other segments.
 Analysis of Corporate Financial Results Comparing the Years and Quarters Ended December 31, 2008
and 2007
  Yearly
    
    QuarterlyVariance
    
    Variance($ millions)
    
    ($ millions)($9.7
    )
    
    
    ($0.5
    )
    
    Net profit/(loss) variance for the comparative periods primarily due to:Ø
    
    
    ($4.5
    )
    
    
    ($0.4
    )
    
    Reduction in
interest revenue
less interest
expenses. This is
due to a reduction
in the intercompany
loan balances on
which other
segments are
charged interest
expense based on
market rates. Some
of the intercompany
balances have been
converted into
investments in our
subsidiaries which
has reduced the
intercompany
balances on which
interest is
charged.Ø
    
    
    ($6.6
    )
    
    
    
    $6.6 million
one-time gain
recognized in the
quarter ended June
30, 2007 due to the
signing of the LNG
shareholders
agreement governing
the development of
the LNG Project.Ø
    
    
    $0.5
    
    
    
    $0.9
    
    
    Increase in net
income on
intra-group profit
eliminated on
consolidation
between Midstream
 Refining and
Downstream
segments.Ø
    
    
    $1.4
    
    
    
    ($0.9
    )
    
    Reduction in office
and administration
and other expenses
due to additional
recharges to the
operating streams.
 Management Discussion and Analysis   INTEROIL CORPORATION       19




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##### 



LIQUIDITY AND CAPITAL RESOURCES
 Summary of Debt facilities
  BalanceoutstandingOrganization
    
    Facility
    
    
    December 31, 2008
    
    
    Maturity dateOPIC secured loan
    
    $
    62,500,000
    
    
    
    $
    62,500,000
    
    
    
    December 2015Unsecured 8% convertible debentures
    
    $
    95,000,000
    
    
    
    $
    78,975,000
    
    
    
    May 2013BNP Paribas working capital facility
    
    $
    190,000,000
    
    
    
    $
    53,386,775
    (1)
    
    
    August 2009Westpac working capital
facility
    
    $
    30,700,000
    
    
    
    $
    15,405,627
    
    
    
    October 2011BSP working capital facility
    
    $
    26,800,000
    
    
    
    $
    nil
    
    
    
    August 2009
 (1)
    
    Excludes letters of credit totaling $27.6 million.
 Overseas Private Investment Corporation (OPIC) Secured Loan (Midstream)
  Unsecured 8% Subordinated Convertible Debentures (Corporate and Upstream)
   BNP Paribas Working Capital Facility (Midstream)
  Management Discussion and Analysis   INTEROIL CORPORATION       20




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##### 



Bank
South Pacific and Westpac Working Capital Facility (Downstream)
   Other Sources of Capital
 Upstream
    Summary of Cash Flows
 Year ended December 31,($ thousands)
    
    2008
    
    
    2007
    
    
    2006Net cash inflows/(outflows) from:Operations
    
    
    15,586
    
    
    
    
    (31,620
    )
    
    
    
    2,187Investing
    
    
    (47,391
    )
    
    
    
    (34,370
    )
    
    
    
    (97,071
    )Financing
    
    
    36,913
    
    
    
    
    78,170
    
    
    
    
    66,963Net cash movement
    
    
    5,108
    
    
    
    
    12,180
    
    
    
    
    (27,921
    )Opening cash
    
    
    43,862
    
    
    
    
    31,681
    
    
    
    
    59,602Closing cash
    
    
    48,970
    
    
    
    
    43,861
    
    
    
    
    31,681
 Management Discussion and Analysis   INTEROIL CORPORATION       21




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##### 



Analysis of Cash Flows Provided By/(Used In) Operating Activities Comparing the Years Ended
December 31, 2008 and 2007
  YearlyVariance($ millions)$47.2
    
    
    Variance for the comparative periods primarily due to:Ø
    
    
    ($12.2
    )
    
    Increase in cash used by operations prior to changes
in operating segments working capital.Ø
    
    
    $59.4
    
    
    Increase in cash provided by operations due to
working capital movements. These working capital
movements relate to the timing of receipts, payments
and inventory purchases, along with the decreasing
crude and refined product price environment.
 Analysis of Cash Flows Provided By/(Used In) Investing Activities Comparing the Years Ended
December 31, 2008 and 2007
  YearlyVariance($ millions)($13.0
    )
    
    Variance for the comparative periods primarily due to:Ø
    
    
    $5.2
    
    
    Lower cash outflow on oil and gas exploration expenditure 
the current year outflows related to the Elk-4A and Antelope
drilling and extended well drilling program. The extended
well program is partly funded by cash calls to the IPI
investors.Ø
    
    
    ($3.5
    )
    
    Lower cash inflows from cash calls made from IPI investors in
relation to the Elk/Antelope extended well programs.Ø
    
    
    $2.1
    
    
    Reduction in expenditure on plant and equipment.Ø
    
    
    $6.5
    
    
    Proceeds received from the sale of our interest in PRL 4 and 5.Ø
    
    
    ($14.0
    )
    
    Higher cash outflows due to movement in our secured cash
restricted balances in line with the usage of the BNP working
capital facility at period ends.Ø
    
    
    ($5.9
    )
    
    Decrease in cash used in our development segments for working
capital requirements. This working capital relates to
movement in accounts payables and accruals of our Upstream and
LNG segment.Ø
    
    
    ($7.0
    )
    
    $7.0 million received in the third quarter of 2007 on
settlement of the insurance claim for the Elk well blowout.Ø
    
    
    $3.3
    
    
    Final settlement payment of the $3.3 million made in 2007 for
the acquisition of Shells PNG distribution assets.
 Management Discussion and Analysis   INTEROIL CORPORATION       22




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##### 



Analysis of Cash Flows Provided By/(Used In) Financing Activities Comparing the Years Ended
December 31, 2008 and 2007
  YearlyVariance($ millions)($41.3
    )
    
    Variance for the comparative periods primarily due to:Ø
    
    
    ($27.3
    )
    
    Higher repayment of the BNP Paribas working capital facility.Ø
    
    
    $94.8
    
    
    Net proceeds from the issuance of debentures during May 2008.Ø
    
    
    ($14.3
    )
    
    Net proceeds from the issuance of preference shares during December 2007Ø
    
    
    ($70.0
    )
    
    Repayment of the Merrill Lynch bridging facility during May 2008.Ø
    
    
    ($4.5
    )
    
    Repayment of two installments of the OPIC secured loan in June 2008 and
December 2008 compared to only one payment made during 2007.Ø
    
    
    ($0.4
    )
    
    Lower cash inflows relating to the Elk option agreement  $5.5 million in
the year to December 31, 2008 compared with $5.9 million in the same
period of 2007.Ø
    
    
    $4.0
    
    
    Net payments received from Petromin in the quarter ended December 31, 2008.Ø
    
    
    ($23.9
    )
    
    Net proceeds from the issuance of common shares during 2007.
 Capital Expenditures
 Upstream Capital Expenditures
   Yearly($ millions)$63.9
    
    
    Expenditures in the year ended December 31, 2008 due to:Ø
    
    
    $8.3
    
    
    Drilled the Elk-4 appraisal well as part of the Elk extended well
program.Ø
    
    
    $9.3
    
    
    Drilled the Elk-4A exploratory well intersecting the Antelope structure.Ø
    
    
    $17.1
    
    
    Tested the Elk-4A appraisal well as part of the Elk extended well
program.Ø
    
    
    $22.6
    
    
    Preparatory/drilling costs on the Antelope-1 appraisal well.Ø
    
    
    $1.0
    
    
    Preparatory costs on our next appraisal well Antelope-2.Ø
    
    
    $0.9
    
    
    Costs incurred in developing Elk PDL.Ø
    
    
    $1.1
    
    
    Field geology costs on PPL 236 and PPL 237.Ø
    
    
    $4.4
    
    
    Fixed assets additions and inventory purchases.
 Management Discussion and Analysis   INTEROIL CORPORATION       23




---



##### 



Midstream Capital Expenditures
  Downstream Capital Expenditures
  Capital Requirements
  Upstream
    Midstream  Refining
  Management Discussion and Analysis   INTEROIL CORPORATION       24




---



##### 



Midstream  Liquefaction
  Downstream
  Contractual Obligations and Commitments
  Payments Due by Period ($ thousands)Contractual obligations
    
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More than($ thousands)
    
    
    Total
    
    1 Year
    
    1 - 2 years
    
    2 - 3 years
    
    3 - 4 years
    
    4 - 5 years
    
    5 YearSecured loan and debenture obligations
    
    
    
    141,475
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    87,975
    
    
    
    17,500Indirect participation interest(1)
    
    
    
    1,384
    
    
    
    540
    
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PNG LNG Inc. Joint Venture (proportionate
share of commitments)
    
    
    
    904
    
    
    
    884
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention
licenses(2)
    
    
    
    95,000
    
    
    
    16,500
    
    
    
    4,500
    
    
    
    23,333
    
    
    
    35,333
    
    
    
    15,334
    
    
    
    Total
    
    
    
    238,763
    
    
    
    26,924
    
    
    
    14,364
    
    
    
    32,333
    
    
    
    44,333
    
    
    
    103,309
    
    
    
    17,500
 (1)
    
    These amounts represent the estimated cost of completing our commitment to drill exploration
wells under our indirect participation interest agreement entered into in July 2003. See Note
18 to our audited financial statements for the year ended December 31, 2008.(2)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents the
amount we have committed as a condition on renewal of these licenses. Of this commitment, as at
December 31, 2008, management estimates that $43,926,310 would satisfy the commitments in relation
to the IPI investors
 Off Balance Sheet Arrangements
  Management Discussion and Analysis INTEROIL CORPORATION 25




---



##### 



Transactions with Related Parties
   Share Capital
  Derivative Instruments
     Management Discussion and Analysis INTEROIL CORPORATION 26




---



##### 



CRITICAL ACCOUNTING ESTIMATES
  Income Taxes
  Oil and Gas Properties
  Asset Retirement Obligations
  Management
Discussion and Analysis     INTEROIL CORPORATION     27




---



##### 



Environmental Remediation
  Impairment of Long-Lived Assets
  Legal and Other Contingent Matters
  
 NEW ACCOUNTING STANDARDS
 Standards adopted effective January 1, 2008
  
    
    CICA 1400  General standards of financial statement presentation
    
    CICA 1535  Capital Disclosures
    
    CICA 3031  Inventories
    
    CICA 3862  Financial Instruments  Disclosures; and
    
    CICA 3863  Financial Instruments  Presentation
  Management Discussion and Analysis INTEROIL CORPORATION 28




---



##### 



General standards of financial statement presentation
  Capital Disclosures
  Inventories
  Financial Instruments  Disclosure and Presentation
     New Accounting standards not yet applicable as at December 31, 2008
      Management Discussion and Analysis     INTEROIL CORPORATION     29




---



##### 



NON-GAAP MEASURES AND RECONCILIATION
  Consolidated  Operating results
    
    Year ended December 31,($ thousands, except per share data)
    
    2008
    
    
    2007
    
    
    2006Sales and operating revenues
    
    
    915,579
    
    
    
    
    625,526
    
    
    
    
    511,088Cost of sales and operating expenses
    
    
    (888,623
    )
    
    
    
    (573,609
    )
    
    
    
    (499,495
    )Gross Margin
    
    
    26,956
    
    
    
    
    51,917
    
    
    
    
    11,593
  Management Discussion and Analysis INTEROIL CORPORATION 30




---



##### 



2008
    
    
    2007Quarters ended
    
    
    
    
    
    
    Sep-30
    
    
    Jun-30
    
    
    Mar-31
    
    
    Dec-31
    
    
    Sep-30
    
    
    Jun-30
    
    
    Mar-31($ thousands)
    
    Dec-31
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)Upstream
    
    
    (2,483
    )
    
    
    
    231
    
    
    
    
    10,164
    
    
    
    
    (1,135
    )
    
    
    
    (3,128
    )
    
    
    
    (5,015
    )
    
    
    
    (5,492
    )
    
    
    
    (4,009
    )Midstream  Refining
    
    
    (13,976
    )
    
    
    
    17,516
    
    
    
    
    16,329
    
    
    
    
    5,724
    
    
    
    
    9,589
    
    
    
    
    (1,332
    )
    
    
    
    3,775
    
    
    
    
    6,336Midstream  Liquefaction
    
    
    (2,501
    )
    
    
    
    (1,570
    )
    
    
    
    (1,784
    )
    
    
    
    (1,636
    )
    
    
    
    (797
    )
    
    
    
    (4,104
    )
    
    
    
    (444
    )
    
    
    
    (322
    )Downstream
    
    
    (7,244
    )
    
    
    
    610
    
    
    
    
    7,893
    
    
    
    
    4,529
    
    
    
    
    3,627
    
    
    
    
    3,301
    
    
    
    
    2,760
    
    
    
    
    3,028Corporate and Consolidated
    
    
    (2,639
    )
    
    
    
    27
    
    
    
    
    (5,248
    )
    
    
    
    (347
    )
    
    
    
    (2,394
    )
    
    
    
    (3,105
    )
    
    
    
    4,959
    
    
    
    
    (1,931
    )Earnings before interest, taxes,
depreciation and amortization
    
    
    (28,843
    )
    
    
    
    16,814
    
    
    
    
    27,354
    
    
    
    
    7,135
    
    
    
    
    6,897
    
    
    
    
    (10,255
    )
    
    
    
    5,558
    
    
    
    
    3,102Subtract:Upstream
    
    
    (1,345
    )
    
    
    
    (1,137
    )
    
    
    
    (841
    )
    
    
    
    (704
    )
    
    
    
    (474
    )
    
    
    
    (177
    )
    
    
    
    (178
    )
    
    
    
    (206
    )Midstream  Refining
    
    
    (2,771
    )
    
    
    
    (2,113
    )
    
    
    
    (2,263
    )
    
    
    
    (2,761
    )
    
    
    
    (4,397
    )
    
    
    
    (8,155
    )
    
    
    
    (2,156
    )
    
    
    
    (2,091
    )Midstream  Liquefaction
    
    
    (65
    )
    
    
    
    (63
    )
    
    
    
    (60
    )
    
    
    
    (53
    )
    
    
    
    (53
    )
    
    
    
    (53
    )
    
    
    
    
    
    
    
    
    Downstream
    
    
    (2,232
    )
    
    
    
    (885
    )
    
    
    
    (715
    )
    
    
    
    (1,005
    )
    
    
    
    (1,145
    )
    
    
    
    (3,320
    )
    
    
    
    66
    
    
    
    
    (39
    )Corporate and Consolidated
    
    
    546
    
    
    
    
    152
    
    
    
    
    (1,050
    )
    
    
    
    (667
    )
    
    
    
    624
    
    
    
    
    6,483
    
    
    
    
    (2,590
    )
    
    
    
    (2,146
    )Interest expense(1) (2)
    
    
    (5,867
    )
    
    
    
    (4,046
    )
    
    
    
    (4,929
    )
    
    
    
    (5,190
    )
    
    
    
    (5,445
    )
    
    
    
    (5,222
    )
    
    
    
    (4,858
    )
    
    
    
    (4,482
    )Upstream
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream  Refining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    
    69
    
    
    
    
    12
    
    
    
    
    (17
    )Midstream  Liquefaction
    
    
    (12
    )
    
    
    
    (25
    )
    
    
    
    (49
    )
    
    
    
    (24
    )
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    4,297
    
    
    
    
    82
    
    
    
    
    (3,213
    )
    
    
    
    (752
    )
    
    
    
    (1,112
    )
    
    
    
    261
    
    
    
    
    (32
    )
    
    
    
    (483
    )Corporate and Consolidated
    
    
    (159
    )
    
    
    
    (24
    )
    
    
    
    (124
    )
    
    
    
    (81
    )
    
    
    
    (12
    )
    
    
    
    214
    
    
    
    
    (15
    )
    
    
    
    (13
    )Income taxes and non-controlling
interest
    
    
    4,126
    
    
    
    
    33
    
    
    
    
    (3,386
    )
    
    
    
    (857
    )
    
    
    
    (1,181
    )
    
    
    
    544
    
    
    
    
    (35
    )
    
    
    
    (513
    )Upstream
    
    
    (175
    )
    
    
    
    (134
    )
    
    
    
    (135
    )
    
    
    
    (154
    )
    
    
    
    (134
    )
    
    
    
    299
    
    
    
    
    (338
    )
    
    
    
    (309
    )Midstream  Refining
    
    
    (2,742
    )
    
    
    
    (2,742
    )
    
    
    
    (2,723
    )
    
    
    
    (2,761
    )
    
    
    
    (2,158
    )
    
    
    
    (2,781
    )
    
    
    
    (2,748
    )
    
    
    
    (2,717
    )Midstream  Liquefaction
    
    
    (19
    )
    
    
    
    (19
    )
    
    
    
    (16
    )
    
    
    
    (15
    )
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    (722
    )
    
    
    
    (693
    )
    
    
    
    (582
    )
    
    
    
    (573
    )
    
    
    
    (700
    )
    
    
    
    (497
    )
    
    
    
    (552
    )
    
    
    
    (456
    )Corporate and Consolidated
    
    
    14
    
    
    
    
    15
    
    
    
    
    17
    
    
    
    
    18
    
    
    
    
    21
    
    
    
    
    20
    
    
    
    
    20
    
    
    
    
    21Depreciation and amortisation
    
    
    (3,644
    )
    
    
    
    (3,573
    )
    
    
    
    (3,439
    )
    
    
    
    (3,485
    )
    
    
    
    (2,986
    )
    
    
    
    (2,959
    )
    
    
    
    (3,618
    )
    
    
    
    (3,461
    )Upstream
    
    
    (4,003
    )
    
    
    
    (1,039
    )
    
    
    
    9,188
    
    
    
    
    (1,993
    )
    
    
    
    (3,736
    )
    
    
    
    (4,893
    )
    
    
    
    (6,009
    )
    
    
    
    (4,524
    )Midstream  Refining
    
    
    (19,490
    )
    
    
    
    12,660
    
    
    
    
    11,345
    
    
    
    
    202
    
    
    
    
    2,990
    
    
    
    
    (12,199
    )
    
    
    
    (1,117
    )
    
    
    
    1,511Midstream  Liquefaction
    
    
    (2,596
    )
    
    
    
    (1,677
    )
    
    
    
    (1,910
    )
    
    
    
    (1,728
    )
    
    
    
    (878
    )
    
    
    
    (4,157
    )
    
    
    
    (444
    )
    
    
    
    (322
    )Downstream
    
    
    (5,900
    )
    
    
    
    (886
    )
    
    
    
    3,383
    
    
    
    
    2,198
    
    
    
    
    670
    
    
    
    
    (254
    )
    
    
    
    2,242
    
    
    
    
    2,050Corporate and Consolidated
    
    
    (2,238
    )
    
    
    
    171
    
    
    
    
    (6,405
    )
    
    
    
    (1,075
    )
    
    
    
    (1,761
    )
    
    
    
    3,612
    
    
    
    
    2,374
    
    
    
    
    (4,069
    )Net profit (loss) per segment
    
    
    (34,227
    )
    
    
    
    9,229
    
    
    
    
    15,601
    
    
    
    
    (2,396
    )
    
    
    
    (2,715
    )
    
    
    
    (17,891
    )
    
    
    
    (2,954
    )
    
    
    
    (5,354
    )
 (1)
    
    The inter-company interest charges have been restated for quarter ended March 31, 2008 and
June 30, 2008 to reflect transfer of certain inter-company loan balances to inter-company
investments.(2)
    
    During the year, the Company has transferred notional interest cost from Corporate segment to
the Upstream and Midstream  Liquefaction segments to reflect a more accurate view of its
segment results. The prior year comparatives have been reclassified to conform to the current
classification.
 
 PUBLIC SECURITIES FILINGS
 www.sedar.com
 Management Discussion and Analysis INTEROIL CORPORATION 31




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##### 



www.interoil.com
 
 DISCLOSURE CONTROLS AND PROCEDURES
  Internal Control Over Financial Reporting
  
 GLOSSARY OF TERMS
 Barrel, Bbl
 BP
 Condensate
 Crack spread
 Crude Oil
 EBITDA
 Farm out
 FEED
 Management Discussion and Analysis INTEROIL CORPORATION 32




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##### 



Feedstock
 FID
 GAAP
 Gas
 ICCC
 IPP
 IPI
 LIBOR
 LNG
 LPG
 Naphtha
 Natural gas
 PGK
 PPL
 PRL
 Working interest
 Mcf
 Bil cu ft
 Tcf
 Management Discussion and Analysis INTEROIL CORPORATION 33