##### 



InterOil Corporation
Consolidated Financial Statements 
(Expressed in United States dollars)
Years ended December 31, 2006, 2005 and 2004
    
    (INTEROIL LOGO)




---



##### 



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
    
    
    7Notes to the Consolidated Financial Statements
    
    
    8Reconciliation to accounting principles generally accepted in the United States
    
    
    33




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##### 



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




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##### 



INDEPENDENT AUDIT REPORT TO THE SHAREHOLDERS OF INTEROIL CORPORATION
     
 2




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##### 

DIV style="font-family: Helvetica,Arial,sans-serif">




AUDITORS REPORT TO THE SHAREHOLDERS













3



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##### 



InterOil Corporation
 
 Consolidated Balance Sheets
  
   As atDecember 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $AssetsCurrent assets:Cash and cash equivalents (note 5)
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398Cash restricted (note 7)
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Trade receivables (note 8)
    
    
    67,542,902
    
    
    
    49,958,973
    
    
    
    58,698,069Commodity derivative contracts (note 7)
    
    
    1,759,575
    
    
    
    1,482,798
    
    
    
    503,500Other assets
    
    
    2,954,946
    
    
    
    1,011,195
    
    
    
    806,123Inventories (note 9)
    
    
    67,593,558
    
    
    
    44,087,484
    
    
    
    27,916,902Prepaid expenses
    
    
    880,640
    
    
    
    638,216
    
    
    
    190,135Total current assets
    
    
    201,714,996
    
    
    
    173,232,689
    
    
    
    132,156,254Cash restricted (note 7)
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    102,096Deferred financing costs (note 17)
    
    
    1,716,757
    
    
    
    1,256,816
    
    
    
    1,311,488Plant and equipment (note 10)
    
    
    242,642,077
    
    
    
    237,399,148
    
    
    
    244,363,355Oil and gas properties (note 11)
    
    
    37,449,734
    
    
    
    16,399,492
    
    
    
    6,605,360Future income tax benefit (note 12)
    
    
    1,424,014
    
    
    
    1,058,898
    
    
    
    1,303,631Total assets
    
    
    488,164,862
    
    
    
    429,557,096
    
    
    
    385,842,184Liabilities and shareholders equityCurrent liabilities:Accounts payable and accrued liabilities
    
    
    73,310,793
    
    
    
    26,005,034
    
    
    
    26,328,544Income tax payable
    
    
    2,784,576
    
    
    
    3,900,459
    
    
    
    2,881,398Working capital facility  crude feedstock (note 13)
    
    
    36,873,508
    
    
    
    70,724,322
    
    
    
    76,520,541Deferred hedge gain (note 7)
    
    
    1,385
    
    
    
    1,016,998
    
    
    
    537,358Business combination financing (note 14)
    
    
    
    
    
    
    
    
    
    
    12,123,106Unsecured loan (note 16)
    
    
    
    
    
    
    21,453,132
    
    
    
    Due to related parties (note 15)
    
    
    
    
    
    
    
    
    
    
    1,056,251Deferred liquefaction project liability (note 17)
    
    
    6,553,080
    
    
    
    
    
    
    
    Current portion of secured loan (note 17)
    
    
    13,500,000
    
    
    
    9,000,000
    
    
    
    9,000,000Current portion of indirect participation interest  PNGDV (note 18)
    
    
    730,534
    
    
    
    
    
    
    
    Current portion of indirect participation interest (note 18)
    
    
    12,460,725
    
    
    
    35,092,558
    
    
    
    13,749,852Total current liabilities
    
    
    146,214,601
    
    
    
    167,192,503
    
    
    
    142,197,050Accrued financing costs (note 17)
    
    
    1,087,500
    
    
    
    921,109
    
    
    
    863,329Secured loan (note 17)
    
    
    184,166,433
    
    
    
    71,500,000
    
    
    
    76,000,000Indirect participation interest (note 18)
    
    
    36,827,877
    
    
    
    30,166,311
    
    
    
    Indirect participation interest  PNGDV (note 18)
    
    
    1,012,999
    
    
    
    9,685,830
    
    
    
    10,608,830Total liabilities
    
    
    369,309,410
    
    
    
    279,465,753
    
    
    
    229,669,209Non-controlling interest (note 19)
    
    
    5,759,206
    
    
    
    6,023,149
    
    
    
    6,404,262Shareholders equity:Share capital (note 20)
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    216,813,654Authorised  unlimited
Issued and outstanding  29,871,180
(Dec 31, 2005  29,163,320)
(Dec 31, 2004  28,310,884)Contributed surplus
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    1,841,776Warrants (note 22)
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227Foreign currency translation adjustment
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    463,200Conversion options (note 18)
    
    
    25,475,368
    
    
    
    25,475,368
    
    
    
    Accumulated deficit
    
    
    (154,276,635
    )
    
    
    (110,890,555
    )
    
    
    (71,608,144
    )Total shareholders equity
    
    
    113,096,246
    
    
    
    144,068,194
    
    
    
    149,768,713Total liabilities and shareholders equity
    
    
    488,164,862
    
    
    
    429,557,096
    
    
    
    385,842,184
 See accompanying notes to the consolidated financial statements. Commitments and
contingencies (note 24)
 On behalf of the Board  Phil Mulacek, Director Christian Vinson, Director
 4




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##### 



InterOil Corporation
 
 Consolidated Statement of Operations
  
   December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $RevenueSales and operating revenues
    
    
    511,087,934
    
    
    
    481,180,645
    
    
    
    70,644,486Interest
    
    
    3,223,995
    
    
    
    1,830,808
    
    
    
    382,461Other
    
    
    3,747,603
    
    
    
    528,270
    
    
    
    196,337518,059,532
    
    
    
    483,539,723
    
    
    
    71,223,284ExpensesCost of sales and operating expenses
    
    
    499,494,540
    
    
    
    467,246,990
    
    
    
    65,344,516Administrative and general expenses
    
    
    20,728,618
    
    
    
    14,672,793
    
    
    
    7,831,550Depreciation and amortization
    
    
    12,352,672
    
    
    
    11,036,550
    
    
    
    639,075Exploration costs, excluding exploration impairment (note 11)
    
    
    1,657,671
    
    
    
    
    
    
    
    2,903,313Exploration impairment (note 11)
    
    
    416,923
    
    
    
    2,144,429
    
    
    
    35,566,761Legal and professional fees
    
    
    3,937,517
    
    
    
    3,606,415
    
    
    
    3,573,727Short term borrowing costs
    
    
    8,478,540
    
    
    
    8,855,857
    
    
    
    4,705,190Long term borrowing costs
    
    
    11,856,872
    
    
    
    6,351,337
    
    
    
    1,401,256Accretion expense (note 18)
    
    
    3,741,254
    
    
    
    5,647,491
    
    
    
    Loss on amendment of indirect participation interest  PNGDV
(note 18)
    
    
    1,446,901
    
    
    
    
    
    
    
    Foreign exchange loss/(gain)
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    392,805559,366,698
    
    
    
    520,358,452
    
    
    
    122,358,193Loss before income taxes and non-controlling interest
    
    
    (41,307,166
    )
    
    
    (36,818,729
    )
    
    
    (51,134,909
    )Income taxesCurrent
    
    
    (1,232,487
    )
    
    
    (2,605,265
    )
    
    
    (2,538,410
    )Future
    
    
    (1,110,386
    )
    
    
    (226,729
    )
    
    
    663,347(2,342,873
    )
    
    
    (2,831,994
    )
    
    
    (1,875,063
    )Loss before non-controlling interest
    
    
    (43,650,039
    )
    
    
    (39,650,723
    )
    
    
    (53,009,972
    )Non-controlling interest (note 16)
    
    
    263,959
    
    
    
    368,312
    
    
    
    70,091Net loss
    
    
    (43,386,080
    )
    
    
    (39,282,411
    )
    
    
    (52,939,881
    )Basic loss per share(note 20)
    
    
    (1.47
    )
    
    
    (1.36
    )
    
    
    (2.09
    )Diluted loss per share(note 20)
    
    
    (1.47
    )
    
    
    (1.36
    )
    
    
    (2.09
    )Weighted average number of common shares outstandingBasic and diluted
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575
 See accompanying notes to the consolidated financial statements
 5




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##### 








InterOil
CorporationConsolidated Statement of Cash Flows
(Expressed in United States dollars)
    
    (InterOil Logo)


December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash flows provided by (used in):Operating activitiesNet (loss) (note 5)
    
    
    (43,386,080
    )
    
    
    (39,282,411
    )
    
    
    (52,939,881
    )Adjustments for non-cash transactionsNon-controlling interest
    
    
    (263,959
    )
    
    
    (381,113
    )
    
    
    (70,091
    )Depreciation and amortization
    
    
    12,352,672
    
    
    
    11,036,550
    
    
    
    639,075Future income tax asset
    
    
    1,333,108
    
    
    
    244,733
    
    
    
    (663,347
    )Loss/(gain) on sale of other assets
    
    
    
    
    
    
    
    
    
    
    (94,260
    )Loss/(gain) on sale of plant and equipment
    
    
    263,945
    
    
    
    (95,053
    )
    
    
    Impairment of plant and equipment
    
    
    755,857
    
    
    
    
    
    
    
    Amortization of discount on debt
    
    
    28,891
    
    
    
    161,255
    
    
    
    604,045Amortization of deferred financing costs
    
    
    219,033
    
    
    
    154,672
    
    
    
    268,873Accretion of discount on indirect participation interest
    
    
    3,741,254
    
    
    
    5,647,491
    
    
    
    Debt conversion settlement expense  debentures (note 22)
    
    
    
    
    
    
    
    
    
    
    77,589Interest expense forfeited by debenture holders
    
    
    
    
    
    
    
    
    
    
    998,438Loss/(gain) on unsettled hedge contracts
    
    
    (71,875
    )
    
    
    119,200
    
    
    
    33,858Gain on derivative contracts
    
    
    (1,220,500
    )
    
    
    (585,000
    )
    
    
    Stock compensation expense
    
    
    1,976,072
    
    
    
    1,668,896
    
    
    
    1,209,921Inventory revaluation
    
    
    
    
    
    
    355,215
    
    
    
    1,508,334Capitalized oil and gas properties expensed
    
    
    416,923
    
    
    
    2,144,429
    
    
    
    35,566,761Loss on amendment of indirect participation interest  PNGDV
    
    
    1,446,901
    
    
    
    
    
    
    
    Unrealized foreign exchange loss/(gain)
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    392,805Non-cash interest on secured loan facility
    
    
    2,926,025
    
    
    
    
    
    
    
    Change in non-cash operating working capital(Increase)/decrease in trade receivables
    
    
    (10,438,531
    )
    
    
    8,751,789
    
    
    
    (49,224,125
    )(Increase) in commodity derivative contracts
    
    
    
    
    
    
    (33,858
    )
    
    
    (Increase)/decrease in other assets and prepaid expenses
    
    
    4,051
    
    
    
    (653,153
    )
    
    
    982,014Decrease/ (increase) in inventories
    
    
    2,642,493
    
    
    
    (16,515,467
    )
    
    
    (23,240,590
    )Increase in accounts payable, accrued liabilities
and income tax payable
    
    
    28,773,008
    
    
    
    3,752,531
    
    
    
    4,183,664(3,245,522
    )
    
    
    (22,712,704
    )
    
    
    (79,766,917
    )Investing activitiesExpenditure on oil and gas properties
    
    
    (21,405,742
    )
    
    
    (11,249,477
    )
    
    
    (19,154,106
    )Expenditure on plant and equipment
    
    
    (13,585,792
    )
    
    
    (5,575,194
    )
    
    
    (38,947,904
    )Proceeds from indirect participation interest
    
    
    
    
    
    
    80,410,591
    
    
    
    10,724,885Expenditure on oil and gas properties applied against
indirect participation interest (note 18)
    
    
    (21,152,032
    )
    
    
    (31,774,513
    )
    
    
    Proceeds received on sale of assets
    
    
    3,770,080
    
    
    
    112,229
    
    
    
    405,353Redemption of short-term investments
    
    
    
    
    
    
    
    
    
    
    24,723,572Acquisition of subsidiary net of cash received (note 14)
    
    
    (25,820,515
    )
    
    
    
    
    
    
    4,631,904Repayment of business combination financing
    
    
    
    
    
    
    (12,226,581
    )
    
    
    (Increase) in restricted cash held as security on borrowings
    
    
    (15,856,955
    )
    
    
    (1,063,046
    )
    
    
    (15,501,806
    )Change in non-cash working capitalIncrease/(decrease) in accounts payable and accrued liabilities
    
    
    2,412,621
    
    
    
    (3,165,756
    )
    
    
    4,094,594(91,638,335
    )
    
    
    15,468,253
    
    
    
    (29,023,508
    )Financing activitiesRepayments of secured loan
    
    
    (4,500,000
    )
    
    
    (4,500,000
    )
    
    
    Proceeds from secured loan, net of transaction costs
    
    
    125,293,488
    
    
    
    
    
    
    
    2,000,000Net proceeds from senior convertible debentures and warrants
    
    
    
    
    
    
    
    
    
    
    41,740,234Proceeds from conversion options
    
    
    
    
    
    
    22,700,814
    
    
    
    6,259,967Proceeds from related party borrowings
    
    
    
    
    
    
    
    
    
    
    1,775,565(Repayments) to related parties
    
    
    
    
    
    
    (1,056,251
    )
    
    
    (2,198,065
    )Proceeds from unsecured borrowings
    
    
    
    
    
    
    21,453,132
    
    
    
    5,100,000Repayments of unsecured borrowings
    
    
    (21,453,132
    )
    
    
    
    
    
    
    (5,100,000
    )Proceeds from/(repayments of) working capital facility
    
    
    (33,850,814
    )
    
    
    (5,796,219
    )
    
    
    76,520,541Proceeds from issue of common shares
    
    
    1,473,943
    
    
    
    5,500,384
    
    
    
    2,020,31666,963,485
    
    
    
    38,301,860
    
    
    
    128,118,558Increase/(decrease) in cash and cash equivalents
    
    
    (27,920,372
    )
    
    
    31,057,409
    
    
    
    19,328,133Cash and cash equivalents, beginning of period
    
    
    59,601,807
    
    
    
    28,544,398
    
    
    
    9,216,265Cash and cash equivalents, end of period (note 5)
    
    
    31,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398


See accompanying notes to the consolidated financial
statements


See note 5 for non cash financing and investing
activities








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##### 



InterOil Corporation
 
 Consolidated Statements of Shareholders Equity
  
   Year endedDecember 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Share capitalAt beginning of period
    
    
    223,934,500
    
    
    
    216,813,654
    
    
    
    157,449,200Adjustment to reflect change in accounting for employee stock
options (note 2(t))
    
    
    
    
    
    
    
    
    
    
    92,434Issue of capital stock (note 20)
    
    
    9,954,866
    
    
    
    7,120,846
    
    
    
    59,272,020At end of period
    
    
    233,889,366
    
    
    
    223,934,500
    
    
    
    216,813,654Contributed surplusAt beginning of period
    
    
    2,933,586
    
    
    
    1,841,776
    
    
    
    540,222Adjustment to reflect change in accounting for employee stock
options (note 2(t))
    
    
    
    
    
    
    
    
    
    
    645,216Stock compensation (note 21)
    
    
    1,443,840
    
    
    
    1,091,810
    
    
    
    656,338At end of period
    
    
    4,377,426
    
    
    
    2,933,586
    
    
    
    1,841,776WarrantsAt beginning of period
    
    
    2,137,852
    
    
    
    2,258,227
    
    
    
    Movement for period (note 22)
    
    
    
    
    
    
    (120,375
    )
    
    
    2,258,227At end of period
    
    
    2,137,852
    
    
    
    2,137,852
    
    
    
    2,258,227Foreign currency translation adjustmentAt beginning of period
    
    
    477,443
    
    
    
    463,200
    
    
    
    Movement for period, net of tax
    
    
    1,015,426
    
    
    
    14,243
    
    
    
    463,200At end of period
    
    
    1,492,869
    
    
    
    477,443
    
    
    
    463,200Conversion optionsAt beginning of period
    
    
    25,475,368
    
    
    
    
    
    
    
    Movement for period (note 18)
    
    
    
    
    
    
    25,475,368
    
    
    
    At end of period
    
    
    25,475,368
    
    
    
    25,475,368
    
    
    
    Accumulated deficitAt beginning of period
    
    
    (110,890,555
    )
    
    
    (71,608,144
    )
    
    
    (11,031,402
    )Adjustment to reflect change in accounting for employee stock
options (note 2(t))
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Adjustment to cummulative debentures conversion expense (note 22)
    
    
    
    
    
    
    
    
    
    
    (6,899,211
    )Net (loss) for period
    
    
    (43,386,080
    )
    
    
    (39,282,411
    )
    
    
    (52,939,881
    )At end of period
    
    
    (154,276,635
    )
    
    
    (110,890,555
    )
    
    
    (71,608,144
    )Shareholders equity at end of period
    
    
    113,096,246
    
    
    
    144,068,194
    
    
    
    149,768,713
 See accompanying notes to the consolidated financial statements
 7




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##### 



InterOil Corporation
 
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   1. Nature of operations and organization
    2. Significant accounting policies
  (a) Basis of preparation
    (b) Principles of consolidation
         8




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##### 



InterOil
Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
 (c) Going concern
    (d) Segment reporting
  a.
    
    that engages in business activities from which it may earn revenues and incur
expenses (including revenues and expenses relating to transactions with other segment 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.
  (e) Foreign currency translation
 Functional and presentation currency
  Group companies
   (f) Revenue recognition
  Revenue from midstream operations :
  9




---



##### 



InterOil
Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
  Revenue from downstream operations:
  Interest income:
  (g) Income tax
    (h) Acquisitions of assets
    (i) Impairment of assets
    10




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##### 



InterOil Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
 (j) Cash and cash equivalents
  (k) Restricted cash
  (l) Trade receivables
   (m) Inventory
 Raw materials and stores and finished goods
  Crude oil and refined petroleum products
  (n) Assets held for sale
     (o) Derivative financial instruments
  11




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##### 



InterOil Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
       (p) Deferred financing costs
  (q) Plant and equipment
 Refinery assets
     12




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##### 



InterOil Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
 Other assets
  Downstream
    
    
    0% - 25
    %Midstream
    
    
    1% - 33
    %Upstream
    
    
    4% - 100
    %Corporate
    
    
    13% - 33
    %
  Leased assets
   Asset retirement obligations
  Environmental remediation
  Disposal of property, plant and equipment
  (r) Oil and gas properties
   13




---



##### 



InterOil Corporation
 Notes to Consolidated Financial Statements
(Expressed in United States dollars)
  
   2. Significant accounting policies (contd)
 (s) Accounts payable and accrued liabilities
  (t) Employee entitlements
 Wages and salaries, and annual leave
  Long Service Leave
  Retirement benefit obligations
  Stock-based compensation
     Profit-sharing and bonus plans
  (u) Earnings per share
 Basic earnings per share
  Diluted earnings per share
  14




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 2. Significant accounting policies (contd)
 (v) Reclassification
  3. Financial Risk Management
   (a) Market risk
 Foreign exchange risk
    Price risk
   Product risk
   (b) Credit risk
   15




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 3. Financial Risk Management (contd)
 (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
   16




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 4. Segmented financial information (contd)
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2006
    
    Upstream
    
    Marketing
    
    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
    )
    
    
    499,494,541Office and admin and other expenses
    
    
    6,370,436
    
    
    
    8,017,245
    
    
    
    694,416
    
    
    
    7,671,208
    
    
    
    14,974,443
    
    
    
    (8,552,604
    )
    
    
    29,175,144Foreign exchange (gain)/loss
    
    
    (61,423
    )
    
    
    (4,635,878
    )
    
    
    (219
    )
    
    
    (192,433
    )
    
    
    145,142
    
    
    
    
    
    
    
    (4,744,811
    )Exploration costs, excluding
exploration impairment
    
    
    1,657,671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,657,671Exploration impairment
    
    
    416,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416,923Depreciation and amortisation
    
    
    806,142
    
    
    
    10,729,546
    
    
    
    
    
    
    
    909,767
    
    
    
    37,247
    
    
    
    (130,030
    )
    
    
    12,352,672Accretion expense
    
    
    3,741,254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,741,254Interest expense
    
    
    5,428
    
    
    
    10,880,779
    
    
    
    
    
    
    
    151,730
    
    
    
    7,894,820
    
    
    
    (1,659,453
    )
    
    
    17,273,304Total segment expenses
    
    
    12,936,431
    
    
    
    476,365,857
    
    
    
    694,197
    
    
    
    192,051,454
    
    
    
    23,051,652
    
    
    
    (145,732,893
    )
    
    
    559,366,698(Loss)/income before income taxes
and non-controlling interest
    
    
    (7,687,727
    )
    
    
    (24,210,492
    )
    
    
    (694,197
    )
    
    
    5,268,367
    
    
    
    (12,780,228
    )
    
    
    (1,202,889
    )
    
    
    (41,307,166
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,273,773
    )
    
    
    (69,100
    )
    
    
    
    
    
    
    (2,342,873
    )Non controlling interest
    
    
    
    
    
    
    259,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,790
    
    
    
    263,959Total net income/(loss)
    
    
    (7,687,727
    )
    
    
    (23,951,323
    )
    
    
    (694,197
    )
    
    
    2,994,594
    
    
    
    (12,849,328
    )
    
    
    (1,198,099
    )
    
    
    (43,386,080
    )Total assets
    
    
    68,260,887
    
    
    
    325,351,819
    
    
    
    (683,582
    )
    
    
    98,722,803
    
    
    
    393,700,711
    
    
    
    (397,187,776
    )
    
    
    488,164,862
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2005
    
    Upstream
    
    Marketing
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exploration impairment
    
    
    2,144,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,144,429Depreciation and amortisation
    
    
    314,467
    
    
    
    10,598,134
    
    
    
    
    
    
    
    204,247
    
    
    
    49,732
    
    
    
    (130,030
    )
    
    
    11,036,550Accretion expense
    
    
    5,647,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,647,491Interest expense
    
    
    
    
    
    
    10,161,899
    
    
    
    
    
    
    
    225,450
    
    
    
    806,694
    
    
    
    (206,895
    )
    
    
    10,987,148Total segment expenses
    
    
    9,844,212
    
    
    
    467,889,698
    
    
    
    
    
    
    
    116,012,247
    
    
    
    12,515,581
    
    
    
    (85,903,286
    )
    
    
    520,358,452(Loss)/income before income taxes
and non-controlling interest
    
    
    (8,549,067
    )
    
    
    (31,223,781
    )
    
    
    
    
    
    
    9,188,914
    
    
    
    (6,453,337
    )
    
    
    218,542
    
    
    
    (36,818,729
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,755,845
    )
    
    
    (76,149
    )
    
    
    
    
    
    
    (2,831,994
    )Non controlling interest
    
    
    
    
    
    
    362,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,172
    
    
    
    368,312Total net income/(loss)
    
    
    (8,549,067
    )
    
    
    (30,861,641
    )
    
    
    
    
    
    
    6,433,069
    
    
    
    (6,529,486
    )
    
    
    224,714
    
    
    
    (39,282,411
    )Total assets
    
    
    75,587,143
    
    
    
    314,904,035
    
    
    
    
    
    
    
    47,342,109
    
    
    
    317,227,597
    
    
    
    (325,503,788
    )
    
    
    429,557,096
 17




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 4. Segmented financial information (contd)
 Midstream -Refining and
    
    Midstream -
    
    
    
    
    
    
    
    
    
    ConsolidationYear ended December 31, 2004
    
    Upstream
    
    Marketing
    
    Liquefaction
    
    Downstream
    
    Corporate
    
    adjustments
    
    TotalRevenues from external customers
    
    
    
    
    
    
    26,309,547
    
    
    
    
    
    
    
    62,410,291
    
    
    
    
    
    
    
    (18,075,352
    )
    
    
    70,644,486Intersegment revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    489,111
    
    
    
    3,787,944
    
    
    
    (4,277,055
    )
    
    
    Interest revenue
    
    
    151,780
    
    
    
    8,761
    
    
    
    
    
    
    
    56,896
    
    
    
    165,024
    
    
    
    
    
    
    
    382,461Other revenue
    
    
    (39,267
    )
    
    
    (63,031
    )
    
    
    
    
    
    
    205,836
    
    
    
    92,799
    
    
    
    
    
    
    
    196,337Total segment revenue
    
    
    112,513
    
    
    
    26,255,277
    
    
    
    
    
    
    
    63,162,134
    
    
    
    4,045,767
    
    
    
    (22,352,407
    )
    
    
    71,223,284Cost of sales and operating expenses
    
    
    
    
    
    
    27,685,347
    
    
    
    
    
    
    
    53,158,737
    
    
    
    
    
    
    
    (15,499,568
    )
    
    
    65,344,516Office and admin and other expenses
    
    
    1,649,191
    
    
    
    3,167,216
    
    
    
    
    
    
    
    3,146,905
    
    
    
    10,538,730
    
    
    
    (3,766,608
    )
    
    
    14,735,434Exchange (Gain)/loss
    
    
    
    
    
    
    (34,121
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34,121
    )Exploration costs, excluding exploration impairment
    
    
    2,903,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,903,313Exploration impairment
    
    
    35,566,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,566,761Depreciation and amortisation
    
    
    12,510
    
    
    
    311,986
    
    
    
    
    
    
    
    224,214
    
    
    
    90,365
    
    
    
    
    
    
    
    639,075Interest expense
    
    
    4,932
    
    
    
    843,888
    
    
    
    
    
    
    
    455,368
    
    
    
    1,899,027
    
    
    
    
    
    
    
    3,203,215Total segment expenses
    
    
    40,136,707
    
    
    
    31,974,316
    
    
    
    
    
    
    
    56,985,224
    
    
    
    12,528,122
    
    
    
    (19,266,176
    )
    
    
    122,358,193(Loss)/income before income taxes and
non-controlling interest
    
    
    (40,024,194
    )
    
    
    (5,719,039
    )
    
    
    
    
    
    
    6,176,910
    
    
    
    (8,482,355
    )
    
    
    (3,086,231
    )
    
    
    (51,134,909
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,899,803
    )
    
    
    24,740
    
    
    
    
    
    
    
    (1,875,063
    )Non controlling interest
    
    
    
    
    
    
    68,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,130
    
    
    
    70,091Total net income/(loss)
    
    
    (40,024,194
    )
    
    
    (5,650,078
    )
    
    
    
    
    
    
    4,277,107
    
    
    
    (8,457,615
    )
    
    
    (3,085,101
    )
    
    
    (52,939,881
    )Total assets
    
    
    21,570,219
    
    
    
    310,941,494
    
    
    
    
    
    
    
    34,436,144
    
    
    
    211,530,962
    
    
    
    (192,636,636
    )
    
    
    385,842,184
 5. Cash and cash equivalents
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash on deposit
    
    
    31,681,435
    
    
    
    59,597,724
    
    
    
    24,224,523Bank term deposits-Papua New Guinea kina deposits
    
    
    
    
    
    
    
    
    
    
    4,315,513-Australian dollar deposits
    
    
    
    
    
    
    4,083
    
    
    
    4,36231,681,435
    
    
    
    59,601,807
    
    
    
    28,544,398
 18




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 6. Supplemental cash flow information
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Cash paid during the yearInterest
    
    
    8,548,552
    
    
    
    13,373,832
    
    
    
    1,444,006Income taxes
    
    
    2,306,218
    
    
    
    1,656,985
    
    
    
    1,914,459Interest received
    
    
    3,154,380
    
    
    
    1,800,062
    
    
    
    671,479Non-cash investing and financing activities:Deferred financing costs included in accounts payable and accrued liabilities
    
    
    500,000
    
    
    
    100,000
    
    
    
    Accrued financing costs and deferred financing costs
    
    
    
    
    
    
    
    
    
    
    834,439Increase in additional paid up capital as a result of a change in accounting
policy for stock based compensation (2(t))
    
    
    
    
    
    
    
    
    
    
    645,216Decrease in plant and equipment as a result of impairment
    
    
    755,857
    
    
    
    
    
    
    
    Deferred liquefaction project liability
    
    
    6,553,080
    
    
    
    
    
    
    
    Increase in share capital from:the exercise of share options
    
    
    532,232
    
    
    
    577,086
    
    
    
    646,216the exercise of warrants
    
    
    
    
    
    
    120,375
    
    
    
    change in accounting policy for stock based compensation (note 2(t))
    
    
    
    
    
    
    
    
    
    
    92,434transfer of deferred transaction costs on conversion of the debenture
    
    
    
    
    
    
    
    
    
    
    (3,093,734
    )transfer of carrying value of debentures to share capital on conversion of
the securities
    
    
    
    
    
    
    
    
    
    
    42,890,448conversion of indirect participation interest into share capital
    
    
    7,948,691
    
    
    
    923,000
    
    
    
    9,226,260shares issued to induce conversion of debentures
    
    
    
    
    
    
    
    
    
    
    6,976,800transaction costs being attributed to share capital transaction
    
    
    
    
    
    
    
    
    
    
    300,000Movement in accumulated deficit as a result of the inducement paid on
conversion of the debentures
    
    
    
    
    
    
    
    
    
    
    (6,899,211
    )
  7. Financial instruments
 Cash and cash equivalents
   Cash restricted
  December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$
    
    
    $
    
    
    $Cash deposit on working capital facility (5.0%)
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Cash restricted  Current
    
    
    29,301,940
    
    
    
    16,452,216
    
    
    
    15,497,127Cash deposit on secured loan (3.9%)
    
    
    647,502
    
    
    
    106,267
    
    
    
    Debt reserve for secured loan
    
    
    2,420,000
    
    
    
    
    
    
    
    Bank term deposits on Petroleum Prospecting Licenses (0.8%)
    
    
    107,997
    
    
    
    103,786
    
    
    
    102,096Cash deposit on office premises (4.5%)
    
    
    41,785
    
    
    
    
    
    
    
    Cash restricted  Non-current
    
    
    3,217,284
    
    
    
    210,053
    
    
    
    102,09632,519,224
    
    
    
    16,662,269
    
    
    
    15,599,223
 19




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 7. Financial instruments (contd)
     Commodity derivative 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
    
    
    249,999As at December 31, 2004:
 Derivative
    
    Type
    
    Notional volumes (bbls)Naphtha swap
    
    Sell naphtha
    
    
    50,000Naphtha crack spread swap
    
    Sell naphtha/buy crude
    
    
    50,000
 20




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 8. Trade receivables
   9. Inventories
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Midstream  refining and marketing (crude oil feedstock)
    
    
    12,795,356
    
    
    
    5,019,580
    
    
    
    3,971,982Midstream  refining and marketing (refined petroleum product)
    
    
    22,329,270
    
    
    
    25,967,357
    
    
    
    16,396,975Midstream  refining and marketing (parts inventory)
    
    
    46,646
    
    
    
    
    
    
    
    Downstream (refined petroleum product)
    
    
    32,422,296
    
    
    
    13,100,547
    
    
    
    7,547,94567,593,568
    
    
    
    44,087,484
    
    
    
    27,916,902
   10. Plant and equipment
   Corporate &December 31, 2006
    
    Upstream
    
    Midstream
    
    Downstream
    
    Consolidated
    
    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
 21




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 10. Plant and equipment (contd)
 Corporate &December 31, 2005
    
    Upstream
    
    Midstream
    
    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
 Corporate &December 31, 2004
    
    Upstream
    
    Midstream
    
    Downstream
    
    Consolidated
    
    TotalsPlant and equipment
    
    
    5,659,248
    
    
    
    236,551,876
    
    
    
    10,875,211
    
    
    
    263,217
    
    
    
    253,349,552Deferred project
costs and work in
progress
    
    
    
    
    
    
    
    
    
    
    949,924
    
    
    
    
    
    
    
    949,924Consolidation entries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,002,214
    )
    
    
    (2,002,214
    )Accumulated
depreciation and
amortisation
    
    
    (19,792
    )
    
    
    (419,629
    )
    
    
    (7,317,596
    )
    
    
    (176,890
    )
    
    
    (7,933,907
    )Net book value
    
    
    5,639,456
    
    
    
    236,132,247
    
    
    
    4,507,539
    
    
    
    (1,915,887
    )
    
    
    244,363,355Capital expenditure
    
    
    1,131
    
    
    
    40,532,990
    
    
    
    1,320,644
    
    
    
    83,920
    
    
    
    41,938,685
   11. Oil and gas properties
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Drilling equipment
    
    
    18,242,972
    
    
    
    15,100,860
    
    
    
    5,353,471Petroleum Prospecting License drilling programs at cost
    
    
    19,206,762
    
    
    
    1,298,632
    
    
    
    1,251,88937,449,734
    
    
    
    16,399,492
    
    
    
    6,605,360
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Exploration costs, excluding exploration impairment
    
    
    1,657,671
    
    
    
    
    
    
    
    2,903,313Exploration impairmentCosts incurred in prior years
    
    
    
    
    
    
    2,059,367
    
    
    
    16,576,982Costs incurred in current year
    
    
    416,923
    
    
    
    85,062
    
    
    
    18,989,779Total exploration impairment
    
    
    416,923
    
    
    
    2,144,429
    
    
    
    35,566,7612,074,594
    
    
    
    2,144,429
    
    
    
    38,470,074
 22




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 12. Income taxes
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $(Loss) before income taxes and non controlling interest
    
    
    (41,307,166
    )
    
    
    (36,818,729
    )
    
    
    (51,134,909
    )Statutory income tax rate
    
    
    35.10
    %
    
    
    35.10
    %
    
    
    35.12
    %Computed tax (benefit)
    
    
    (14,498,815
    )
    
    
    (12,923,374
    )
    
    
    (17,958,580
    )Effect on income tax of:Losses in foreign jurisdictions not deductible
    
    
    251,639
    
    
    
    2,834,689
    
    
    
    2,273,530Non-deductible stock compensation expense
    
    
    693,601
    
    
    
    585,783
    
    
    
    424,924Gains and losses on foreign exchange
    
    
    (1,358,526
    )
    
    
    268,843
    
    
    
    58,659Tax rate differential in foreign jurisditions
    
    
    1,103,122
    
    
    
    1,224,361
    
    
    
    (341,613
    )Over provision for tax in prior years
    
    
    (51,632
    )
    
    
    (113,950
    )
    
    
    (42,874
    )Tax losses for which no future tax benefit has been brought to account
    
    
    12,166,624
    
    
    
    9,845,189
    
    
    
    2,696,330Temporary differences for which no future tax benefit has been brought to account
    
    
    778,301
    
    
    
    1,123,458
    
    
    
    14,552,726Temporary differences brought to account on acquisition of subsidiary
    
    
    1,135,181
    
    
    
    (34,902
    )
    
    
    (488,027
    )Other  net
    
    
    2,123,377
    
    
    
    21,897
    
    
    
    699,9882,342,872
    
    
    
    2,831,994
    
    
    
    1,875,063
  December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Future tax assetsTemporary differencesPlant and equipment
    
    
    3,030,479
    
    
    
    2,665,173
    
    
    
    2,263,654Exploration expenditure
    
    
    24,828,156
    
    
    
    12,184,351
    
    
    
    11,541,022Other  net
    
    
    122,713
    
    
    
    99,834
    
    
    
    127,24027,981,348
    
    
    
    14,949,358
    
    
    
    13,931,916Losses carried forward
    
    
    27,060,498
    
    
    
    17,373,507
    
    
    
    4,850,38055,041,846
    
    
    
    32,322,865
    
    
    
    18,782,296Less valuation allowance
    
    
    (53,617,833
    )
    
    
    (31,263,967
    )
    
    
    (17,478,665
    )1,424,013
    
    
    
    1,058,898
    
    
    
    1,303,631
    23




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 12. Income taxes (contd)
  13. Working capital facility  crude feedstock
     December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Working capital credit facility
    
    
    170,000,000
    
    
    
    150,000,000
    
    
    
    100,000,000Less amounts included in the working capital facility liability:Short term advances
    
    
    (13,201,940
    )
    
    
    (47,527,408
    )
    
    
    (63,485,637
    )Discounted receivables (note 8)
    
    
    (23,671,568
    )
    
    
    (23,196,914
    )
    
    
    (13,034,904
    )(36,873,508
    )
    
    
    (70,724,322
    )
    
    
    (76,520,541
    )Less: other amounts outstanding under the facility:Letters of credit outstanding
    
    
    (79,000,000
    )
    
    
    (33,765,000
    )
    
    
    (14,000,000
    )Hedging facility
    
    
    (1,500,000
    )
    
    
    (1,500,000
    )
    
    
    Working capital credit facility available for use
    
    
    52,626,492
    
    
    
    44,010,678
    
    
    
    9,479,459
   14. Acquisition of a subsidiary
 IPL PNG Ltd.
  24




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 14. Acquisition of a subsidiary (contd)
    $Cash
    
    
    4,989,895Trade receivables
    
    
    6,288,834Inventory
    
    
    20,429,728Other assets
    
    
    2,190,226Future income tax benefit
    
    
    1,698,224Property, plant and equipment
    
    
    8,799,691Total assets acquired
    
    
    44,396,598Accounts payable and accrued liabilities
    
    
    (11,815,188
    )Net assets acquired
    
    
    32,581,410
  PNG LNG Inc. and Liquid Niugini Gas Ltd
  Direct Employment Services Company and SPI InterOil Holdings Limited
    InterOil Products Limited
   25




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 14. Acquisition of a subsidiary (contd)
   $Cash
    
    
    5,859,517Trade receivables
    
    
    8,241,400Inventory
    
    
    6,759,089Other assets
    
    
    1,614,249Future income tax benefit
    
    
    640,284Property, plant and equipment
    
    
    3,180,530Total assets acquired
    
    
    26,295,069Accounts payable and accrued liabilities
    
    
    (13,399,720
    )Net assets acquired
    
    
    12,895,349
  15. Related parties
 Petroleum
Independent and Exploration Corporation (P.I.E.)
    Breckland Limited
  Direct Employment Services Company (DESC)
  26




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 15.
    
    Related parties (contd)
 Director fees
  BNP Paribas
  16. Unsecured loan
   17. Secured loan
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Secured loan (OPIC)  current portion
    
    
    13,500,000
    
    
    
    9,000,000
    
    
    
    9,000,000Secured loan (OPIC)  non current portion
    
    
    62,500,000
    
    
    
    71,500,000
    
    
    
    76,000,000Secured loan (bridging facility)  non current portion
    
    
    121,666,433
    
    
    
    
    
    
    
    Total non current secured loan
    
    
    184,166,433
    
    
    
    71,500,000
    
    
    
    76,000,000Total secured loan
    
    
    197,666,433
    
    
    
    80,500,000
    
    
    
    85,000,000
 OPIC Secured Loan
      27




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 17. Secured loan (contd)
  Bridging Facility
       18. Indirect participation interests
 Indirect participation interest (IPI)
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Current portion
    
    
    12,460,725
    
    
    
    35,092,558
    
    
    
    13,749,852Non current portion
    
    
    36,827,877
    
    
    
    30,166,311
    
    
    
    Total indirect participation interest
    
    
    49,288,602
    
    
    
    65,258,869
    
    
    
    13,749,852
   28




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 18. Indirect participation interests (contd)
       Indirect participation interest  PNGDV
 December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Current portion
    
    
    730,534
    
    
    
    
    
    
    
    Non current portion
    
    
    1,012,999
    
    
    
    9,685,830
    
    
    
    10,608,830Total indirect participation interest  PNGDV
    
    
    1,743,533
    
    
    
    9,685,830
    
    
    
    10,608,830
 29




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 18. Indirect participation interests (contd)
    Other
  19. Non controlling interest
   20. Share capital
  Common shares 
 Number of shares
    
    
    $January 1, 2004
    
    
    24,815,961
    
    
    
    157,449,200Shares issued for debt
    
    
    3,184,828
    
    
    
    56,698,121Shares issued on exercise of options
    
    
    310,095
    
    
    
    2,666,333December 31, 2004
    
    
    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 amendment of
indirect participation interest -
PNGDV
    
    
    575,575
    
    
    
    7,948,691December 31, 2006
    
    
    29,871,180
    
    
    
    233,889,366
 30




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 21. Stock compensation
   December 31, 2006
    
    December 31, 2005
    
    December 31, 2004Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    average
    
    Number of
    
    average
    
    Number of
    
    averageStock options outstanding
    
    options
    
    exercise price $
    
    options
    
    exercise price $
    
    options
    
    exercise price $Outstanding at beginning of
year
    
    
    746,800
    
    
    
    22.23
    
    
    
    1,162,322
    
    
    
    9.91
    
    
    
    1,363,265
    
    
    
    7.55Granted
    
    
    725,500
    
    
    
    15.87
    
    
    
    516,450
    
    
    
    25.82
    
    
    
    224,460
    
    
    
    26.30Exercised
    
    
    (132,285
    )
    
    
    (11.14
    )
    
    
    (781,322
    )
    
    
    (6.50
    )
    
    
    (310,095
    )
    
    
    (6.52
    )Forfeited
    
    
    (285,433
    )
    
    
    (18.01
    )
    
    
    (74,000
    )
    
    
    (13.11
    )
    
    
    (100,308
    )
    
    
    (25.28
    )Expired
    
    
    (41,082
    )
    
    
    (15.36
    )
    
    
    (76,650
    )
    
    
    (26.01
    )
    
    
    (15,000
    )
    
    
    (8.00
    )Outstanding at end of year
    
    
    1,013,500
    
    
    
    20.59
    
    
    
    746,800
    
    
    
    22.23
    
    
    
    1,162,322
    
    
    
    9.91
 Options issued and outstanding
    
    Options exercisableWeighted averageWeighted average
    
    remaining term
    
    
    
    
    
    Weighted averageRange of exercise prices $
    
    Number of options
    
    exercise price $
    
    (years)
    
    Number of options
    
    exercise price $5.01 to 8.00
    
    
    10,000
    
    
    
    5.27
    
    
    
    0.39
    
    
    
    10,000
    
    
    
    5.2713.01 to 24.00
    
    
    714,000
    
    
    
    18.03
    
    
    
    3.63
    
    
    
    150,000
    
    
    
    18.8424.00 to 31.00
    
    
    289,500
    
    
    
    27.44
    
    
    
    1.93
    
    
    
    77,500
    
    
    
    30.271,013,500
    
    
    
    20.59
    
    
    
    2.97
    
    
    
    237,500
    
    
    
    22.00
   Weighted averageRisk free interest
    
    
    
    
    
    
    
    
    
    expected life forYear
    
    Period
    
    rate (%)
    
    Dividend yield
    
    Volatility (%)
    
    options2006
    
    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
    
    
    
    3.22004
    
    January 1 to December 31
    
    
    2.5
    
    
    
    
    
    
    
    45
    
    
    
    3.8
 31




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 22. Debentures and warrants
   23. Loss per share
  24. Commitments and contingencies
  Less than
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-2 years
    
    2-3 years
    
    3-4 years
    
    4-5 years
    
    5 years000
    
    000
    
    000
    
    000
    
    000
    
    000
    
    000Secured loan obligations
    
    
    197,666
    
    
    
    13,500
    
    
    
    130,666
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500Accrued financing costs
    
    
    1,450
    
    
    
    363
    
    
    
    1,087
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquisition of subsidiary  IPL PNG Ltd
    
    
    1,771
    
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest  PNGDV (note 18)
    
    
    1,744
    
    
    
    731
    
    
    
    1,013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation interest (note 18)
    
    
    49,289
    
    
    
    12,461
    
    
    
    21,087
    
    
    
    15,740
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and retention licenses (a)
    
    
    5,237
    
    
    
    1,877
    
    
    
    3,360
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257,157
    
    
    
    30,703
    
    
    
    157,213
    
    
    
    24,740
    
    
    
    9,000
    
    
    
    9,000
    
    
    
    26,500
 
 (a)
    
    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.    25. Subsequent events
  32




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 
 26. Reconciliation to accounting principles generally accepted in the United States
  Consolidated statements of operations
  Year endedDecember 31, 2006
    
    December 31, 2005
    
    December 31, 2004$
    
    $
    
    $Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAP
    
    Canadian GAAP
    
    U.S. GAAPRevenueSales and operating revenues (1)
    
    
    511,087,934
    
    
    
    511,189,438
    
    
    
    481,180,645
    
    
    
    481,180,645
    
    
    
    70,644,486
    
    
    
    121,974,268Interest income
    
    
    3,223,995
    
    
    
    
    
    
    
    1,830,808
    
    
    
    
    
    
    
    382,461
    
    
    
    Other income
    
    
    3,747,603
    
    
    
    
    
    
    
    528,270
    
    
    
    
    
    
    
    196,337
    
    
    
    518,059,532
    
    
    
    511,189,438
    
    
    
    483,539,723
    
    
    
    481,180,645
    
    
    
    71,223,284
    
    
    
    121,974,268ExpensesCost of sales and operating expenses (excluding
depreciation shown below) (1)
    
    
    499,494,540
    
    
    
    499,584,532
    
    
    
    467,246,990
    
    
    
    467,400,576
    
    
    
    65,344,516
    
    
    
    129,871,126Administrative and general expenses (1), (2)
    
    
    20,728,618
    
    
    
    20,762,574
    
    
    
    14,672,793
    
    
    
    14,687,717
    
    
    
    7,831,550
    
    
    
    8,081,740Depreciation and amortization (1)
    
    
    12,352,672
    
    
    
    11,591,513
    
    
    
    11,036,550
    
    
    
    10,836,696
    
    
    
    639,075
    
    
    
    1,462,953Exploration costs, excluding exploration impairment
    
    
    1,657,671
    
    
    
    1,657,671
    
    
    
    
    
    
    
    
    
    
    
    2,903,313
    
    
    
    2,903,313Exploration impairment
    
    
    416,923
    
    
    
    416,923
    
    
    
    2,144,429
    
    
    
    2,144,429
    
    
    
    35,566,761
    
    
    
    35,566,761Legal and professional fees (1)
    
    
    3,937,517
    
    
    
    3,937,517
    
    
    
    3,606,415
    
    
    
    3,606,415
    
    
    
    3,573,727
    
    
    
    3,655,631Short term borrowing costs
    
    
    8,478,540
    
    
    
    8,478,540
    
    
    
    8,855,857
    
    
    
    8,855,857
    
    
    
    4,705,190
    
    
    
    4,705,190Long term borrowing costs (1)
    
    
    11,856,872
    
    
    
    11,856,872
    
    
    
    6,351,337
    
    
    
    6,351,337
    
    
    
    1,401,256
    
    
    
    1,897,029Accretion expense
    
    
    3,741,254
    
    
    
    3,741,254
    
    
    
    5,647,491
    
    
    
    5,647,491
    
    
    
    
    
    
    
    Debt conversion expense (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,976,800Loss/(gain) on revaluation of conversion options (6)
    
    
    
    
    
    
    19,755,017
    
    
    
    
    
    
    
    (4,279,284
    )
    
    
    
    
    
    
    Loss on amendment of indirect participation
interest  PNGDV (16)
    
    
    1,446,901
    
    
    
    1,446,901
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange loss/(gain) (2)
    
    
    (4,744,810
    )
    
    
    (4,744,810
    )
    
    
    796,590
    
    
    
    796,590
    
    
    
    392,805
    
    
    
    392,805Non-controlling interest (7)
    
    
    (263,959
    )
    
    
    (265,865
    )
    
    
    (368,312
    )
    
    
    (368,475
    )
    
    
    (70,091
    )
    
    
    (265,624
    )Interest income
    
    
    
    
    
    
    (3,223,995
    )
    
    
    
    
    
    
    (1,830,808
    )
    
    
    
    
    
    
    (382,461
    )Other income
    
    
    
    
    
    
    (3,747,603
    )
    
    
    
    
    
    
    (528,270
    )
    
    
    
    
    
    
    (196,337
    )559,102,739
    
    
    
    571,247,041
    
    
    
    519,990,140
    
    
    
    513,320,271
    
    
    
    122,288,102
    
    
    
    194,668,926Loss before income taxes
    
    
    (41,043,207
    )
    
    
    (60,057,603
    )
    
    
    (36,450,417
    )
    
    
    (32,139,626
    )
    
    
    (51,064,818
    )
    
    
    (72,694,658
    )Income tax expense (3)
    
    
    (2,342,873
    )
    
    
    (2,342,873
    )
    
    
    (2,831,994
    )
    
    
    (2,831,994
    )
    
    
    (1,875,063
    )
    
    
    (1,875,063
    )Loss before cumulative effect of accounting change
    
    
    (43,386,080
    )
    
    
    (62,400,476
    )
    
    
    (39,282,411
    )
    
    
    (34,971,620
    )
    
    
    (52,939,881
    )
    
    
    (74,569,721
    )Cumulative effect of accounting change (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Net loss
    
    
    (43,386,080
    )
    
    
    (62,400,476
    )
    
    
    (39,282,411
    )
    
    
    (34,971,620
    )
    
    
    (52,939,881
    )
    
    
    (75,307,371
    )
 33




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
  Year endedDecember 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2004$
    
    $
    
    $Net loss as shown in the Canadian GAAP financial statements
    
    
    (43,386,080
    )
    
    
    (39,282,411
    )
    
    
    (52,939,881
    )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)
    
    
    761,159
    
    
    
    199,854
    
    
    
    Gain on revaluation of conversion options (6)
    
    
    
    
    
    
    4,279,284
    
    
    
    Decrease in non-controlling interest expense (7)
    
    
    1,907
    
    
    
    163
    
    
    
    195,533Decrease in administrative and general expenses from ineffective portion of hedges (2)
    
    
    
    
    
    
    22,456
    
    
    
    Increase in sales as a result of items being ineligible for capitalization due to
difference in date of commencement of operations of refinery(1)
    
    
    
    
    
    
    
    
    
    
    51,329,782Increase in sales from ineffective portion of hedges (2)
    
    
    101,504
    
    
    
    
    
    
    
    Description of items having the effect of decreasing reported incomeLoss on revaluation of conversion options (6)
    
    
    (19,755,017
    )
    
    
    
    
    
    
    Increase in depreciation and amortization due to difference in date of commencement
of operations of refinery (1)
    
    
    
    
    
    
    
    
    
    
    (823,878
    )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
    )
    
    
    (64,526,610
    )Increase in cost of sales from ineffective portion of hedges (2)
    
    
    (89,992
    )
    
    
    
    
    
    
    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
    )
    
    
    (250,190
    )Increase in legal and professional fees as a result of items being ineligible for
capitalization due to difference in date of commencement of operations of refinery
(1)
    
    
    
    
    
    
    
    
    
    
    (81,904
    )Increase in long term borrowing costs as a result of items being ineligible for
capitalization due to difference in date of commencement of operations of refinery
(1)
    
    
    
    
    
    
    
    
    
    
    (495,773
    )Debt conversion expense (5)
    
    
    
    
    
    
    
    
    
    
    (6,976,800
    )Cumulative effect of accounting change relating to stock compensation (4)
    
    
    
    
    
    
    
    
    
    
    (737,650
    )Net loss according to US GAAP
    
    
    (62,400,476
    )
    
    
    (34,971,620
    )
    
    
    (75,307,371
    )
 Statements of comprehensive income/(loss), net of tax
 Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004$
    
    
    $
    
    
    $Net loss in accordance with U.S. GAAP, net of tax
    
    
    (62,400,476
    )
    
    
    (34,971,620
    )
    
    
    (75,307,371
    )Foreign currency translation reserve, net of tax
    
    
    1,015,426
    
    
    
    14,243
    
    
    
    463,200Deferred hedge gain, net of tax
    
    
    (993,153
    )
    
    
    457,184
    
    
    
    537,358Total other comprehensive income, net of tax
    
    
    22,273
    
    
    
    471,427
    
    
    
    1,000,558Comprehensive loss, net of tax
    
    
    (62,378,203
    )
    
    
    (34,500,193
    )
    
    
    (74,306,813
    )
 Statements of cash flows
  34




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##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
 Statements of accumulated other comprehensive income, net of tax (AOCI)
 TotalForeign
    
    
    
    
    
    accumulatedcurrency
    
    
    
    
    
    othertranslation
    
    Deferred hedge
    
    comprehensivereserve
    
    gain
    
    incomeAOCI balance as of December 31, 2003
    
    
    
    
    
    
    
    
    
    
    Current period change
    
    
    463,200
    
    
    
    537,358
    
    
    
    1,000,558AOCI balance as of December 31, 2004
    
    
    463,200
    
    
    
    537,358
    
    
    
    1,000,558Current period change
    
    
    14,243
    
    
    
    457,184
    
    
    
    471,427AOCI balance as of December 31, 2005
    
    
    477,443
    
    
    
    994,542
    
    
    
    1,471,985Current period change
    
    
    1,015,426
    
    
    
    (993,153
    )
    
    
    22,273AOCI balance as of December 31, 2006
    
    
    1,492,869
    
    
    
    1,389
    
    
    
    1,494,258
 Per share amounts
   Weighted average number of shares on which earnings per
    
    Year ended December 31,share calculations are based in accordance with U.S. GAAP
    
    2006
    
    2005
    
    2004Basic
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    Diluted
    
    
    29,602,360
    
    
    
    28,832,263
    
    
    
    25,373,575Net income/(loss) per share in accordance with U.S. GAAPBasic
    
    
    (2.11
    )
    
    
    (1.21
    )
    
    
    (2.97
    )Diluted
    
    
    (2.11
    )
    
    
    (1.21
    )
    
    
    (2.97
    )
 Consolidated balance sheets
 December 31, 2006
    
    
    December 31, 2005
    
    
    December 31, 2004Canadian GAAP
    
    
    U.S. GAAP
    
    
    Canadian GAAP
    
    
    U.S. GAAP
    
    
    Canadian GAAP
    
    
    U.S. GAAPCurrent assets
    
    
    201,714,996
    
    
    
    201,714,996
    
    
    
    173,442,742
    
    
    
    173,442,742
    
    
    
    132,258,350
    
    
    
    132,258,350Oil and gas properties
    
    
    37,449,734
    
    
    
    37,449,734
    
    
    
    16,399,492
    
    
    
    16,399,492
    
    
    
    6,605,360
    
    
    
    6,605,360Capital assets (1), (2)
    
    
    242,642,077
    
    
    
    231,175,281
    
    
    
    237,399,148
    
    
    
    225,171,193
    
    
    
    244,363,355
    
    
    
    232,496,306Deferred financing costs
    
    
    1,716,757
    
    
    
    1,716,757
    
    
    
    1,256,816
    
    
    
    1,256,816
    
    
    
    1,311,488
    
    
    
    1,311,488Restricted Cash
    
    
    3,217,284
    
    
    
    3,217,284
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Future income tax benefit (3)
    
    
    1,424,014
    
    
    
    1,424,014
    
    
    
    1,058,898
    
    
    
    1,058,898
    
    
    
    1,303,631
    
    
    
    1,303,631Total assets
    
    
    488,164,862
    
    
    
    476,698,066
    
    
    
    429,557,096
    
    
    
    417,329,141
    
    
    
    385,842,184
    
    
    
    373,975,135Current liabilities (2), (6)
    
    
    146,214,601
    
    
    
    173,164,195
    
    
    
    167,192,503
    
    
    
    188,187,731
    
    
    
    142,197,050
    
    
    
    141,659,692Accrued financing costs
    
    
    1,087,500
    
    
    
    1,087,500
    
    
    
    921,109
    
    
    
    921,109
    
    
    
    863,329
    
    
    
    863,329Long term debt (6)
    
    
    222,007,309
    
    
    
    236,007,431
    
    
    
    111,352,141
    
    
    
    110,536,000
    
    
    
    86,608,830
    
    
    
    86,608,830Non-controlling interest (7)
    
    
    5,759,206
    
    
    
    5,416,831
    
    
    
    6,023,149
    
    
    
    5,682,695
    
    
    
    6,404,262
    
    
    
    6,063,971Shareholders equity (1) (2) (4) (5) (6)
    
    
    113,096,246
    
    
    
    61,022,109
    
    
    
    144,068,194
    
    
    
    112,001,606
    
    
    
    149,768,713
    
    
    
    138,779,313Total liabilities and shareholders equity
    
    
    488,164,862
    
    
    
    476,698,066
    
    
    
    429,557,096
    
    
    
    417,329,141
    
    
    
    385,842,184
    
    
    
    373,975,135
 (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.
 35




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
 As disclosed in note 2(q) 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.In the prior year, in addition to recognizing December 2004s results in the statement of
operations, one month of depreciation expense was also recorded under U.S. GAAP for the
refinery during 2004. 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 includes
hedges which are unsettled at period end in current liabilities based on a marked to market
calculation. Under SFAS No. 133 the marked 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. Details of hedge accounting is disclosed in notes 2(o) and
7 in the consolidated financial statements of the Company for the year ended December 31,
2006.(3)
    
    Income tax effect of adjustmentsThe income tax effect of U.S. GAAP adjustments was an addition to the future tax asset of
$6,871,557 (2005  reduction of $1,497,267) for the year ended December 31, 2006 due to an
increase in the loss carry-forwards. A corresponding decrease in the valuation allowance
was recorded. No income tax expense was recorded in the years ended December 31, 2006, 2005
and 2004 due to the tax holiday period in Papua New Guinea through five years after the
refinery commences operations.(4)
    
    Stock based compensationAt January 1, 2004, the Company adopted the provisions of CICA 3870 in respect of the
employee stock-based awards, which resulted in recognition of compensation expense for such
awards under Canadian GAAP on a basis consistent with the fair value provisions of SFAS No.
123. As disclosed in note 2(t) to the consolidated financial statements, the Company
retroactively applied the fair value method to all employee stock options granted on or
after January 1, 2002, without restatement to prior years.This is not consistent with the modified prospective transition method allowed for a
voluntary change to the fair value method under FASB Statement No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123 (SFAS No. 148). The modified prospective method requires retroactive consideration
of all employee stock awards granted, modified or settled on or after January 1, 1995. The
Company did not adjusted for this GAAP difference as there were no options granted, modified
or settled between January 1, 1995 and January 1, 2002 that would have materially impacted
net income for the years ended December 31, 2005, 2004 and 2003.The cumulative effect of this change in accounting principle of $737,650 was recorded to
opening accumulated deficit under Canadian GAAP. This is required to be disclosed as a
cumulative change in accounting principle in the statement of operations under U.S. GAAP.
 36




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
 (5)
    
    Debt conversion expenseAs disclosed in note 22 in the consolidated financial statements, 100% of the convertible
debentures were converted before December 31, 2004. The Company issued an additional
180,000 shares to induce conversion before the end of the year. Under Canadian GAAP, the
fair value of these shares was recorded as an increase in share capital of $6,976,800 with
offsetting adjustments to retained earnings of $6,899,211 and a conversion expense of
$77,589.FASB Statement No. 84, Induced Conversions of Convertible Debt requires an expense to be
recorded when convertible debt is converted under an inducement. The Company recognized the
entire fair value of the inducement shares of $6,976,800 as a conversion expense under U.S.
GAAP.(6)
    
    Indirect participation interestAs disclosed in note 18 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.EITF 00-19 Accounting for derivatives indexed to and potentially settled in a Companys own
stock requires the conversion options to be treated as a current liability. As a result,
the conversion options should be adjusted to their fair market value on the reporting date.
As such the Company has recognised a loss on the revaluation of conversion options totalling
$19,755,017 (2005  gain of $4,279,284) at December 31, 2006.Under Canadian GAAP, the Company split $8,138,742 of transaction costs relating to the
indirect participation interest agreement between the indirect participation interest
liability ($6,364,523) and the conversion options ($1,774,219). Under
U.S. GAAP the full
amount of $8,138,742 has been allocated to the indirect participation interest liability.(7)
    
    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 4 above.
 Acquisition of InterOil Products Limited (IPL)
    InterOil
    
    IPL (1)
    
    Pro formaTwelve months ended December 31, 2004
    
    (audited)
    
    (unaudited)
    
    (unaudited)Sales and operating revenue  Canadian GAAP
    
    
    70,644,486
    
    
    
    27,317,000
    
    
    
    97,961,486Sales and operating revenue  US GAAP
    
    
    121,974,268
    
    
    
    27,317,000
    
    
    
    149,291,268Net profit/(loss)  Canadian GAAP
    
    
    (52,939,881
    )
    
    
    2,350,000
    
    
    
    (50,589,881
    )Net profit/(loss)  U.S. GAAP
    
    
    (75,307,371
    )
    
    
    2,350,000
    
    
    
    (72,957,371
    )Basic loss per share (cents per share)Canadian GAAP (2)
    
    
    (208
    )
    
    
    
    
    
    
    (199
    )U.S. GAAP (3)
    
    
    (297
    )
    
    
    
    
    
    
    (287
    )Diluted loss per share (cents per share)Canadian GAAP (2)
    
    
    (208
    )
    
    
    
    
    
    
    (199
    )U.S. GAAP (3)
    
    
    (297
    )
    
    
    
    
    
    
    (287
    )
 37




---



##### 



InterOil CorporationNotes to Consolidated Financial Statements
(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
 InterOil
    
    IPL (1)
    
    Pro formaTwelve months ended December 31, 2003
    
    (audited)
    
    (unaudited)
    
    (unaudited)Sales and operating revenue  Canadian and U.S. GAAP
    
    
    
    
    
    
    69,897,000
    
    
    
    69,897,000Net profit/(loss)  Canadian GAAP
    
    
    (3,517,569
    )
    
    
    6,474,000
    
    
    
    2,956,431Net profit  U.S. GAAP
    
    
    4,435,965
    
    
    
    6,474,000
    
    
    
    10,909,965Basic earnings/(loss) per share (cents per share)Canadian GAAP (2)
    
    
    (15
    )
    
    
    
    
    
    
    14U.S. GAAP (3)
    
    
    20
    
    
    
    
    
    
    
    49Diluted earnings/(loss) per share (cents per share)Canadian GAAP (2)
    
    
    (15
    )
    
    
    
    
    
    
    13U.S. GAAP (3)
    
    
    18
    
    
    
    
    
    
    
    45
 
 (1)
    
    Financial data for the year ended December 31, 2004 represents results for the period from
January 1, 2004 to April 28, 2004, the effective date the Company gained control of IPL, and
is derived from the unaudited management accounts of IPL. Financial data for the year ended
December 31, 2003 represents the actual results for the year ended December 31, 2003.(2)
    
    The weighted average number of shares used in the earnings per share information is
consistent with that used under Canadian GAAP for the respective periods.(3)
    
    The weighted average number of shares used in the earnings per share information is
consistent with that used under U.S. GAAP for the respective periods. Recent Accounting Pronouncements
 Fair value measurements
  Accounting for uncertainty in income taxes
  Accounting for certain hybrid financial instruments
  Accounting for registration payment arrangements
  38




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InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars)
    
    (INTEROIL LOGO)
 26. Reconciliation to accounting principles generally accepted in the United States (contd)
   39