##### Table of Contents



InterOil Corporation
Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)Years ended December 31, 2007, 2006 and 2005




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##### 



InterOil Corporation
Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
  
 Table of contents
 Managements Report
    
    
    1Auditors Report to the Shareholders
    
    
    2Consolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Consolidated Statements of Shareholders Equity
    
    
    7Consolidated Statements of Comprehensive Income
    
    
    8Notes to the Consolidated Financial Statements
    
    
    9Reconciliation to accounting principles generally accepted in the United States
    
    
    38




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##### Table of Contents



InterOil Corporation
Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 
 MANAGEMENTS REPORT
      Phil Mulacek
    
    Collin VisaggioChief Executive Officer
    
    Chief Financial Officer
 Consolidated Financial Statements INTEROIL CORPORATION       1




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##### Table of Contents



INDEPENDENT AUDIT REPORT TO THE SHAREHOLDERS OF INTEROIL CORPORATION
  Consolidated financial statements
     Internal control over financial reporting
    Consolidated Financial Statements INTEROIL CORPORATION 2




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##### Table of Contents



(Signed) PricewaterhouseCoopers
 Melbourne, Australia
March 28, 2008
 Consolidated Financial Statements INTEROIL CORPORATION 3




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##### Table of Contents



Consolidated Balance Sheet InterOil Corporation
Consolidated Balance Sheet
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 As atDecember 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $AssetsCurrent assets:Cash and cash equivalents (note 5)
    
    
    43,861,762
    
    
    
    31,681,435
    
    
    
    59,601,807Cash restricted (note 7)
    
    
    22,002,302
    
    
    
    29,301,940
    
    
    
    16,452,216Trade receivables (note 8)
    
    
    63,145,444
    
    
    
    67,542,902
    
    
    
    49,958,973Commodity derivative contracts (note 7)
    
    
    
    
    
    
    1,759,575
    
    
    
    1,482,798Other assets
    
    
    146,992
    
    
    
    2,954,946
    
    
    
    1,011,195Inventories (note 9)
    
    
    82,589,242
    
    
    
    67,593,558
    
    
    
    44,087,484Prepaid expenses
    
    
    5,102,540
    
    
    
    880,640
    
    
    
    638,216Total current assets
    
    
    216,848,282
    
    
    
    201,714,996
    
    
    
    173,232,689Cash restricted (note 7)
    
    
    382,058
    
    
    
    3,217,284
    
    
    
    210,053Deferred financing costs (note 19)
    
    
    
    
    
    
    1,716,757
    
    
    
    1,256,816Plant and equipment (note 10)
    
    
    232,852,222
    
    
    
    242,642,077
    
    
    
    237,399,148Oil and gas properties (note 11)
    
    
    84,865,127
    
    
    
    54,524,347
    
    
    
    19,738,927Future income tax benefit (note 12)
    
    
    2,867,312
    
    
    
    1,424,014
    
    
    
    1,058,898Total assets
    
    
    537,815,001
    
    
    
    505,239,475
    
    
    
    432,896,531Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities (note 13)
    
    
    60,427,607
    
    
    
    76,095,369
    
    
    
    29,905,493Commodity derivative contracts (note 7)
    
    
    1,960,300
    
    
    
    
    
    
    
    Working capital facility  crude feedstock (note 15)
    
    
    66,501,372
    
    
    
    36,873,508
    
    
    
    70,724,322Deferred hedge gain (note 7)
    
    
    
    
    
    
    1,385
    
    
    
    1,016,998Unsecured loan (note 18)
    
    
    
    
    
    
    
    
    
    
    21,453,132Deferred liquefaction project liability (note 19)
    
    
    
    
    
    
    6,553,080
    
    
    
    Current portion of secured loan (note 19)
    
    
    136,776,760
    
    
    
    13,500,000
    
    
    
    9,000,000Current portion of indirect participation interest -
PNGDV (note 20)
    
    
    1,080,004
    
    
    
    730,534
    
    
    
    Total current liabilities
    
    
    266,746,043
    
    
    
    133,753,876
    
    
    
    132,099,945Accrued financing costs (note 19)
    
    
    
    
    
    
    1,087,500
    
    
    
    921,109Secured loan (note 19)
    
    
    61,141,389
    
    
    
    184,166,433
    
    
    
    71,500,000Preference share liability (note 23)
    
    
    7,797,312
    
    
    
    
    
    
    
    Deferred gain on contributions to LNG project (note 14)
    
    
    9,096,537
    
    
    
    
    
    
    
    Indirect participation interest (note 20)
    
    
    96,086,369
    
    
    
    96,861,259
    
    
    
    96,861,259Indirect participation interest  PNGDV (note 20)
    
    
    844,490
    
    
    
    1,190,633
    
    
    
    9,685,830Total liabilities
    
    
    441,712,140
    
    
    
    417,059,701
    
    
    
    311,068,143Non-controlling interest (note 21)
    
    
    4,292
    
    
    
    5,759,206
    
    
    
    6,023,149Shareholders equity:Share capital (note 22)
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    223,934,500Authorised  unlimitedIssued and outstanding - 31,026,356
(Dec 31, 2006 - 29,871,180)(Dec 31, 2005 - 29,163,320)Preference shares (note 23)
    
    
    6,842,688
    
    
    
    
    
    
    
    (Authorised - 1,035,554, issued and outstanding -
517,777)Contributed surplus (note 24)
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    2,933,586Warrants (note 25)
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive Income
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    477,443Conversion options (note 20)
    
    
    19,840,000
    
    
    
    20,000,000
    
    
    
    20,000,000Accumulated deficit
    
    
    (208,389,853
    )
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )Total shareholders equity
    
    
    96,098,569
    
    
    
    82,420,568
    
    
    
    115,805,239Total liabilities and shareholders equity
    
    
    537,815,001
    
    
    
    505,239,475
    
    
    
    432,896,531
 See accompanying notes to the consolidated financial statements. Commitments and contingencies (note 27), Going Concern (note
2(b))
 On behalf of the Board  Phil Mulacek, Director            Christian Vinson,
Director
 Consolidated Financial
Statements INTEROIL CORPORATION       4




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##### Table of Contents



Consolidated Statement of Operations InterOil Corporation
Consolidated Statement of Operations
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $RevenueSales and operating revenues
    
    
    625,526,068
    
    
    
    511,087,934
    
    
    
    481,180,645Interest
    
    
    2,180,285
    
    
    
    3,223,995
    
    
    
    1,830,808Other
    
    
    2,666,890
    
    
    
    3,747,603
    
    
    
    528,270630,373,243
    
    
    
    518,059,532
    
    
    
    483,539,723ExpensesCost of sales and operating expenses
    
    
    573,609,441
    
    
    
    499,494,540
    
    
    
    467,246,990Administrative and general expenses
    
    
    39,270,348
    
    
    
    20,728,618
    
    
    
    14,672,793Legal and professional fees
    
    
    6,532,646
    
    
    
    3,937,517
    
    
    
    3,606,415Exploration costs, excluding exploration impairment (note 11)
    
    
    13,305,437
    
    
    
    6,176,866
    
    
    
    11,009,434Exploration impairment (note 11)
    
    
    1,242,606
    
    
    
    1,647,185
    
    
    
    19,570,073Short term borrowing costs
    
    
    13,212,112
    
    
    
    8,478,540
    
    
    
    8,855,857Long term borrowing costs
    
    
    9,536,162
    
    
    
    11,856,872
    
    
    
    6,351,337Depreciation and amortization
    
    
    13,024,258
    
    
    
    12,352,672
    
    
    
    11,036,550Loss on amendment of indirect participation interest  PNGDV (note 20)
    
    
    
    
    
    
    1,851,421
    
    
    
    Gain on LNG shareholder agreement (note 19)
    
    
    (6,553,080
    )
    
    
    
    
    
    
    Foreign exchange gain
    
    
    (5,078,338
    )
    
    
    (4,744,810
    )
    
    
    796,590658,101,592
    
    
    
    561,779,421
    
    
    
    543,146,039Loss before income taxes and non-controlling interest
    
    
    (27,728,349
    )
    
    
    (43,719,889
    )
    
    
    (59,606,316
    )Income taxes (note 12)Current
    
    
    (2,491,761
    )
    
    
    (1,232,487
    )
    
    
    (2,605,265
    )Future
    
    
    1,284,869
    
    
    
    (1,110,386
    )
    
    
    (226,729
    )(1,206,892
    )
    
    
    (2,342,873
    )
    
    
    (2,831,994
    )Loss before non-controlling interest
    
    
    (28,935,241
    )
    
    
    (46,062,762
    )
    
    
    (62,438,310
    )Non-controlling interest (note 21)
    
    
    22,333
    
    
    
    263,959
    
    
    
    368,312Net loss
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )Basic loss per share(note 26)
    
    
    (0.96
    )
    
    
    (1.55
    )
    
    
    (2.15
    )Diluted loss per share(note 26)
    
    
    (0.96
    )
    
    
    (1.55
    )
    
    
    (2.15
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    29,998,133
    
    
    
    29,602,360
    
    
    
    28,832,263
 See accompanying notes to the consolidated financial statements
 Consolidated Financial Statements INTEROIL CORPORATION       5




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##### Table of Contents



Consolidated Statement of Cash Flows InterOil Corporation
Consolidated Statement of Cash Flows(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005$
    
    
    $
    
    
    $Cash flows provided by (used in):Operating activitiesNet loss
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )Adjustments for non-cash and non-operating transactionsNon-controlling interest
    
    
    (22,333
    )
    
    
    (263,959
    )
    
    
    (381,113
    )Depreciation and amortization
    
    
    13,024,258
    
    
    
    12,352,672
    
    
    
    11,036,550Future income tax asset
    
    
    (1,600,985
    )
    
    
    1,333,108
    
    
    
    244,733Fair value adjustment on IPL PNG Ltd. acquisition
    
    
    (367,935
    )
    
    
    
    
    
    
    Loss/(Gain) on sale of plant and equipment
    
    
    269,321
    
    
    
    263,945
    
    
    
    (95,053
    )Impairment of plant and equipment
    
    
    960,000
    
    
    
    755,857
    
    
    
    Amortization of discount on debt
    
    
    
    
    
    
    28,891
    
    
    
    161,255Amortization of deferred financing costs
    
    
    421,691
    
    
    
    219,033
    
    
    
    154,672(Gain)/loss on unsettled hedge contracts
    
    
    (47,314
    )
    
    
    (71,875
    )
    
    
    119,200Loss on derivative contracts
    
    
    3,765,800
    
    
    
    (1,220,500
    )
    
    
    (585,000
    )Stock compensation expense
    
    
    6,062,962
    
    
    
    1,976,072
    
    
    
    1,668,896Inventory revaluation
    
    
    
    
    
    
    
    
    
    
    355,215Non-cash interest on secured loan facility
    
    
    6,143,660
    
    
    
    2,926,025
    
    
    
    Oil and gas properties expensed
    
    
    14,548,043
    
    
    
    7,824,051
    
    
    
    30,579,507Loss on amendment of indirect participation interest  PNGDV
    
    
    
    
    
    
    1,851,421
    
    
    
    Gain on LNG shareholder agreement
    
    
    (6,553,080
    )
    
    
    
    
    
    
    Preference share transaction costs
    
    
    390,000
    
    
    
    
    
    
    
    Gain on buy back of minority interest
    
    
    (394,290
    )
    
    
    
    
    
    
    Loss on proportionate consolidation of LNG project
    
    
    2,375,278
    
    
    
    
    
    
    
    Unrealized foreign exchange gain
    
    
    (5,078,338
    )
    
    
    (4,744,810
    )
    
    
    796,590Change in operating working capitalDecrease/(increase) in trade receivables
    
    
    6,661,838
    
    
    
    (6,663,218
    )
    
    
    8,751,789(Increase) in commodity derivative contracts
    
    
    
    
    
    
    
    
    
    
    (33,858
    )(Increase)/decrease in other assets and prepaid expenses
    
    
    (2,698,546
    )
    
    
    4,051
    
    
    
    (653,153
    )(Increase)/decrease in inventories
    
    
    (6,033,038
    )
    
    
    2,642,493
    
    
    
    (16,515,467
    )(Decrease)/Increase in accounts payable, accrued liabilities
and income tax payable
    
    
    (43,630,528
    )
    
    
    28,773,008
    
    
    
    3,752,531Net cash (used in)/from operating activities
    
    
    (40,716,444
    )
    
    
    2,187,462
    
    
    
    (22,712,704
    )Investing activitiesExpenditure on oil and gas properties
    
    
    (69,086,765
    )
    
    
    (49,658,154
    )
    
    
    (43,023,990
    )Proceeds from IPI cash calls
    
    
    21,782,988
    
    
    
    
    
    
    
    Expenditure on plant and equipment
    
    
    (7,289,319
    )
    
    
    (13,585,792
    )
    
    
    (5,575,194
    )Expenditure on oil and gas properties applied against
indirect participation interest (note 20)
    
    
    (3,327
    )
    
    
    1,667,396
    
    
    
    Proceeds received on sale of assets
    
    
    65,072
    
    
    
    3,770,080
    
    
    
    112,229Acquisition of subsidiary (note 16)
    
    
    (3,326,631
    )
    
    
    (25,820,515
    )
    
    
    Proceeds from insurance claim
    
    
    7,000,000
    
    
    
    
    
    
    
    Repayment of business combination financing
    
    
    
    
    
    
    
    
    
    
    (12,226,581
    )Decrease/(increase) in restricted cash held as security on
borrowings
    
    
    10,134,864
    
    
    
    (15,856,955
    )
    
    
    (1,063,046
    )Change in
non-cash working capital
Increase/(decrease) in accounts payable and accrued liabilities
    
    
    15,449,784
    
    
    
    2,412,621
    
    
    
    (3,165,756
    )Net cash (used in)/from investing
activities
    
    
    (25,273,334
    )
    
    
    (97,071,319
    )
    
    
    (64,942,338
    )Financing activitiesRepayments of secured loan
    
    
    (4,500,000
    )
    
    
    (4,500,000
    )
    
    
    (4,500,000
    )Proceeds from indirect participation interest
    
    
    
    
    
    
    
    
    
    
    103,111,405Proceeds from bridging facility, net
of transaction costs
    
    
    
    
    
    
    125,293,488
    
    
    
    Financing fees related to bridging facility
    
    
    (100,000
    )
    
    
    
    
    
    
    Proceeds from PNG LNG cash call
    
    
    9,450,308
    
    
    
    
    
    
    
    Payments for deferred financing fees
    
    
    (362,500
    )
    
    
    
    
    
    
    (Repayments) to related parties
    
    
    
    
    
    
    
    
    
    
    (1,056,251
    )Proceeds from unsecured borrowings
    
    
    
    
    
    
    
    
    
    
    21,453,132Repayments of unsecured borrowings
    
    
    
    
    
    
    (21,453,132
    )
    
    
    Proceeds from Clarion Finanz for
Elk option agreement
    
    
    5,922,712
    
    
    
    
    
    
    
    Proceeds from/(repayments of) working
capital facility
    
    
    29,627,864
    
    
    
    (33,850,814
    )
    
    
    (5,796,219
    )Proceeds from issue of common shares, net
of transaction costs
    
    
    23,816,100
    
    
    
    1,473,943
    
    
    
    5,500,384Proceeds from preference shares, net
of transaction costs
    
    
    14,250,000
    
    
    
    
    
    
    
    Proceeds from conversion of warrants
    
    
    65,621
    
    
    
    
    
    
    
    Net cash from/(used in) financing
activities
    
    
    78,170,105
    
    
    
    66,963,485
    
    
    
    118,712,451Increase/(decrease) in cash
and cash equivalents
    
    
    12,180,327
    
    
    
    (27,920,372
    )
    
    
    31,057,409Cash and cash equivalents, beginning of
period
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398Cash and cash equivalents, end
of period (note 5)
    
    
    43,861,762
    
    
    
    31,681,435
    
    
    
    59,601,807
 See accompanying notes to the consolidated financial statements
 See note 6 for non cash financing and investing activities
 Consolidated Financial
Statements INTEROIL CORPORATION       6




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InterOil Corporation 
 Consolidated Statements of Shareholders Equity
(Expressed in United States dollars) InterOil Corporation
Consolidated Statements of Shareholders Equity(Expressed in United States dollars)
    

(INTEROIL LOGO)
 Year endedDecember 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Share capitalAt beginning of period
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    216,813,654Issue of capital stock (note 22)
    
    
    25,434,767
    
    
    
    9,954,866
    
    
    
    7,120,846At end of period
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    223,934,500Preference sharesAt beginning of period
    
    
    
    
    
    
    
    
    
    
    Issue of shares (note 23)
    
    
    6,842,688
    
    
    
    
    
    
    
    At end of period
    
    
    6,842,688
    
    
    
    
    
    
    
    Contributed surplusAt beginning of period
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    1,841,776Stock compensation (note 24)
    
    
    5,960,122
    
    
    
    1,443,840
    
    
    
    1,091,810At end of period
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    2,933,586WarrantsAt beginning of period
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227Movement for period (note 25)
    
    
    (18,818
    )
    
    
    
    
    
    
    (120,375
    )At end of period
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive IncomeAt beginning of period
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    463,200Deferred hedge gain recognised on transition
    
    
    1,385
    
    
    
    
    
    
    
    Deferred hedge (loss)/gain movement for period, net of tax
    
    
    (1,385
    )
    
    
    
    
    
    
    Foreign currency translation adjustment movement for
period, net of tax
    
    
    4,532,150
    
    
    
    1,015,426
    
    
    
    14,243At end of period
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    477,443Conversion optionsAt beginning of period
    
    
    20,000,000
    
    
    
    20,000,000
    
    
    
    20,000,000Movement for period (note 20)
    
    
    (160,000
    )
    
    
    
    
    
    
    At end of period
    
    
    19,840,000
    
    
    
    20,000,000
    
    
    
    20,000,000Accumulated deficitAt beginning of period
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )
    
    
    (71,608,144
    )Net loss for period
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )At end of period
    
    
    (208,389,853
    )
    
    
    (179,476,945
    )
    
    
    (133,678,142
    )Shareholders equity at end of period
    
    
    96,098,569
    
    
    
    82,420,568
    
    
    
    115,805,239
 See accompanying notes to the consolidated financial statements
 Consolidated Financial
Statements INTEROIL CORPORATION       7




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##### Table of Contents



InterOil Corporation 
 Consolidated Statements of Comprehensive Income
(Expressed in United States dollars) InterOil Corporation
Consolidated Statements of Comprehensive Income(Expressed in United States dollars)
    

(INTEROIL LOGO)
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Net loss
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )Other comprehensive income, net of tax
    
    
    4,530,765
    
    
    
    1,015,426
    
    
    
    14,243Comprehensive loss
    
    
    (24,382,143
    )
    
    
    (44,783,377
    )
    
    
    (62,055,755
    )
 See accompanying notes to the consolidated financial statements
 Consolidated Financial
Statements INTEROIL CORPORATION       8




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InterOil Corporation 
 Notes to Consolidated Financial Statements
(Expressed in United States dollars) InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 1. Nature of operations and organization
    2. Significant accounting policies
  (a) Basis of preparation
   (b) Going concern
       Consolidated Financial
Statements INTEROIL CORPORATION       9




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InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars) InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 2. Significant accounting policies (contd)
    (c) Principles of consolidation
 Subsidiaries
       Proportionate consolidation of Joint Venture interests
  Consolidated Financial Statements INTEROIL CORPORATION       10




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##### Table of Contents



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 (d) Changes in accounting policies
 Financial instrument and hedging activities
  
    
    Section 1530, Comprehensive Income;
    
    Section 3251, Equity;
    
    Section 3855, Financial Instruments  Recognition and Measurement; and
    
    Section 3865, Hedges.
 Comprehensive Income and Equity
    Financial Instruments Recognition and Measurement, Disclosure and Presentation
    Derivatives
  Hedge Accounting
  Consolidated Financial
Statements INTEROIL CORPORATION 11




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##### Table of Contents



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
    Accounting Changes
   (e) New standards issued but not yet effective
  
    
    CICA 3862  Financial Instruments  Disclosures
    
    CICA 3863  Financial Instruments  Presentation; and
    
    CICA 1535  Capital Disclosures
  Financial Instruments  Disclosure and Presentation
      Capital Disclosures
  Consolidated Financial
Statements INTEROIL CORPORATION 12




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InterOil Corporation
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 (f) Segment reporting
 An operating segment (also referred to as a business segment) is a component of an enterprise:a.
    
    that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other segments of
the same enterprise),b.
    
    whose operating results are regularly reviewed by the Companys management to make
decisions about resources to be allocated to the segment and assess its performance, andc.
    
    for which discrete financial information is available.
  (g) Foreign currency translation
 Functional and presentation currency
  Group companies
   (h) Revenue recognition
  Revenue from midstream operations :
  Revenue from downstream operations:
  Interest income:
  (i) Income tax
   Consolidated Financial Statements
INTEROIL CORPORATION 13




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##### Table of Contents



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
   (j) Acquisitions of assets
    (k) Impairment of assets
    (l) Cash and cash equivalents
  (m) Restricted cash
  (n) Trade receivables
   Consolidated Financial Statements
INTEROIL CORPORATION 14




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InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 (o) Inventory
 Raw materials and stores and finished goods
  Crude oil and refined petroleum products
  (p) Assets held for sale
     (q) Derivative financial instruments
     Consolidated Financial Statements
INTEROIL CORPORATION 15




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 (r) Deferred financing costs
  (s) Plant and equipment
 Refinery assets
     Other assets
  Downstream
    
    
    0%  25
    %Midstream
    
    
    1%  33
    %Upstream
    
    
    4%  100
    %Corporate
    
    
    13%  33
    %
  Leased assets
   Asset retirement obligations
  Consolidated Financial
Statements INTEROIL CORPORATION       16




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
  Environmental remediation
  Disposal of property, plant and equipment
  (t) Oil and gas properties
   (u) Accounts payable and accrued liabilities
  (v) Employee entitlements
 Wages and salaries, and annual leave
  Long Service Leave
  Retirement benefit obligations
  Stock-based compensation
  Consolidated Financial
Statements INTEROIL CORPORATION       17




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 Profit-sharing and bonus plans
  (w) Earnings per share
 Basic earnings per share
  Diluted earnings per share
  (x) Reclassification
  3. Financial Risk Management
   (a) Market risk
 Foreign exchange risk
    Price risk
   Product risk
  Consolidated Financial Statements
INTEROIL CORPORATION       18




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 3. Financial Risk Management (contd)
  (b) Credit risk
   (c) Liquidity risk
  (d) Cash flow and fair value interest rate risk
    (e) Geographic risk
  4. Segmented financial information
    Notes to and forming part of the segment information
   Consolidated Financial
Statements INTEROIL CORPORATION       19




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 4. Segmented financial information (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2007
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    233,868,997
    
    
    
    
    
    
    
    391,657,071
    
    
    
    
    
    
    
    
    
    
    
    625,526,068Intersegment revenues
    
    
    
    
    
    
    289,947,580
    
    
    
    
    
    
    
    81,062
    
    
    
    9,482,002
    
    
    
    (299,510,644
    )
    
    
    Interest revenue
    
    
    407,348
    
    
    
    69,721
    
    
    
    41,215
    
    
    
    13,679
    
    
    
    13,954,079
    
    
    
    (12,305,757
    )
    
    
    2,180,285Other revenue
    
    
    2,139,336
    
    
    
    
    
    
    
    
    
    
    
    527,554
    
    
    
    
    
    
    
    
    
    
    
    2,666,890Total segment revenue
    
    
    2,546,684
    
    
    
    523,886,298
    
    
    
    41,215
    
    
    
    392,279,366
    
    
    
    23,436,081
    
    
    
    (311,816,401
    )
    
    
    630,373,243Cost of sales and operating expenses
    
    
    
    
    
    
    495,058,782
    
    
    
    
    
    
    
    368,803,507
    
    
    
    
    
    
    
    (290,252,848
    )
    
    
    573,609,441Administrative, professional and
general expenses
    
    
    5,020,371
    
    
    
    16,349,058
    
    
    
    5,688,932
    
    
    
    10,774,921
    
    
    
    20,276,009
    
    
    
    (9,563,067
    )
    
    
    48,546,224Foreign exchange (gain)/loss
    
    
    622,821
    
    
    
    (5,889,324
    )
    
    
    19,954
    
    
    
    (15,379
    )
    
    
    183,591
    
    
    
    
    
    
    
    (5,078,337
    )Gain on LNG shareholder agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,553,080
    )
    
    
    
    
    
    
    (6,553,080
    )Exploration costs, excluding
exploration impairment
    
    
    13,305,437
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,305,437Exploration impairment
    
    
    1,242,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,242,606Depreciation and amortisation
    
    
    482,448
    
    
    
    10,404,953
    
    
    
    15,431
    
    
    
    2,204,782
    
    
    
    48,037
    
    
    
    (131,393
    )
    
    
    13,024,258Interest expense
    
    
    
    
    
    
    16,798,634
    
    
    
    
    
    
    
    4,437,994
    
    
    
    11,074,173
    
    
    
    (12,305,758
    )
    
    
    20,005,043Total segment expenses
    
    
    20,673,683
    
    
    
    532,722,103
    
    
    
    5,724,317
    
    
    
    386,205,825
    
    
    
    25,028,730
    
    
    
    (312,253,066
    )
    
    
    658,101,592(Loss)/income before income taxes
and non-
controlling interest
    
    
    (18,126,999
    )
    
    
    (8,835,805
    )
    
    
    (5,683,102
    )
    
    
    6,073,541
    
    
    
    (1,592,649
    )
    
    
    436,665
    
    
    
    (27,728,349
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (12,665
    )
    
    
    (1,365,674
    )
    
    
    171,447
    
    
    
    
    
    
    
    (1,206,892
    )Non controlling interest
    
    
    
    
    
    
    20,899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,434
    
    
    
    22,333Total net income/(loss)
    
    
    (18,126,999
    )
    
    
    (8,814,906
    )
    
    
    (5,695,767
    )
    
    
    4,707,867
    
    
    
    (1,421,202
    )
    
    
    438,099
    
    
    
    (28,912,908
    )Total assets
    
    
    100,054,671
    
    
    
    318,454,252
    
    
    
    6,595,722
    
    
    
    133,598,054
    
    
    
    494,852,295
    
    
    
    (515,739,993
    )
    
    
    537,815,001Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2006
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    315,211,130
    
    
    
    
    
    
    
    195,876,804
    
    
    
    
    
    
    
    
    
    
    
    511,087,934Intersegment revenues
    
    
    
    
    
    
    136,583,916
    
    
    
    
    
    
    
    22,480
    
    
    
    8,669,933
    
    
    
    (145,276,329
    )
    
    
    Interest revenue
    
    
    2,820,888
    
    
    
    360,319
    
    
    
    
    
    
    
    100,750
    
    
    
    1,601,491
    
    
    
    (1,659,453
    )
    
    
    3,223,995Other revenue
    
    
    2,427,816
    
    
    
    
    
    
    
    
    
    
    
    1,319,787
    
    
    
    
    
    
    
    
    
    
    
    3,747,603Total segment revenue
    
    
    5,248,704
    
    
    
    452,155,365
    
    
    
    
    
    
    
    197,319,821
    
    
    
    10,271,424
    
    
    
    (146,935,782
    )
    
    
    518,059,532Cost of sales and operating expenses
    
    
    
    
    
    
    451,374,165
    
    
    
    
    
    
    
    183,511,182
    
    
    
    
    
    
    
    (135,390,806
    )
    
    
    499,494,541Administrative, professional and
general expenses
    
    
    6,370,436
    
    
    
    8,017,245
    
    
    
    694,416
    
    
    
    7,671,208
    
    
    
    15,378,963
    
    
    
    (8,552,604
    )
    
    
    29,579,664Foreign exchange (gain)/loss
    
    
    (61,423
    )
    
    
    (4,635,878
    )
    
    
    (219
    )
    
    
    (192,433
    )
    
    
    145,142
    
    
    
    
    
    
    
    (4,744,811
    )Exploration costs, excluding
exploration impairment
    
    
    6,176,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,176,866Exploration impairment
    
    
    1,647,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,647,185Depreciation and amortisation
    
    
    806,142
    
    
    
    10,729,546
    
    
    
    
    
    
    
    909,767
    
    
    
    37,247
    
    
    
    (130,030
    )
    
    
    12,352,672Interest expense
    
    
    5,428
    
    
    
    10,880,779
    
    
    
    
    
    
    
    151,730
    
    
    
    7,894,820
    
    
    
    (1,659,453
    )
    
    
    17,273,304Total segment expenses
    
    
    14,944,634
    
    
    
    476,365,857
    
    
    
    694,197
    
    
    
    192,051,454
    
    
    
    23,456,172
    
    
    
    (145,732,893
    )
    
    
    561,779,421(Loss)/income before income taxes
and non-controlling interest
    
    
    (9,695,930
    )
    
    
    (24,210,492
    )
    
    
    (694,197
    )
    
    
    5,268,367
    
    
    
    (13,184,748
    )
    
    
    (1,202,889
    )
    
    
    (43,719,889
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,273,773
    )
    
    
    (69,100
    )
    
    
    
    
    
    
    (2,342,873
    )Non controlling interest
    
    
    
    
    
    
    259,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,790
    
    
    
    263,959Total net income/(loss)
    
    
    (9,695,930
    )
    
    
    (23,951,323
    )
    
    
    (694,197
    )
    
    
    2,994,594
    
    
    
    (13,253,848
    )
    
    
    (1,198,099
    )
    
    
    (45,798,803
    )Total assets
    
    
    85,335,500
    
    
    
    325,351,819
    
    
    
    (683,582
    )
    
    
    98,722,803
    
    
    
    393,700,711
    
    
    
    (397,187,776
    )
    
    
    505,239,475
 Consolidated Financial
Statements INTEROIL CORPORATION       20




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 4. Segmented financial information (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2005
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    356,326,763
    
    
    
    
    
    
    
    124,853,882
    
    
    
    
    
    
    
    
    
    
    
    481,180,645Intersegment revenues
    
    
    
    
    
    
    80,094,501
    
    
    
    
    
    
    
    6,202
    
    
    
    5,345,017
    
    
    
    (85,445,720
    )
    
    
    Interest revenue
    
    
    1,011,511
    
    
    
    244,157
    
    
    
    
    
    
    
    95,317
    
    
    
    686,718
    
    
    
    (206,895
    )
    
    
    1,830,808Other revenue
    
    
    283,634
    
    
    
    496
    
    
    
    
    
    
    
    245,760
    
    
    
    30,509
    
    
    
    (32,129
    )
    
    
    528,270Total segment revenue
    
    
    1,295,145
    
    
    
    436,665,917
    
    
    
    
    
    
    
    125,201,161
    
    
    
    6,062,244
    
    
    
    (85,684,744
    )
    
    
    483,539,723Cost of sales and operating expenses
    
    
    
    
    
    
    436,490,554
    
    
    
    
    
    
    
    110,857,139
    
    
    
    
    
    
    
    (80,100,703
    )
    
    
    467,246,990Office and admin and other expenses
    
    
    2,426,909
    
    
    
    9,204,613
    
    
    
    
    
    
    
    4,724,568
    
    
    
    11,608,822
    
    
    
    (5,465,658
    )
    
    
    22,499,254Foreign exchange (gain)/loss
    
    
    (689,084
    )
    
    
    1,434,498
    
    
    
    
    
    
    
    843
    
    
    
    50,333
    
    
    
    
    
    
    
    796,590Exploration costs, excluding
exploration impairment
    
    
    11,009,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,009,434Exploration impairment
    
    
    19,570,073
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,570,073Depreciation and amortisation
    
    
    314,467
    
    
    
    10,598,134
    
    
    
    
    
    
    
    204,247
    
    
    
    49,732
    
    
    
    (130,030
    )
    
    
    11,036,550Interest expense
    
    
    
    
    
    
    10,161,899
    
    
    
    
    
    
    
    225,450
    
    
    
    806,694
    
    
    
    (206,895
    )
    
    
    10,987,148Total segment expenses
    
    
    32,631,799
    
    
    
    467,889,698
    
    
    
    
    
    
    
    116,012,247
    
    
    
    12,515,581
    
    
    
    (85,903,286
    )
    
    
    543,146,039(Loss)/income before income taxes
and non-
controlling interest
    
    
    (31,336,654
    )
    
    
    (31,223,781
    )
    
    
    
    
    
    
    9,188,914
    
    
    
    (6,453,337
    )
    
    
    218,542
    
    
    
    (59,606,316
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,755,845
    )
    
    
    (76,149
    )
    
    
    
    
    
    
    (2,831,994
    )Non controlling interest
    
    
    
    
    
    
    362,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,172
    
    
    
    368,312Total net income/(loss)
    
    
    (31,336,654
    )
    
    
    (30,861,641
    )
    
    
    
    
    
    
    6,433,069
    
    
    
    (6,529,486
    )
    
    
    224,714
    
    
    
    (62,069,998
    )Total assets
    
    
    78,926,578
    
    
    
    314,904,035
    
    
    
    
    
    
    
    47,342,109
    
    
    
    317,227,597
    
    
    
    (325,503,788
    )
    
    
    432,896,531
 5. Cash and cash equivalents
  December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Cash on deposit
    
    
    43,861,762
    
    
    
    31,681,435
    
    
    
    59,597,724Bank term deposits- Australian dollar deposits
    
    
    
    
    
    
    
    
    
    
    4,08343,861,762
    
    
    
    31,681,435
    
    
    
    59,601,807
 Consolidated Financial
Statements INTEROIL CORPORATION       21




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INEROIL LOGO)
 6. Supplemental cash flow information
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Cash paid during the yearInterest
    
    
    16,934,058
    
    
    
    8,548,552
    
    
    
    13,373,832Income taxes
    
    
    2,344,282
    
    
    
    2,306,218
    
    
    
    1,656,985Interest received
    
    
    2,176,678
    
    
    
    3,154,380
    
    
    
    1,800,062Non-cash investing and financing activities:Deferred financing costs included in accounts payable and accrued
liabilities
    
    
    
    
    
    
    500,000
    
    
    
    100,000Increase in deferred gain on contributions to LNG project
    
    
    9,096,537
    
    
    
    
    
    
    
    Loss on proportionate consolidation of LNG project
    
    
    2,375,278
    
    
    
    
    
    
    
    Fair value adjustment on IPL PNG Ltd. acquisition (note 16)
    
    
    (367,935
    )Decrease in plant and equipment as a result of impairment
    
    
    960,000
    
    
    
    755,857
    
    
    
    (Decrease)/increase in deferred liquefaction project liability
    
    
    (6,553,080
    )
    
    
    6,553,080
    
    
    
    Reduction to plant and equioment due to negative goodwill on Enron
buy-back
    
    
    4,841,776
    
    
    
    
    
    
    
    Increase in share capital from:the exercise of share options
    
    
    102,840
    
    
    
    532,232
    
    
    
    577,086the exercise of warrants
    
    
    18,818
    
    
    
    
    
    
    
    120,375conversion of indirect participation interest into share capital
    
    
    934,890
    
    
    
    7,948,691
    
    
    
    923,000Buyback of minority interest
    
    
    496,500
    
    
    
    
    
    
    
    
 7. Financial instruments
 Cash
and cash equivalents
   Cash
restricted
  December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Cash deposit on working capital facility (5.0%)
    
    
    20,240,553
    
    
    
    29,301,940
    
    
    
    16,452,216Debt reserve for secured loan
    
    
    1,761,749
    
    
    
    
    
    
    
    Cash restricted  Current
    
    
    22,002,302
    
    
    
    29,301,940
    
    
    
    16,452,216Cash deposit on secured loan (3.4%)
    
    
    
    
    
    
    647,502
    
    
    
    106,267Debt reserve for secured loan
    
    
    
    
    
    
    2,420,000
    
    
    
    Bank term deposits on Petroleum Prospecting
Licenses (0.4%)
    
    
    116,090
    
    
    
    107,997
    
    
    
    103,786Cash deposit on office premises (6.3%)
    
    
    265,968
    
    
    
    41,785
    
    
    
    Cash restricted  Non-current
    
    
    382,058
    
    
    
    3,217,284
    
    
    
    210,05322,384,360
    
    
    
    32,519,224
    
    
    
    16,662,269
 Consolidated Financial Statements
INTEROIL CORPORATION       22




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 7. Financial instruments (contd)
    Commodity derivative contracts
   a. Hedge accounted contracts:
   Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell Naphtha
    
    
    175,000As at December 31, 2005:Derivative
    
    Type
    
    Notional volumes (bbls)Crude swap
    
    Sell crude
    
    
    300,000Crude swap
    
    Buy crude
    
    
    250,000Jet kerosene crack spread swap
    
    Sell jet kerosene/buy crude
    
    
    249,999b. Non-hedge accounted derivative contracts:In addition to the above hedge accounted contracts, as at December 31, 2007, the Company had the
following open non-hedge accounted derivative contracts outstanding. Any gains/losses on these
contracts are included in general and administration expenses for the
period.As at December 31, 2007:Derivative
    
    Type
    
    Notional volumes (bbls)Brent contracts to manage export price risk
    
    Sell Brent
    
    
    130,000Naphtha swap
    
    Sell Naphtha
    
    
    150,000As at December 31, 2006:Derivative
    
    Type
    
    Notional volumes (bbls)Brent contracts to manage export price risk
    
    Sell Brent
    
    
    320,000
 Consolidated Financial
Statements INTEROIL CORPORATION       23




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 7. Financial instruments (contd)
  Derivative
    
    Type
    
            
    
        
    Notional volumes (bbls)Crude swap
    
    Sell Crude
    
    
    
    
    
    50,000
 8. Trade receivables
   9. Inventories
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Midstream  refining and marketing (crude oil feedstock)
    
    
    3,587,786
    
    
    
    12,795,356
    
    
    
    5,019,580Midstream  refining and marketing (refined petroleum product)
    
    
    43,173,806
    
    
    
    22,329,270
    
    
    
    25,967,357Midstream  refining and marketing (parts inventory)
    
    
    201,526
    
    
    
    46,636
    
    
    
    Dow nstream (refined petroleum product)
    
    
    35,626,124
    
    
    
    32,422,296
    
    
    
    13,100,54782,589,242
    
    
    
    67,593,558
    
    
    
    44,087,484
   10. Plant and equipment
   Midstream -
    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2007
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    246,561,648
    
    
    
    140,051
    
    
    
    42,709,718
    
    
    
    390,135
    
    
    
    291,048,753Deferred project costs and work in progress
    
    
    
    
    
    
    457,092
    
    
    
    2,622,735
    
    
    
    3,405,625
    
    
    
    
    
    
    
    6,485,452Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,859,295
    )
    
    
    (2,859,295
    )Accumulated depreciation and amortisation
    
    
    (1,193,374
    )
    
    
    (32,799,711
    )
    
    
    (15,431
    )
    
    
    (27,737,982
    )
    
    
    (76,190
    )
    
    
    (61,822,688
    )Net book value
    
    
    53,827
    
    
    
    214,219,029
    
    
    
    2,747,355
    
    
    
    18,377,361
    
    
    
    (2,545,350
    )
    
    
    232,852,222Capital expenditure
    
    
    
    
    
    
    777,962
    
    
    
    2,777,112
    
    
    
    5,200,427
    
    
    
    243,338
    
    
    
    8,998,839
 Consolidated Financial
Statements INTEROIL CORPORATION       24




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 10. Plant and equipment (contd)
 Midstream -
    
    Midstream -
    
    
    
    
    
    Corporate &December 31, 2006
    
    Upstream
    
    Refining
    
    Liquefaction
    
    Downstream
    
    Consolidate
    
    TotalsPlant and equipment
    
    
    1,247,201
    
    
    
    249,741,042
    
    
    
    
    
    
    
    37,697,458
    
    
    
    146,797
    
    
    
    288,832,498Deferred project costs and work in progress
    
    
    
    
    
    
    723,566
    
    
    
    
    
    
    
    715,653
    
    
    
    
    
    
    
    1,439,219Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,990,688
    )
    
    
    (2,990,688
    )Accumulated
depreciation and
amortisation
    
    
    (153,455
    )
    
    
    (21,760,341
    )
    
    
    
    
    
    
    (22,697,003
    )
    
    
    (28,153
    )
    
    
    (44,638,952
    )Net book value
    
    
    1,093,746
    
    
    
    228,704,267
    
    
    
    
    
    
    
    15,716,108
    
    
    
    (2,872,044
    )
    
    
    242,642,077Capital expenditure
    
    
    
    
    
    
    11,948,960
    
    
    
    
    
    
    
    10,543,842
    
    
    
    156,817
    
    
    
    22,649,619
 Midstream -
    
    
    Midstream -
    
    
    
    
    
    
    Corporate &December 31, 2005
    
    Upstream
    
    
    Refining
    
    
    Liquefaction
    
    
    Downstream
    
    
    Consolidated
    
    
    TotalsPlant and equipment
    
    
    5,657,125
    
    
    
    238,078,544
    
    
    
    
    
    
    
    12,164,417
    
    
    
    331,183
    
    
    
    256,231,269Deferred project costs and work in progress
    
    
    
    
    
    
    1,987,085
    
    
    
    
    
    
    
    1,386,488
    
    
    
    
    
    
    
    3,373,573Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,120,718
    )
    
    
    (3,120,718
    )Accumulated depreciation and amortisation
    
    
    (308,378
    )
    
    
    (11,245,748
    )
    
    
    
    
    
    
    (7,332,042
    )
    
    
    (198,808
    )
    
    
    (19,084,976
    )Net book value
    
    
    5,348,747
    
    
    
    228,819,881
    
    
    
    
    
    
    
    6,218,863
    
    
    
    (2,988,343
    )
    
    
    237,399,148Capital expenditure
    
    
    
    
    
    
    3,284,108
    
    
    
    
    
    
    
    1,902,334
    
    
    
    95,782
    
    
    
    5,282,224
    11. Oil and gas properties
  December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Drilling equipment
    
    
    22,326,171
    
    
    
    18,242,972
    
    
    
    15,100,860Petroleum Prospecting License drilling programs at cost
    
    
    62,538,956
    
    
    
    36,281,375
    
    
    
    4,638,06784,865,127
    
    
    
    54,524,347
    
    
    
    19,738,927
  Consolidated Financial Statements
INTEROIL CORPORATION       25




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 11. Oil and gas properties (contd)
  Year endedDecember 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Exploration costs, excluding exploration impairment
    
    
    13,305,437
    
    
    
    6,176,866
    
    
    
    11,009,434Exploration impairmentCosts incurred in prior years
    
    
    
    
    
    
    
    
    
    
    2,059,367Costs incurred in current year
    
    
    1,242,606
    
    
    
    1,647,185
    
    
    
    17,510,706Total exploration impairment
    
    
    1,242,606
    
    
    
    1,647,185
    
    
    
    19,570,07314,548,043
    
    
    
    7,824,051
    
    
    
    30,579,507
 12. Income taxes
  December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $(Loss) before income taxes and non controlling interest
    
    
    (27,728,349
    )
    
    
    (43,719,889
    )
    
    
    (59,606,317
    )Statutory income tax rate
    
    
    35.10
    %
    
    
    35.10
    %
    
    
    35.10
    %Computed tax (benefit)
    
    
    (9,732,650
    )
    
    
    (15,345,681
    )
    
    
    (20,921,817
    )Effect on income tax of:Losses in foreign jurisdictions not deductible
    
    
    (2,481,828
    )
    
    
    251,639
    
    
    
    2,834,689Non-deductible stock compensation expense
    
    
    2,128,100
    
    
    
    693,601
    
    
    
    585,783Gains and losses on foreign exchange
    
    
    2,069,183
    
    
    
    (1,687,001
    )
    
    
    268,843Tax rate differential in foreign jurisditions
    
    
    720,014
    
    
    
    1,103,122
    
    
    
    696,307Over provision for tax in prior years
    
    
    (218,403
    )
    
    
    (51,632
    )
    
    
    (113,950
    )Tax losses for which no future
tax benefit has been brought to account
    
    
    8,319,445
    
    
    
    12,166,624
    
    
    
    8,390,975Temporary differences for which
no future tax benefit has been brought to account
    
    
    192,826
    
    
    
    3,124,836
    
    
    
    11,104,170Temporary differences brought to account on acquisition of subsidiary
    
    
    546,026
    
    
    
    1,135,181
    
    
    
    (34,902
    )Other  net
    
    
    (335,821
    )
    
    
    952,184
    
    
    
    21,8961,206,892
    
    
    
    2,342,873
    
    
    
    2,831,994
  December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Future tax assetsTemporary differencesPlant and equipment
    
    
    (8,338,671
    )
    
    
    3,030,479
    
    
    
    2,665,173Exploration expenditure
    
    
    32,563,507
    
    
    
    41,870,390
    
    
    
    26,940,837Other  net
    
    
    1,549,740
    
    
    
    122,713
    
    
    
    99,83325,774,576
    
    
    
    45,023,582
    
    
    
    29,705,843Losses carried forward
    
    
    59,016,255
    
    
    
    27,754,495
    
    
    
    15,390,10984,790,831
    
    
    
    72,778,077
    
    
    
    45,095,952Less valuation allowance
    
    
    (81,923,519
    )
    
    
    (71,354,063
    )
    
    
    (44,037,054
    )2,867,312
    
    
    
    1,424,014
    
    
    
    1,058,898
  Consolidated Financial
Statements INTEROIL CORPORATION       26




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 12. Income taxes (contd)
   13. Accounts payable and accrued liabilities
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Accounts payable  crude import
    
    
    
    
    
    
    41,006,000
    
    
    
    Other accounts payable and accrued liabilities
    
    
    57,162,039
    
    
    
    32,304,793
    
    
    
    26,005,034Income tax payable
    
    
    3,265,568
    
    
    
    2,784,576
    
    
    
    3,900,459Total Accounts Payable and Accrued liabilities
    
    
    60,427,607
    
    
    
    76,095,369
    
    
    
    29,905,493
 14. Deferred gain on contributions to LNG Project
     Consolidated Financial Statements
INTEROIL CORPORATION       27




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 15. Working capital facility  crude feedstock
     December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Working capital credit facility
    
    
    170,000,000
    
    
    
    170,000,000
    
    
    
    150,000,000Less amounts included in the working capital facility liability:Short term advances
    
    
    (66,501,372
    )
    
    
    (13,201,940
    )
    
    
    (47,527,408
    )Discounted receivables (note 8)
    
    
    
    
    
    
    (23,671,568
    )
    
    
    (23,196,914
    )(66,501,372
    )
    
    
    (36,873,508
    )
    
    
    (70,724,322
    )Less: other amounts outstanding under the facility:Letters of credit outstanding
    
    
    (32,000,000
    )
    
    
    (79,000,000
    )
    
    
    (33,765,000
    )Bank guarantees on hedging facility
    
    
    (2,500,000
    )
    
    
    (1,500,000
    )
    
    
    (1,500,000
    )Working capital credit facility available for use
    
    
    68,998,628
    
    
    
    52,626,492
    
    
    
    44,010,678
   16. Acquisition of a subsidiary
 InterOil LNG Holdings Inc.
  PNG LNG Inc. and Liquid Niugini Gas Ltd
  Consolidated Financial
Statements INTEROIL CORPORATION       28




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 16. Acquisition of a subsidiary (contd)
 IPL PNG Ltd.
     $Cash
    
    
    4,989,895Trade receivables
    
    
    6,288,834Inventory
    
    
    20,429,728Other assets
    
    
    2,190,226Future income tax benefit
    
    
    1,698,224Property, plant and equipment
    
    
    10,355,322Total assets acquired
    
    
    45,952,229Accounts payable and accrued liabilities
    
    
    (11,815,188
    )Net assets acquired
    
    
    34,137,041
  Direct Employment Services Company and SPI InterOil Holdings Limited
   17. Related parties
 Petroleum Independent and Exploration Corporation (P.I.E)
  Consolidated Financial
Statements INTEROIL CORPORATION       29




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 17. Related parties (contd)
   Breckland Limited
  Direct Employment Services Company (DESC)
  Director fees
  BNP Paribas
  18. Unsecured loan
   Consolidated Financial Statements
INTEROIL CORPORATION       30




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 19. Secured loan
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Secured loan (OPIC)  current portion
    
    
    9,000,000
    
    
    
    13,500,000
    
    
    
    9,000,000Secured loan (bridging facility)  current portion
    
    
    127,810,093
    
    
    
    
    
    
    
    Secured loan (bridging facility)  deferred financing costs
    
    
    (33,333
    )
    
    
    
    
    
    
    Total current secured loan
    
    
    136,776,760
    
    
    
    13,500,000
    
    
    
    9,000,000Secured loan (OPIC)  non current portion
    
    
    62,500,000
    
    
    
    62,500,000
    
    
    
    71,500,000Secured loan (OPIC)  deferred financing costs
    
    
    (1,358,611
    )
    
    
    
    
    
    
    Secured loan (bridging facility)  non current portion
    
    
    
    
    
    
    121,666,433
    
    
    
    Total non current secured loan
    
    
    61,141,389
    
    
    
    184,166,433
    
    
    
    71,500,000Total secured loan
    
    
    197,918,149
    
    
    
    197,666,433
    
    
    
    80,500,000
 OPIC Secured Loan
       
 Bridging Facility
  Consolidated Financial Statements INTEROIL CORPORATION       31




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 19. Secured loan (contd)
      20. Indirect participation interests
 Indirect participation interest (IPI)
 December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Indirect participation interest (IPI)
    
    
    96,086,369
    
    
    
    96,861,259
    
    
    
    96,861,259
    Consolidated Financial
Statements INTEROIL CORPORATION       32




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 20. Indirect participation interests (contd)
   Indirect participation interest  PNGDV
 December 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005$
    
    
    $
    
    
    $Current portion
    
    
    1,080,004
    
    
    
    730,534
    
    
    
    Non current portion
    
    
    844,490
    
    
    
    1,190,633
    
    
    
    9,685,830Total indirect participation interest  PNGDV
    
    
    1,924,494
    
    
    
    1,921,167
    
    
    
    9,685,830
    Other
  21. Non controlling interest
  Consolidated Financial
Statements INTEROIL CORPORATION       33




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 21. Non controlling interest (contd)
  $Minority interest prior to buyback
    
    
    5,732,565Less:Fair value of InterOil shares issued
    
    
    (496,500
    )Negative goodwill on buyback
    
    
    5,236,065Less: Costs assignable to acquired assets
    
    
    (4,841,776
    )Gain on buyback of minority interest
    
    
    394,289
   22. Share capital
  Common shares 
 Number of shares
    
    
    $January 1, 2005
    
    
    28,310,884
    
    
    
    216,813,654Shares issued for debt
    
    
    52,000
    
    
    
    923,000Shares issued on exercise of warrants
    
    
    19,168
    
    
    
    540,346Shares issued on exercise of options
    
    
    781,268
    
    
    
    5,657,500December 31, 2005
    
    
    29,163,320
    
    
    
    223,934,500Shares issued on exercise of options
    
    
    132,285
    
    
    
    2,006,175Shares issued on conversion of indirect participation interest  PNGDV
    
    
    575,575
    
    
    
    7,948,691December 31, 2006
    
    
    29,871,180
    
    
    
    233,889,366Shares issued on exercise of options
    
    
    22,000
    
    
    
    418,938Shares issued on conversion of indirect participation interest
    
    
    26,667
    
    
    
    934,890Shares issued on conversion of warrants
    
    
    2,995
    
    
    
    84,439Shares issued on buyback of minority interest
    
    
    25,000
    
    
    
    496,500Shares issued on Private Placement
    
    
    1,078,514
    
    
    
    23,500,000December 31, 2007
    
    
    31,026,356
    
    
    
    259,324,133
 23. Preference Shares
  Consolidated Financial Statements
INTEROIL CORPORATION       34




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 23. Preference Shares (contd)
      24. Stock compensation
  December 31, 2007
    
    December 31, 2006
    
    December 31, 2005Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageNumber of
    
    exercise price
    
    Number of
    
    exercise price
    
    Number of
    
    exercise priceStock options outstanding
    
    options
    
    $
    
    options
    
    $
    
    options
    
    $Outstanding at beginning of
period
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23
    
    
    
    1,162,322
    
    
    
    9.91Granted
    
    
    354,750
    
    
    
    32.91
    
    
    
    725,500
    
    
    
    15.87
    
    
    
    516,450
    
    
    
    25.82Exercised
    
    
    (22,000
    )
    
    
    (14.37
    )
    
    
    (132,285
    )
    
    
    (11.14
    )
    
    
    (781,322
    )
    
    
    (6.50
    )Forfeited
    
    
    (143,250
    )
    
    
    (25.94
    )
    
    
    (285,433
    )
    
    
    (18.01
    )
    
    
    (74,000
    )
    
    
    (13.11
    )Expired
    
    
    (2,500
    )
    
    
    (27.00
    )
    
    
    (41,082
    )
    
    
    (15.36
    )
    
    
    (76,650
    )
    
    
    (26.01
    )Outstanding at end of period
    
    
    1,200,500
    
    
    
    23.70
    
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23
  Consolidated Financial
Statements INTEROIL CORPORATION       35




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 24. Stock compensation (contd)
 Options issued and outstanding
    
    
    
    
    
    Options exercisableRange of exercise
    
    
    
    
    
    Weighted average
    
    Weighted average
    
    
    
    
    
    Weighted averageprices $
    
    Number of options
    
    exercise price $
    
    remaining term (years)
    
    Number of options
    
    exercise price $12.01 to 24.00
    
    
    647,000
    
    
    
    17.53
    
    
    
    2.89
    
    
    
    262,000
    
    
    
    18.1524.01 to 31.00
    
    
    419,500
    
    
    
    27.84
    
    
    
    2.03
    
    
    
    93,000
    
    
    
    29.4031.01 to 41.00
    
    
    44,000
    
    
    
    39.39
    
    
    
    0.66
    
    
    
    
    
    
    
    41.01 to 51.00
    
    
    90,000
    
    
    
    41.08
    
    
    
    1.42
    
    
    
    90,000
    
    
    
    41.081,200,500
    
    
    
    23.70
    
    
    
    2.21
    
    
    
    445,000
    
    
    
    25.14
     Weighted averageRisk free interest
    
    
    
    
    
    expected life forYear
    
    Period
    
    rate (%)
    
    Dividend yield
    
    Volatility (%)
    
    options2007
    
    October 1 to Dec 31
    
    3.4
    
    
    
    74
    
    5.02007
    
    January 1 to Sep 30
    
    5
    
    
    
    63
    
    5.02006
    
    October 1 to December 31
    
    4.6
    
    
    
    65
    
    5.02006
    
    July 1 to September 30
    
    5.1
    
    
    
    68
    
    4.22006
    
    January 1 to June 30
    
    4.4
    
    
    
    60
    
    4.82005
    
    July 1 to December 31
    
    2.5
    
    
    
    55
    
    3.62005
    
    January 1 to June 30
    
    2.5
    
    
    
    45
    
    3.2
 25. Warrants
  Consolidated Financial
Statements INTEROIL CORPORATION       36




---



##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 26. Loss per share
  Potential dilutive instruments outstanding
    
    Number of shares 2007
    
    Number of shares 2006Preferred stock
    
    
    517,777
    
    
    
    Employee stock options
    
    
    1,200,500
    
    
    
    1,013,500IPI Indirect Participation interest  conversion options
    
    
    3,306,667
    
    
    
    3,333,334Warrants
    
    
    337,252
    
    
    
    340,247Others
    
    
    5,000
    
    
    
    5,000Total stock options/shares outstanding
    
    
    5,367,196
    
    
    
    4,692,081
 27. Commitments and contingencies
 Commitments
  Less than 1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    year
    
    1-2 years
    
    2-3 years
    
    3-4 years
    
    4-5 years
    
    5 years'000
    
    
    
    '000
    
    
    
    '000
    
    
    
    '000
    
    
    
    '000
    
    
    
    '000
    
    
    
    '000Secured loan obligations
    
    
    199,310
    
    
    
    136,810
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500Accrued financing costs
    
    
    1,088
    
    
    
    1,088
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest  PNGDV (note 20)
    
    
    1,924
    
    
    
    1,080
    
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest (note 20) (a)
    
    
    96,086
    
    
    
    
    
    
    
    96,086
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    PNG LNG Inc. Joint Venture (proportionate
share of commitments)
    
    
    388
    
    
    
    
    
    
    
    236
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention licenses (b)
    
    
    7,899
    
    
    
    2,183
    
    
    
    5,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,695
    
    
    
    141,161
    
    
    
    111,882
    
    
    
    9,152
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500
  (a)
    
    The liability presented in relation to indirect participation interest is not a cash
commitment and will be resolved once the IPI investors have elected to convert their
interests into a joint venture interest or shares in InterOil Corporation. InterOils
commitment is to complete the eight well drilling program. As at December 31, 2007,
management estimate that a further $47,422,277 will be required to be spent to fulfill this
commitment.(b)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents
the amount InterOil has committed to spend to its joint venture partners. In addition to
this amount, InterOil must drill an exploration well on PPL 237 in the two year period
commencing March 2007. As the cost of drilling this well cannot be estimated, it is not
included within the above table. Contingencies:
 Todd Peters, et al v. Phil Mulacek, et al th Paul A. Martin, et al v. Philippe Mulacek et al Peters Martin
 Consolidated Financial
Statements INTEROIL CORPORATION       37




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 27. Commitments and contingencies (contd)
  Import Parity Price (IPP) formula
  28. Subsequent events
  
 29. Reconciliation to accounting principles generally accepted in the United States
  Consolidated Financial Statements
INTEROIL CORPORATION       38




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
 Consolidated Balance Sheets
    
    As atDecember 31, 2007
    
    December 31, 2006
    
    December 31, 2005$
    
    $
    
    $Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAPAssetsCurrent assets:Cash and cash equivalents (8)
    
    
    43,861,762
    
    
    
    40,152,026
    
    
    
    31,681,435
    
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    59,601,807Cash restricted (8)
    
    
    22,002,302
    
    
    
    21,916,736
    
    
    
    29,301,940
    
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    16,452,216Trade receivables
    
    
    63,145,444
    
    
    
    63,145,444
    
    
    
    67,542,902
    
    
    
    67,542,902
    
    
    
    49,958,973
    
    
    
    49,958,973Commodity derivative contracts
    
    
    
    
    
    
    
    
    
    
    1,759,575
    
    
    
    1,759,575
    
    
    
    1,482,798
    
    
    
    1,482,798Other assets (8)
    
    
    146,992
    
    
    
    120,460
    
    
    
    2,954,946
    
    
    
    2,954,946
    
    
    
    1,011,195
    
    
    
    1,011,195Inventories
    
    
    82,589,242
    
    
    
    82,589,242
    
    
    
    67,593,558
    
    
    
    67,593,558
    
    
    
    44,087,484
    
    
    
    44,087,484Prepaid expenses (8)
    
    
    5,102,540
    
    
    
    5,076,006
    
    
    
    880,640
    
    
    
    880,640
    
    
    
    638,216
    
    
    
    638,216Total current assets
    
    
    216,848,282
    
    
    
    212,999,914
    
    
    
    201,714,996
    
    
    
    201,714,996
    
    
    
    173,232,689
    
    
    
    173,232,689Cash restricted
    
    
    382,058
    
    
    
    382,058
    
    
    
    3,217,284
    
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    210,053Deferred financing costs (6)
    
    
    
    
    
    
    1,395,066
    
    
    
    1,716,757
    
    
    
    1,716,757
    
    
    
    1,256,816
    
    
    
    1,256,816Investment in LNG Project (8)
    
    
    
    
    
    
    5,848,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plant and equipment (1), (8)
    
    
    232,852,222
    
    
    
    219,117,006
    
    
    
    242,642,077
    
    
    
    231,175,281
    
    
    
    237,399,148
    
    
    
    225,171,192Oil and gas properties
    
    
    84,865,127
    
    
    
    84,865,127
    
    
    
    54,524,347
    
    
    
    54,524,347
    
    
    
    19,738,927
    
    
    
    19,738,927Future income tax benefit
    
    
    2,867,312
    
    
    
    2,867,312
    
    
    
    1,424,014
    
    
    
    1,424,014
    
    
    
    1,058,898
    
    
    
    1,058,898Total assets
    
    
    537,815,001
    
    
    
    527,475,095
    
    
    
    505,239,475
    
    
    
    493,772,679
    
    
    
    432,896,531
    
    
    
    420,668,575Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities (6), (8)
    
    
    60,427,607
    
    
    
    59,682,621
    
    
    
    76,095,369
    
    
    
    76,095,369
    
    
    
    29,905,493
    
    
    
    29,905,493Commodity derivative contracts
    
    
    1,960,300
    
    
    
    1,960,289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Working capital facility  crude feedstock
    
    
    66,501,372
    
    
    
    66,501,372
    
    
    
    36,873,508
    
    
    
    36,873,508
    
    
    
    70,724,322
    
    
    
    70,724,322Deferred hedge gain (2)
    
    
    
    
    
    
    
    
    
    
    1,385
    
    
    
    
    
    
    
    1,016,998
    
    
    
    Unsecured loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,453,132
    
    
    
    21,453,132Deferred liquefaction project liability
    
    
    
    
    
    
    
    
    
    
    6,553,080
    
    
    
    6,553,080
    
    
    
    
    
    
    
    Current portion of secured loan (6)
    
    
    136,776,760
    
    
    
    136,810,093
    
    
    
    13,500,000
    
    
    
    13,500,000
    
    
    
    9,000,000
    
    
    
    9,000,000Current portion of indirect participation interest -
PNGDV
    
    
    1,080,004
    
    
    
    1,080,004
    
    
    
    730,534
    
    
    
    730,534
    
    
    
    
    
    
    
    Total current liabilities
    
    
    266,746,043
    
    
    
    266,034,379
    
    
    
    133,753,876
    
    
    
    133,752,491
    
    
    
    132,099,945
    
    
    
    131,082,947Accrued financing costs
    
    
    
    
    
    
    
    
    
    
    1,087,500
    
    
    
    1,087,500
    
    
    
    921,109
    
    
    
    921,109Secured loan (6)
    
    
    61,141,389
    
    
    
    62,500,000
    
    
    
    184,166,433
    
    
    
    184,166,433
    
    
    
    71,500,000
    
    
    
    71,500,000Preference share liability (7)
    
    
    7,797,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred gain on contributions to LNG project (8)
    
    
    9,096,537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest (4)
    
    
    96,086,369
    
    
    
    115,926,369
    
    
    
    96,861,259
    
    
    
    116,861,259
    
    
    
    96,861,259
    
    
    
    116,861,259Indirect participation interest  PNGDV
    
    
    844,490
    
    
    
    844,490
    
    
    
    1,190,633
    
    
    
    1,190,633
    
    
    
    9,685,830
    
    
    
    9,685,830Total liabilities
    
    
    441,712,140
    
    
    
    445,305,238
    
    
    
    417,059,701
    
    
    
    437,058,316
    
    
    
    311,068,143
    
    
    
    330,051,145Non-controlling interest (5)
    
    
    4,292
    
    
    
    4,388
    
    
    
    5,759,206
    
    
    
    5,416,831
    
    
    
    6,023,149
    
    
    
    5,682,695Preference shares (7)
    
    
    
    
    
    
    14,250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareholders equity:Share capital
    
    
    259,324,133
    
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    223,934,500Preference shares (7)
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplus
    
    
    10,337,548
    
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    2,933,586Warrants
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive Income
    
    
    6,025,019
    
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    1,494,258
    
    
    
    477,443
    
    
    
    1,471,985Conversion options (4)
    
    
    19,840,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    Accumulated deficit
    
    
    (208,389,853
    )
    
    
    (209,890,265
    )
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )
    
    
    (133,678,142
    )
    
    
    (145,543,188
    )Total shareholders equity
    
    
    96,098,569
    
    
    
    67,915,469
    
    
    
    82,420,568
    
    
    
    51,297,532
    
    
    
    115,805,239
    
    
    
    84,934,735Total liabilities and shareholders equity
    
    
    537,815,001
    
    
    
    527,475,095
    
    
    
    505,239,475
    
    
    
    493,772,679
    
    
    
    432,896,531
    
    
    
    420,668,575
 Consolidated Financial Statements   INTEROIL CORPORATION       39




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29.
    
    Reconciliation to accounting principles generally accepted in the United States (contd)
 Consolidated statements of operations
  Year endedDecember 31, 2007
    
    December 31, 2006
    
    December 31, 2005$
    
    $
    
    $Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPRevenueSales and
operating revenues
(2)
    
    
    625,526,068
    
    
    
    625,526,068
    
    
    
    511,087,934
    
    
    
    511,189,438
    
    
    
    481,180,645
    
    
    
    481,180,645Interest income
    
    
    2,180,285
    
    
    
    
    
    
    
    3,223,995
    
    
    
    
    
    
    
    1,830,808
    
    
    
    Other income
    
    
    2,666,890
    
    
    
    
    
    
    
    3,747,603
    
    
    
    
    
    
    
    528,270
    
    
    
    630,373,243
    
    
    
    625,526,068
    
    
    
    518,059,532
    
    
    
    511,189,438
    
    
    
    483,539,723
    
    
    
    481,180,645ExpensesCost of sales and
operating expenses
(excluding
depreciation
shown below) (2)
    
    
    573,609,441
    
    
    
    573,609,441
    
    
    
    499,494,540
    
    
    
    499,584,532
    
    
    
    467,246,990
    
    
    
    467,400,576Administrative and
generalexpenses (2), (8)
    
    
    39,270,348
    
    
    
    38,153,126
    
    
    
    20,728,618
    
    
    
    20,762,574
    
    
    
    14,672,793
    
    
    
    14,687,717Legal and
professional fees
(8)
    
    
    6,532,646
    
    
    
    6,038,280
    
    
    
    3,937,517
    
    
    
    3,937,517
    
    
    
    3,606,415
    
    
    
    3,606,415Exploration costs,
excluding
exploration
impairment
    
    
    13,305,437
    
    
    
    13,305,437
    
    
    
    6,176,866
    
    
    
    6,176,866
    
    
    
    11,009,434
    
    
    
    11,009,434Exploration
impairment
    
    
    1,242,606
    
    
    
    1,242,606
    
    
    
    1,647,185
    
    
    
    1,647,185
    
    
    
    19,570,073
    
    
    
    19,570,073Short term
borrowing costs
    
    
    13,212,112
    
    
    
    11,151,150
    
    
    
    8,478,540
    
    
    
    8,478,540
    
    
    
    8,855,857
    
    
    
    8,855,857Long term
borrowing costs
(7)
    
    
    9,536,162
    
    
    
    9,536,162
    
    
    
    11,856,872
    
    
    
    11,856,872
    
    
    
    6,351,337
    
    
    
    6,351,337Depreciation and
amortization (1),
(8)
    
    
    13,024,258
    
    
    
    12,550,011
    
    
    
    12,352,672
    
    
    
    11,591,513
    
    
    
    11,036,550
    
    
    
    10,836,696Loss on amendment
of indirect
participation
interest -
PNGDV
    
    
    
    
    
    
    
    
    
    
    1,851,421
    
    
    
    1,851,421
    
    
    
    
    
    
    
    Gain on LNG
shareholder agreement (note 20)
    
    
    (6,553,080
    )
    
    
    (6,553,080
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on equity accountedinvestment (8)
    
    
    
    
    
    
    (5,561,684
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange
loss/(gain) (2)
    
    
    (5,078,338
    )
    
    
    (5,099,651
    )
    
    
    (4,744,810
    )
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    796,590Non-controlling
interest (5)
    
    
    (22,333
    )
    
    
    (22,236
    )
    
    
    (263,959
    )
    
    
    (265,865
    )
    
    
    (368,312
    )
    
    
    (368,475
    )Interest income (8)
    
    
    
    
    
    
    (2,146,183
    )
    
    
    
    
    
    
    (3,223,995
    )
    
    
    
    
    
    
    (1,830,808
    )Other income
    
    
    
    
    
    
    (2,666,890
    )
    
    
    
    
    
    
    (3,747,603
    )
    
    
    
    
    
    
    (528,270
    )658,079,259
    
    
    
    643,536,489
    
    
    
    561,515,462
    
    
    
    553,904,747
    
    
    
    542,777,727
    
    
    
    540,387,142Loss before income
taxes
    
    
    (27,706,016
    )
    
    
    (18,010,421
    )
    
    
    (43,455,930
    )
    
    
    (42,715,309
    )
    
    
    (59,238,004
    )
    
    
    (59,206,497
    )Income tax expense
(3), (8)
    
    
    (1,206,892
    )
    
    
    (1,194,227
    )
    
    
    (2,342,873
    )
    
    
    (2,342,873
    )
    
    
    (2,831,994
    )
    
    
    (2,831,994
    )Net loss
    
    
    (28,912,908
    )
    
    
    (19,204,648
    )
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )
    
    
    (62,069,998
    )
    
    
    (62,038,491
    )
 Consolidated Financial
Statements INTEROIL CORPORATION 40




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29.
    
    Reconciliation to accounting principles generally accepted in the United States (contd)
 Reconciliation of Canadian GAAP net income/(loss) to U.S. GAAP net income/(loss)
 Year endedDecember 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Net loss as shown in the Canadian GAAP financial statements
    
    
    (28,912,908
    )
    
    
    (45,798,803
    )
    
    
    (62,069,998
    )Description of items having the effect of increasing reported incomeDecrease in depreciation and amortization due to
difference in date of commencement of operations of
refinery (1)
    
    
    478,935
    
    
    
    761,159
    
    
    
    199,854Decrease in non-controlling interest expense (5)
    
    
    (96
    )
    
    
    1,907
    
    
    
    163Decrease in administrative and general expenses from
ineffective portion of hedges (2)
    
    
    
    
    
    
    
    
    
    
    22,456Increase in reporting income due to reversal of
proportionate consolidation of LNG Project and equity
accounting the investment (8)
    
    
    9,097,535
    
    
    
    
    
    
    
    Increase in sales from ineffective portion of hedges (2)
    
    
    
    
    
    
    101,504
    
    
    
    Decrease in long term borrowing costs relating to
financing costs on preference shares expensed
    
    
    390,000
    
    
    
    
    
    
    
    Decrease in long term borrowing costs relating to
dividends paid to preference share holders expensed
under Canadian GAAP
    
    
    84,247
    
    
    
    
    
    
    
    Description of items having the effect of decreasing reported incomeReduced gain on sale of minority interest under U.S.
GAAP (5)
    
    
    (342,361
    )
    
    
    
    
    
    
    Increase in cost of sales and operating expenses as a
result of items being ineligible for capitalization due
to difference in date of commencement of operations of
refinery (1)
    
    
    
    
    
    
    
    
    
    
    (153,586
    )Increase in cost of sales from ineffective portion of
hedges (2)
    
    
    
    
    
    
    (89,993
    )
    
    
    Increase in administrative and general expenses from
ineffective portion of hedges (2)
    
    
    
    
    
    
    (33,956
    )
    
    
    Increase in administrative and general expenses as a
result of items being ineligible for capitalization due
to difference in date of commencement of operations of
refinery (1)
    
    
    
    
    
    
    
    
    
    
    (37,380
    )Net loss according to US GAAP
    
    
    (19,204,648
    )
    
    
    (45,058,182
    )
    
    
    (62,038,491
    )
 Statement of comprehensive income/(loss), net of tax
 Year endedDecember 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2005$
    
    $
    
    $Net loss in accordance with U.S. GAAP, net of tax
    
    
    (19,204,648
    )
    
    
    (45,058,182
    )
    
    
    (62,038,491
    )Foreign currency translation reserve, net of tax
    
    
    4,532,150
    
    
    
    1,015,426
    
    
    
    14,243Deferred hedge gain, net of tax
    
    
    (1,389
    )
    
    
    (993,153
    )
    
    
    457,184Total other comprehensive income, net of tax
    
    
    4,530,761
    
    
    
    22,273
    
    
    
    471,427Comprehensive loss, net of tax
    
    
    (14,673,887
    )
    
    
    (45,035,909
    )
    
    
    (61,567,064
    )
 Consolidated Financial
Statements INTEROIL CORPORATION 41




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
 Consolidated Statements
of Shareholders Equity
    
    Year endedDecember 31, 2007
    
    December 31, 2006
    
    December 31, 2005$
    
    $
    
    $Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAP
    
    Canadian GAAP
    
    US GAAPShare capitalAt beginning of period
    
    
    233,889,366
    
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    223,934,500
    
    
    
    216,813,654
    
    
    
    216,813,654Issue of capital stock
    
    
    25,434,767
    
    
    
    25,434,767
    
    
    
    9,954,866
    
    
    
    9,954,866
    
    
    
    7,120,846
    
    
    
    7,120,846At end of period
    
    
    259,324,133
    
    
    
    259,324,133
    
    
    
    233,889,366
    
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    223,934,500Preference SharesAt beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issue of Preference shares
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    6,842,688
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contributed surplusAt beginning of period
    
    
    4,377,426
    
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    2,933,586
    
    
    
    1,841,776
    
    
    
    1,841,776Stock compensation
    
    
    5,960,122
    
    
    
    5,960,122
    
    
    
    1,443,840
    
    
    
    1,443,840
    
    
    
    1,091,810
    
    
    
    1,091,810At end of period
    
    
    10,337,548
    
    
    
    10,337,548
    
    
    
    4,377,426
    
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    2,933,586WarrantsAt beginning of period
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227
    
    
    
    2,258,227Movement for period
    
    
    (18,818
    )
    
    
    (18,818
    )
    
    
    
    
    
    
    
    
    
    
    (120,375
    )
    
    
    (120,375
    )At end of period
    
    
    2,119,034
    
    
    
    2,119,034
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,137,852Accumulated Other Comprehensive IncomeAt beginning of period
    
    
    1,492,869
    
    
    
    1,494,258
    
    
    
    477,443
    
    
    
    1,471,985
    
    
    
    463,200
    
    
    
    1,000,558Deferred hedge gain
recognised on transition
    
    
    1,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred hedge
(loss)/gain movement for
period, net of tax
    
    
    (1,385
    )
    
    
    (1,389
    )
    
    
    
    
    
    
    (993,153
    )
    
    
    
    
    
    
    457,184Foreign currency
translation adjustment
movement for period, net
of tax
    
    
    4,532,150
    
    
    
    4,532,150
    
    
    
    1,015,426
    
    
    
    1,015,426
    
    
    
    14,243
    
    
    
    14,243At end of period
    
    
    6,025,019
    
    
    
    6,025,019
    
    
    
    1,492,869
    
    
    
    1,494,258
    
    
    
    477,443
    
    
    
    1,471,985Conversion optionsAt beginning of period
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    .Movement for period
    
    
    (160,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    19,840,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    
    
    
    
    20,000,000
    
    
    
    Accumulated deficitAt beginning of period
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )
    
    
    (133,678,142
    )
    
    
    (145,543,188
    )
    
    
    (71,608,144
    )
    
    
    (83,504,697
    )Net loss for period
    
    
    (28,912,908
    )
    
    
    (19,204,648
    )
    
    
    (45,798,803
    )
    
    
    (45,058,182
    )
    
    
    (62,069,998
    )
    
    
    (62,038,491
    )Deduct:Preference Share Dividends
    
    
    
    
    
    
    (84,247
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At end of period
    
    
    (208,389,853
    )
    
    
    (209,890,265
    )
    
    
    (179,476,945
    )
    
    
    (190,601,370
    )
    
    
    (133,678,142
    )
    
    
    (145,543,188
    )Shareholders equity at end of period
    
    
    96,098,569
    
    
    
    67,915,469
    
    
    
    82,420,568
    
    
    
    51,297,532
    
    
    
    115,805,239
    
    
    
    84,934,735
 Consolidated Financial Statements
INTEROIL CORPORATION       42




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InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
 Reconciliation of Canadian GAAP Statement of cash flows to U.S. GAAP:
 December 31, 2007
    
    December 31, 2006
    
    December 31, 2005$
    
    $
    
    $Cash flows provided by (used in):Operating activities  Canadian GAAP (as per consolidated
cash flows)
    
    
    (40,716,444
    )
    
    
    2,187,462
    
    
    
    (22,712,704
    )Reconciling items:Exploration costs expensed including exploration impairment
    
    
    (14,548,043
    )
    
    
    (7,824,051
    )
    
    
    (30,579,507
    )Being LNG project equity accounted under US GAAP as
opposed to proportionate consolidation under Canadian
GAAP
    
    
    (1,797,833
    )
    
    
    
    
    
    
    Operating activities  U.S. GAAP
    
    
    (57,062,320
    )
    
    
    (5,636,589
    )
    
    
    (53,292,211
    )Investing activities  Canadian GAAP (as per consolidated
cash flows)
    
    
    (25,273,334
    )
    
    
    (97,071,319
    )
    
    
    (64,942,338
    )Reconciling items:Exploration costs expensed including exploration impairment
    
    
    14,548,043
    
    
    
    7,824,051
    
    
    
    30,579,507Being cash investment in LNG Project
    
    
    (1,976,975
    )
    
    
    
    
    
    
    Being
reversal of PNG LNG cash call proportionately consolidated in cash flow statement
    
    
    65,072
    
    
    
    
    
    
    
    Investing activities  U.S. GAAP
    
    
    (12,637,194
    )
    
    
    (89,247,268
    )
    
    
    (34,362,831
    )Financing activities  Canadian and U.S. GAAP
    
    
    78,170,105
    
    
    
    66,963,485
    
    
    
    118,712,451(Decrease)/increase in cash and cash equivalents
    
    
    8,470,591
    
    
    
    (27,920,372
    )
    
    
    31,057,409Cash and cash equivalents, beginning of period (U.S.GAAP)
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398Cash and cash equivalents, end of period (U.S. GAAP)
    
    
    40,152,026
    
    
    
    31,681,435
    
    
    
    59,601,807
  Per share amounts
   Consolidated Financial Statements
INTEROIL CORPORATION       43




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
 Weighted average number of shares on which earnings per
    
    Year ended December 31,share calculations are based in accordance with U.S. GAAP
    
    2007
    
    2006
    
    2005Basic
    
    
    29,998,133
    
    
    
    29,602,360
    
    
    
    28,832,263Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    29,998,133
    
    
    
    29,602,360
    
    
    
    28,832,263Net income/(loss) per share in accordance with U.S. GAAPBasic
    
    
    (0.64
    )
    
    
    (1.52
    )
    
    
    (2.15
    )Diluted
    
    
    (0.64
    )
    
    
    (1.52
    )
    
    
    (2.15
    )
 (1)
    
    OperationsThe Company determined that refinery operations commenced under U.S. GAAP at December 1,
2004, which is the date management assessed that construction of the refinery was
substantially complete and ready for its intended use. The Company ceased capitalization
of certain costs to the refinery project at this date and recognized one months results
from sales, related costs of sales and operating expenses and administrative and general
expenses in the statement of operations for the year ended December 31, 2004.As disclosed in note 2(s) in the consolidated financial statements, operations commenced on
January 1, 2005 under Canadian GAAP. Therefore, the Company continued to capitalize
December 2004s results to the refinery project. Due to the difference in the cost basis
of the refinery, the depreciation expense recorded under U.S. GAAP differs from that
recorded under Canadian GAAP during 2005.The useful life for the refinery under U.S. GAAP is the same as that disclosed under
Canadian GAAP in note 2(q) in the consolidated financial statements.(2)
    
    Derivative instruments and hedgingThe Company accounts for derivatives and hedging activities in accordance with FASB
Statement No. 133, Accounting for Derivative Instruments and Certain Hedging Activities,
as amended (SFAS No. 133), which requires that all derivative instruments be recorded on
the balance sheet at their respective fair values.The Canadian Institute of Chartered Accountants issued Accounting Guideline 13 Hedging
Relationships (AcG-13), which became effective January 1, 2004. This guideline was
issued to align certain accounting principles under Canadian GAAP with SFAS No. 133,
including hedge documentation and assessing hedge effectiveness. The Company adopted the
hedge accounting provisions in AcG-13 and SFAS No. 133 in respect of the commodity forward
contracts it transacted beginning in July 2004. Under Canadian GAAP, the Company included
hedges which are unsettled at period end in current liabilities based on a mark to market
calculation. Under SFAS No. 133 the mark to market amount for the unsettled hedges is
included in other comprehensive income to the extent that they are effective. The
ineffective portion is expensed.Effective January 1, 2007, CICA 3865  Hedges came into effect as explained under Note
2(d). This revision brings Canadian accounting treatment of hedges in line with the U.S.
GAAP treatment and the Company has followed the transition provisions as per guidance under
the new standard to reclassify the mark to market amount for the unsettled hedges from
current liabilities to other comprehensive income. Details of hedge accounting are
disclosed in notes 2(o) and note 7 in the consolidated financial statements of the Company
for the year ended December 31, 2007.(3)
    
    Income tax effect of adjustmentsThe income tax effect of U.S. GAAP adjustments was a reduction to the future tax asset of
$3,403,154 (2006  $259,957, 2005  $11,059) for the year ended December 31, 2007 due to a
decrease in the loss carry-forwards. A corresponding decrease in the valuation allowance
was recorded.
 Consolidated Financial Statements
INTEROIL CORPORATION       44




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 29.
    
    Reconciliation to accounting principles generally accepted in the United States (contd)(4)
    
    Indirect participation interest

As disclosed in note 20 in the consolidated financial statements, the Company entered into an indirect participation interest agreement in exchange for proceeds of $125,000,000. Under Canadian GAAP, this amount was apportioned between non financial
liabilities and equity. Under U.S. GAAP, the Company has not bifurcated the amount as the Company has opted to utilize the scope exception under SFAS 133 Para 10(f) for derivatives that serve as impediments to sales accounting.(5)
    
    Non controlling interestThe non-controlling interest movements are the result of the U.S. GAAP adjustments relating to the midstream operations described in points 1 to 3 above.(6)
    
    Deferred Financing costsDeferred financial costs are offset against the respective liabilities under Canadian GAAP; however, the same is disclosed as a separate item on the face of the balance sheet under US GAAP in accordance with guidance under APB 21.(7)
    
    Preference shares:As disclosed in Note 23, 517,777 preference shares were issued to an investor in November 2007 for $15,000,000.Under Canadian GAAP, the preference shares were assessed based on the rights attached to those shares and Management valued the equity and liability component of the instrument using the residual value basis.As the Preference share agreement has contractual redemption provisions under Fundamental change section mainly relating to listing requirements, shareholding etc, under U.S. GAAP, the preference shares needs to be classified
under temporary equity classification in accordance with ASR 268.In addition to the above, the 5% dividend paid for the year amounting to $84,247 has been included within long term borrowing costs within Canadian GAAP, but has been treated as a reduction to retained earnings under U.S. GAAP.(8)
    
    Investment in LNG Project/Deferred gain on contributions to LNG Project:As disclosed in Note 14, a Shareholders Agreement was signed on July 30, 2007 which converted PNG LNG Inc. and its subsidiaries into a joint venture project from being a subsidiary of InterOil. Under Canadian GAAP, joint ventures are
proportionately consolidated into the Companys consolidated financials based on the shareholding in the joint venture.Applying the guidance under APB 18, a corporate joint venture has to be equity accounted under U.S. GAAP. InterOil has also followed the guidance under SAB Topic 5H wherein a gain on contributions to the joint venture is not recognised,
however, a gain is recognised as a result of a change in economic interest.InterOil will account for the joint venture using equity accounted method. In addition to the gain or loss recognised as part of the operations, InterOil will also recognise any difference between the Investment carried in its balance sheet
and the underlying equity in net assets of the joint venture in the statement of operations and the investment balance will increase/decrease in line with this difference.
 Consolidated Financial
Statements INTEROIL CORPORATION       45




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
  Midstream - liquefaction
    
    Canadian GAAP
    
    
    GAAP
    
    
    US GAAPConsolidated Balance Sheet
    
    
    
    
    
    AdjustmentsCash and cash equivalents
    
    
    3,709,736
    
    
    
    (3,709,736
    )
    
    
    Cash restricted
    
    
    85,566
    
    
    
    (85,566
    )
    
    
    Other assets
    
    
    26,532
    
    
    
    (26,532
    )
    
    
    Prepaid expenses
    
    
    26,534
    
    
    
    (26,534
    )
    
    
    Current assets
    
    
    3,848,368
    
    
    
    (3,848,368
    )
    
    
    Investment in PNG LNG Inc.
    
    
    
    
    
    
    5,848,612
    
    
    
    5,848,612Plant and equipment
    
    
    2,747,355
    
    
    
    (2,747,355
    )
    
    
    Total assets
    
    
    6,595,723
    
    
    
    (747,111
    )
    
    
    5,848,612Accounts payable and accrued liabilities
    
    
    762,033
    
    
    
    (748,110
    )
    
    
    13,923Intercompany payables
    
    
    3,127,116
    
    
    
    
    
    
    
    3,127,116Current liabilities
    
    
    3,889,149
    
    
    
    (748,110
    )
    
    
    3,141,039Deferred gain on contributions to LNG project
    
    
    9,096,537
    
    
    
    (9,096,537
    )
    
    
    Total
non-current liabilities
    
    
    9,096,537
    
    
    
    (9,096,537
    )
    
    
    Share capital
    
    
    1
    
    
    
    
    
    
    
    1Accumulated deficit
    
    
    (6,389,964
    )
    
    
    9,097,536
    
    
    
    2,707,572Shareholders Equity
    
    
    (6,389,963
    )
    
    
    9,097,536
    
    
    
    2,707,573Total liabilities and Shareholders equity
    
    
    6,595,723
    
    
    
    (747,111
    )
    
    
    5,848,612
 Midstream - liquefaction
    
    Canadian GAAP
    
    
    GAAP
    
    
    US GAAPConsolidated Statement of Operation
    
    
    
    
    
    AdjustmentsInterest income
    
    
    41,215
    
    
    
    (34,102
    )
    
    
    7,113Total revenues
    
    
    41,215
    
    
    
    (34,102
    )
    
    
    7,113Office and Administrative expenses
    
    
    3,042,521
    
    
    
    (1,459,583
    )
    
    
    1,582,938Depreciation
    
    
    15,431
    
    
    
    (15,431
    )
    
    
    Professional fees
    
    
    2,646,411
    
    
    
    (2,060,962
    )
    
    
    585,449Exchange (Gain) loss
    
    
    19,954
    
    
    
    (21,313
    )
    
    
    (1,359
    )Gain on equity accounted investment
    
    
    
    
    
    
    (5,561,684
    )
    
    
    (5,561,684
    )Income taxes
    
    
    12,665
    
    
    
    (12,665
    )
    
    
    Total expenses
    
    
    5,736,982
    
    
    
    (9,131,638
    )
    
    
    (3,394,656
    )Net gain/(loss)
    
    
    (5,695,767
    )
    
    
    9,097,536
    
    
    
    3,401,769
 Consolidated Financial
Statements INTEROIL CORPORATION       46




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##### Table of Contents



InterOil Corporation 
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
    

(INTEROIL LOGO)
 29. Reconciliation to accounting principles generally accepted in the United States (contd)
 Recent Accounting Pronouncements
 Fair value measurements
  Fair Value Option for Financial Assets and Financial Liabilities
  Business combinations
  Non-controlling interests in consolidated financial statements
  Consolidated Financial Statements
INTEROIL CORPORATION       47