InterOil
      Corporation
                      
                      Annual
      Information Form
                      
                      For
      the Year Ended December 31, 2009
                      March
      1, 2010




TABLE
OF CONTENTS




TABLE
      OF CONTENTS
              1PRELIMINARY
      NOTES
              2GENERAL
              2NON-GAAP
      MEASURES AND RECONCILIATION
              2LEGAL
      NOTICE – FORWARD-LOOKING STATEMENTS
              2ABBREVIATIONS
      AND EQUIVALENCIES
              4CONVERSION
              5GLOSSARY
      OF TERMS
              5CORPORATE
      STRUCTURE
              8GENERAL
      DEVELOPMENT OF THE BUSINESS
              9BUSINESS
      STRATEGY
              14DESCRIPTION
      OF OUR BUSINESS
              15UPSTREAM
      - EXPLORATION AND PRODUCTION
              15MIDSTREAM
      - REFINING
              18MIDSTREAM
      - LIQUEFACTION
              21DOWNSTREAM
      - WHOLESALE AND RETAIL DISTRIBUTION
              22RESOURCES
              23THE
      ENVIRONMENT AND COMMUNITY RELATIONS
              25RISK
      FACTORS
              26DIVIDENDS
              36DESCRIPTION
      OF CAPITAL STRUCTURE
              36MARKET
      FOR SECURITIES
              38DIRECTORS
      AND EXECUTIVE OFFICERS
              39AUDIT
      COMMITTEE
              42LEGAL
      PROCEEDINGS AND REGULATORY ACTIONS
              43INTERESTS
      OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
              44MATERIAL
      CONTRACTS
              44TRANSFER
      AGENT AND REGISTRAR
              47INTERESTS
      OF EXPERTS
              48ADDITIONAL
      INFORMATION
              48Schedule
      A – Report of Management and Directors on Oil and Gas
      Disclosure
              49Schedule
      B – Report on Reserves Data by Independent Qualified Reserves
      Evaluator
              50Schedule
      C – Audit Committee Charter
              52




Annual Information FormINTEROIL
CORPORATION     1





PRELIMINARY
NOTES




GENERAL





This
Annual Information Form (“AIF”) has been prepared by InterOil Corporation for
the year ended December 31, 2009.  It should be read in conjunction
with InterOil’s audited consolidated financial statements and notes for the year
ended December 31, 2009 and Management’s Discussion and Analysis for the year
ended December 31, 2009 (“2009 MDA”), copies of which may be obtained online
from SEDAR at www.sedar.com.





In this
AIF, references to “we”, “us”, “our”, “the Company”, “the Corporation” and
“InterOil” refer to InterOil Corporation and/or InterOil Corporation and its
subsidiaries as the context requires.





All
dollar amounts are stated in United States dollars unless otherwise
specified.





Information
presented in this AIF is as of December 31, 2009 unless otherwise
specified.





Certain
information, not being within our knowledge, has been furnished by our directors
and executive officers.  Such information includes information as to
common shares in the Company beneficially owned by them, their places of
residence and principal occupations, both present and historical, and potential
conflicts of interest.





NON-GAAP
MEASURES AND RECONCILIATION





Gross
Margin is a non-GAAP measure derived from ‘sales and operating revenues’ less
‘cost of sales and operating expenses’.





Earnings
before interest, taxes, depreciation and amortization,(“EBITDA”), represents our
net income/(loss) plus total interest expense (excluding amortization of debt
issuance costs), income tax expense, depreciation and amortization
expense.  We use EBITDA to analyze operating
performance.  EBITDA does not have a standardized meaning prescribed
by United States or Canadian GAAP and, therefore, may not be comparable with the
calculation of similar measures for other companies.  The items
excluded from EBITDA are significant in assessing our operating
results.  Therefore, EBITDA should not be considered in isolation or
as an alternative to net earnings, operating profit, net cash provided from
operating activities and other measures of financial performance prepared in
accordance with Canadian GAAP.  Further, EBITDA is not a measure of
cash flow under Canadian GAAP and should not be considered as such.





For
reconciliation of these non-GAAP measures to measures under GAAP, refer to the
heading “Non-GAAP Measures and Reconciliation” in our 2009
MD&A.





LEGAL
NOTICE – FORWARD-LOOKING STATEMENTS


This AIF
contains “forward-looking statements” as defined in U.S. federal and Canadian
securities laws.  Such statements are generally identifiable by the
terminology used such as “may,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” “estimates,” “forecasts,” “budgets,” “targets” or other similar
wording suggesting future outcomes or statements regarding an
outlook.  We have based these forward-looking statements on our
current expectations and projections about future events.  All
statements, other than statements of historical fact, included in or
incorporated by reference in this AIF are forward-looking
statements.  Forward-looking statements include, without limitation;
plans for our exploration (including drilling plans) and other business
activities and results therefrom; the construction of an LNG plant and
condensate stripping facility in Papua New Guinea; the development of such LNG
plant and stripping facility; the commercialization and monetization of any
resources; whether sufficient resources will be established; the likelihood of
successful exploration for gas and gas condensate; the potential discovery of
any commercial quantities of oil; cash flows from operations; sources of
capital; operating costs; business strategy; contingent liabilities;
environmental matters; and plans and objectives for future operations; the
timing, maturity and amount of future capital and other
expenditures.





Many
risks and uncertainties may affect the matters addressed in these
forward-looking statements, including but not limited to:




Annual Information FormINTEROIL
CORPORATION     2








·
            our ability to finance the
      development ofanLNGand condensate strippingfacility;





·
            the uncertainty in our ability
      to attract capital;





·
            the uncertainty associated with the
      regulated prices at whichour products may be
      sold;





·
            the inherent uncertainty of
      oil and gas exploration
activities;





·
            potential effects from oil and
      gas pricedeclines;





·
            the availability of crude
      feedstock at economic rates;





·
            our ability to timely
      construct and commission our LNGand condensate strippingfacility;





·
            difficulties withthe recruitment and retention
      of qualified
personnel;





·
            losses from our hedging
      activities;





·
            fluctuations in currency
      exchange rates;





·
            the uncertainty of success in
      pending lawsuits and other
  proceedings;





·
            political, legal and economic
      risks in Papua New
Guinea;





·
            ourability to meet maturing
      indebtedness;





·
            stock price
      volatility;





·
            landowner claimsand disruption;





·
            compliance with and changes in
      foreign governmental laws and regulations, including environmental
      laws;





·
            the inability of our refinery
      to operate at full capacity;





·
            the impact of
      competition;





·
            the margins for our
      products;





·
            inherent limitations in all
      control systems, and misstatements due to errorsthat may occur and not be
      detected;





·
            exposure to certain uninsured
      risks stemming from our
operations;





·
            contractual
      defaults.





·
            payments from exploration
      partners;





·
            interest rate
      risk;





·
            weather conditions and
      unforeseen operating
hazards;





·
            the impact of legislation
      regulating emissions of greenhouse gases on current and potential markets
      for our products;





·
            the impact of our current debt
      on our ability to obtain further
  financing;





·
            the adverse effects from
      importation of competing products contrary to our legal rights;
      and





·
            law enforcement
      difficulties.




Annual Information FormINTEROIL
CORPORATION     3







Forward-looking
statements and information are based on our current beliefs as well as
assumptions made by, and information currently available to, us concerning
anticipated financial conditions and performance, business prospects,
strategies, regulatory developments, the ability to attract joint venture
partners, future hydrocarbon commodity prices, the ability to obtain equipment
in a timely manner to carry out development activities, the ability to market
products successfully to current and new customers, the effects from increasing
competition, the ability to obtain financing on acceptable terms, and the
ability to develop reserves and production through development and exploration
activities.  Although we consider these assumptions to be reasonable
based on information currently available to us, they may prove to be
incorrect.





Although
we believe that the assumptions underlying our forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and, therefore, we
cannot assure you that the forward-looking statements will
eventuate.  In light of the significant uncertainties inherent in our
forward-looking statements, the inclusion of such information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.  Some of these and other risks and
uncertainties that could cause actual results to differ materially from such
forward-looking statements are more fully described under the heading “Risk
Factors” in this AIF.





Furthermore,
the forward-looking information contained in this AIF is made as of the date
hereof, unless otherwise specified and, except as required by applicable law, we
will not update publicly or to revise any of this forward-looking
information.  The forward-looking information contained in this report
is expressly qualified by this cautionary statement.


ABBREVIATIONS
AND EQUIVALENCIES


Abbreviations


Crude
      Oil and Natural Gas Liquids
            
            Natural
      Gasbbl
            one
      barrel equalling 34.972 Imperial gallons or 42 U.S.
gallons
            
            btu
            British
      Thermal Unitsbblpd
            barrels
      per day
            
            mscf
            thousand
      standard cubic feetboe(1)
            barrels
      of oil equivalent
            
            mscfpd
            thousand
      standard cubic feet per dayboepd
            barrels
      of oil equivalent per day
            
            mmbtu
            million
      British Thermal Unitsmboe
            thousand
      barrels of oil equivalent
            
            mmbtupd
            million
      British Thermal Units per daymbbl
            thousand
      barrels
            
            mmscf
            million
      standard cubic feetmmbbls
            million
      barrels
            
            mmscfpd
            million
      standard cubic feet per daymmboe
            million
      barrels of oil equivalentWTI
            West
      Texas Intermediate crude oil delivered at Cushing,
Oklahoma
            
            scfpd
            standard
      cubic feet per daybscf
            billion
      standard cubic feet
            
            tcf
            trillion
      standard cubic feetpsi
            pounds
      per square inch







Note:


(1)
            All
      calculations converting natural gas to crude oil equivalent have been made
      using a ratio of six mcf of natural gas to one barrel of crude
      equivalent.  Boe's may be misleading, particularly if used in
      isolation.  A boe conversion ratio of six mcf of natural gas to
      one barrel of crude oil equivalent is based on an energy equivalency
      conversion method primarily applicable at the burner tip and does not
      represent a value equivalency at the
wellhead.




Annual
Information FormINTEROIL
CORPORATION     4







CONVERSION




The
following table sets forth certain standard conversions between Standard
Imperial Units and the International System of Units (metric
units).




To
      Convert From
              
              To
              
              Multiply
      Bymcf
              
              cubic
      metres
              
              28.317cubic
      metres
              
              cubic
      feet
              
              35.315bbls
              
              cubic
      metres
              
              0.159cubic
      metres
              
              bbls
              
              6.289feet
              
              metres
              
              0.305metres
              
              feet
              
              3.281miles
              
              kilometres
              
              1.609kilometres
              
              miles
              
              0.621acres
              
              hectares
              
              0.405hectares
              
              acres
              
              2.471


GLOSSARY
OF TERMS




“AIF”means this Annual
Information Form for the year ended December 31, 2009.





“API” means the American
Petroleum Institute.





“Barrel, Bbl” (petroleum) Unit
volume measurement used for petroleum and its products.





“BNP Paribas” BNP Paribas
Capital (Singapore) Limited.





“Board”  means the
board of directors of InterOil





“BP” BP Singapore Pte
Limited.





“COGE Handbook” refers to the
Canadian Oil and Gas Evaluation Handbook.





“Condensate” A component of
natural gas which is a liquid at surface conditions.





“Crack spread” The
simultaneous purchase or sale of crude against the sale or purchase of refined
petroleum products.  These spread differentials which represent
refining margins are normally quoted in dollars per barrel by converting the
product prices into dollars per barrel and subtracting the crude
price.





“Crude Oil” A mixture
consisting mainly of pentanes and heavier hydrocarbons that exists in the liquid
phase in reservoirs and remains liquid at atmospheric pressure and
temperature.  Crude oil may contain small amounts of sulfur and other
non-hydrocarbons but does not include liquids obtained from the processing of
natural gas.





“Debentures” means the 8%
subordinated convertible debentures of InterOil due May 9, 2013.





“EBITDA” EBITDA represents net
income/(loss) plus total interest expense (excluding amortization of debt
issuance costs), income tax expense, depreciation and amortization
expense.  EBITDA is a non-GAAP measure used to analyze operating
performance.  See “Non-GAAP Measures and
Reconciliation”.





“Farm out”  A
contractual agreement with an owner who holds a working interest in an oil and
gas lease to assign all or part of that interest to another party in exchange
for the other party’s fulfillment of contractually specified
conditions.  Farm out agreements often stipulate that a party must
drill a well to a certain depth, at a specified location, within a certain time
frame; furthermore, typically, the well must be completed as a commercial
producer to earn an assignment of the working interest.  The assignor
of the interest usually reserves a specified overriding royalty interest, with
the option to convert the overriding royalty interest to a specified working
interest upon payout of drilling and production expenses





“FEED” Front end engineering
and design.





“Feedstock” Raw material used
in a processing plant.





“FID”Final investment
decision.




Annual Information FormINTEROIL
CORPORATION     5








“GAAP” Generally accepted
accounting principles.





“Gas” means a mixture of
lighter hydrocarbons that exist either in the gaseous phase or in solution in
crude oil in reservoirs but are gaseous at atmospheric
conditions.  Natural gas may contain sulfur or other non-hydrocarbon
compounds.





“Gross reserves” refers to
InterOil's working interest reserves before the deduction of royalties and
before including any royalty interests.





“Gross wells” refers to the
total number of wells in which we have an interest.





“ICCC”means Independent
Consumer and Competition Commission in Papua New Guinea.





“IPI holders” means investors
holding IPWIs in certain exploration wells required to be drilled pursuant to
the Amended and Restated Indirect Participation Interest Agreement dated
February 25, 2005.





“IPF” means InterOil power
fuel.   InterOil’s marketing name for low sulfur waxy residue oil
or LSWR.





“IPP”means import parity
price.  For each refined product produced and sold locally in Papua
New Guinea, IPP is calculated under agreement with the State by adding the costs
that would typically be incurred to import such product to an average posted
price for such product in Singapore as reported by Platts.  The costs
added to the reported Platts price include freight costs, insurance costs,
landing charges, losses incurred in the transportation of refined products,
demurrage and taxes.





“IPWI”means indirect
participation working interest.





“Joint Venture Company” or
"PNG LNG" means PNG LNG,
Inc., a joint venture company established in 2007 by InterOil LNG Holdings Inc.,
an affiliate of InterOil, MLPLC and Pac LNG to construct the proposed LNG
plant.  Under an agreement reached in February 2009, MLPLC no longer
holds any interest in PNG LNG. (See “Material Contracts – Share
Purchase and Sale and Settlement Agreement dated February 27,
2009)





“LNG”means liquefied natural
gas.  Natural gas converted to a liquid state by pressure and severe
cooling for transportation purposes, and then returned to a gaseous state to be
used as fuel.  LNG, which is predominantly artificially liquefied
methane, is not to be confused with NGLs, natural gas liquids, which are heavier
fractions that occur naturally as liquids.





“LNG Project” means the
potential development by us of an LNG processing facility in Papua New Guinea
described as our Midstream Liquefaction business segment and being undertaken as
a joint venture with Pac LNG through the Joint Venture Company.





“LPG”  Liquefied
petroleum gas, typically ethane, propane, butane and
isobutane.  Usually produced at refineries or natural gas processing
plants, including plants that fractionate raw natural gas plant
liquids.  LPG can also occur naturally as a condensate.





“LSWR” means low sulfur waxy
residual fuel oil.





“Mark-to-market” refers to the
accounting standards of assigning a value to a position held in a financial
instrument based on the current fair market price for the instrument or similar
instruments.





“MLPLC” Merrill Lynch PNG LNG Corp., a companyorganized under the laws of the Cayman Islands and an affiliate of
Merrill Lynch, Pierce, Fenner & Smith Inc. and Merrill Lynch &
Co.





“Naphtha”That portion of the
distillate obtained from the refinement of petroleum which is an intermediate
between the lighter gasoline and the heavier benzene, has a specific gravity of
about 0.7, and is used as a solvent for varnishes, illuminant, and other similar
products.





“Natural gas” means a
naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in
porous geological formations beneath the earth's surface, often in association
with petroleum.  The principal constituent is methane.





“NGL” means natural gas
liquids, consisting of any one or more of propane, butane and
condensate.




Annual Information FormINTEROIL
CORPORATION     6








“Net wells” refers to the
aggregate of the numbers obtained by multiplying each gross well by our
percentage working interest in that well.





“NI 51-101” refers to National
Instrument 51-101 - Standards
of Disclosure for Oil and Gas Activities adopted by the Canadian
Securities Administrators.





“NI 52-110” refers to National
Instrument 52-110 - Audit
Committees adopted by the Canadian Securities
Administrators.





“OPIC”meansOverseas Private
Investment Corporation, an agency of the United States Government.





“Pac LNG” Pacific LNG
Operations Ltd., a company incorporated in the Bahamas and affiliated with
Clarion Finanz A.G.





“PDL”meansPetroleum Development
License.  The right granted by the State to develop a field for
commercial production.





“Petromin”meansPetromin PNG Holdings
Limited, a company incorporated in Papua New Guinea and mandated by the State to
invest in resource projects on its behalf.





“PGK”means the Kina, currency
of Papua New Guinea.





“PNGDV”meansPNG Drilling Ventures
Limited,an entity
with which we entered into an indirect participation agreement in May
2003.  (See
“Description of our Business – Upstream - Exploration and Production –
Participation  Agreements”, “Material Contracts – Drilling
Participation Agreement dated July 21, 2003”).





“PPL” means Petroleum
Prospecting License.  The tenement given by the State to explore for
oil and gas.





“PRL”means Petroleum
Retention License.  The tenement given by the State to allow the
license holder to evaluate the commercial and technical options for the
potential development of an oil and/or gas field.





“Royalties” refers to
royalties paid to others.  The royalties deducted from the reserves
are based on the percentage royalty calculated by applying the applicable
royalty rate or formula.





“Shut-in” refers to wells that
are capable of producing oil or natural gas which are not producing due to lack
of available transportation facilities, available markets or other
reasons.





“State” or “PNG”means the Independent
State of Papua New Guinea.





“Sweet/sour crude” Sweetness
describes the degree of a given crude's sulfur content.  Sour crudes
are high in sulfur, sweet crudes are low.





“Working interest” means the
percentage of undivided interest held by InterOil in an oil and natural gas
property.





“YBCA” means the Business Corporations Act
(Yukon Territory).




Annual Information FormINTEROIL
CORPORATION     7








CORPORATE
STRUCTURE





Name,
Address and Incorporation





InterOil
Corporation is a Yukon Territory corporation, continued under that Territory’s
YBCA on August 24, 2007.  In November 2007, InterOil amended its
articles to authorize 1,035,554 Series A Preferred Shares.





Our
      registered office
                
                Our
      corporate office
                
                Our
      corporate officeIn
      Canada is located at:
                
                in
      Australia is located at:
                
                in
      Papua New Guinea is located at:Suite
      300,204 Black Street
                  Whitehorse,
      Yukon
                  Y1A
      2M9
                
                Level
      1, 60-92 Cook Street,
                  Portsmith,
      Queensland 4870
                
                Level
      6 Defens Haus
                  Cnr
      Champion Parade and Hunter Street, Port
Moresby


Copies of
the Company’s current articles and by-laws are available on SEDAR at
www.sedar.com.





Inter-corporate
Relationships





Inter-corporate
relationships with and among all of our subsidiaries are set out in the diagram
below.











Annual Information FormINTEROIL
CORPORATION     8








GENERAL
DEVELOPMENT OF THE BUSINESS





Three
Year History





InterOil
is developing a fully integrated energy company operating in Papua New Guinea
and its surrounding Southwest Pacific region.  The following is a
summary of significant events in the development of InterOil’s businesses and
corporate activities over the past three years.





Upstream
– Exploration and Production





Over the
past three years, our upstream business segment has focused on the drilling
program in what we refer to as the Elk and Antelope fields in Papua New
Guinea.  This has led to natural gas and natural gas liquids
discoveries in those fields. We continue to evaluate the size and structure of
the Elk and Antelope fields by drilling additional appraisal
wells.  Our ability to commercialize these discoveries will depend, in
part, on the results of these appraisal wells.  In addition, there is
no market for natural gas in PNG, so our ability to sell natural gas production
from our discoveries will depend upon the development of a liquefied natural gas
facility in PNG.  This project will require substantial amounts of
financing and will take a number of years to complete. As discussed below, we
are evaluating the construction of both a liquefied natural gas facility near
our refinery in PNG and a condensate stripping facility within the Elk and
Antelope fields.  No assurances can be given that we will be able to
successfully construct such facilities, or as to the timing of such
construction.





We
spudded the Elk-2 well in February 2007.  The Elk-2 well was the first
appraisal well to help delineate the extent of the Elk
structure.  Elk-2 was drilled to a depth of 3,329 metres but did not
flow gas at commercial rates having penetrated the reservoir below the gas-water
contact.





During
2007, a seismic program was conducted with 12 lines totaling 230 kilometres
acquired.  Of this, 44 kilometres related to PPL 237, with the
remaining 186 kilometres over PPL 238.  Final processing of the 12
lines of Elk appraisal seismic was completed in December 2007.





The Elk
4/4A well was spudded in November 2007.  On May 1, 2008, while
drilling at 7,402 feet (2,256 metres) the well experienced a gas kick, which
resulted in a flow of natural gas and natural gas liquids to the surface and a
discovery in the Antelope structure.  The well was completed with 41⁄2
inch tubing as a potential producer and completion work ended on August 31,
2008.  On September 4, 2008, the well recorded a short term gas flow
rate of 105 mmscfpd.





In June,
2008, we accepted an offer of $6.5 million from Horizon Oil Limited to purchase
our working interests in PRL 4 and PRL 5.  The decision was made to
allow us to focus our resources on the Elk and Antelope fields and PPL’s 236,
237 and 238.  A right of first refusal to purchase hydrocarbon
condensates from these licenses was retained.





On
October 30, 2008, Petromin entered into an agreement with us to take a direct
interest in the Elk/ Antelope field and fund 20.5% of the costs of its
development if certain conditions are met (see “Material Contracts – Investment
Agreement dated October 30, 2008”) The State’s right to invest arises
under legislation and is exercisable upon issuance of the PDL, which has not yet
occurred.  On grant of a PDL, Petromin has agreed to pay us 20.5% of
all other sunk costs incurred by InterOil prior to entering into the
agreement.  Until the PDL is granted, any payment made by Petromin is
to be separately held in a liability account in accordance with the provisions
of the agreement.  Once the PDL is granted, the conveyance of this
interest to the State is able to be formalized, and we are obliged to distribute
the proceeds received from Petromin between the existing interest holders
(InterOil, IPI holders and PNGDV) on a pro-rata basis based on the interest
surrendered by each to the State.  The State may also elect to
participate in a further 2.0% working interest on behalf of the landowners of
the licensed areas.





On
October 15, 2008, the Antelope 1 well was spudded.  On December 31,
2008, gas was encountered at 1,748 metres in a limestone/dolomite reservoir
which flowed to surface.  The well was drilled to 2,370 metres on
January 7, 2009 and was logged indicating a homogenous gross reservoir of 611
metres and net reservoir of 550 metres.  Average porosity over the 550
metres was 8.4% with some dolomite zones displaying over 20% porosity which may
be indicative of a reef.  Drill Stem Test (“DST”) 1 flowed 13.1
mmscfpd. Drilling continued to 2,710 metres and the well was logged. Subsequent
drill stem tests 3 and 6 were performed (DST’s 2, 4 and 5 were mechanically
unsuccessful).   The well was then completed with 7 inch tubing
and flow tested at 382 mmscfpd. After plugging back to 2,355 metres, a sidetrack
was commenced with the objective to drill ahead in order to re-test an interval
suspected to include a gas/oil or gas/water contact. At 2,416 metres drilling
was suspended and testing operations commenced. DST 8 was conducted within the
interval from 2,380 metres and 2,416 metres recovered oil and oil emulsion
(approximately 44 API gravity).  Flow information from the sidetrack
was considered unreliable as a result of the sidetrack’s close proximity to the
original wellbore.  A second sidetrack was commenced in an attempt to
deviate far enough from the original wellbore and sidetrack 1 to obtain more
reliable information. Further DST’s were then conducted with DST 12 (which
tested an interval from 2,347 metres to 2,402 metres) recovering gas and
condensate. DST 14 (which tested an interval from 2,420 metres to 2,452 metres)
recovered gas and condensate. In both cases the water recovered was measured as
drilling fluid and not formation water.  The Antelope-1 side track was
completed with 2 7/8 inch tubing and the well was made ready for future
production and/or long term flow testing.




Annual Information FormINTEROIL
CORPORATION     9








On July
27, 2009, the Antelope 2 well, located approximately 4 kilometers south of
Antelope 1 and within the boundaries of PPL237 was spudded. After drilling to
1,832 metres, a 9 5/8 inch liner was set at the top of the limestone
section.  The well was drilled to 2,260 metres and temporarily
completed with 7” tubing and a high rate flow test to confirm deliverability was
performed in early December 2009. This flow test recorded a maximum flow rate of
705 mmcfd including 11,200 bbls of condensate per day.  Subsequent to
this flow test, the 7inch tubing was removed and a 7inch liner was
run.  A 6 1⁄4 inch hole was then drilled to 2325 metres and DST 2 was
performed.  This DST confirmed gas and condensate with a stabilized
condensate to gas ratio (“CGR”) of over 20Bbl/MMcf.  The well was then
drilled to 2,365 metres and DST 3 was carried out over the interval 2,320 metres
to 2,365 metres.  The result of DST 3 along with the data acquired
during the logging operations helped us to establish the hydrocarbon water
contact in the reservoir at approximately 2,224 metres.  The well is
currently being sidetracked to drill a horizontal section in the pay interval of
the lower part of the reservoir.





In
September 2009, a 100 kilometer 2D seismic program to appraise the Antelope
field was commenced and recording of seismic data is continuing.





During
the third quarter of 2009, Pac LNG (which company holds voting and economic
interests in the Joint Venture Company pursuing the LNG Project) acquired a 2.5%
direct working interest in gas and condensate in the Elk and Antelope
fields.  The interest was acquired in furtherance of an option granted
to it in 2007 and in exchange for $25 million, together with payment of certain
historical exploration costs and the transfer to InterOil of 2.5% of Pacific
LNG’s economic interest in the Joint Venture Company.





On
December 15, 2009, we completed the second stage of an exchange of certain
indirect participation interests held by a number of IPI holders under the
Amended and Restated Indirect Participation Agreement dated February 2005 (the
“IPI Agreement” – see ‘Material Contracts’) for a
number of our common shares. Pursuant to this exchange, we acquired each IPI
holder’s relevant pro rata right, title and interest in, to and under the IPI
Agreement and in any future discoveries.  The participation interests
acquired totaled 4.8364% of the Elk and Antelope fields, and of the four
exploration wells still to be drilled under the IPI Agreement.  In
exchange for these interests, InterOil issued 1,344,710 common shares to those
investors having an aggregate value of US$62.9 million when issued.





In
December 2009, we agreed on terms to divest our 15% non-operated interest in PPL
244, an offshore block in the Gulf of Papua in exchange for $2.0
million.  The decision was made to allow us to focus our resources on
the Elk and Antelope fields and PPL’s 236, 237 and 238.  We are
currently seeking approval from the State to allow this divestment to be
finalized.





During
2009, we continued efforts to commercialize the Elk and Antelope fields. The
commercialization of any resource discovered in the Elk and Antelope fields
remains uncertain.  We are evaluating the feasibility of a condensate
stripping facility which would extract condensate from the resource ahead of a
planned LNG Plant.  If feasible, such a facility would not commence
operations prior to 2012.  The discovery is located in an area
requiring construction of a pipeline and a gas liquefaction facility in order to
process any gas extracted, which we would not expect to be operational prior to
2015.  We are also undertaking a continuing process exploring the sale
of a portion of the ownership in the proposed LNG Project and the Elk and
Antelope fields to industry investors with a view to assisting us to pursue the
LNG Project.





Due to
the substantial expected infrastructure capital requirements, additional wells
are required to develop sufficient condensate and/or natural gas resources to
feed a condensate stripping and/or LNG facility.  Only once economic
and technical uncertainties have been resolved, will InterOil (and any strategic
investors) be in a position to make a Financial Investment Decision (“FID”) to
proceed with the construction of the necessary condensate stripping and/or LNG
plant infrastructure.  No assurances can be given that we will be able
to successfully construct such facilities, or as to the timing of such
construction.




Annual Information FormINTEROIL
CORPORATION     10








In order
to progress the development and commercialization of the Elk and Antelope
fields, we are required to apply for one or more PDLs, which will consist of the
acreage surrounding the field and also acreage on which to locate facilities and
pipeline rights of way.  An application for a PRL in respect of the
Elk and Antelope fields was submitted in August 2009 for an area on PPL 238
totaling 105,445 acres (42,178 hectares).  Grant of the PRL would
allow us to evaluate the technical and commercial feasibility of condensate
and/or gas production from the Elk and Antelope fields.





Midstream
– Refining segment





Beginning
in November 2007, the basis of calculating the IPP at which products from our
refinery may be sold domestically in PNG was revised to more closely mirror
changes in the costs of crude feedstock than the previous pricing
formula.  The IPP formula was modified by changing the benchmark price
for each refined product from ‘Singapore Posted Prices’, which was no longer
being updated, to “Mean of Platts Singapore” (‘MOPS’), which is the benchmark
price for refined products in the Asia Pacific region.  Minor
additional adjustments to this interim formula were made in June 2008.
Finalisation of the IPP formula and replacement of it in our Project Agreement
with the State (See “Material
Contracts – Project Agreement”) remains subject to further review and
agreement.  The outcome of the review is uncertain.  (See
“Risk
Factors”).





During
2008, further improvements were made to the refinery such that its operational
capacity was expanded from its nameplate 32,500 bblspd to 36,500
bblspd.





During
2009, our total throughput per day (excluding shut down days) was 21,155 bbls
per operating day versus 22,034 bbl per operating day in 2008, and 19,713 bbls
per operating day in 2007.  The total number of barrels processed into
product at our refinery for 2009 was 5.72 million as compared with
5.67 million for 2008, and 5.57 million in 2007.  2008 marked the
first time that we achieved a net income from our refining operations for the
year, with such profitability also occurring in 2009.





Midstream
– Liquefaction segment





In May
2006, we entered into a memorandum of understanding with the State for natural
gas development projects in Papua New Guinea and a tri-partite agreement with
Merrill Lynch Commodities (Europe) Limited and Pac LNG.   The
tri-partite agreement related to a proposal for the construction of a
liquefaction plant to be built adjacent to our refinery.





On July
30, 2007, a shareholders’ agreement was signed between InterOil LNG Holdings
Inc., a subsidiary of InterOil, Pac LNG., Merrill Lynch Commodities (Europe)
Limited and the Joint Venture Company for the development of a gas liquefaction
facility and associated infrastructure referred to as the LNG
Project.  The LNG Project is targeting a facility that will produce up
to nine million tons per annum of LNG and condensates.  The
infrastructure contemplated includes a condensate storage and handling facility,
a gas pipeline from the Elk and Antelope fields, as well as sourced suppliers of
gas, and LNG storage and handling.  The LNG facility would be designed
to interface with our existing refining facilities.





In 2008,
certain disputes arose among Merrill Lynch and the other partners to the LNG
Project, including InterOil. In February 27, 2009, a settlement agreement was
entered into whereby InterOil LNG Holdings Inc. and Pac LNG acquired Merrill
Lynch Commodities (Europe) Limited’s  interests in the Joint Venture
Company.  InterOil ultimately issued 499,834 common shares valued at
$11.25 million for its share of the consideration payable to Merrill Lynch in
relation to the settlement.  As a result of this transaction, Merrill
Lynch has not retained any ownership in the LNG Project or in the Joint Venture
Company.  (See “Material Contracts – Share Purchase
and Sale and Settlement Agreement dated February 27, 2009”).





In March
2008, Bechtel was retained to undertake the FEED and engineering, procurement
and contracting work for the proposed LNG facility.





In 2009,
technology supporting work in advance of potential FEED was completed by Bechtel
and InterOil.  This work included initial Environment Impact Statement
(EIS) development, review of alternate onshore and offshore pipeline routes,
preliminary sizing of the pipeline and associated compression.





On
December 23, 2009, the LNG Project Agreement between the State and Liquid
Niugini Gas Ltd (a wholly owned subsidiary of the Joint Venture Company
incorporated under the laws of PNG) was executed.  The agreement
contains provisions for development of the LNG Project, along with pipeline
infrastructure to deliver gas from InterOil’s Elk and Antelope fields,
established the fiscal and taxation regime to be applied to the LNG Project for
a twenty year period and provided for the acquisition by the State, through its
nominee Petromin, of an interest totaling up to 20.5% of the equity in the LNG
Project.  A further 2% ownership stake is expected to be assumed by
directly affected landowners.  The obligations under the agreement are
contingent upon the finalization of certain additional agreements, the LNG
Project obtaining certain approvals and authorizations, obtaining leases over
required land, passage of enabling legislation and a FID.




Annual Information FormINTEROIL
CORPORATION     11








We are
also undertaking a continuing process to explore the sale of a portion of the
ownership in the proposed LNG Project and the Elk and Antelope fields to
industry investors with a view to assisting us to finance and pursue the
project.





Downstream
– Wholesale and Retail Distribution





During
2007, we acquired three additional aviation fuelling depots in Papua New
Guinea.  During 2007 and 2008, we conducted a terminal and depot asset
rationalization and refurbishment program.





In
keeping with our retail network strategy plan, during 2009 we acquired two
additional retail sites and entered into a head lease for an additional
site.





In 2009,
we entered into our first direct chartering shipping arrangement with the owner
of a fuel transport vessel which will result in us being able to direct vessel
movements rather than co-ordinate shipping with other distributors.





In June
2009, Papua New Guinea’s competition authority, the Independent Consumer &
Competition Commission (ICCC), commenced a review into the pricing arrangements
for petroleum products in PNG.  The last such review was undertaken
during 2004 and pricing regulations established as a result of that were due to
expire on December 31, 2009. The purpose of the review is to consider the extent
to which the existing regulation of price setting arrangements at both wholesale
and retail levels should continue or be revised for the next five year
period.  We have provided detailed submissions to the
ICCC.  The ICCC has recently advised that its final report will be
issued in March 2010. It is possible that the ICCC may determine to increase
regulation of pricing and reduce the margins able to be obtained by our
distribution business.  Such a decision, if made, may negatively
affect our downstream business and require a review of its operations. (See
“Risk Factors”).  The existing pricing regulations have been carried
over subsequent to December 31, pending this decision.





During
2009 we negotiated an agreement with Airlines of PNG, PNG’s second largest
airline, to supply their aviation fuel requirements.





As of
December 31, 2009, we provided petroleum products to 56 retail service stations
with 43 operating under the InterOil brand name and the remaining 13 operating
under their own independent brand.  Of the 56 service stations that we
supply, 17 are either owned by or head leased to us with a sublease to
company-approved operators.  The remaining 39 service stations are
independently owned and operated.  We supply products to each of these
service stations pursuant to distribution supply agreements.  We also
provide fuel pumps and related infrastructure to the operators of the majority
of these retail service stations that are not owned or leased by
us.





Financing





In 2007,
InterOil undertook the following financing transactions:





·
            In
      July 2007, we entered into the LNG Project Shareholders Agreement (see
      “Material Contracts – LNG Project Shareholders Agreement dated July 30,
      2007”) which had the effect of freezing the interest rate on the now
      retired $130.0 million secured credit bridging facility provided by Pac
      LNG and MLPLC and entered into in May 2006, at 4% for the life of that
      loan.




·
            In
      November and December 2007, we undertook a private placement of 1,078,514
      common shares with institutional investors at an issue price of $23.18 per
      share and received net proceeds of $23.5
  million.




·
            In
      November 2007, we issued 517,777 series A preferred shares at an issue
      price of $28.97.  We received net proceeds of $14.3
      million.  In July and August 2008, all $15.0 million series A
      preferred shares issued in November 2007 were converted into 517,777
      common shares.




Annual Information FormINTEROIL
CORPORATION     12







·
            In
      December 2007, we amended our OPIC loan agreement (see “Material Contracts - OPIC Loan
      Agreement”) in order to defer two installments of $4.5 million,
      each due on December 31, 2007, to be repaid by January 31, 2008 and
      February 29, 2008 respectively.




In 2008,
InterOil undertook the following financing transactions:





·
            In
      February 2008, payment of the two installments of $4.5 million to OPIC,
      originally deferred in 2007 was deferred further until the end of the OPIC
      loan period.  They are now due to be repaid by June 30, 2015 and
      December 31, 2015, respectively.





·
            In
      May 2008, we converted $60.0 million of the expiring $130.0 million
      bridging facility into common shares.  The balance of $70.0
      million of this facility was repaid on May 12, 2008 with funds raised from
      the issuance of $95.0 million principal amount of
      Debentures.  In July and August 2008, $15.0 million worth of the
      $95.0 million principal amount of Debentures were converted into 600,000
      common shares.  In November 2008, an additional $1.0 million of
      the $95.0 million Debentures was converted into 41,000 common
      shares.





·
            In
      May 2008, we entered into short and long term hedges which helped us to
      manage the risk that we would pay a high price for crude feedstock and,
      because of volatility in crude oil prices, be faced with a low margin on
      refined products.  These hedges resulted in $27.8 million profit
      during the year 2008, with a further $18.2 million of hedging gains which
      were settled during 2009.





·
            In
      August 2008, we filed a short form base shelf prospectus with the Ontario
      Securities Commission and a corresponding registration statement on Form
      F-10/A with the United States Securities and Exchange Commission, to
      provide financial flexibility for the future and issue, from time to time
      until expiry of the prospectus in September 2010, up to a total of $200.0
      million of debt securities, common shares, preferred shares and/or
      warrants in one or more offerings.  A portion of this amount was
      used during 2009.





·
            We
      fund our working capital requirements for the refinery by means of a
      facility provided by BNP Paribas.  This facility is subject to
      an annual review.  (See “Material Contracts – Secured
      Revolving Crude Import Facility”)  In 2008, the facility
      limit was increased by $20.0 million to $190.0 million to accommodate
      higher crude prices and resulting increases in working capital
      requirements.





·
            In
      October 2008, we secured a Papua New Guinea 150.0 million Kina
      (approximately $55.5 million) combined revolving working capital facility
      for our wholesale and retail petroleum products distribution business in
      Papua New Guinea from Bank of South Pacific Limited and Westpac Bank PNG
      Limited. The
      facilities are secured by the capital assets of the downstream business.
      The Westpac facility has an initial term of three years and is due for
      renewal in August 2011.  The BSP facility is renewable annually.
      As at December 31, 2009 we had drawn $7.8 million of the combined
      facility





In 2009,
InterOil undertook the following financing transactions:





·
            During
      May and June 2009, the remaining outstanding Debentures (being $79.0
      million principal amount) were converted into 3,159,000 common
      shares.




·
            On
      June 8, 2009, we completed a registered direct stock offering under the
      base shelf prospectus filed in August 2008 of 2,013,815 common shares to a
      number of institutional investors at a purchase price of $34.98 per share,
      raising gross proceeds of $70.4
million.




·
            In
      August 2009, 302,305 of the 337,252 warrants then outstanding were
      exercised and converted into common shares at an exercise price of
      $21.91.  All remaining unexercised warrants lapsed on August 27,
      2009 in accordance with their
terms.




·
            Our
      working capital facility with BNP Paribas was renewed for the existing
      limit amount of $190 million for a period of 15 months expiring at the end
      of December 2010.




·
            In
      October 2009, we renewed our revolving working capital facility with Bank
      of South Pacific Limited.  The existing facility had a facility
      limit of 70.0 million Kina (approximately $25.9 million). However, on
      renewal, the facility limit was reduced to 50.0 million Kina
      (approximately $18.5 million).  The Westpac facility is for an
      initial term of three years and is due for renewal in October
      2011.  No changes were made to this facility.  The
      total combined facility limit was reduced to 130.0 million Kina
      (approximately $48.1 million).  The BSP facility is renewable
      annually and is next due for renewal in October
  2010.




Annual Information FormINTEROIL
CORPORATION     13








Management
Team





During
2007, 2008 and 2009, InterOil’s Board and senior management changed as
follows:





·
            On
      June 12, 2007, Mr. Mark Laurie was appointed as General Counsel and
      Corporate Secretary.





·
            On
      October 14, 2008, Mr. Donald Hansen resigned from the
    Board.





·
            On
      November 26, 2008, Mr. Roger. Lewis was appointed as an independent
      director and also agreed to serve as a member of each of the Audit,
      Compensation and Nominating and Governance
  committees.





·
            In
      January 2009, Mr Anthony Poon resigned as General Manager of Supply,
      Trading & Risk Management.





BUSINESS
STRATEGY





InterOil’s
strategy is to develop a vertically integrated energy company in Papua New
Guinea and the surrounding region, focusing on niche market opportunities which
provide financial rewards for InterOil shareholders, while being environmentally
responsible, providing a quality working environment and contributing positively
to the communities in which InterOil operates.  A significant element
of that strategy is to establish and develop gas reserves and an LNG facility in
Papua New Guinea and export the LNG.  InterOil is aiming to pursue
this strategy by:





Developing
our position as a prudent and responsible business operator





·
            Build
      on 15 years of engagement in Papua New
Guinea





·
            Maintain
      sound health, safety and security
record





·
            Continue
      developing good relationships with government, partners and
      stakeholders





·
            Remain
      a significant employer in Papua New
Guinea





Enhancing
the existing refining and distribution business





·
            Continue
      growth in profitable market share in the
region





·
            Look
      for added value in refining production, and improved economies of
      scale





·
            Explore
      improved transport efficiencies and
economics





Maximizing
the value of our exploration assets





·
            Seek
      possible early cash flows from condensate
  production





·
            Establish
      gas volumes sufficient to underpin the LNG
  Project





·
            Introduce
      strategic investors through the sale of partial interests in the Elk and
      Antelope fields, the LNG Project and associated LNG off-take to accelerate
      exploration and development activities.





Building an
export gas liquefaction business in Papua New Guinea





·
            Select
      and contract with strategic
partners





·
            Establish
      LNG Project’s commercial viability and
structure





·
            Seek
      licences, enabling legislation and approvals required for the LNG Project
      from the State.




Annual Information FormINTEROIL
CORPORATION     14








Positioning
for long term success





·
            Accelerate
      exploration activity to extract full value from exploration
      licenses





·
            Undertake
      seismic work to identify additional exploration
    opportunities





DESCRIPTION
OF OUR BUSINESS





Overview





Our
operations are organized into four major business segments:





Segments
                  
                  OperationsUpstream
                  
                  Exploration
      and Production – Explores and appraises potential oil and natural gas
      structures in Papua New Guinea with a view to commercializing significant
      discoveries. Current commercialisation of the Elk and Antelope fields
      includes the development of a condensate stripping and recycling facility
      and development of gas production facilities for liquefied natural
      gas.Midstream
                  
                  Refining
      – Produces refined petroleum products at Napa Napa in Port Moresby,
      Papua New Guinea for the domestic market and for spot export.
                    Liquefaction
      - Developing an onshore and/or offshore LNG processing facility in Papua
      New Guinea.Downstream
                  
                  Wholesale
      and Retail Distribution– Markets and
      distributes refined products domestically in Papua New Guinea on a
      wholesale and retail basis.Corporate
                  
                  Corporate
      – Provides support to the other business segments by engaging in business
      development and improvement activities and providing general and
      administrative services and management, undertakes financing and treasury
      activities, and is responsible for government and investor
      relations.  General and administrative and integrated costs are
      recovered from business segments on an equitable
  basis.





As of
December 31, 2009, we had 680 full-time employees in all segments, with 114 in
upstream, 121 in midstream, 368 in downstream and 77 in
corporate.  Our work force is not unionized.





UPSTREAM
- EXPLORATION AND PRODUCTION





Description
of Properties





As at
December 31, 2009 we had interests in four PPLs in Papua New Guinea covering
approximately 4.7 million gross acres, of which approximately 4.1 million net
acres were operated by InterOil.  PPL’s 236, 237 and 238 are located
in the Eastern Papuan Basin northwest of Port Moresby.  All of our
licenses are located onshore in Papua New Guinea, except for PPL 244 which is
offshore in the Gulf of Papua.





The
following table summarizes our interests and the details of exploration wells
that have been drilled on acreage currently held by InterOil as at December 31,
2009:




Annual Information FormINTEROIL
CORPORATION     15








License
                                          
                                          Location
                                          
                                          Operator
                                          
                                          InterOil Current
                                            Working Interest 1
                                          
                                          
                                          Acreage
                                            Gross
                                          
                                          
                                          Acreage
                                            NetPPL
      236
                                          
                                          Onshore
                                          
                                          InterOil
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          1,122,224
                                          
                                          
                                          
                                          1,122,224PPL
      237
                                          
                                          Onshore
                                          
                                          InterOil
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          809,267
                                          
                                          
                                          
                                          809,267PPL
      238
                                          
                                          Onshore
                                          
                                          InterOil
                                          
                                          
                                          100.00
                                          %
                                          
                                          
                                          2,084,326
                                          
                                          
                                          
                                          2,084,326PPL
      244
                                          
                                          Offshore
                                          
                                          Talisman
                                          
                                          
                                          15.00
                                          %
                                          
                                          
                                          675,400
                                          
                                          
                                          
                                          101,310Total
                                          
                                          
                                          
                                          4,691,217
                                          
                                          
                                          
                                          4,117,127


1 See Petroleum
License Details – Net Working Interest on PPL 236, PPL 237 and PPL
238





Operated
License Commitments, Terms, Expiry and Re-Application





The
primary six year terms of our operated exploration licenses expired in March
2009.  Under the relevant legislation in Papua New Guinea, a licensee
is permitted to apply for a second exploration term for a further five year
period, but is required to relinquish 50% of the acreage granted under the
primary term.  In March 2009, all three licenses were renewed in
respect of what we considered the most prospective 50% of the license
acreage.





The PPL
license renewals also required that we make further commitments on spending
within those license areas during the renewed license term.  Set out
below are InterOil’s applicable commitments for each PPL based on the approved
renewals in March 2009:





License
                                                
                                                License
                                                  Issued for
                                                  second
                                                  termin
                                                
                                                Second
                                                  Term
                                                
                                                Commitment
                                                  Years 1— 2
                                                  (US $ Millions)
                                                
                                                
                                                Commitment
                                                  Years 3 - 5
                                                  (US $ Millions)
                                                
                                                
                                                Total License
                                                  Commitment
                                                  (US $ Millions)
                                                
                                                License
                                                  ExpiryPPL
      236
                                                
                                                March
      2009
                                                
                                                5
      years
                                                
                                                $
                                                5.0
                                                
                                                
                                                $
                                                10.0
                                                
                                                
                                                $
                                                15.0
                                                
                                                March
      2014PPL
      237
                                                
                                                March
      2009
                                                
                                                5
      years
                                                
                                                $
                                                14.0
                                                
                                                
                                                $
                                                34.0
                                                
                                                
                                                $
                                                48.0
                                                
                                                March
      2014PPL
      238
                                                
                                                March
      2009
                                                
                                                5
      years
                                                
                                                $
                                                2.0
                                                
                                                
                                                $
                                                30.0
                                                
                                                
                                                $
                                                32.0
                                                
                                                March
      2014Totals
                                                
                                                $
                                                21.0
                                                
                                                
                                                $
                                                74.0
                                                
                                                
                                                $
                                                95.0





Petroleum
License Details





Net
Working Interests on PPL236, PPL237 & PPL238 (the Operated Exploration
Licenses)





The
Operated Exploration Licenses are located onshore in the eastern Papuan Basin,
northwest of Port Moresby and are wholly owned by InterOil, subject to investor
elections to earn a working interest in any discoveries under our various
indirect participation interest agreements.  The State also has the
right under relevant PNG legislation to acquire a 22.5% interest (which includes
2% on behalf of landowners) in any PDL, by contributing its share of exploration
and development costs.  Finally, Pac LNG holds a 2.5% working interest
in gas and condensate in the Elk and Antelope fields (which fields are located
on PPL 237 and PPL 238) under an agreement entered into in 2009.  The
agreement grants Pac LNG rights to be registered on the PRL applied for in
respect of the fields and on any subsequent PDL.  The table below sets
forth the potential dilution of existing working interests in a discovery in the
event that the State, Pac LNG and indirect participation interest holders all
exercises their rights to acquire their allocated interests in the Elk and
Antelope discoveries.




Annual Information FormINTEROIL
CORPORATION     16








Participant
                                
                                Working interests *
                                
                                
                                With State
                                  participationInterOil
                                
                                
                                74.1614
                                %
                                
                                
                                57.4751
                                %IPI
      holders
                                
                                
                                16.5886
                                %
                                
                                
                                12.8562
                                %PNGDV
                                
                                
                                6.75
                                %
                                
                                
                                5.2312
                                %Pac
      LNG
                                
                                
                                2.50
                                %
                                
                                
                                1.9375
                                %State
      entitlement (Petromin)
                                
                                
                                0.00
                                %
                                
                                
                                20.50
                                %Landowners
      entitlement
                                
                                
                                0.00
                                %
                                
                                
                                2.00
                                %Total
                                
                                
                                100.00
                                %
                                
                                
                                100.00
                                %





* These
interests assume all existing potential partners as at December 31, 2009 elect
to participate.





Our
current exploration efforts are focused on the Operated Exploration Licenses,
with the vast majority of our exploration expenditure relating to PPL’s 238 and
237, where the Elk and Antelope fields are located.





On
October 30, 2008, Petromin entered into an agreement to take a 20.5% direct
interest in the Elk and Antelope fields.  If certain conditions in the
agreement are met, Petromin has agreed to fund 20.5% of the costs of developing
the Elk and Antelope fields.  The State’s right to invest arises under
legislation and is exercisable upon issuance of the PDL, which has not yet
occurred.  The agreement contains certain provisions applicable in the
event that the PDL is not issued within a certain timeframe. During 2009, the
State confirmed Petromin’s nomination to exercise its interest in the Elk and
Antelope fields.





Petroleum
Prospecting License 236





We have a
100% working interest in PPL 236, subject to elections made by holders of
certain indirect participation interests described below.  We are the
operator of the license.  This license covers an area that includes
our refinery and has limited road access. We conducted desktop studies over this
license area in September and October 2009.





Petroleum
Prospecting License 237





We have a
100% working interest in PPL 237, subject to elections made by holders of
indirect participation interests described below.  We are the operator
of the license.  In 2007, 28 miles (44 kilometres) of the 144 mile
(230 kilometres) Elk appraisal 2D seismic program were acquired over PPL 237.
During 2009, the Antelope-2 well was drilled in this license area. This well
satisfies our obligation to drill a well on PPL 237 in the first year of the
current second term of the PPL 237 license.  On December 2, 2009, a
short term surface flow test of Antelope-2 was conducted resulting in an
estimated 705 mmscfpd of gas and associated condensate of approximately 11,200
bbls per day. During 2009, we also undertook various continuing desktop and
surface studies.





Petroleum
Prospecting License 238





We have a
100% working interest in PPL 238, subject to elections made by holders of
indirect participation interests described below.  We are the operator
of the license.  We have drilled a total of seven wells on this
license of which Elk 1, Elk 4A and Antelope-1 have been gas/condensate discovery
wells. On March 2, 2009 a short term surface flow test of Antelope-1 was
conducted resulting in an estimated 382 mmscfpd of gas and associated condensate
of approximately 5,000 bblpd.  This well encountered a dolomitized
reef and penetrated approximately 2,000 feet of reservoir with matrix porosity
averaging around 8%. On November 28, 2008, we applied for a Declaration of
Location over our discovery block and an additional 8 blocks in the license that
comprised the Elk and Antelope fields and a development corridor.  The
declaration of location is a necessary pre-condition to the application for a
PRL or a PDL and was granted in March 2009. In August 2009, we applied for a PRL
over the declared location.  The PRL is yet to be granted. Subject to
an election to be made by Petromin to acquire a 20.5% interest on behalf of the
State, we will have a 97.5% interest in the PRL once it is granted, recognizing
the 2.5% direct working interest held by Pacific LNG Operations Limited acquired
during 2009.




Annual Information FormINTEROIL
CORPORATION     17








Petroleum
Prospecting License 244





We
currently have a 15% working interest in PPL 244 although we have agreed to
terms to divest all of our interest in this license.  This divestment
is currently pending approval from the State, at which point it will become
unconditional and the transaction will be finalized.  Talisman Oil
Limited is the operator of this license.  This license was granted on
February 25, 2005 for a six year term ending February 25, 2011.  This
license is located offshore in the Gulf of Papua and the operator is preparing
to drill a commitment well in the second half of 2010.





Petroleum
Development License (”PDL”)





In order
to progress the proposed development and commercialization of the Elk and
Antelope fields, we are required to apply for one or more PDLs, which will
consist of the acreage surrounding the Elk and Antelope fields and also acreage
on which to locate facilities and pipelines.  We have commenced
preparation of an application for a PDL which encompasses the Elk and Antelope
fields and this work is ongoing.





The
State’s Department of Petroleum and Energy (“DPE”) will review any PDL
application and an initial development plan and consider awarding a
PDL.  Should the PDL be issued, the acreage would be held subject to
periodic review.  It is at this stage that the State’s interest would
be recorded on the Papua New Guinea Petroleum register as a partner on the
license, if the State elects to take up such interest.





Participation
Agreements





In May
2003, we entered into an indirect participation agreement with PNGDV which was
amended in May 2006.  Under this amended agreement, PNGDV has a right
to a 6.75% interest in the next four exploration wells (the first of which was
Elk-1 so that two of these four wells have now been drilled) to be drilled by
us.  PNGDV also retained the right to participate for up to an
interest of 5.75% in the 16 wells that follow the next four wells by
contributing their share of well costs.




In
February 2005, we entered into an agreement with IPI holders pursuant to which
the IPI holders paid us an aggregate of $125 million and we agreed to drill
eight exploration wells in Papua New Guinea on PPLs 236, 237 and 238. We have
drilled four of the eight wells to date.  IPI holders hold interests
totaling 16.5886% of each of these existing and future wells, including those in
the Elk and Antelope fields.





In
addition to the above, PNG Energy Investors (“PNGEI”) has the right to
participate up to a 4.25% interest in 16 wells commencing from exploration wells
numbered 9 to 24.  As at the end of December 31, 2009, we have drilled less
than 9 exploration wells.   In order to participate, PNGEI would be
required to contribute a proportionate amount of drilling costs related to these
future wells.





For
further details on these participation agreements, refer to the “Material Contracts” section
of this AIF.




Pac LNG
holds a 2.5% direct working interest in gas and condensate in the Elk and
Antelope fields under an agreement entered into in 2009. The agreement grants
rights to Pacific LNG to be registered on the PRL applied for in respect of the
Elk and Antelope fields.





If a PDL
is granted, investors in our participation interest programs set out above have
the right to become working interest owners in the PDL.  In order to
maintain their right to earn revenues from the field, the investors are required
to continue to fund their share of ongoing appraisal drilling and all subsequent
capital expenditures which may be required to bring the field into
production.





MIDSTREAM
- REFINING





Our
refinery is located across the harbor from Port Moresby, the capital city of
Papua New Guinea.  Our refinery is currently the sole refiner of
hydrocarbons located in Papua New Guinea.  Under our 30 year agreement
with the State which expires in 2035, the State has undertaken to ensure that
domestic distributors purchase their refined petroleum product needs from the
refinery, or any refinery which is constructed in Papua New Guinea, at an
IPP.  (See under the heading “Sales” below for a further
discussion of IPP).  Our refinery’s production capacity is more than
sufficient to meet all of the domestic demand for the refined products we
produce in Papua New Guinea.  However, during 2008 and continuing
through 2009, not all domestic demand was sourced from our refinery, as some
competing product was imported and sold in Papua New Guinea by distributors in
contravention of our rights under our agreement with the State.  Jet
fuel, diesel and gasoline are the primary products that we produce for the
domestic market.  The refining process also results in the production
of naphtha and low sulfur waxy residue.  To the extent that we do not
convert naphtha to gasoline, we export it to the Asian markets in two grades,
light naphtha and mixed naphtha, which are predominately used as petrochemical
feedstock.  Low sulfur waxy residue can be and is being sold as fuel
domestically and by export and is valued by more complex refineries as cracker
feedstock.




Annual Information FormINTEROIL
CORPORATION     18








Facilities
and Major Subcontractors





Our
refinery includes a jetty with two berths for loading and off-loading ships and
a road tanker loading system (gantry).  Our larger berth has deep
water access of 56 feet (17 metres) and has been designed to accommodate 12,000
to 130,000 dwt crude and product tankers.  Our smaller berth can
accommodate ships with a capacity of up to 22,000 dwt.  Our tank farm
has the ability to store approximately 750,000 barrels of crude feedstock and
approximately 1.1 million barrels of refined products.  We have a
reverse osmosis desalination unit that produces all of the water used by our
refinery, power generation facilities that meet all of our electricity needs,
and other site infrastructure and support facilities, including a laboratory, a
waste water treatment plant, staff accommodation and a fire
station.





Our
refinery’s on-site laboratory is an Australian National Association of Testing
Authorities (NATA) accredited lab.  The lab is staffed and operated by
an independent nationally accredited company.  All crude imports and
finished products are tested and certified on-site to contractual specifications
while independent certification of quantities loaded and discharged at the
refinery are also provided by the laboratory.





Crude
Supply and Throughput





In
December 2001, we entered into an agreement with BP for the supply of crude
feedstock to our refinery.  The original agreement continued until
June 2009 when it was renewed for a further 12 months until June
2010.  BP is the largest marketer of crude oil in the Asia Pacific
region.  This contract provides a reliable source of supply and
provides access to the majority of the regional crudes suitable for our
refinery.  Our supply agreement with BP provides BP with financial
incentives to secure the most economically attractive crude feedstock for our
refinery. We will continue to review these arrangements and other options for
sources of supply after expiration of this contract. We do not expect that the
expiration of this contract will adversely affect our ability to obtain crude
feedstock for the refinery.





Sales





Papua New
Guinea is our principal market for the products our refinery produces, other
than naphtha and low sulfur waxy residue.  Under our 30 year agreement
with the State, the State has agreed to ensure that all domestic distributors
purchase their refined petroleum product needs from our refinery, (and from any
refinery which may be constructed in Papua New Guinea), at IPP.  In
general, the IPP is the price that would be paid in Papua New Guinea for a
refined product that is being imported.  In November 2007, the IPP was
modified by changing the Singapore benchmark price from the ”Singapore Posted
Prices” which is no longer being updated, to ”Mean of Platts Singapore” (”MOPS”)
which is the benchmark price for refined products in the region in which we
operate.  The revised formula is yet to be formally entrenched by
means of necessary amendment to the Project Agreement governing the Company’s
relationship with the Independent State of Papua New Guinea.  However,
it is the current IPP calculation mechanism being monitored by the ICCC (see
“Material Contracts – Refinery Project Agreement”).





The major
export product from our refinery is naphtha, which was historically sold to
Shell International Eastern Trading Company on a term basis pursuant to a
contract that expired in September 2008.  A 12 month term contract was
then signed with Sojitz Corporation for export sales of naphtha from October 1,
2008 to September 30, 2009.  From October 1, 2009, a new term
agreement with Dalian Fujia Dahua Petrochemicals, which operates a petrochemical
plant in China, has been put in place providing for export sales of naphtha
until September 30, 2010.





During
2009, there were six export cargoes of naphtha averaging approximately 27,000
metric tons each for a total of approximately 166,000 tonnes or 1.55 million
bbls.  The production of naphtha at the refinery is variable and
depends on the composition of the crude feedstock used, the relative economics
for gasoline and naphtha, and our ability to convert naphtha to
gasoline.  We did not export any gasoline or middle distillates in
2007 or 2008. However, we made an export sale of diesel and gasoline to the
Pacific Island of Nauru in November 2009.




Annual Information FormINTEROIL
CORPORATION     19








Our
refinery is fully certified to manufacture and market Jet A-1 fuel to
international specifications and markets this product to both domestic Papua New
Guinea and overseas airlines.





Until the
conversion in 2006, of the main process furnaces and commissioning of the
Hyundai generators which burn low sulfur waxy residue, we were a net consumer of
LPG.  With the installation of the low sulfur waxy residue firing
generators, heaters and boilers, improved facilities for recovering LPG from the
reformer off-gas and increased percentages of sweet crudes containing LPG, we
are now a net producer of LPG.





Competition





Due to
their favorable properties, light sweet crudes from the Southeast Asian and
Northwestern Australian region are highly sought after by refiners for use as
feedstock.  Therefore, there is significant competition to secure
cargoes of these crude types.  Due to the limited supply of light
sweet crudes and the resources of most of our competitors, we are not always
able to secure the specific crudes we desire for our refinery and are required
to obtain alternate crudes that are available.





We own
the only refinery in Papua New Guinea.  As a result, we are currently
the only beneficiary of the IPP structure and the associated requirement for
domestic refined product needs to be procured from domestic refineries as
described under the heading “Sales” above.  We
do not envision any new entrants into the refining business within Papua New
Guinea under the current market conditions.  However, domestic
distributors did not source all of their requirements from the refinery during
2008 and 2009 and a volume of competing finished product is currently being
imported, in contravention of our rights under our Refinery Project
Agreement.  Excess diesel, gasoline, naphtha and low sulfur waxy
residue that are exported are sold subject to prevailing commodity market
conditions.  Our geographical position and limited storage capacity
limits our ability to compete with the regional refining center in Singapore to
secure sales of large cargo sizes.  However, these same factors may
also provide competitive advantages if we expand our exports of refined products
to the small and fragmented South Pacific markets.





Customers





Domestically
in Papua New Guinea we sell Jet A-1 fuel, diesel, gasoline and small parcels of
gases and low sulfur waxy residue to all domestic distributors.  Our
main domestic customer is our downstream business segment, however we also
distribute fuel products to Niugini Oil Company (NOC) and Exxon Mobil, with
gases sold to Origin PNG.





Our major
exports are naphtha and low sulfur waxy residue (“LSWR”).  Previously
we sold all naphtha exports under term contracts with Shell and Sojitz
Corporation.  Since October 2009, all sales of naphtha have been under
our 12 month term contract with Dalian Petrochemical Plant.  Sales of
export LSWR were also under a term contract with Shell International Eastern
Trading Company which expired in December 2008.  We have not renewed
the term contracts for sales of low sulfur waxy residue and, since such time,
sell LSWR in the spot market.





Trading
and Risk Management





Our
revenues are derived from the sale of refined petroleum
products.  Prices for refined products and crude feedstock are
volatile and sometimes experience large fluctuations over short periods of time
as a result of relatively small changes in supplies, weather conditions,
economic conditions and government actions.  Due to the nature of our
business, there is always a time difference between the purchase of a crude
feedstock and its arrival at the refinery and the supply of finished products to
customers.





Generally,
we are required to purchase crude feedstock two months in advance, whereas the
supply or export of finished products takes place after the crude feedstock is
discharged and processed.  This timing difference impacts upon the
cost of our crude feedstock and the revenue from the proceeds of the sale of
products, due to the fluctuation in prices during the time
period.  Therefore, we use various derivative instruments to reduce or
hedge the risks of changes in the relative prices of our crude feedstock and
refined products.  These derivatives, which we use to manage our price
risk, effectively enable us to manage the refinery margin.  However,
this means that if the difference between our sales price of the refined
products and our acquisition price of crude feedstock expands or increases, then
the benefits are limited to the margin range we have established.  We
refer to this risk as timing and margin risk.




Annual Information FormINTEROIL
CORPORATION     20








The
derivative instrument which we generally use is an over-the-counter
swap.  Swap transactions are executed between the counterparties in
the derivatives swaps market.  It is commonplace among major refiners
and trading companies in Asia Pacific to use derivative swaps as a tool to hedge
their price exposures and margins.  Due to the wide usage of such
derivative tools in the Asia Pacific region, the swaps market generally provides
sufficient liquidity for our hedging and risk management
activities.  The derivative swaps instrument covers commodities or
products such as jet, kerosene, diesel, naphtha, and also crudes such as Tapis
and Dubai.  Using these tools, we actively engage in hedging
activities to manage margins. Occasionally, there is insufficient liquidity in
the crude swaps market, and we then use other derivative instruments such as
Brent futures on the International Petroleum Exchange to hedge our crude
costs.





The high
volatility of crude prices in 2008 meant that we faced significant timing and
margin risk on our crude cargos during the year.  During May 2008, we
entered into short and long term hedges which helped us to manage significant
portion of this timing and margin risk.  Our hedges netted us $27.8
million profit during the year with a further $18.2 million of hedging gains
recognized in our 2009 refinery profit as the underlying transactions
occurred.  In light of lower volatility, no new hedges were entered
into during 2009 and there are no outstanding derivative hedge contracts as at
December 31, 2009.





MIDSTREAM
- LIQUEFACTION





InterOil
is developing an LNG Project for the potential construction of liquefaction
facilities that would be built adjacent to our refinery.  The LNG
Project targets facilities that would produce up to nine million tons per annum
of LNG and associated condensates.  The infrastructure currently being
contemplated includes condensate storage and handling, a gas pipeline from the
Elk and Antelope fields and LNG storage and handling.  Initial design
for the liquefaction facilities incorporates interface with our existing
refining facilities.





On July
30, 2007, a shareholders’ agreement was signed between InterOil LNG Holdings
Inc., Pacific LNG Operations Ltd., Merrill Lynch Commodities (Europe) Limited
and PNG LNG Inc. (“Joint Venture Company”).  The signing of this
shareholders’ agreement meant that PNG LNG Inc. was no longer a subsidiary of
InterOil Corporation and became a jointly controlled entity between InterOil and
the other parties to the shareholders’ agreement.  This shareholders
agreement established the Joint Venture Company as the basis for participation
in and furtherance of the LNG Project.





On
February 27, 2009, a settlement agreement was entered into whereby InterOil LNG
Holdings Inc. and Pacific LNG Operations Ltd acquired Merrill Lynch’s interests
in the Joint Venture Company in equal shares.  InterOil ultimately
issued 499,834 common shares valued at $11.25 million for its share of the
consideration to Merrill Lynch.  As a result of this transaction,
Merrill Lynch has not retained any ownership in LNG Project or in the Joint
Venture Company.  (See “Material Contracts – Share Purchase
and Sale and Settlement Agreement dated February 27, 2009”)





At
present, we have equal voting rights with Pac LNG in the Joint Venture Company
and all decisions are required to be unanimous. At the time the shareholders
agreement was signed, we were also provided with non-voting B class shares in
the Joint Venture Company reflecting a fair economic value of $100.0 million in
recognition of our contribution to the LNG Project.  Our contribution
included, among other things, infrastructure developed by us near the proposed
liquefaction facility site at Napa Napa, our stakeholder relations within Papua
New Guinea, our negotiation of natural gas supply agreements with landowners and
our contribution to project development.  Under the 2007 shareholders’
agreement, we are not required to contribute towards cash calls from the Joint
Venture Company until an equal amount has been contributed by our joint venture
partner to equalize their investment in the Joint Venture Company with that of
InterOil.  As of December 31, 2009, InterOil held 86.66% of the
non-voting B class or economic shareholding in the Joint Venture
Company.  Ultimately, after such equalization, we are entitled to a
52.5% economic interest in the Joint Venture Company while Pacific LNG is
entitled to 47.5%.





Our
shareholders’ agreement recognises that the Final Investment Division for the
project is expected to be approved when all of the joint venture partners agree
that each and all of the following steps have been completed.





(i)
            conclusion
      of FEED for certain (phase 1)
facilities;





(ii)
            execution
      of the major project contracts;





(iii)
            approval
      of the construction plan and
budget;





(iv)
            approval
      of the financing plan; and





(v)
            receipt
      of each material governmental approval required for the
      project.




Annual Information FormINTEROIL
CORPORATION     21








Initial
engineering design has been undertaken in relation to the LNG Project and the
regulatory and taxation regime with the State was established with the execution
on December 23, 2009, of the LNG Project Agreement.  This agreement
also provides for the participation by the State in the LNG Project, allowing it
to take up to a 20.5% ownership stake.  Affected landowners are able
to take an additional 2% stake.  Aside from the extensive negotiation
process associated with this agreement, effort has been focused towards,
establishing the availability of sufficient gas quantities to underpin this
project.





We are
also undertaking a continuing process to explore the sale of a portion of the
ownership in the LNG Project and the Elk and Antelope fields, to industry
investors with a view to assisting us to finance the project.





Completion
of liquefaction facilities will require substantial amounts of financing and
construction will take a number of years to complete.  No assurances
can be given that we will be able to successfully finance or construct such
facilities, or as to the timing of such construction.





DOWNSTREAM
- WHOLESALE AND RETAIL DISTRIBUTION





We have
the largest wholesale and retail petroleum product distribution base in Papua
New Guinea.  This business includes bulk storage, transportation
distribution, aviation, wholesale and retail facilities for refined petroleum
products.  Our downstream business supplies petroleum products
nationally in Papua New Guinea through a portfolio of retail service stations
and commercial customers.  As of December 31, 2009, we believe we
supplied approximately 70% of Papua New Guinea’s total refined petroleum product
needs.





Sales





The ICCC
regulates the maximum prices that may be charged by the wholesale and retail
hydrocarbon distribution industry in Papua New Guinea.  Our Downstream
business may charge less than the maximum margin set by the ICCC in order to
maintain its competitiveness with other participants in the
market.  In June 2009, ICCC commenced a review into the pricing
arrangements for petroleum products in PNG.  The last such review was
undertaken during 2004 and was due to expire on December 31,
2009.  The purpose of the review is to consider the extent to which
the existing regulation of price setting arrangements at both wholesale and
retail levels should continue or be revised for the next five year
period.  We have provided detailed submissions to the
ICCC.  The ICCC have most recently advised that its final report will
be issued in March 2010.  It is possible that the ICCC may determine
to increase regulation of pricing and reduce the margins able to be obtained by
our distribution business.  Such a decision, if made, may negatively
affect our downstream business and require a review of its
operations.





Supply
of Products





Our
retail and wholesale distribution business distributes diesel, jet fuel,
gasoline, kerosene and fuel oil as well as Shell branded commercial and
industrial lubricants, such as engine and hydraulic oils.  In general,
all of the refined products sold pursuant to our wholesale and retail
distribution business are purchased from our refinery.  We import the
commercial and industrial lubricants and fuel oil, which constitute a small
percentage of our sales.





We
deliver refined products from our refinery to two tanker
vessels.  These vessels deliver the refined products to distribution
terminals and depots, including those owned by us.  We do not own
these vessels but rather lease them on a full time charter basis.  We
are responsible for the scheduling of all the deliveries made by these tankers
to the petroleum industry participants and customers in Papua New
Guinea.  Our inland depots are supplied by road tankers which are
owned and operated by third party independent transport
contractors.





Our
terminal and depot network distributes refined petroleum products to retail
service stations, aviation facilities and commercial customers.  We
supply retail service stations and commercial customers with petroleum products
using trucks or, in the case of some commercial customers, coastal
ships.  We do not own any of these shipping or trucking distribution
assets.  We pass transportation costs through to our
customers.




Annual Information FormINTEROIL
CORPORATION     22








Retail
Distribution





As of
December 31, 2009, we provided petroleum products to 56 retail service stations
with 43 operating under the InterOil brand name and the remaining 13 operating
under their own independent brand.  Of the 56 service stations that we
supply, 17 are either owned by or head leased to us with a sublease to
company-approved operators.  The remaining 39 service stations are
independently owned and operated.  We supply products to each of these
service stations pursuant to distribution supply agreements.  Under
the cover of an equipment loan agreement, we also provide fuel pumps and related
infrastructure to the operators of the majority of these retail service stations
that are not owned or leased by us.





Wholesale
Distribution





We also
supply petroleum products as a wholesaler to commercial clients.  We
operate 12 aviation refueling facilities throughout Papua New Guinea and are the
largest aviation supplier in PNG, outside the main centre of Port
Moresby.





We own
and operate six large terminals and eleven depots that we use to supply product
throughout Papua New Guinea.  We enter into commercial supply
agreements with mining, agricultural, fishing, logging and similar commercial
clients whereby we supply their petroleum product needs.  Pursuant to
many of these agreements, we supply and maintain company-owned above-ground
storage tanks and pumps that are used by these customers.  More than
two-thirds of the volume of petroleum products that we sold during 2009 was
supplied to commercial customers.  Although the volume of sales to
commercial customers is far larger than through our retail distribution network,
these sales have a lower margin.





Competition





Our main
competitor in the wholesale and retail distribution business in Papua New Guinea
is ExxonMobil.   We also compete with smaller local distributors
of petroleum products.  We believe that throughout 2009, our
competitors progressively increased their direct importation of refined
petroleum products activity rather than sourcing products from our
refinery.  We have been able to obtain refined products for our
distribution business at competitive prices to date, but our competitive
position is threatened by the importing activity of our
competitors.  We also believe that our commitment to the distribution
business in Papua New Guinea at a time when major-integrated oil and gas
companies have exited the Papua New Guinea fuel distribution market provides us
with a competitive advantage.  However, major-integrated oil and gas
companies such as ExxonMobil have greater resources than we do and could if they
decided to do so, expand much more rapidly in this market than we
can.





Customers





We sell
approximately 20% of our refined petroleum products to Ok Tedi Mining Limited
(“OTML”) in Papua New Guinea pursuant to a wholesale distribution
contract.  Due to the amount of petroleum products provided to OTML,
the loss of this customer, at least in the short term, would adversely affect
the profitability of our retail and wholesale distribution business segment and
of the refinery.  At present, no contract is in place with OTML with
the previous contract having expired in December 2009.  Agreement has
been reached in principle for a new three year supply arrangement and we are
currently working to finalise the agreement.





We also
sell approximately 10% of our refined petroleum products to Shell Oil Products
Ltd (SOPL) in Papua New Guinea pursuant to a wholesale supply contract for the
international airport. Due to the amount of petroleum products provided to SOPL,
the loss of this customer, at least in the short term would adversely affect the
profitability of our wholesale distribution business segment and of the
refinery.  At present, no contract is in place with SOPL with the
previous contract having expired in October 2009. SOPL’s owner is engaged in the
process of tendering for the divestment of SOPL and the aviation refueling
business conducted by it at Port Moresby’s international airport.  We
participated in the tender process during 2009 and entered into an agreement to
acquire SOPL as the preferred bidder.  The agreement was subject to
approval by Papua New Guinea’s competition authority, the Independent Consumer
and Competition Commission (ICCC).  The ICCC refused to authorize the
acquisition by us on the basis of our existing market share and the agreement
was terminated.  Shell’s owners have reinstated the sale
process.


RESOURCES





We
currently have no production or reserves as defined in NI 51-101 or under the
definitions established by the United States Securities and Exchange
Commission.




Annual Information FormINTEROIL
CORPORATION     23








The Elk
and Antelope fields (see “Description of Our
Business”), located in Papua New Guinea, is reservoired in a composite
trap comprising structural and stratigraphic elements consisting of a Late
Oligocene to Late Miocene limestone and carbonate.   The Elk field
overlies the northern end of the Antelope field and comprises a tectonic wedge,
or over thrust, of highly fractured deep water limestone and has been penetrated
by the Elk-1 and Elk-2 wells.  The Antelope structural field
penetrated by the Antelope-1 and Antelope-2 wells consists of a dominantly
shallow water reef/platform complex with a dolomite cap with well developed
secondary porosity and permeability.





An
evaluation of the resources of gas and condensate for the Elk and Antelope
fields has been completed by GLJ Petroleum Consultants Ltd., an independent
qualified reserves evaluator, as of December 31, 2009, and was prepared in
accordance with the definitions and guidelines in the COGE Handbook and NI
51-101.  All resources estimated are classified as contingent
resources – economic status undetermined as follows:





Gross
Resources Estimate for Gas and Condensate*





CaseAs
      at December 31, 2009
                              
                              Low
                              
                              
                              Best
                              
                              
                              HighInitial
      Recoverable Sales Gas (tcf)
                              
                              
                              6.19
                              
                              
                              
                              8.18
                              
                              
                              
                              9.94Initial
      Recoverable Condensate (mmbbls)
                              
                              
                              117.1
                              
                              
                              
                              156.5
                              
                              
                              
                              194.7Initial
      Recoverable (mmboe)
                              
                              
                              1,148.8
                              
                              
                              
                              1,519.8
                              
                              
                              
                              1,851.4





*These
estimates represent 100% of the Elk/Antelope Field. InterOil currently has a
97.50% working interest in the Elk and Antelope fields





Resource
Estimate for Gas and Condensate – Net to InterOil*





CaseAs
      at December 31, 2009
                              
                              Low
                              
                              
                              Best
                              
                              
                              HighInitial
      Recoverable Sales Gas Resources (tcf)
                              
                              
                              3.56
                              
                              
                              
                              4.70
                              
                              
                              
                              5.71Initial
      Recoverable Condensate (mmbbls)
                              
                              
                              67.3
                              
                              
                              
                              89.9
                              
                              
                              
                              111.9Initial
      Recoverable (mmboe)
                              
                              
                              660.6
                              
                              
                              
                              873.2
                              
                              
                              
                              1063.6





*These
estimates are based upon InterOil holding a 57.4751% working interest in the Elk
and Antelope fields, which assumes that: (i) the State and landowners elect to
participate in the Elk and Antelope fields to the full extent provided under
applicable PNG oil and gas legislation after a PDL has been granted in relation
to the Elk/Antelope field and (ii) all elections are made to participate in the
Field by all investors pursuant to relevant indirect participation interest
agreements with InterOil, including to participate fully and directly in the
PDL.





Contingent
resources are those quantities of natural gas and condensate estimated, as of a
given date, to be potentially recoverable from known accumulations using
established technology or technology under development, but which are not
currently considered to be commercially recoverable due to one or more
contingencies.  The
economic status of the resources is undetermined and there is no certainty that
it will be commercially viable to produce any portion of the
resources.  The following contingencies must be met before the
resources can be classified as reserves:





·
            Sanctioning
      of the facilities required to process and transport marketable natural gas
      to market.


·
            Confirmation
      of a market for the marketable natural gas and
  condensate.


·
            Determination
      of economic viability.





Although
a final project has not yet been sanctioned, pre-FEED studies are ongoing for
LNG and condensate stripping operations as options for monetization of the gas
and condensate.





The “low”
estimate is considered to be a conservative estimate of the quantity that will
actually be recovered. It is likely that the actual remaining quantities
recovered will exceed the low estimate. With the probabilistic methods used,
there should be at least a 90 percent probability (P90) that the quantities
actually recovered will equal or exceed the low estimate.  The “best”
estimate is considered to be the best estimate of the quantity that will
actually be recovered.  It is equally likely that the actual remaining
quantities recovered will be greater or less than the best
estimate.  With the probabilistic methods used, there should be at
least a 50 percent probability (P50) that the quantities actually recovered will
equal or exceed the best estimate.  The “high” estimate is considered
to be an optimistic estimate of the quantity that will actually be
recovered.  It is unlikely that the actual remaining quantities
recovered will exceed the high estimate.  With the probabilistic
methods used, there should be at least a 10 percent probability (P10) that the
quantities actually recovered will equal or exceed the high
estimate.




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CORPORATION     24








The
accuracy of resource estimates are in part a function of the quality and
quantity of the available data and of engineering and geological interpretation
and judgment.  Other factors in the classification as a resource
include a requirement for more delineation wells, detailed design estimates and
near term development plans.  The size of the resource estimate could
be positively impacted, potentially in a material amount, if additional
delineation wells determined that the aerial extent, reservoir quality and/or
the thickness of the reservoir is larger than what is currently estimated based
on the interpretation of the seismic and well data.  The size of the
resource estimate could be negatively impacted, potentially in a material
amount, if additional  delineation wells determined that the aerial
extent, reservoir quality and/or the thickness of the reservoir are less than
what is currently estimated based on the interpretation of the seismic and well
data.





THE
ENVIRONMENT AND COMMUNITY RELATIONS





Environmental
Protection





Our
operations in Papua New Guinea are subject to an environmental law regime which
includes laws concerning emissions of substances into, and pollution and
contamination of, the atmosphere, waters and land, production, use, handling,
storage, transportation and disposal of waste, hazardous substances and
dangerous goods, conservation of natural resources, the protection of threatened
and endangered flora and fauna and the health and safety of people.





These
environmental laws require that our sites be operated, maintained, abandoned and
reclaimed to standards set out in the relevant legislation.  The
significant Papua New Guinea laws applicable to our operations include the
Environment Act 2000; the Oil and Gas Act 1998; the Dumping of Wastes at Sea Act
(Ch. 369); the Conservation Areas Act (Ch.362); and the International Trade
(Flora and Fauna) Act (Ch.391).





The
Environment Act 2000 is the single most significant legislation affecting our
operations.  This regulates the environmental impact of development
activities in order to promote sustainable development of the environment and
the economic, social and physical well-being of people and imposes a duty to
take all reasonable and practicable measures to prevent or minimize
environmental harm.  A breach of this act can result in significant
fines or penalties.  Under the Compensation (Prohibition of Foreign
Legal Proceedings) Act 1995, no legal proceedings for compensation claims
arising from petroleum projects in Papua New Guinea may be taken up or pursued
in any foreign court.





Compliance
with Papua New Guinea’s environmental legislation can require significant
expenditures.  The environmental legislation regime is complex and
subject to different interpretations.  Although no assurances can be
made, we believe that, absent the occurrence of an extraordinary event,
continued compliance with existing Papua New Guinea laws regulating the release
of materials into the environment or otherwise relating to the protection of the
environment will not have a material effect upon our capital expenditures,
earnings or competitive position with respect to our existing assets and
operations, as has been the case during 2009.  Future legislative
action and regulatory initiatives could result in changes to operating permits,
additional remedial actions or increased capital expenditures and operating
costs that cannot be assessed with certainty at this time.





We have
outstanding loans with OPIC, an agency of the United States
Government.  OPIC is required by statute to conduct an environmental
assessment of every project proposed for financing and to decline support for
projects that, in OPIC’s judgment, would have an unreasonable or major adverse
impact on the environment, or on the health or safety of workers in the host
country.  For most industrial sectors, OPIC expects projects to meet
the more stringent of the World Bank or host-country environmental, health and
safety standards.  OPIC systematically monitors compliance with
environmental representations and non-compliance may constitute a default under
loan agreements.





More
stringent laws and regulations relating to climate change and greenhouse gases
may be adopted in the future and could cause us to incur material expenses in
complying with them.  Regulatory initiatives could adversely affect
the marketability of the refined products we produce and any oil and natural gas
we may produce in the future.  The impact of such future programs
cannot be predicted, but we do not expect our operations to be affected any
differently than other similarly situated domestic competitors.




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CORPORATION     25








Environmental
and Social Policies





We have
developed and implemented an environmental policy which acknowledges that the
principles of sustainable development are integral to responsible resource
management and will strive to minimize impacts on the physical environment.
Other environmental initiatives embrace the introduction of “ Environmental Risk
Analysis“ for
major projects in which hazards to the environment are identified, mitigating
controls implemented and a “ Hazard Register “developed to monitor any residual
risks. We are also developing project specific “ Environmental Management,
Monitoring & Reporting Plans “, in compliance with the PNG environmental
legislation and in order to monitor our ongoing compliance and
performance,  we have established corporate level controls in which
all “ near miss and real incidents “ are reported, and
investigated.





We have
not adopted any specific social policies that are fundamental to our
operations.  However, we are committed to working closely with the
communities we operate in and to complying with all laws and governmental
regulations applicable to our activities, including maintaining a safe and
healthy work environment and conducting our activities in full compliance with
all applicable environmental laws.





We have
established a dedicated Community Relations department to oversee the management
of community assistance programs and to manage land acquisition related
compensation claims and payments. Our development philosophy is based on
“bottom-up planning” thus ensuring that all planning and development takes the
local community into account.  In relation to our midstream business,
the department has developed a long-term community development assistance
program that benefits the villages in the vicinity of the
refinery.  In addition, we have a team of officers associated with our
upstream business who operate in the field and perform a wide variety of
tasks.  These include land owner identification studies, social
mapping management, local recruitment, liaising with landowners, recording
compensation payments to land owners and assisting in the provision of health
and medical services in the areas in which our exploration activities are
conducted.  Generally, the department works closely with government,
landowners and the community in order to ensure that all our activities have a
minimum environmental impact and to at least maintain, and generally improve,
the quality of life of the people inhabiting the areas in which we
work.





We are
currently formulating an application for a PDL to develop the Elk and Antelope
fields as required under PNG’s Oil & Gas Act. As a
pre-requisite to the grant of a PDL, we are required to undertake specific
studies and investigations designed to define land boundaries and landowners as
well as addressing the potential impact of the project, in terms of its social,
economic and environmental impact.  To this end, we have engaged
specialist external consultants to assist us in a full scale social mapping and
land owner identification program, a social economic impact assessment (SEIA)
program and an environmental impact statement (EIS) program.  These
studies will assist the State in convening a forum of all interested
stakeholders at a landowner, local and provincial government level for the
purpose of procuring an agreement on benefit sharing.





RISK
FACTORS





Our
business is subject to numerous risks and uncertainties, some of which are
described below.  The risks and uncertainties described below are not
the only risks facing us.  Additional risks not presently known to us
or which we consider immaterial based on information currently available to us
may also materially adversely affect us.  If any of the following
risks or uncertainties actually occur, our business, financial condition and
results of operations could be materially adversely affected.





Our
ability to develop our planned condensate stripping plant or LNG facility is
contingent on our ability to obtain significant funding.





Our share
of additional equity contribution for the construction of a LNG facility will be
significant, both to maintain our existing ownership interest in the joint
venture or to meet the requirements of any reduced interest in the event we sell
a portion of it, and may amount to hundreds of millions of
dollars.  We are also seeking to develop a separate condensate
stripping facility.  Our existing cost estimates are subject to change
due to such items as cost overruns, change orders, delays in construction,
increased material costs, escalation of labor costs, and increased spending to
maintain the construction schedule.




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CORPORATION     26








To fund
these development projects, we will need to pursue a variety of sources of
funding besides those that we currently have committed or planned, such as
financing at the project level and/or divestment of a portion of our
interest.  Our ability to obtain such significant funding will depend,
in part, on factors beyond our control, such as the status of capital and
industry markets at the time financing is sought and such markets’ view of our
industry and prospects at such time. In addition, we may not be able to reduce
our funding obligations by selling a portion of our interest in the project on
terms acceptable to us.  Additionally, we may not be able to obtain
financing on terms that are acceptable to us, if at all, even if our development
project is otherwise proceeding on schedule. In addition, our ability to obtain
some types of financing may be dependent upon our ability to obtain other types
of financing.  For example, project-level debt financing is typically
contingent upon a significant equity capital contribution from the project
sponsor.  As a result, even if we are able to identify potential
project-level lenders, we may have to obtain another form of external financing
for us to fund an equity capital contribution to the project
subsidiary.  A failure to obtain financing at any point in the
development process could cause us to delay or fail to complete our business
plan for our LNG facility or our condensate stripping plant.





We
depend upon access to the capital markets to fund our growth
strategy.  Currently, the capital and credit markets are continuing to
experience disruption which, if it continues for an extended period of time, is
likely to adversely affect our growth strategy.




As a
result of this weakened global economic situation, we, along with all other oil
and gas entities, may have restricted access to capital, bank debt and equity,
and may also face increased borrowing costs.  Although our business
and asset base have not declined, the lending capacity of all financial
institutions has diminished and risk premiums have increased.  As
future capital expenditures will be financed out of funds generated from
operations, borrowings and possible future equity or asset sales, our ability to
do so is dependent on, among other factors, the overall state of capital markets
and investor appetite for investments in the energy industry and our assets and
securities in particular.





To the
extent that external sources of capital are limited or unavailable or available
only on onerous terms, our ability to make capital investments and maintain
existing assets may be impaired, and our assets, liabilities, business,
financial condition and results of operations may be materially and adversely
affected as a result.





Based on
current funds available and expected funds generated from operations, we believe
we have sufficient funds available to fund our refining and distribution
business operations in the normal course, but not the development of our
exploration assets, our proposed condensate stripping facility, and the LNG
Project, each of which would require significant capital.  However, if
funds generated from operations are lower than expected or capital costs for
these projects exceed current estimates, if we incur major unanticipated
expenses related to development or maintenance of our existing properties or if
any of our existing facilities are unable to be renewed, we may be required to
seek additional capital to maintain capital expenditures at planned levels in
relation to our operating, refining and distribution businesses as
well.  Significant capital will be required in order to fund
additional exploration and development of the Elk and Antelope fields and meet
our exploration license commitments.  Additionally, significant
capital would be required to develop the condensate stripping facility and the
LNG Project.  Failure to obtain any financing necessary for our
capital expenditure plans will likely result in delays in these
activities.





There
is uncertainty associated with the regulated prices at which our products are
sold, both by our refinery and our distribution businesses.





Under our
Refinery Project agreement with the State (See “Material Contracts – Refinery
Project Agreement”), refined products produced by our refinery are required to
be sold at a defined import parity price in order for domestic distributors in
PNG to be required to source their fuel needs from our refinery.  In
general, the IPP is the price that would be paid in Papua New Guinea for a
refined product that is being imported, which price is set monthly.  A
revised formula was established with the State during 2008 and has been in
operation since. Our agreement with the State has not been amended formally to
capture that revised formula.





We are
purchasing our crude at a fluctuating spot market price.  A primary
reason for the renegotiation of the pricing formula with the State was to
establish a new pricing mechanism that will correlate more closely with the
daily movements in the price of refined products and therefore the price of
crude.  In the event that such pricing mechanism is not finalized
based on a market price marker recognized by the industry, as is in operation at
present, then there is a possibility that such misalignment between the IPP for
our products and the fluctuating market price of our supply may reduce our
profit and cause us to cease operating the refinery.





The
wholesale distribution margins able to be obtained by our downstream business
are also closely regulated in Papua New Guinea. Papua New Guinea’s competition
authority is currently undertaking a review of pricing regulation and wholesale
margins.  It is possible that the authority may determine to increase
regulation and/or decrease margins which may have the affect of reducing our
profitability and, in a more extreme case, negatively affecting the viability of
our downstream business, in whole or in part.




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We
may not be successful in our exploration for oil and gas.





As of
December 31, 2009, we had drilled a total of eight exploration wells and a
number of appraisal wells in our PPL’s since the inception of our exploration
program in our PPL’s.  Of the exploration wells, we consider two to
have been successful.  We plan to drill additional wells in Papua New
Guinea during the coming years in line with our commitments under our
PPL’s.  We cannot be certain that the exploration wells we drill will
be productive or that we will recover all or any portion of the costs to drill
these wells.  Because of the high cost, topography and subsurface
characteristics of the areas we are exploring, we have limited seismic or other
geoscience data to assist us in identifying drilling objectives.  The
lack of this data makes our exploration activities more risky than would be the
case if such information were readily available.





Our
exploration and development plans may be curtailed, delayed or cancelled as a
result of a lack of adequate capital and other factors, such as weather,
compliance with governmental regulations, price controls, landowner
interference, mechanical difficulties, shortages of materials, delays in the
delivery of equipment, success or failure of activities in similar areas,
current and forecasted prices for oil and changes in the estimates of costs to
complete the projects.  We will continue to gather information about
our exploration projects, and it is possible that additional information may
cause us to alter our schedule or determine that a project should not be pursued
at all.  You should understand that our plans regarding our projects
are subject to change.  We cannot assure you that our exploration
activities have or will result in the discovery of any reserves.  In
addition, the costs of exploration and development may materially exceed initial
estimates.





If
there is a sustained economic downturn or recession in PNG or globally, oil and
natural gas prices may fall and may become and remain depressed for a long
period of time, which may adversely affect our results of
operations.





Many
economists are predicting that the effects from this current global economic
crisis or recession will be long lasting, at least in certain parts of the
world.  The reduced economic activity associated with an economic
crisis or recession may substantially reduce the demand for oil and natural gas
and refined products, which could adversely affect the results of operations in
our midstream and downstream businesses and the viability of our development
projects.





Our
refinery’s financial condition may be materially adversely affected if we are
unable to obtain crude feedstocks at economic rates for our
refinery.





While we
have a number of possible sources we employ for crude supply, our agreement with
BP currently provides for the delivery of crude feedstock.  The BP
crude supply agreement expires on June 30, 2010.    We
cannot assure you that we will continue to be able to source adequate feedstock
for our refinery.





Various
crude oils that are suitable for use as refinery feedstock are available in the
nearby region.  However, our access to oil sourced from farther
outside Papua New Guinea may be more limited as there are a limited number of
crude oil sources currently available that are compatible with our refinery and
economic for it to refine.  In addition, the increased cost, if any,
of oil from outside Papua New Guinea may reduce our gross profit margins and
negate the operational benefits of using such oil.  We can provide no
assurances that we will be able to obtain all of the oil needed to operate our
refinery or that we will be able to obtain the crude feedstocks that allow us to
operate our refinery at profitable levels.





Even
if we obtain sufficient funding for our LNG facility and condensate stripping
plant, we may not be able to timely construct and commission them.





We may
not complete construction of our LNG facility or condensate stripping facility
in a timely manner, or at all, due to numerous factors, some of which are beyond
our control.  Factors that could adversely affect our planned
construction include, but are not limited to, the following:





·
            failure
      by contractors to fulfill their obligations under construction contracts,
      or disagreements with them over contractual
  obligations;




·
            our
      failure to enter into satisfactory agreements with contractors for the
      construction;




·
            shortages
      of materials or delays in delivery of
materials;




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·
            cost
      overruns and difficulty in obtaining sufficient financing to pay for such
      additional costs;




·
            difficulties
      or delays in obtaining gas for commissioning activities necessary to
      achieve commercial operability of the LNG or condensate stripping
      plant;




·
            failure
      to obtain all required governmental and third-party permits, licenses and
      approvals for construction and
operation;




·
            weather
      conditions and other catastrophes;




·
            difficulties
      in obtaining a proper workforce for construction purposes, increased labor
      costs and potential labor disputes;




·
            resistance
      in the local and global community to the developments due to safety,
      environmental or security concerns;
and




·
            local
      economic and infrastructure
conditions.




Our
inability to timely complete (or complete at all) our LNG facility or our
condensate stripping plant may prevent us in part or in whole from commencing
operations.  Thus, as a result, we may not receive any cash revenues
from the condensate stripping plant or LNG facility on time or at
all.





Our
ability to recruit and retain qualified personnel may have a material adverse
effect on our operating results and stock price.





Our
success depends in large part on the continued services of our directors,
executive officers, our senior managers and other key personnel.  The
loss of these people, especially without advance notice, could have a material
adverse impact on our results of operations and our stock price.  It
is also very important that we attract and retain highly skilled personnel,
including technical personnel, to operate our refinery, accommodate our
exploration plans, assist us with our development projects, and replace
personnel who leave.  Competition for qualified personnel can be
intense, and there are a limited number of people with the requisite knowledge
and experience, particularly in Papua New Guinea where a substantial number of
our personnel are required to work.  Under these conditions, we could
be unable to recruit, train, and retain employees.  If we cannot
attract and retain qualified personnel, it could have a material adverse impact
on our operating results and stock price.





Our
hedging activities may result in losses.





To reduce
the risks of changes in the relative prices of our crude feed stocks and refined
products, we may enter into hedging arrangements.  Hedging
arrangements would expose us to risk of financial loss in some circumstances,
including the following:





·
            If
      the amount of refined products produced is less than expected or is not
      produced or sold during the planned time
period;




·
            If
      the other party to the hedging contract defaults on its contract
      obligations, which risk has increased with the global financial and credit
      market crisis; or




·
            If
      there is a change in the expected differential between the underlying
      price in the hedging agreement and actual prices
  received.




In
addition, these hedging arrangements may limit the benefit we would receive from
increases in the price of our refined products relative to the prices for our
crude feed stocks.





While we
believe our hedge counterparties to be strong and creditworthy counterparties,
current disruptions occurring in the financial markets could lead to sudden
changes in a counterparty’s liquidity, which could impair their ability to
perform under the terms of the hedging contract.  We are unable to
predict sudden changes in a counterparty’s creditworthiness or ability to
perform.  Even if we do accurately predict sudden changes, our ability
to negate the risk may be limited depending upon market conditions.




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Our
results of operations and financial condition may be adversely affected by
changes in currency exchange rates.





Our
results of operations and financial condition may be affected by currency
exchange rates.  Exchange rates may fluctuate widely in response to
international political conditions, general economic conditions and other
factors beyond our control. While our oil sales are denominated in the Papua New
Guinean currency, Kina (“PGK”), portions of our operating costs, with respect to
the purchase of crude and other imported products, and our indebtedness are
denominated in US dollars.  A strengthening of the US dollar versus
the PGK may have the effect of increasing operating costs while a weakening of
the US dollar verses the PGK may reduce operating costs.  In addition,
since our indebtedness needs to be paid in US dollars, a strengthening of the US
dollar versus the PGK may negatively impact our ability to service our US-dollar
denominated debt. Moreover, we may have additional exposure to currency exchange
risk since we may not be able to convert our PGK-based revenue cash flow in a
timely manner in order to meet our US-dollar denominated debt
obligations.





We
are a party to lawsuits and other proceedings in which we may not be
successful.





We are a
party to lawsuits and other proceedings, both currently and that will arise in
the course of our business in the future.  There is a risk that we
will not be successful with respect to the legal actions to which we are a
party, which could have a material adverse effect on our consolidated financial
position, results of operations or cash flows.





Our
investments in Papua New Guinea are subject to political, legal and economic
risks that could materially adversely affect their value.





Our
investments in Papua New Guinea involve risks typically associated with
investments in developing countries, such as uncertain political, economic,
legal and tax environments; expropriation and nationalization of assets; war;
renegotiation or nullification of existing contracts; taxation policies; foreign
exchange restrictions; international monetary fluctuations; currency controls;
and foreign governmental regulations that favor or require the awarding of
service contracts to local contractors or require foreign contractors to employ
citizens of, or purchase supplies from, a particular jurisdiction.





Political
conditions have at times been unstable in Papua New Guinea.  We
attempt to conduct our business in such a manner that political and economic
events of this nature will have minimal effects on our operations.  We
believe that oil exploration and refinery operations are in the long term best
interests of Papua New Guinea and that we will continue to have the support of
the current government.  Notwithstanding the current support, our
ability to conduct operations or exploration and development activities is
subject to changes in government regulations or shifts in political attitudes
over which we have no control.  There can be no assurance that we have
adequate protection against any or all of the risks described
above.





In
addition, if a dispute arises with respect to our Papua New Guinea operations or
proposed development projects, we may be subject to the exclusive jurisdiction
of foreign courts or may not be successful in subjecting foreign persons,
especially foreign oil ministries and national oil companies, to the
jurisdiction of Canada or the United States.





Our
inability to generate sufficient cash flow to pay off or refinance our
indebtedness with near-term maturities could have a material adverse effect on
our financial condition.





We cannot
assure that our business will generate cash flows from operations or that future
borrowings will be available to us in an amount sufficient to enable us to pay
our maturing indebtedness as it falls due.  As a result, we may need to
refinance all or a portion of the debt, or to secure new financing before
maturity.  This, to some extent, is subject to general economic, financial,
legislative and regulatory factors and other factors that are beyond our
control.  We cannot be sure that we will be able to obtain the refinancing
or new financing on reasonable terms or at all.





The
price of our common shares has been volatile.




The
market price of the common shares has been, and is likely to continue to be,
volatile and subject to wide fluctuations.  From March 31, 2009
through February 19, 2010, the highest sales price of the common shares on the
New York Stock Exchange has been U.S. $84.05 and the lowest sales price of the
common shares on such exchange has been U.S. $24.35.  The fluctuation
in the market prices of the common shares is caused by a number of factors, some
of which are outside our control, including the following:




•
            quarterly
      variations in our results of
operations;





•
            success
      or failure of our exploration
activities




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Information Form   INTEROIL
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•
            material
      events public announcements concerning our business and
      operations;





•
            changes
      in stock market analyst recommendations or earnings estimates regarding
      the common shares;





•
            short
      selling activity





•
            strategic
      actions, such as acquisitions by InterOil or its
    competitors;





•
            new
      laws or regulations or new interpretations of existing laws or regulations
      applicable to our business;





•
            significant
      sales of the common shares;





•
            the
      acquisition or loss of major customers or
  suppliers;





•
            additions
      or departures of key personnel;





•
            changes
      in market valuations for refining, exploration and production companies or
      companies participating in the retail distribution of refined oil
      products; and





•
            changes
      in accounting standards, policies, guidance, interpretations or
      principles.





A decline
in the market price of the common shares could cause you to lose some or all of
your investment.




Title
to certain of our properties may be defective or challenged by third party
landowner claims, and landowner action may impede access to or activity on our
properties.





While we
believe that we have satisfactory title to our properties, some risk exists that
title to certain properties may be defective or subject to
challenge.  In particular, our properties in Papua New Guinea could be
subject to native title or traditional landowner claims, which may deprive us of
some of our property rights that consequently may have a material adverse effect
on our exploration and drilling operations and our development
projects.  In addition, landowner disturbances may occur on our
properties which disrupt our business in Papua New Guinea.





The
implementation of new Papua New Guinean laws, may have a material adverse effect
on our operations and financial condition.





Our
operations require licenses and permits from various governmental authorities to
drill wells, develop the LNG Project, operate the refinery and market our
refined products.  We believe that we hold all necessary licenses and
permits under applicable laws and regulations for our operations in Papua New
Guinea and believe we will be able to comply in all material respects with the
terms of such licenses and permits.  However, such licenses and
permits are subject to change.  There can be no guarantee that we will
be able to obtain or maintain all necessary licenses and permits that may be
required to maintain our continued operations.  Moreover, it is
possible that new laws may be enacted in Papua New Guinea (such as a limitation
on foreign ownership of local assets) that may have a material adverse effect on
our operations and financial condition.





Additional
licenses and permits will be required to allow us to develop our planned LNG
Project and our proposed condensate stripping facility.  There can be
no guarantee that we will be able to obtain such licenses and
permits.





We are
subject to extensive laws and regulations, including those relating to the
discharge of materials into the environment, waste management, pollution
prevention measures and the characteristics and composition of gasoline and
diesel fuels.  If we violate or fail to comply with these laws and
regulations, we could be fined or otherwise sanctioned.  Because
environmental laws and regulations are increasingly becoming more stringent and
new environmental laws and regulations are continuously being enacted or
proposed, the level of future expenditures required for environmental matters
could increase in the future.  In addition, any major upgrades to our
refinery could require material additional expenditures to comply with
environmental laws and regulations.  In addition, environmental gas
laws and permits may be an obstacle to the development of our liquefaction and
condensate stripping facilities.




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Our
refinery has not operated at full capacity for an extended period of time and
our profitability may be materially negatively affected if it continues not to
do so.





Our
refinery did not operate at full capacity during 2009.  In addition,
our ability to operate our refinery at its rated capacity must be considered in
light of the risks inherent in the operation of, and the difficulties, costs,
complications and delays we face as the operator of, a relatively small
refinery.  These risks include, without limitation, shortages and
delays in the delivery of crude feedstocks or equipment; contractual
disagreements; labor shortages or disruptions; difficulties marketing our
refined products; political events; accidents; and unforeseen engineering,
design or environmental problems.  If these risks prevent us from
operating at full capacity in the future, our profitability may be negatively
affected.





We sell
approximately 20% of our refined petroleum products to Ok Tedi Mining Limited
(OTML) in Papua New Guinea pursuant to wholesale distribution
contracts.  We do not anticipate that the loss of other wholesale
distribution contracts would have a material impact on this business
segment.  However, due to the amount of petroleum products provided to
OTML, the loss of this customer, at least in the short term, would adversely
affect the profitability of our retail and wholesale distribution business
segment and of the refinery.  At present, no contract is in place with
OTML with the previous contract having expired in December
2009.  Agreement has been reached in principle for a new three year
supply arrangement and we are currently working to formalise it.





We also
sell approximately 10% of our products to Shell Oil Products Limited (SOPL) in
Papua New Guinea pursuant to a wholesale supply agreement for the international
airport.  The loss of this customer, at least in the short term, would
adversely affect the profitability of the refinery and the wholesale
distribution business.  At present, no long term contract is in place,
the previous agreement having expired in October 2009. Additionally, SOPL’s
owner is engaged in the process of tendering for the divestment of SOPL and the
aviation refueling business conducted by it at Port Moresby’s international
airport.





The
project agreement with the government of Papua New Guinea gives us certain
rights to supply the domestic market in Papua New Guinea with our refined
products.  However, not all domestic demand was sourced from our
refinery during 2009 as some competing product has been imported and sold in
Papua New Guinea in contravention of our rights.





Our
refinery is rated to process up to 32,500 barrels of oil per day and is proven
to be able to process up to 36,500 barrels of oil per day.  We are
able to fulfill the domestic market in Papua New Guinea’s demand for our
products by refining approximately 18,000 barrels of crude feedstock a day. We
are currently operating the refinery at less than full capacity due to an
inability to profitably export our refined products and to the incidence of
competing imports of finished products.  Therefore, in order to
process these additional barrels of crude feedstock, we must identify markets
into which we can sell our products profitably.  The operating margins
currently needed for our refinery to sell refined products profitably and the
cost and availability of obtaining tankers to export our refined products limit
our ability to export our refined products from Papua New Guinea.  In
addition, under our current refinery configuration we are unable to export
diesel and gasoline to Australia due to recent changes in Australia’s
regulations regarding permitted sulfur and benzene content that our refined
products currently do not meet.





In
addition, our project agreement provides that if there is more than one refinery
operating in Papua New Guinea during the term of the project agreement, the
right to supply the domestic market will be shared by the refineries in
proportion to their refining capacities.  Therefore, if one or more
additional refineries are built in Papua New Guinea, our share of the domestic
market will be diminished.





The
exploration and production, refining and distribution businesses are
competitive.





We
operate in the highly competitive areas of oil exploration and production,
refining and distribution of refined products.  A number of our
competitors have materially greater financial and other resources than we
possess.  Such competitors have a greater ability to bear the economic
risks inherent in all phases of the industry.





In our
exploration and production business, we compete for the purchase of licenses
from the government of Papua New Guinea and the purchase of leases from other
oil and gas companies.  Factors that affect our ability to compete in
the marketplace include:





·
            Our
      access to the capital necessary to drill wells and undertake other
      exploration activities necessary to retain our exploration licenses or
      PPL’s, and to  acquire additional
  properties;




Annual
Information Form   INTEROIL
CORPORATION   32







·
            Our
      ability to acquire and analyze seismic, geological and other information
      relating to a property;




·
            Our
      ability to retain the personnel necessary to properly evaluate seismic and
      other information relating to a
property;




·
            The
      development of, and our ability to access, transportation systems to bring
      future production to the market, and the costs of such transportation
      systems;




·
            The
      standards we establish for the minimum projected return on an investment
      of our capital; and




·
            The
      availability of alternate fuel
sources.




We will
also compete with other oil and gas companies in Papua New Guinea for the labor
and equipment needed to carry out our exploration operations and assist us with
development projects.  Most of our competitors have substantially
greater financial and other resources than we have.  In addition,
larger competitors may be able to absorb the burden of any changes in federal,
state and local laws and regulations more easily than we can, which would
adversely affect our competitive position.  These competitors may be
able to pay more for exploratory prospects and productive oil and gas properties
and may be able to define, evaluate, bid for and purchase a greater number of
properties and prospects than we can.  Our ability to explore for oil
and gas prospects and to acquire additional properties in the future will depend
on our ability to conduct operations, to evaluate and select suitable
properties, and to consummate transactions in this highly competitive
environment.  In addition, most of our competitors have been operating
in the oil and gas business for a much longer time than we have and have
demonstrated the ability to operate through industry cycles.





In our
refining business, we compete with several companies for available supplies of
crude oil and other feed stocks and for outlets for our refined
products.  Many of our competitors obtain a significant portion of
their feed stocks from company-owned production, which may enable them to obtain
feed stocks at a lower cost.  The high cost of transporting goods to
and from Papua New Guinea reduces the availability of alternate fuel sources and
retail outlets for our refined products.  Competitors that have their
own production or extensive distribution networks are at times able to offset
losses from refining operations with profits from producing or retailing
operations, and may be better positioned to withstand periods of depressed
refining margins or feedstock shortages.  In addition, new technology
is making refining more efficient, which could lead to lower prices and reduced
margins.  We cannot be certain that we will be able to implement new
technologies in a timely basis or at a cost that is acceptable to
us.





If
our refining margins do not meet our expectations, we may be required to write
down the value of our refinery.





The
determination of our refinery’s fair market value is highly dependent upon the
difference between the sale price we receive for refined products that we
produce and the cost of the crude feed stocks used to produce those refined
products.  This difference is commonly referred to as refining
margin.  Volatile market conditions beyond our control could cause our
refining margins and resulting cash flows to fall below expectations for
extended periods.  Should this occur, we will be required to write
down the carrying value of our refinery on our balance sheet.  Any
significant write down of the value of our refinery could result in our failure
to meet the financial covenants under our outstanding loan
agreements.





The
prices we receive for the refined products we produce and sell are likely to
continue to be subject to large fluctuations in response to relatively minor
changes in the supply of and demand for oil and a variety of additional factors
beyond our control.  These factors include, but are not limited to,
the condition of the worldwide economy and the demand for and supply of oil, the
actions of the Organization of Petroleum Exporting Countries, governmental
regulations, political stability in the Middle East and elsewhere, and the
availability of alternate fuel sources.  Oil and gas markets are both
seasonal and cyclical.  The prices for oil will affect:





·
            Our
      revenues, cash flows and earnings;




·
            Our
      ability to attract capital to finance our operations, and the cost of such
      capital;




·
            The
      value of our oil properties;




·
            The
      profit or loss we incur in refining petroleum products;
  and




·
            The
      profit or loss we incur in exploring for and developing
      reserves.




Annual
Information Form   INTEROIL
CORPORATION   33








There
are inherent limitations in all control systems, and misstatements due to error
that could seriously harm our business may occur and not be
detected.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP.  A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.




A control
system, no matter how well designed and operated, can provide only reasonable
assurance that the objectives of the control system are met.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Our
refining and distribution operations expose us to risks, not all of which are
insured.





Our
refining and distribution operations are subject to various hazards common to
the industry, including explosions, fires, toxic emissions, maritime hazards and
uncontrollable flows of crude oil and refined products.  In addition,
these operations are subject to hazards of loss from earthquakes, tsunamis and
severe weather conditions.  As protection against operating hazards,
we maintain insurance coverage against some, but not all of such potential
losses.  We may not be able to maintain or obtain insurance of the
type and amount we desire at reasonable rates.  In addition, losses
may exceed coverage limits.  As a result of market conditions,
premiums and deductibles for certain types of insurance policies for refiners
have increased substantially and could escalate further.  In some
instances, certain insurance could become unavailable or available only for
reduced amounts of coverage.  For example, insurance carriers now
require broad exclusions for losses due to risk of war and terrorist
acts.  If we were to incur a significant liability for which we were
not fully insured, it could have a material adverse effect on our financial
position.





Third
parties may default on their contractual obligations.




In the
normal course of our business, we have entered into contractual arrangements
with third parties which subject us to the risk that such parties may default on
their obligations.  This default risk has been heightened by the
global financial market and credit crisis.  We may be exposed to third
party credit risk through our contractual arrangements with our current or
future joint venture partners, lenders, customers and other
parties.  In the event such entities fail to meet their contractual
obligations to us, such failures could have a material adverse effect on us and
our cash flow from operations.





We
depend on partners to timely fund their portion of the costs of our drilling
program.





We are
the operator of our PPL’s and thus are responsible for contracting on behalf of
all the remaining parties participating in the project.  We rely on
the timely payment of cash calls by our partners to pay for the percentage of
the budget for which they are responsible.  In our current wells, that
percentage is over 16%.  If our partners fail to pay their share of
project costs or do not pay on a timely basis, we may have a limited ability,
particularly in the current economic environment, to expend the capital
necessary to undertake or complete future drilling programs on a timely basis or
at all.  We cannot assure that additional debt or equity financing or
cash generated by operations will be available to meet these
requirements.





Variable
rate indebtedness subjects us to interest rate risk, which could cause our debt
service obligations to increase.





Certain
of our borrowings are at variable rates of interest and expose us to interest
rate risk and we may in the future borrow additional money at variable
rates.  This exposes us to interest rate risk if interest rates
increase, as our debt service obligations on the variable rate indebtedness
would increase even though the amount borrowed would remain the same, and our
net income would decrease.  A 1% change in interest rates would result
in a $0.1 million change in our annual interest expense.




Annual Information
Form   INTEROIL CORPORATION   34







Weather
and unforeseen operating hazards may adversely impact our operating
activities.





Our
operations are subject to risks inherent in the oil and gas industry, such as
blowouts, cratering, explosions, uncontrollable flows of oil, gas or well
fluids, fires, equipment failures including damages to our wharf facilities,
pollution, and other environmental risks.  These risks could result in
substantial losses due to injury and loss of life, severe damage to and
destruction of property and equipment, pollution and other environmental damage,
and suspension of operations.  Our Papua New Guinea operations are
subject to a variety of additional operating risks such as earthquakes,
mudslides, tsunamis, cyclones and other effects associated with active
volcanoes, extensive rainfall or other adverse weather
conditions.  Our operations could result in liability for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages.  For
some risks, we may not obtain insurance if we believe the cost of available
insurance is excessive relative to the risks presented.  In addition,
pollution and environmental risks generally are not fully
insurable.  As a result, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could have a
material adverse effect on our financial condition and results of
operations.





The
enactment of legislation to regulate emissions of greenhouse gases could result
in a reduction in demand for fossil fuels that may reduce demand for our
products in the global markets and thus negatively impact our financial
condition.





Studies
have suggested that emissions of certain gases, commonly referred to as
“greenhouse gases,” may be contributing to the warming of the Earth’s
atmosphere. Methane, a primary component of natural gas, and carbon dioxide, a
byproduct of the burning of natural gas, are examples of greenhouse gases. 
More than 160 nations are signatories to the 1992 Framework Convention on Global
Climate Change, commonly known as the “Kyoto Protocol”, which is intended to
limit or capture emissions of greenhouse gases.  The implementation of the
Kyoto Protocol in a number of countries and other potential legislation limiting
emissions, such as those adopted by the European Union, could affect the global
demand for fossil fuels. The Kyoto Protocol is set to expire in 2012.
 The nations subject to the Kyoto Protocol have not yet reached agreement
upon a successor to the Kyoto Protocol, but the parties have “taken note of” the
Copenhagen Accord, a voluntary agreement to work to curb climate change.
 If Papua New Guinea or other countries in which we operate or desire
to operate enact legislation focused on reducing greenhouse gases, either
independently or in response to the Kyoto Protocol or a successor
agreement, it could have the effect of adversely affecting our operations
and the demand for our products, consequently reducing our revenues and
profitability.





Our
debt levels and debt covenants and other factors may limit our future
flexibility in obtaining additional financing.





As of
December 31, 2009, we had $44.5 million in long-term debt with OPIC which
matures in 2015, together with principal repayments due during 2010 totaling
$9.0 million.  We also operate working capital facilities with BNP
Paribas, and with Bank of South Pacific Limited and Westpac Banking PNG Limited,
respectively for our midstream and downstream refining
businesses.  The level of our indebtedness will have important effects
on our future operations, including:





·
            A
      portion of our cash flow will be used to pay interest and principal on our
      debt and will not be available for other
  purposes;




·
            Our
      loan agreements and facilities contain financial tests which we must
      satisfy in order to avoid a default under such credit facilities;
      and




·
            Our
      ability to obtain additional financing for capital expenditures and other
      purposes may be limited.




We make,
and will continue to make, substantial capital expenditures for exploration,
development, acquisition and production of oil and gas reserves, our proposed
liquefaction facility and other infrastructure associated with that proposed LNG
Project, our proposes condensate stripping facility refinery expansions and
improvements, acquisitions of distribution assets, and for further capital
acquisitions and expenses.  We will need additional financing to
complete our business plans.  If we are unable to obtain debt or
equity financing because of lower refining margins, lower oil or gas prices,
delays, operating difficulties, construction costs, lack of drilling success,
the global financial and credit market crisis or other reasons we may not have
the ability to expend the capital necessary to undertake or complete future
drilling programs and to make other needed capital
expenditures.  There can be no assurance that additional debt or
equity financing or cash generated by operations will be available to meet these
requirements.




Annual Information
Form   INTEROIL CORPORATION   35







Our
competitors have progressively increased their direct importation of refined
petroleum products rather than sourcing from our refinery





We
believe that during 2009, our competitors progressively increased their direct
importation of refined petroleum products rather than sourcing from our
refinery.  We believe that at least some of this competing product has
been imported and distributed in Papua New Guinea in contravention of our legal
rights.  Such an increase in our competitors’ importation could have a
negative affect on our business and materially affect our results from
operations.





You
may be unable to enforce your legal rights against us.





We are a
Yukon Territory, Canada corporation.  Substantially all of our assets
are located outside of Canada and the United States.  It may be
difficult for investors to enforce, outside of Canada and the United States,
judgments against us that are obtained in Canada or the United States in any
such actions, including actions predicated upon the civil liability provisions
of the securities laws of Canada and the United States.  In addition,
many of our directors and officers are nationals or residents of countries
outside of Canada and the United States, and all, or a substantial portion of,
the assets of such persons are located outside of Canada and the United
States.  As a result, it may be difficult for investors to affect
service of process within Canada or the United States upon such persons or to
enforce judgments against them obtained in Canadian or United States courts,
including judgments predicated upon the civil liability provisions of the
securities laws of Canada or the United States.





DIVIDENDS





To date
we have not paid dividends on our common shares and currently reinvest all cash
flows from operations for the future operation and development of our
business.  No change to this policy or approach is intended or under
consideration at the present date.  There are no restrictions which
prevent us from paying dividends on our common shares.  Any decision
to pay dividends on our common shares in the future depend upon our earnings and
financial position and such other factors as the Board may consider appropriate
in the circumstances.





DESCRIPTION
OF CAPITAL STRUCTURE





InterOil
is authorized to issue an unlimited number of common shares and an unlimited
number of preferred shares, issuable in series, of which 1,035,554 series A
preferred shares are authorized.  As at December 31, 2009, 43,545,654
common shares were issued and outstanding.  All of the series A
preferred shares that have been issued were converted into common shares during
2008 and none remain outstanding as at December 31, 2009.




Common
Shares





Holders
of common shares are entitled to vote at any meeting of the shareholders of
InterOil and to one vote per share held, to receive, out of all profits or
surplus available for dividends, any dividends declared by InterOil on the
common shares, and to receive the remaining property of InterOil in the event of
liquidation, dissolution or winding up of InterOil, whether voluntary or
involuntary.





Preferred
Shares





Preferred
shares may at any time and from time to time be issued in one or more series,
each series to consist of such number of shares as may, before the issue
thereof, be determined by unanimous resolution of the directors of
InterOil.  Subject to the provisions of the YBCA, the directors of
InterOil may by unanimous resolution fix from time to time, before the issue
thereof, the designation, rights, privileges, restrictions and conditions
attaching to each series of the preferred shares.




Annual Information
Form   INTEROIL CORPORATION   36







Series
A Preferred Shares




Effective
November 17 2007, InterOil amended its articles to establish the series A
preferred shares in connection with a US$15 million private placement
financing.  The financing closed on November 21, 2007, at which time,
517,777series A
preferred shares were issued.  As at the date hereof, all such shares
have been converted into common shares and no series A preferred shares are
outstanding.  InterOil does not intend to issue any series A preferred
shares in the future, as the provisions governing such shares were established
as a result of negotiation with the purchasers of such shares pursuant to the
private placement.




Shareholder
Rights Plan





On May
27, 2007, the Company adopted a rights plan which was approved by our
shareholders at the June 25, 2007 annual and special meeting of
shareholders.  The rights plan was adopted to ensure, to the extent
possible, that all shareholders of the Company are treated fairly in connection
with any take-over bid for InterOil.  As long as a bid meets certain
requirements intended to protect the interests of all shareholders, the
provisions of the rights plan will not be invoked. Under the provisions of the
rights plan, one right has been issued for each common share of InterOil
outstanding.  The rights will trade together with the common shares
and will not be separable from the common shares or exercisable unless a
take-over bid is made which is not a permitted bid.  The rights
entitle shareholders, other than shareholders making the take-over bid, to
purchase additional common shares of InterOil at a substantial discount to the
market price at the time.  Phil Mulacek, the Chairman and Chief
Executive Officer of InterOil, holds a substantial proportion of the common
shares of InterOil and, subject to certain grandfather provisions in the rights
plan, his shareholdings will not trigger its operation.





The
rights plan is similar to those adopted by other Canadian listed
companies.  A copy of the rights plan is available under
the Company's SEDAR profile at www.sedar.com.  The rights plan
will expire on the date of our annual and special meeting of shareholders to be
held in June 2010, unless our shareholders resolve to reconfirm or replace it at
that meeting.





Options





InterOil
has a stock incentive plan, authorised by our shareholders at the annual and
special meeting held on June 19, 2009, that allows employees to acquire common
shares of InterOil.  Option exercise prices are governed by the plan
rules and equal the market price for the common shares on the date the options
were granted.  Options granted under the plan are generally fully
exercisable after two years or more and expire five years after the grant date,
although some have shorter vesting periods.  Default provisions in the
plan rules provide for immediate vesting of granted options and expiry ten years
after the grant date.  Some granted under predecessor plans approved
in 2004 and 2006 also remain in effect.  No further grants may now be
made under these superseded plans.





As of
December 31, 2009, there were options outstanding to purchase 1,838,500 common
shares pursuant to our stock incentive plans.





Restricted
Stock Awards





In
addition to the options noted above, the InterOil Corporation 2009 Stock
Incentive Plan also allows employees to acquire common shares of the Company
pursuant to restricted stock units granted by InterOil. As of December 31, 2009,
restricted stock units entitling employees rights to 41,400 common shares were
outstanding pursuant to the stock incentive plan.  The restricted
stock units provided those employees with the right to receive common shares on
certain vesting dates.  Vesting dates occur in equal tranches during
April 2010 and April 2011.





Other
instruments Convertible into or Exchangeable for Common Shares





We have
entered into an agreement with Petroleum Independent and Exploration LLC
(“P.I.E.”), under which P.I.E. can exchange its remaining 5,000 shares in SPI
InterOil LDC on a one-for-one basis for our common shares.  This
election may be made by P.I.E. at any time.





We have
granted IPI holders, (see “Material Contracts – Amended and Restated Indirect
Participation Interest Agreement dated February 25, 2005”) the right to convert
their interests under that agreement into a certain number of our common
shares.  Certain investors under that agreement have waived their
conversion right.  At December 31, 2009, rights to convert up to
527,147 common shares remained.




Annual
Information Form   INTEROIL
CORPORATION   37


MARKET
FOR SECURITIES





Our
common shares are listed and posted for trading on the New York stock Exchange
under the symbol IOC. We are also listed on the Port Moresby Stock Exchange
under the symbol IOC in Papua New Guinea Kina. Our common shares traded on the
Toronto Stock Exchange (TSX) in Canadian dollars under the symbol IOL until the
close of trade on January 27, 2009, at which time they were voluntarily
de-listed from the TSX. Our common shares also traded on the NYSE Alternext
Exchange (formerly the American Stock Exchange) in United States dollars under
the symbol of IOC until March 31, 2009, at which time they were voluntarily
de-listed from that exchange.  On the same day, our common shares
began trading on the New York Stock Exchange (NYSE) in United States dollars and
under the same symbol.    The following tables disclose the
monthly high and low trading prices and volumes of our common shares as traded,
during 2009:




Toronto
Stock Exchange (TSL:IOL) in Canadian Dollars





Month
                      
                      High
                      
                      
                      Low
                      
                      
                      VolumeJanuary
                      
                      $
                      25.99
                      
                      
                      $
                      17.85
                      
                      
                      
                      2,411,400Total
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,411,400




NYSE
Alternext Exchange (NYSE Alternext:IOC) / New York Stock Exchange (NYSE:IOC) in
United States Dollars





Month
                      
                      High
                      
                      
                      Low
                      
                      
                      VolumeJanuary
                      
                      $
                      20.89
                      
                      
                      $
                      13.53
                      
                      
                      
                      10,898,200February
                      
                      $
                      20.11
                      
                      
                      $
                      16.50
                      
                      
                      
                      4,869,100March
                      
                      $
                      29.00
                      
                      
                      $
                      19.25
                      
                      
                      
                      11,418,000April
                      
                      $
                      33.97
                      
                      
                      $
                      26.70
                      
                      
                      
                      10,467,300May
                      
                      $
                      38.10
                      
                      
                      $
                      31.86
                      
                      
                      
                      11,977,100June
                      
                      $
                      38.06
                      
                      
                      $
                      24.35
                      
                      
                      
                      13,327,600July
                      
                      $
                      31.47
                      
                      
                      $
                      25.00
                      
                      
                      
                      8,389,200August
                      
                      $
                      34.24
                      
                      
                      $
                      26.80
                      
                      
                      
                      6,607,500September
                      
                      $
                      41.90
                      
                      
                      $
                      27.20
                      
                      
                      
                      17,287,100October
                      
                      $
                      54.32
                      
                      
                      $
                      37.09
                      
                      
                      
                      19,149,300November
                      
                      $
                      58.02
                      
                      
                      $
                      42.83
                      
                      
                      
                      14,357,300December
                      
                      $
                      78.43
                      
                      
                      $
                      59.16
                      
                      
                      
                      25,515,500Total
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      154,290,400





Prior
sales





·
            231,750
      common shares were issued during 2009 upon the exercise of stock options
      by employees at various prices defined by the option grant terms in
      accordance with relevant stock incentive
plans.





·
            499,834
      common shares were issued pursuant to an agreement entered into whereby
      InterOil LNG Holdings Inc. and Pacific LNG Operations Limited, acquired
      Merrill Lynch’s interests in the Joint Venture Company (See “Material
      Contracts – Share Purchase and Sale and Settlement Agreement dated
      February 27, 2009”).  InterOil issued 652,931 common shares
      valued at $11.25 million for its share of the consideration payable to
      Merrill Lynch in relation to the settlement.  InterOil’s
      consideration was subject to a post closing balancing adjustment which
      resulted in the cancellation of 153,097 of the common shares originally
      issued.





·
            70,548
      common shares were issued to on May 11, 2009 at a deemed price of $33.34
      as payment of a proportion of the second interest installment due to
      holders of our 8% convertible subordinate
  Debentures.





·
            During
      May and June of 2009, 3,159,000 common shares were issued to Debenture
      holders who elected or were mandatorily required to convert their
      Debentures into common shares.




Annual Information
Form   INTEROIL CORPORATION   38







·
            2,013,815
      common shares were issued on June 8, 2009 on completion of a registered
      direct stock offering to a number of institutional investors at a purchase
      price of $34.98 per share, raising $70.4
  million.





·
            302,305
      common shares were issued in August 2009 on the exercise of warrants at an
      exercise price of $21.91 per share.





·
            A
      total of 1,344,710 common shares were issued in two tranches in September
      and December 2009 at an average, calculated price of $46.84 in relation to
      exchange transactions undertaken with certain IPI investors under which we
      acquired indirect participation interests held by them pursuant to the
      Amended and Restated Indirect Participation Interest Agreement of February
      2005 (See “Material Contracts”).





DIRECTORS
AND EXECUTIVE OFFICERS





The
following table provides information with respect to all of our directors and
executive officers:





Directors
and Executive Officers





Name, Address
                        
                        Position with InterOil
                        
                        Date ofAppointmentPhil
      E. Mulacek
                          Texas,
      USA
                        
                        Chairman
      and Chief Executive Officer
                        
                        May
      29, 1997Christian
      Vinson
                          Port
      Moresby, PNG
                        
                        Vice
      President Corporate Development and Government Affairs,
      Director
                        
                        May
      29, 1997Gaylen
      Byker
                          Michigan,
      USA
                        
                        Director(1)
      (4)
                        
                        May
      29, 1997Roger
      Grundy
                          Derbyshire,
      UK
                        
                        Director
      (4)
                        
                        May
      29, 1997Edward
      N. Speal
                          New
      York, USA
                        
                        Director(2)
      (4)
                        
                        June
      25, 2003Roger
      F. Lewis
                          Western
      Australia, Australia
                        
                        Director(3)
                        
                        November
      26, 2008William
      Jasper III
                          Texas,
      USA
                        
                        President
      and Chief Operating Officer
                        
                        September
      18, 2006Collin
      Visaggio
                          Western
      Australia, Australia
                        
                        Chief
      Financial Officer
                        
                        October
      26, 2006Mark
      Laurie
                          South
      Australia, Australia
                        
                        General
      Counsel and Corporate Secretary
                        
                        June
      12,
2007





Notes:


(1)
            Gaylen
      Byker acts as Chairman of each of the Board’s Audit Committee, Nominating
      and Corporate Governance Committee and Compensation Committee and has held
      such positions throughout 2009.


(2)
            Edward
      Speal is a member of the Audit Committee, Compensation Committee and
      Nominating and Corporate Governance Committee, and has held such positions
      throughout 2009.


(3)
            Roger
      Lewis has held the position of Director and member of the Audit Committee,
      Nominating and Corporate Governance Committee and Compensation Committee
      from his date of appointment and throughout
  2009.


(4)
            Messrs
      Grundy and Speal and Dr Byker are also members of the Board’s Reserves
      Committee.


(5)
            Certain
      information has been furnished by our directors and executive
      officers.  Such information includes information as to common
      shares in the Company beneficially owned by them, their places of
      residence and principal occupations, both present and historical, and
      potential conflicts of interest.





The term
of office of each of the directors of InterOil will expire at the next annual
meeting of our shareholders.  All executive officers generally hold
office at the pleasure of the Board.





As of
February 19, 2010, our directors and executive officers as a group beneficially
owned, or controlled or directed, directly or indirectly, 6,211,235 common
shares, representing 14.25% of our outstanding issued common
shares.  In addition to the common shares owned or controlled or
directed, directly or indirectly, by our directors and executive officers,
1,225,000 shares are issuable upon exercise of outstanding options, resulting in
directors and executive officers holding 16.18% of our issued common shares on a
diluted basis.




Annual Information
Form   INTEROIL CORPORATION   39







Our Board
has established an Audit Committee, a Compensation Committee and a Nominating
and Corporate Governance Committee.  Dr. Byker, Mr. Lewis and Mr.
Speal are the members of each of these committees.  Dr. Byker is the
Chairman of each committee.  In addition, the Board has established a
Reserves Committee. Mr Speal is Chairman of this committee while Mr Grundy and
Dr Byker are members.





The
following is a brief description of the background and principal occupations of
each director and executive officer at present and during the preceding five
years:





Phil E. Mulacek is the
Chairman of our Board of Directors and our Chief Executive
Officer.  He has held these positions since InterOil’s
inception.  Mr. Mulacek is the founder and President of Petroleum
Independent Exploration Corporation based in Houston,
Texas.  Petroleum Independent Exploration Corporation was established
in 1981 for the purposes of oil and gas exploration, drilling and production,
and operated across the southwest portion of the United
States.  Petroleum Independent Exploration Corporation led the
development of our refinery and the commercial activities that were necessary to
secure the refinery's economic viability.  Mr. Mulacek has over 25
years experience in oil and gas exploration and production and holds a Bachelor
of Science degree in petroleum engineering from Texas Tech
University.





Christian M. Vinson is the
Executive Vice President of InterOil responsible for Corporate Development &
Government Affairs. From 1995 to August 2006, he was our Chief Operating
Officer.  Mr. Vinson joined us from Petroleum Independent Exploration
Corporation, a Houston, Texas based oil and gas exploration and production
company.  Before joining Petroleum Independent Exploration
Corporation, Mr. Vinson was a manager with NUM Corporation, a Schneider company
involved in mechanical and electrical engineering automation, in Naperville,
Illinois where he established of the company’s first office in the United
States.  Mr. Vinson earned an Electrical and Mechanical Engineering
degree from Ecole d’Electricité et Mécanique Industrielles, Paris,
France.





Gaylen J. Byker is President
of Calvin College, a liberal arts institution of higher learning, located in
Grand Rapids, Michigan.  He is also a director and chairman of the
Finance and Audit Committee of Priority Health, Inc, an entity regulated by the
State of Michigan Office of Financial and Insurance Services.  Dr.
Byker has obtained four university degrees including a PhD in international
relations from the University of Pennsylvania and a Doctorate of Jurisprudence
from the University of Michigan.  Dr. Byker is a former partner of
Offshore Energy Development Corporation where he was head of development,
hedging and project finance for gas exploration and transportation projects
offshore.  Prior to joining OEDC, he was co-head of commodity
derivatives at Phibro Energy, Inc., a subsidiary of Salomon, Inc. and head of
the commodity-indexed transactions group at Banque Paribas, New York, with
worldwide responsibility for hedging and financing transactions utilizing
long-term commodity price risk management.  Dr. Byker was manager of
commodity-indexed swaps and financings for Chase Manhattan Investment Bank, New
York, and was also a lawyer at Morgan, Lewis & Bockius in Philadelphia,
Pennsylvania, U.S.





Roger N. Grundy is the
Managing Director of Breckland Ltd, a UK-based engineering consulting firm, and
is an internationally recognized expert in the area of refinery
efficiency.  Mr. Grundy has acted as a consultant to more than 200
existing refineries on six continents for major oil companies, independents and
various banks.  Mr. Grundy has 40 years experience in all areas of oil
refinery and petrochemical operations and construction and holds an Honors
Degree in Mechanical Engineering from University College, London. He is also a
Fellow of the UK Institute of Mechanical Engineers, a member of the American
Institute of Chemical Engineers and a member of the Energy
Institute.





Edward N. Speal is based in
New York and is the Regional Head of Global Structured Finance for the Americas
for BNP Paribas.  He has had 25 years in the banking
industry.  Previously, Mr. Speal was the President and CEO for BNP
Paribas (Canada). Prior to that appointment, he was the Managing Director
responsible for the Energy, Project Finance and Corporate Banking businesses for
BNP Paribas in Canada.  Mr. Speal was the President and Chief
Executive Officer of Paribas Bank of Canada from 1997 to 1999.  Mr.
Speal worked in New York for Banque Paribas running its commodity index trading
group from 1992 until 1996. From 1989 to 1991, he was Managing Director of R. P.
Urfer & Co., working on an exclusive basis for Banque Paribas as Advisory
Director assisting in the establishment and development of its global commodity
derivatives business.  From 1983 to 1989, Mr. Speal worked for the
Chase Manhattan Bank of Canada. Mr. Speal is a Canadian citizen and is a
graduate of Queen's University at Kingston where he obtained a Bachelor of
Commerce majoring in finance.




Annual
Information Form   INTEROIL
CORPORATION   40







Roger F. Lewisis an
Australian and a former senior finance executive, having spent 22 years with
Woodside Energy Ltd in Western Australia, finishing as Group Financial
Controller.  Prior to that he worked in commercial and finance roles
for over 15 years in the heavy manufacturing industry both in Australia and
overseas. He is a Fellow Certified Practicing Accountant (FCPA) with the
Australian Society of Certified Practicing Accountants and, since 2000, has been
a Commissioner of the Lottery Commission of Western Australia, with particular
responsibility for finance and accounting matters.  He is a member of
the Commission’s Audit, Remuneration and Major Projects
subcommittees.





William J Jasper IIIis President and Chief
Operating Officer of InterOil. Mr. Jasper joined the Company on September 18,
2006 and leads the refining and downstream businesses.  Prior to
joining InterOil, Mr. Jasper had worked for Chevron Pipe Line Company since
1974, serving in leadership and management capacities over facilities, pipelines
and terminals.  Mr. Jasper has an extensive background in operations
and maintenance. Prior to this role Mr. Jasper had served four years as Chairman
of the West Texas LPG Partnership Board of Directors.  Mr. Jasper also
held positions as President and General Manager of Kenai Pipe Line Company in
Alaska, and of West Texas Gulf Pipeline in Texas.





Collin F.Visaggio is the Chief
Financial Officer of InterOil.  Mr. Visaggio joined us on July 17,
2006 and was appointed as Chief Financial Officer on October 26,
2006.  He is a Certified Practicing Accountant with a Masters Degree
in Business.  He has also attended the Stanford Senior Executive
Program in management.  Mr. Visaggio has 24 years of experience in
senior financial and business positions within Woodside Petroleum and BP
Australia.  His career has given him a broad spectrum of financial and
business experience in Exploration and Production, Offshore Gas Production, Oil
Refining, LNG and Domestic Gas.  Mr. Visaggio was at Woodside
Petroleum from March 1988 until July 2005, with his most recent positions being
Manager, Compliance and Business for the Africa business unit, and Manager,
Commercial and Planning for the gas business unit.  His
responsibilities included the management of the business unit, financial and
business processes, and governance.  Prior to this and during his 17
years with Woodside, he was Deputy Chief Financial Officer, Financial Analyst
and Planning Manager within the corporate finance group.  Prior to
joining InterOil, Mr. Visaggio was Chief Financial Officer for Alocit Group Ltd
from July 2005 until March 2006.




Mark Laurie is General
Counsel and Corporate Secretary of InterOil. Mr. Laurie joined us on June 12,
2007. He holds Law and Economics degrees from the University of Adelaide in
South Australia. He was admitted to practice law as a barrister and solicitor in
Australia in 1991. Mr. Laurie was also appointed a notary public in
1997.  Prior to joining InterOil, and from August 2003, he was Company
Secretary, General Counsel, Manager Corporate and Investor Relations, and
Manager - Town Infrastructure with Lihir Gold Limited, a Papua New Guinea gold
mining company listed in Australia, the United States and in Papua New Guinea.
Mr. Laurie lived in Papua New Guinea throughout this
period.  Immediately prior to working for Lihir Gold, he worked as
Commercial Manager for the Electronic Systems Division of Tenix Defence Pty
Limited, a privately held government contractor specializing in high-tech
electronic and computer engineering work for defence and other applications.
Between mid-1996 and December 2001, he held positions as General Counsel,
Company Secretary and Vice President of Investor Relations with F.H. Faulding
and Co. Limited, an Australian based multinational pharmaceutical and health
care company listed in Australia and the United States. Prior to that Mr. Laurie
worked with commercial law firms in Ottawa, Canada and Adelaide, South
Australia.




Conflicts
of Interest





There are
potential conflicts of interest to which some of the directors and officers of
InterOil will be subject in connection with the operations of InterOil. 
Situations may arise where some of the business activities of the directors and
officers will be in direct competition with InterOil.  In particular,
certain directors and officers of InterOil will be in managerial or director
positions with other oil and gas companies, whose operations may, from time to
time, be in direct competition InterOil or entities which may, from time to
time, provide financing to, or make equity investments in, competitors of
InterOil. In addition, certain of the directors have on-going relationships
with other entities in respect of which InterOil has entered or may enter into
material agreements or has a business relationship.  These
relationships may create a real or perceived conflict of interest.




Conflicts,
if any, will be subject to the procedures and remedies in the YBCA.  The
YBCA provides that a director or officer shall disclose the nature and extent of
any interest that he or she has in a material contract or material transaction,
whether made or proposed, if the director or officer: is a party to the
contract or transaction,  is a director or an officer, or an
individual acting in a similar capacity, of a party to the contract or
transaction, or has a material interest in a party to the contract or
transaction, and shall refrain from voting on any matter in respect of such
contract or transaction unless otherwise provided under the YBCA. InterOil
intends to resolve all conflicts of interest in accordance with the provisions
of the YBCA.




Annual
Information Form   INTEROIL
CORPORATION   41







Relationships
and interests which have been disclosed as potentially giving rise to conflicts
of interest include;




·
            P.I.E.
      Group, LLC, which entity is controlled by Mr. Mulacek and in which
      entities controlled by Dr. Byker also have an ownership interest, holds
      small ownership interests (0.01%) in SPI Exploration & Production
      Corporation and S.P.I. Distribution Limited which are subsidiaries of the
      Company.  In addition, Petroleum Independent and Exploration
      Corporation, which company is controlled and partly owned by Mr. Mulacek,
      owns an interest in and acts as General Manager of SP InterOil, LDC,
      another subsidiary of the Company.


·
            Mr.
      Speal occupies a senior position with BNP Paribas in New
      York.  This bank provides, through its Singapore office, certain
      credit facilities to finance the purchase of cargoes of crude oil and
      other petroleum products for InterOil’s refining activities, and to
      support its hedging positions. (See “Material Contracts –
      Secured Revolving Crude Import Facility”).  The bank is
      also acting for InterOil in an advisory capacity associated with the sale
      of a portion of our interest in the Elk and Antelope fields and in the LNG
      Project.


·
            Mr.
      Grundy is a principal of Breckland Limited, which entity provides
      technical engineering advisory services to InterOil on customary
      commercial terms.




See also
under the heading “Interests
of Management and Others in Material Transactions”.




AUDIT
COMMITTEE





Charter
of the Audit Committee





The full
text of the Charter of the Audit Committee is attached as Schedule C to this
Annual Information Form.





Composition
of the Audit Committee





The
current members of the Audit Committee are Dr. Gaylen Byker, Mr. Edward Speal
and Mr. Roger Lewis.  All members held their positions throughout
2009.





Dr.
Byker, Mr. Speal and Mr. Lewis are independent and financially literate within
the meaning of NI 52-110.





Relevant
Education and Experience





The
relevant education and experience of the current members of the Audit Committee
is set out in detail under the heading “Directors and Executive
Officers”:





This
education and experience is such that each member has an understanding of the
accounting principles used by InterOil to prepare its financial statements; the
ability to assess the general application of such accounting principles in
connection with the accounting for estimates, accruals and reserves; experience
preparing, auditing, analyzing or evaluating financial statements that present a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues raised by InterOil’s
financial statements, or experience actively supervising one or more individuals
engaged in such activities; and an understanding of internal controls and
procedures for financial reporting.





Pre-Approval
Policies and Procedures





The Audit
Committee is authorized and required by the Board to review, discuss and
pre-approve non-audit services to be performed by the external auditors, save
where such services are subject to the de-minimis exceptions described in the
U.S. Securities Exchange Act of 1934.  In the event that non-audited
services are required, a documented scope and estimate are submitted by the
Company’s auditors to the Chairman of the Committee who will consult with other
committee members, as necessary, before providing any approval on the
Committee’s behalf.




Annual Information
Form   INTEROIL CORPORATION   42







External
Auditor Service Fees





PricewaterhouseCoopers,
Chartered Accountants have served as InterOil's auditors since June 6,
2005.  The following table sets forth the Audit Fees, Audit – Related
Fees, Tax Fees and All Other Fees billed by PricewaterhouseCoopers in each of
the last two financial years.





PricewaterhouseCoopers





2009
                  
                  
                  2008Audit
      Fees(1)
                  
                  $
                  1,557,328
                  
                  
                  $
                  1,416,583Audit-Related
      Fees(2)
                  
                  $
                  35,144
                  
                  
                  $
                  170,404Tax
      Fees(3)
                  
                  $
                  557,693
                  
                  
                  $
                  473,493All
      Other Fees(4)
                  
                  $
                  47,718
                  
                  
                  $
                  39,192Total
                  
                  $
                  2,197,883
                  
                  
                  $
                  2,099,672





Notes:


1.
            "Audit
      Fees" means the aggregate fees billed by the issuer's external auditor in
      each of the last two fiscal years for audit
fees


2.
            "Audit-Related
      Fees" means the aggregate fees billed in each of the last two fiscal years
      for assurance and related services by the issuer's external auditor that
      are reasonably related to the performance of the audit or review of the
      issuer's financial statements and are not reported as Audit Fees
      above.


3.
            "Tax
      Fees" means the aggregate fees billed in each of the last two fiscal years
      for professional services rendered by the issuer's external auditor for
      tax compliance, tax advice, and tax
planning.


4.
            "All
      Other Fees" means the aggregate fees billed in each of the last two fiscal
      years for products and services provided by the issuer's external auditor,
      other than the services reported as Audit Fees, Audit-Related Fees and Tax
      Fees above and principally relate to the unaudited quarterly reporting of
      our subsidiaries.





LEGAL
PROCEEDINGS AND REGULATORY ACTIONS





The
Company's Chief Executive Officer, Phil Mulacek, and his controlled entities
Petroleum Independent & Exploration Corporation and P.I.E. Group, LLC,
together with the Company and certain of its subsidiaries, are defendants in
Todd Peters, et. al. v. Phil Mulacek et. al.; Cause No. 05-040-03592-CV; pending
in the 284th District Court of Montgomery County, Texas.  The plaintiffs
are members of a partnership that bought a modular oil refinery that was
subsequently, through a series of transactions, sold to a subsidiary of the
Company.  Plaintiffs contend that Mr. Mulacek and his controlled entities
breached fiduciary duties owed to the plaintiffs and also assert claims for
common law fraud, fraudulent inducement, statutory fraud, securities fraud,
breach of contract, investor oppression, conversion, theft, money had and
received, and tortious interference with a contract.   Plaintiffs
assert claims both individually and, in the alternative, derivatively on behalf
of the partnership.  Plaintiffs seek to impose liability on the
Company and certain of its subsidiaries for those alleged acts through claims of
ratification, conspiracy, aiding and abetting, joint enterprise, and knowing
participation in the breach of another's fiduciary duty.  Plaintiffs
further seek to impose liability on the Company and certain of its subsidiaries
directly through the claims of conversion, theft, constructive
trust and tortious interference with a contract.   In late July
2009, plaintiffs amended their petition adding sixteen new
plaintiffs.   Plaintiffs have  proposed
 numerous alternative methods of calculating their
alleged damages,  all of which are based at least partially on
the Company's share price which fluctuates over
time .  Thus, it is difficult   to determine the total
amount of actual damages plaintiffs' seek.  If, however, plaintiffs
are successful in obtaining a favorable verdict,  actual  damages
could exceed $125,000,000.  Plaintiffs also seek unspecified punitive
damages, attorneys' fees, expenses and court costs.  The case is set
for trial beginning in October 2010.  The Company and other
defendants are vigorously contesting the matter.  If however, plaintiffs
succeed in obtaining a judgment in the amount they seek, it could have a
material adverse effect on the Company or its subsidiaries.





During
2008, certain disputes and litigation arose between us and MLPLC and companies
affiliated to it relating to or arising from the LNG Project and PNG LNG
Inc.  On February 27, 2009, a settlement agreement was entered into
whereby the parties settled and agreed to release all of their outstanding
claims against each other and dismissed the litigation with
prejudice.  In addition, the parties granted mutual releases and
entered into arrangements for the acquisition of Merrill Lynch’s interests in
the Joint Venture Company and in the LNG Project by its other existing
shareholders, InterOil LNG Holdings Inc and Pacific LNG Operations Ltd. (See “Material Contracts – Share
Purchase and Sale and Settlement Agreement dated February 27,
2009”).




Annual Information
Form   INTEROIL CORPORATION   43







In
addition to the above, from time to time the Company is involved in various
claims and litigation arising in the normal course of business.  While
the outcome of these matters is uncertain and there can be no assurance that
such matters will be resolved in the Company’s favor, the Company does not
currently believe that the outcome of adverse decisions in any pending or
threatened proceedings related to these and other matters or any amount which it
may be required to pay by reason thereof would have a material adverse impact on
its financial position, results of operations or liquidity.





INTERESTS
OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS





During
2009, we renewed our $190.0 million revolving crude import credit facility with
BNP Paribas through its Singapore office.  This facility is employed
to finance the purchase of cargoes of crude oil and other petroleum products for
our refinery, and to support its hedging positions. We also engaged BNP Paribas
Capital in Singapore to help advise us in relation to the sale of a portion of
our interest in the Elk and Antelope fields and in the LNG
Project.  One of our directors, Mr Edward Speal, is the Regional Head
of Global Structured Finance for the Americas for BNP Paribas based in New
York.





Breckland
Limited provides technical and advisory services to us on customary commercial
terms.  Roger Grundy, one of our directors, is a director and
principal of Breckland and he provides consulting services to us as an employee
of that company.  Breckland was paid $39,416 in respect of consulting
fees and expenses during 2007. No payments for consulting services were made to
Breckland Limited in 2008 or 2009.





Other
than as discussed above, there are no material interests, direct or indirect, of
directors, executive officers of the Company or any person or company that is
the direct or indirect beneficial owner of or who exercises control or direction
over, more than 10% of the outstanding common shares, or any known associate or
affiliate of such persons, in any transaction within the three most recently
completed financial years or during the current financial year that has
materially affected or will materially affect the Company.





See also
under the heading “Directors
and Executive Officers – Conflicts of Interest”.





MATERIAL
CONTRACTS





The
following represent material contracts entered into or still in effect during
2009:





Share
Purchase and Sale and Settlement Agreement dated February 27, 2009





The
Settlement Agreement effected the resolution and settlement of all disputes
between each of InterOil, Merrill Lynch and  Pac LNG and their
respective affiliates in connection with PNG LNG, the joint venture company
established in 2007 by InterOil LNG Holdings Inc. ("InterOil Holdings"), an
affiliate of InterOil, MLPLC, an affiliate of Merrill Lynch, and Pac LNG to
construct the proposed LNG plant on a site adjacent to InterOil's refinery in
Papua New Guinea.  The parties entered into a shareholders' agreement
governing PNG LNG (the "LNG Project Shareholders Agreement" referred to below),
which was considered to be a key milestone in furthering the proposal for the
construction of the LNG plant.  In connection with the LNG
Shareholders Agreement, PNG LNG issued two class "A" shares to InterOil
Holdings, two class "A" shares to MLPLC and one class "A" share to Pac
LNG.  PNG LNG also issued class "B" shares with a fair value of
$100,000,000 to InterOil in recognition of its contribution to the LNG Project
at the time of signing the LNG Shareholders Agreement and issued class “B”
shares to MLPLC and Pac LNG.  The class "A" shares represent the
voting rights in PNG LNG, while the class "B" shares represent the economic
interest in the LNG project.





Pursuant
to the Settlement Agreement, each of InterOil, Pac LNG and their affiliates
released Merrill Lynch and its affiliates, and Merrill Lynch and its affiliates
released InterOil, Pac LNG and their affiliates, from all current claims arising
under the LNG Shareholders' Agreement and certain other agreements entered into
in connection with PNG LNG and the development of the proposed LNG
plant.





As part
of the Settlement Agreement, MLPLC transferred all of its interest in PNG LNG to
InterOil Holdings (as to 50%) and to Pac LNG (as to 50%) in exchange for: (i) a
payment by InterOil to MLPLC of $11,250,000 paid through the issuance of the
Registrable Securities and (ii) a payment by Pac LNG  to MLPLC of
$11,250,000 paid through the transfer of 499,834 common shares of InterOil held
by Pac LNG to MLPLC and cash in an amount of $1,000,000.  Upon closing
of the Settlement Agreement on February 27, 2009, InterOil (through InterOil
LNG) and Pac LNG became the sole shareholders of PNG LNG and Merrill Lynch and
its affiliates no longer held any interest in PNG LNG or the proposed LNG
project.




Annual
Information Form   INTEROIL
CORPORATION   44







Investment
Agreement dated October 30, 2008





On
October 30, 2008, Petromin, a government entity mandated to invest in resource
projects on behalf of the State, together with its subsidiary, Eda LNG Limited
(“Eda”), entered into an agreement with InterOil and its subsidiary, SPI (208)
Limited, under which Eda has agreed to take a 20.5% direct interest in the Elk
and Antelope fields and to fund 20.5% of the costs of developing those
fields.  The interest and funding was contingent upon Petromin’s
nomination by the State as the entity designated to hold the State’s interest in
accordance with PNG’s Oil
& Gas Act and upon issuance of the PDL which nomination has now
occurred. Certain funding, in relation to sunk costs, is contingent upon grant
of a PDL for the field.  The interest and funding commitment may be
increased to 22.5% subsequent to grant of a PDL in the event that Petromin is
also nominated to hold the 2% interest also provided for under the Oil & Gas Act on behalf
of relevant landowners.





Amended
and Restated Common Share Purchase Agreement dated June 10,
2008





We
entered into the Amended and Restated Common Share Purchase Agreement with Pac
LNG, Ltd on June 10, 2008.  This agreement amended and restated, and
replaced, the Common Share Purchase Agreement of May 5, 2008. Under the
Agreement, Pac LNG, an affiliate of Clarion Finanz A.G., and to whom Clarion had
assigned its relevant rights and interests, agreed to convert the promissory
notes issued to Clarion by InterOil in May 2006 totaling $60 million (being a
portion of the $130 million secured credit bridging facility provided with
Merrill Lynch Capital Corporation in May 2006) into 2,649,007 of InterOil’s
common shares on the basis of a calculation yielding a deemed purchase price for
the shares of $22.65 per share. An additional 79,470 common shares were issued
as payment of a fee for the transaction at the same deemed issue
price.





LNG
Project Shareholders Agreement dated July 30, 2007





The
shareholders’ agreement dated July 30, 2007 by and between InterOil LNG Holdings
Corporation.  Merrill Lynch PNG LNG Corporation (“Merrill”) and
Pacific LNG Operations Ltd (“PAC LNG”) (the “Shareholders”) provides for the
establishment of the Joint Venture Company with respect to the LNG Project
described in more detail under the heading “Description of the Business–
Midstream
-Liquefaction”.  It sets out the rights and obligations of the
Shareholders and the terms governing their relationship and provides that the
authorized share capital structure of the Joint Venture Company is to be made up
of Class A Shares and Class B Shares.   No other classes of
shares may be issued.  Only holders of Class A Shares have voting
rights and the right to appoint directors to the Board of the Joint Venture
Company.  Class B shares recognize the parties’ economic interests in
the Joint Venture Company and in the LNG Project.  The agreement
allows for the admission of one or more strategic investors as Class A and/or B
shareholders subject to the prior approval of each existing Shareholder. The
agreement also allows for the State to elect to purchase up to 10% of the issued
and outstanding shares in Liquid Niugini Gas Limited (a wholly owned subsidiary
of the Joint Venture Company).





Pursuant
to the Share Purchase and Sale and Settlement Agreement dated February 27, 2009
under which InterOil and Pac LNG acquired all of Merrill’s interest in the Joint
Venture Company, Merrill retained no ongoing economic interest, legal rights or
involvement in the LNG Project.  This shareholders agreement, while
still in effect, must still be revised to respond to that change.





For
updated information, see “General Development of the Business
– Three Year History – Midstream – Liquefaction Segment”and “Legal Proceedings and Regulatory
Actions”.





Secured
Revolving Crude Import Facility renewed on September 16, 2009 and originally
dated August 12, 2005





We,
through our subsidiary E.P InterOil Limited, entered into a Secured Revolving
Crude Import Facility Agreement with BNP Paribas, Singapore Branch on August 12,
2005 under which credit up to $150 million was made available to us for the
purchase of crude oil supplies for our refinery  in exchange for
payment of certain interest and fees.  The facility is secured against
crude oil inventories held by us and subject to our continuing to meet certain
covenants and conditions, and to annual review and renewal. In August 2006, the
facility was increased to $170 million.  In August 2007, the facility
and agreement was again renewed at the same level.  In 2008, the
overall facility limit was increased temporarily to $210 million and, on
November 30, 2008, was reduced to $190 million to accommodate higher crude
prices and resulting increases in working capital requirements.  On
September 16, 2009, the facility was renewed until December 31, 2010 with a
facility limit of $190.0 million.




Annual Information
Form   INTEROIL CORPORATION   45







Amended
and Restated Indirect Participation Interest Agreement dated February 25,
2005





In
February 2005, we entered into an agreement with institutional accredited
investors in which the investors paid us $125 million and we agreed to drill
eight exploration wells in Papua New Guinea on PPLs 236, 237 and/or
238.  We have drilled four of these eight exploration wells to
date.  The terms of this agreement are described under the heading
“Description of Our
Business—Upstream-Exploration and Production—Indirect Participation
Agreements.”.  Under the agreement, investors are also required
to contribute their proportionate share of completion costs associated with the
eight exploration wells and to subsequent development and appraisal works. In
the event that exploration proves successful, investors may elect to convert
their interests to direct working interests in the relevant PDL, or may continue
to maintain indirect participation interests.  Investors also have the
right, prior to completion of the eighth well, to convert their interest into
our common shares, based upon a certain formula set out in the agreement. Some
investors have elected to waive this conversion right.  This agreement
was amended by Amendment No. 1 signed on November 5, 2007.  The
amendment allows InterOil to pay from the joint account all commissions and
other expenses incurred in connection with structuring this Agreement,
soliciting investors and otherwise entering into the agreement.





Amended
Indirect Participation Interest Agreement dated May 12, 2004





We
entered into an Amended Indirect Participation Interest Agreement with PNG
Energy Investors, LLC on May 12, 2004.  This agreement grants PNG
Energy Investors, LLC the right to acquire up to a 4.25% working interest in
sixteen exploration wells following our drilling of an initial eight exploration
wells.  As of December 31, 2009, we had drilled six exploration wells
associated with this program.  PNG Energy Investors, LLC will have the
right to acquire a working interest in the ninth through the twenty fourth
exploration wells and in order to participate PNGEI would be required to
contribute a proportionate amount of drilling costs related to these
wells.





Drilling
Participation Agreement dated July 21, 2003





During
2004, we raised $12.2 million from PNGDV, as agent and trustee for its
investors, pursuant to the Drilling Participation Agreement dated July 21, 2003
with InterOil.  Under this agreement PNGDV had the right to acquire a
working interest in our first sixteen exploration wells equal to 13.5%
multiplied by the result of eight divided by the number of exploration wells we
drill.  PNGDV will be required to pay its share of any completion
costs for future exploration wells or future development costs if an exploration
well is a commercial success.  As of December 31, 2005, PNG Drilling
Ventures Limited had converted $2.5 million of their investment into 141,545 of
our common shares. In May 2006, PNGDV converted their remaining interest into an
additional 575,575 shares and also retained a 6.75% interest in the next four
wells. Elk–1 was the first of these wells and Antelope-1 the second. PNGDV also
has the right to participate in a further sixteen wells to follow the four
mentioned above up to a level of 5.75% at a cost per well of $112,500 per 1%
(with higher amounts to be paid if the depth exceeds 3,500 metres and the cost
of the well exceeds $8.5 million).





OPIC
Loan Agreement dated June 12, 2001





An $85
million loan from OPIC to EP InterOil Limited, a subsidiary of InterOil, was
used to finance the construction of our refinery at Napa Napa, Port Moresby (see
under the heading “Description
of the Business – Midstream - Refining”)and is secured by all
of the refinery’s capital assets.  The loan matures on December 31,
2015 and requires semi-annual principal payments of $4.5 million and semi-annual
interest payments.  Pursuant to an amendment entered into on February
14, 2008, certain principal payments, originally due during 2007, were deferred
so that they are now due on June 30 and December 31, 2015, respectively. These
deferred payments were subject to a requirement that if we undertook a capital
raising of a certain magnitude, sold all or part of the refinery or if the net
income of the refinery reached a certain level, these deferred payments would be
payable to OPIC. On June 1, 2009, OPIC agreed to waive those restrictions and
the schedule of payments was amended to reflect this such that the principal
payment will not be due until 2015.   Each disbursement under the
loan bears interest at a rate equal to a weighted average of treasury rates at
the time of disbursement plus 3.0%. During 2009, the weighted average interest
rate of all disbursements pursuant to this loan agreement was
6.89%.  During the year ended December 31, 2009, two installments of
$4.5 million and the accrued interest on the loan were paid.




Annual Information
Form   INTEROIL CORPORATION   46







Refinery
Project Agreement





On May
29, 1997, we entered into a project agreement with the State under which we
agreed to construct and operate a refinery in Port Moresby, Papua New
Guinea.  The project agreement expires on January 31,
2035.  In the project agreement, the State has agreed to use its best
efforts to enable us to purchase sufficient crude oil produced in Papua New
Guinea for the refinery to run at full capacity.  If necessary, these
efforts would include proposing legislation and issuing executive orders or
policy directives.  In addition, the government of Papua New Guinea
has agreed that future agreements between Papua New Guinea and producers of oil
in Papua New Guinea will contain provisions requiring such producers to sell oil
produced in Papua New Guinea to local refineries to meet Papua New Guinea’s
requirements for refined petroleum products.  The purchase price for
this oil will be the prevailing fair market price of such oil at the time of
purchase. The Refinery Project Agreement also provides that the State will take
all actions necessary to ensure that local distributors of petroleum products in
Papua New Guinea purchase such product first and foremost from the local
refinery at the IPP.  In general, the IPP represents the equivalent price
that would be paid in Papua New Guinea for a refined product if it were
imported.  For each refined product produced and sold locally in Papua New
Guinea, the IPP was originally calculated by adding the costs that would
typically be incurred to import such product to the average Posted Price for
such product in Singapore as reported by Platts.  The costs that are added
to the reported Platts’ price include freight costs, insurance costs, landing
charges, losses incurred in the transportation of refined products, demurrage
and taxes.  This pricing model has since been jointly reviewed by the State
and InterOil due to the cessation of Singapore Posted Prices.  The basis of
calculating IPP price was revised in November 2007 to an interim agreement and
then amended in June 2008 to a modified IPP formula by changing the benchmark
price for each refined product from ‘Singapore Posted Prices’, which is no
longer being updated, to ‘Mean of Platts Singapore’ (‘MOPS’), which is the
interim benchmark price for refined products in the Asia Pacific region, plus an
agreed premium.  The project agreement provides that, until December 31,
2010, income from the refinery will not be taxed.





Each of
the above material agreements have been filed on SEDAR and are available through
the SEDAR website at, www.sedar.com.





All other
contracts entered or still in effect during 2009 were done so in the ordinary
course of our business or were not material to us.





TRANSFER
AGENT AND REGISTRAR





The
transfer agent and registrar for our common shares and the Series A Preferred
Shares is Computershare Investor Services, Inc.





Transfer
Agent and Registrar





Main
Agent





Computershare
Investor Services Inc.


100
University Avenue, 9th
Floor


Toronto,
Ontario


Canada
M5J 2YI


Tel:  1-800-564-6253
(toll free North America)


Fax:  1-888-453-0330
(toll free North America)


E-mail:  service@computershare.com


Website:
www.computershare.com





Co-Transfer
Agent (USA)





Computershare
Trust Company N.A.


350
Indiana Street


Golden,
Colorado 80401


U.S.A.


Tel:  1-800-962-4284
(toll free North America)


International:
1-514-982-7555




Annual Information
Form   INTEROIL CORPORATION   47





INTERESTS
OF EXPERTS





PricewaterhouseCoopers,
Chartered Accountants, are the Corporation's auditors and have audited the
financial statements of the Corporation for the year ended December 31,
2009.  As at the date hereof, PricewaterhouseCoopers are independent
within the meaning of Public Company Oversight Board Rule 3520.





Information
relating to reserves of the Corporation set forth in the Statement of Reserves
Data and Other Oil and Gas Information was evaluated by GLJ Petroleum
Consultants Limited, as independent qualified reserves evaluators.  As
at the date hereof, the principals of GLJ Petroleum Consultants Limited, did not
hold any registered or beneficial ownership interests, directly or indirectly in
the Common Shares.


ADDITIONAL
INFORMATION





Additional
information, including that related to directors’ and officers’ remuneration,
principal holders of our common shares and securities authorized for issuance
under equity compensation plans will be contained in our Information Circular
for our upcoming annual meeting of shareholders expected to be held in June
2010.  Additional financial information is provided in our audited
consolidated financial statements for the year ended December 31, 2009 and
related 2009 MD&A.  Our audited financial statements, 2009
MD&A, Information Circular and additional information can be found on the
Canadian System for Electronic Document Analysis and Retrieval (“SEDAR”) at
www.sedar.com, and on our website at www.interoil.com.





Copies of
the financial statements, 2009 MD & A and any additional copies of this AIF
may also be obtained by contacting Mr Anesti Dermedgoglou, Vice President of
Investor Relations at Level 1, 60-92 Cook Street, Portsmith, Queensland 4870,
Australia; Telephone:  +61 (7) 4046-4600.




Annual Information
Form   INTEROIL CORPORATION   48







Schedule
A – Report of Management and Directors on Oil and Gas Disclosure





FORM
51-101F3 REPORT OF


MANAGEMENT
AND DIRECTORS


ON
OIL AND GAS DISCLOSURE




Management
of InterOil Corporation (the "Company") is responsible for the preparation and
disclosure of information with respect to the Company's oil and gas activities
in accordance with the securities regulatory requirements. This information
includes resources as at December 31, 2009.





An
independent qualified reserve evaluator has evaluated the Company's reserves
data.  The report of the independent qualified reserves evaluator will
be filed with securities regulatory authorities concurrently with this
report.





The
Reserves Committee of the board of directors of the Company has:





(a)
            reviewed
      the Company's procedures for providing information to the independent
      qualified reserves evaluator;





(b)
            met
      with the independent qualified reserves evaluator to determine whether any
      restrictions affected the ability of the independent qualified reserves
      evaluator to report without reservation;
and





(c)
            reviewed
      the reserves data with management and the independent qualified reserves
      evaluator.





The
Reserves Committee of the board of directors has reviewed the Company's
procedures for assembling and reporting other information associated with oil
and gas activities and has reviewed that information with
management.  The board of directors has, on the recommendation of the
Reserves Committee, approved:





(a)
            the
      content and filing with securities regulatory authorities of Form 51-101F1
      containing resources data and other oil and gas
    information;





(b)
            the
      filing of the Form 51-102F2 which is the report of the independent
      qualified reserves evaluator on the data;
and





(c)
            the
      content and filing of this report.





Because
the resources data are based on judgments regarding future events, actual
results will vary and the variations may be material.





DATED
effective March 1, 2010.





"Phil E.
      Mulacek"
            
            "Roger
      Grundy"Phil
      E. Mulacek
              Chief
      Executive Officer
            
            Roger
      Grundy
              Director"Collin F.
      Visaggio"
            
            "Edward
      Speal"Collin
      F. Visaggio
              Chief
      Financial Officer
            
            Edward
      Speal
              Director




Annual Information
Form   INTEROIL CORPORATION   49








FORM
51-101F2


REPORT
ON RESOURCES DATA




BY




INDEPENDENT
QUALIFIED RESERVES




EVALUATOR
OR AUDITOR




To the
board of directors of InterOil Corporation (the "Company"):




1.
            We
      have prepared an assessment of the Company’s resources data as at December
      31, 2009. The resources data are estimates of low, best and high estimates
      of contingent resources as at December 31,
2009.




2.
            The
      resources data are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on the resources data based on our
      assessment.




We
carried out our assessment in accordance with standards set out in the Canadian
Oil and Gas Evaluation Handbook (the "COGE Handbook") prepared jointly by the
Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian
Institute of Mining, Metallurgy & Petroleum (Petroleum
Society).




3.
            Those
      standards require that we plan and perform an assessment to obtain
      reasonable assurance as to whether the resources data are free of material
      misstatement. An assessment also includes assessing whether the resources
      data are in accordance with principles and definitions in the COGE
      Handbook.




4.
            The
      following table sets forth the estimates of low, best and high estimates
      of contingent resources as at December 31,
2009:




Independent
                      Qualified Reserves
                    
                    Description
                      and
                      Preparation
                      Date of
                        Assessment
                    
                    Location of
                      Reserves
                      (Country or
                      Foreign
                      Geographic
                    
                    Company Gross
                      ContingentResources
                      MMBOEEvaluator
                    
                    Report
                    
                    Area)
                    
                    Low
                    
                    
                    Best
                    
                    
                    HighGLJ
      Petroleum Consultants
                    
                    February
      16, 2010
                    
                    Papua
      New Guinea
                    
                    
                    660.6
                    
                    
                    
                    873.2
                    
                    
                    
                    1063.6




5.
            In
      our opinion, the resources data evaluated by us have, in all material
      respects, been determined and are in accordance with the COGE
      Handbook.




6.
            We
      have no responsibility to update our reports referred to in paragraph 4
      for events and circumstances occurring after their respective preparation
      dates.




7.
            Because
      the resources data are based on judgements regarding future events, actual
      results will vary and the variations may be material. However, any
      variations should be consistent with the fact that resources are
      categorized according to the probability of their
  recovery.




8.
            Contingent
      resources estimates will not be classified as reserves until the following
      contingencies are satisfied: (i) sanctioning of the facilities required to
      process and transport marketable natural gas, (ii) confirmation of a
      market for the marketable natural gas, and (iii) determination of economic
      viability. Contingent resources entail commercial risk not applicable to
      reserves. There is no certainty that it will be commercially viable to
      produce any portion of the contingent
resources.




Annual
Information Form   INTEROIL
CORPORATION   50







EXECUTED
as to our report referred to above:




GLJ
Petroleum Consultants Ltd., Calgary, Alberta, Canada, February 19,
2010




Keith
      M. Braaten, P. Eng.Executive
      Vice-President




Annual Information
Form   INTEROIL CORPORATION   51







Schedule
C – Audit Committee Charter




INTEROIL
CORPORATION


CHARTER
OF THE AUDIT COMMITTEE


OF
THE BOARD OF DIRECTORS





This
Audit Committee Charter (the "Charter") sets forth the purpose and
membership requirements of the Audit Committee (the "Committee") of the Board of Directors
(the "Board") of InterOil Corporation
(the "Company") and establishes the
authority and responsibilities delegated to it by the Board.





1.
            Purpose.  The
      purpose of the Committee is to assist the Board in fulfilling its
      oversight responsibilities relating to the Company’s corporate accounting
      and financial reporting processes and the audits of the Company’s
      financial statements.  In fulfilling this function, the
      Committee’s primary duties and responsibilities are
  to:





·
            Serve
      as an independent and objective party to oversee the integrity of the
      Company’s financial statements and to monitor the Company’s financial
      reporting process and systems of internal controls regarding financial,
      accounting, and legal compliance.




·
            Monitor
      the qualifications, independence and performance of the Company’s
      independent auditors and the performance of the Company’s internal
      auditing function.




·
            Provide
      an avenue of communication between the Board and the independent auditors,
      management and the internal
auditor.




·
            Report
      actions of the Committee to the Board with such recommendations as the
      Committee may deem appropriate.





The
Committee shall be empowered to conduct or cause to be conducted any
investigation appropriate to fulfilling its responsibilities, and shall have
direct access to the independent auditors, the internal auditor and Company
employees as necessary.  The Committee shall be empowered to retain,
at the Company’s expense, independent legal, accounting, or other consultants or
experts as the Committee deems necessary in the performance of its
duties.  The Committee shall have sole authority to approve related
fees and retention terms.





2.
            Committee
      Membership.





2.1.
            Composition and
      Appointment.  The Committee shall consist of three or
      more members of the Board.  The Board shall designate members of
      the Committee.  Membership on the Committee shall rotate at the
      Board’s discretion.  The Board shall fill vacancies on the
      Committee and may remove a Committee member from the membership of the
      Committee at any time without cause.  Members shall serve until
      their successors are appointed by the Board and as otherwise required by
      applicable law or the rules of the New York Stock Exchange ("NYSE").





2.2.
            Independence and Financial
      Literacy.  Each member of the Committee must meet the
      independence, or an applicable exception, financial literacy, and
      experience requirements of the NYSE rules and applicable Canadian and U.S.
      federal securities laws, including the rules and regulations of the U.S.
      Securities and Exchange Commission ("SEC").  In
      addition, at least one member of the Committee must be financially
      sophisticated, as determined by the Board, for purposes of applicable NYSE
      rules.





2.3.
            Service on Multiple Audit
      Committees.  If a member of the Committee serves on the
      audit committee (or, in the absence of an audit committee, the board
      committee performing equivalent functions, or in the absence of such
      committee, the board of directors) of more than two other public
      companies, the Board must affirmatively determine that such simultaneous
      service on multiple audit committees will not impair the ability of such
      member to serve on the Committee.





2.4.
            Subcommittees.  The
      Committee may form and delegate authority to subcommittees consisting of
      one or more members, including the authority to grant pre-approvals of
      audits and permitted non-audit services, provided that decisions of said
      subcommittee to grant pre-approvals shall be presented to the full
      Committee at its next scheduled
meeting.




Annual Information
Form   INTEROIL CORPORATION   52







3.
            Meetings.





3.1.
            Frequency of
      Meetings.  The Committee shall meet at least quarterly,
      or more frequently as circumstances dictate.  The schedule for
      regular meetings of the Committee shall be established by the
      Committee.  The Chairperson of the Committee may call a special
      meeting at any time he or she deems advisable.  Meetings may be
      by written consent.  When necessary, the Committee will meet in
      executive session outside the presence of any senior executive officer of
      the Company.  The Committee and any other independent members of
      the Board that are not members of the Committee will meet in executive
      session, without the presence of non-independent directors and management
      at least once annually.





3.2.
            Minutes.  Minutes
      of each meeting of the Committee shall be kept to document the discharge
      by the Committee of its
responsibilities.





3.3.
            Quorum.  A
      quorum shall consist of at least one-half of the Committee’s members, but
      no fewer than two persons.  The act of a majority of the
      Committee members present at a meeting at which a quorum is present shall
      be the act of the Committee.





3.4.
            Agenda.  The
      Chairperson of the Committee shall prepare an agenda for each meeting of
      the Committee, in consultation with Committee members and any appropriate
      member of the Company’s management or staff, as necessary.  As
      requested by the Chairperson, members of the Company’s management and
      staff shall assist the Chairperson with the preparation of any background
      materials necessary for any Committee
meeting.





3.5.
            Presiding Officer.  The
      Chairperson of the Committee shall preside at all Committee
      meetings.  If the Chairperson is absent at a meeting, a majority
      of the Committee members present at a meeting shall appoint a different
      presiding officer for that meeting.





3.6.
            Private Meetings. The
      Committee may meet privately with management, the chief executive officer
      ("CEO"), the general
      counsel, the internal auditor, the independent auditors, and as a
      Committee to discuss any matters that the Committee or each of these
      groups believe should be discussed
privately.





4.
            General Review
      Procedures.





4.1.
            Annual Report
      Review.  The Committee shall review with management, the
      independent auditors, and the internal auditors, the Company’s year-end
      financial results prior to the release of earnings and the Company’s
      year-end financial statements prior to filing or
      distribution.  Such review shall also include the Company’s
      disclosures that are to be included in the Company’s Annual Information
      Form, Annual Report, Management’s Discussion and Analysis for the year and
      Annual Report on Form 40-F.  The Committee shall also discuss
      with management, the independent auditors and the internal auditors any
      significant issues or findings or any changes to the Company’s accounting
      principles, any items required to be communicated by the independent
      auditors in accordance with Statement on Auditing Standards No. 61, as
      amended, and various topics and events that may have a significant impact
      on the Company or that are the subject of discussions between management
      and the independent auditors.  The Committee shall approve the
      audited financial statements and recommend to the Board whether or not the
      audited financial statements should be filed on SEDAR and included in the
      Company’s Annual Report on Form 40-F for the last fiscal
    year.





4.2.
            Quarterly Report
      Review.  The Committee shall review with management, the
      internal auditors, and the independent auditors (if the independent
      auditors were involved in a review of such financial statements), (i) the
      Company’s interim financial results prior to the release of earnings, the
      Company’s interim financial statements prior to filing or distribution and
      the disclosures that are to be included in the Company’s Management’s
      Discussion and Analysis for each quarter and Form 6-K and (ii) the
      operation of the Company’s internal controls and any special steps adopted
      in light of material control deficiencies.  The Committee shall
      discuss with management, the internal auditors and the independent
      auditors (if required by GAAP, NYSE rules, or applicable Canadian and U.S.
      federal securities laws), any significant findings or any changes to the
      Company’s accounting principles and any items required to be communicated
      by the independent auditors in accordance with Statement on Auditing
      Standards No. 61 as amended.




Annual Information
Form   INTEROIL CORPORATION   53







4.3.
            Canadian and SEC Filings
      Review.  The Committee shall review with financial
      management and the independent auditor (if the independent auditors were
      involved in a review of such financial statements) filings with Canadian
      securities regulators and the SEC which contain or incorporate by
      reference the Company’s financial statements or Management’s Discussion
      and Analysis and consider whether the information in these documents is
      consistent with information contained in the financial
      statements.





4.4.
            Reporting System
      Review.  In consultation with management, the independent
      auditors, and the internal auditors, the Committee shall consider the
      integrity of the Company’s financial reporting processes and controls,
      including computerized information system controls and
      security.  The Committee shall review and discuss with
      management the Company’s significant financial risk exposures and the
      steps management has taken to monitor, control, and report such
      exposures.  The Committee shall review significant findings
      prepared by the independent auditors and the internal auditors together
      with management’s responses, including the status of previous
      recommendations.





4.5.
            Non-GAAP Financial Data
      Review.  The Committee shall review and discuss with
      management earnings including the use of “pro forma,” “adjusted” or other
      non-GAAP information, financial guidance and other press releases of a
      material financial nature, as well as financial information and earnings
      guidance provided to analysts and rating agencies.  Such
      discussion may be done generally consisting of discussing the types of
      information to be disclosed and the types of presentations to be
      made.





4.6.
            Off-Balance Sheet
      Review.  The Committee shall discuss with management and
      the independent auditor the effect of regulatory and accounting
      initiatives as well as off-balance sheet structures on the Company’s
      financial statements.





4.7.
            Risk
      Assessment.  Although it is the job of the CEO and senior
      management to assess and manage the Company’s exposure to risks, the
      Committee shall discuss guidelines and policies to govern the process by
      which risk assessment and risk management is
  addressed.





4.8.
            Audit
      Difficulties.  The Committee shall review with the
      independent auditor any audit problems or difficulties encountered in the
      course of the audit work and management’s response, any restrictions on
      the scope of activities or access to requested information; and any
      significant disagreements between auditors and management.  The
      Committee shall work to resolve disagreements that may have occurred
      between auditors and management related to the Company’s financial
      statements or disclosures.





4.9.
            Hiring
      Approval.  The Committee shall approve the hiring of any
      employee or former employee of the independent
  auditor.





4.10.
            Financial Officer Code of
      Ethics Review.  The Committee shall review and
      periodically recommend modifications to the Company’s Code of Ethics for
      the Chief Executive Officer and Senior Financial
  Officers.





4.11.
            Certification
      Review.  The Committee shall review disclosures made to
      the Committee by the Company’s CEO and CFO during the certification
      process for the audited annual financial statements, interim financial
      statements, related Management’s Discussion and Analysis and Form 40-F
      concerning significant deficiencies or material weaknesses in internal
      controls and any fraud.





4.12.
            Legal Counsel
      Review.  On at least an annual basis, the Committee shall
      review with the Company’s legal counsel any legal matters that could have
      a significant impact on the Company’s financial statements or the
      Company’s compliance with applicable laws and regulations, and inquiries
      received from regulators or governmental
  agencies.





5.
            Independent
      Auditors.





Auditor Performance
      Review.  The Committee shall confirm with the independent
      auditors their ultimate accountability to the Committee.  The
      independent auditors will report directly to the Committee.  The
      Committee will ensure that the independent auditors are aware that the
      Chairperson of the Committee is to be contacted directly by the
      independent auditor (i) to review items of a sensitive nature that can
      impact the accuracy of financial reporting or (ii) to discuss significant
      issues relative to the overall Board responsibility that have been
      communicated to management but, in their judgment, may warrant follow-up
      by the Committee.  The Committee shall review and evaluate the
      performance of the auditors and the lead partner on the independent
      auditor team.




Annual Information
Form   INTEROIL CORPORATION   54







Approval of Independent Auditor
      and Pre-Approval of Services.  The Committee shall be
      directly responsible for the appointment, compensation, retention,
      termination, and oversight of the work of the independent auditors engaged
      (including resolution of disagreements between management and the auditor
      regarding financial reporting) for the purpose of preparing or issuing an
      audit report or performing other audit, review or attest services for the
      Company.  The Committee shall pre-approve all auditing services,
      including the compensation and terms of the audit engagement, and all
      other non-audit services to be performed by the independent auditors,
      subject to the de-minimus exceptions for non-audit services described in
      Section 10A(i)(1)(B) of the Securities Exchange Act of 1934 which are
      approved by the Audit Committee prior to the completion of the
      audit.  The Committee shall periodically discuss current year
      non-audit services performed by the independent auditors and review and
      pre-approve all permitted non-audit service
  engagements.





Auditor
      Independence.  The Committee shall oversee the
      independence of the independent auditors by, among other things, (i) on an
      annual basis, receiving from the independent auditors a formal written
      statement delineating all relationships between the independent auditors
      and the Company, consistent with Independence Standards Board Standard No.
      1, that could impair the auditors’ independence; (ii) actively engaging in
      a dialogue with the independent auditors with respect to any disclosed
      relationships or services that may impact the objectivity and independence
      of the independent auditors; and (iii) taking, or recommending to the
      Board the appropriate action to be taken, in response to the independent
      auditors’ report to satisfy itself of the independent auditors’
      independence.





Auditor
      Report.  The Committee shall annually obtain from the
      independent auditor and review a written report describing (i) the
      independent auditor’s internal quality-control procedures; and (ii) any
      material issues raised by (a) the independent auditor’s most recent
      internal quality-control review, or peer review or (b) any inquiry or
      investigation by governmental or accounting profession authorities, in
      each case, within the preceding five years, respecting one or more
      independent audits carried out by the independent auditor, and any steps
      taken to deal with any such issues.





Audit Partner
      Rotation.  The Committee shall ensure the rotation of the
      lead (or coordinating) audit partner having primary responsibility for the
      audit and the audit partner responsible for reviewing the audit as
      required by law.  The Committee shall obtain, annually, from the
      independent auditor a written statement confirming that neither the lead
      (or coordinating) audit partner having primary responsibility for the
      Company’s audit nor the audit partner responsible for reviewing the
      Company‘s audit has performed audit services for the Company in each of
      the Company’s five previous fiscal
years.





Internal Controls
      Report.  Beginning in fiscal year 2006 or earlier if
      required by applicable accounting rules or Canadian and U.S. federal
      securities laws, the Committee shall annually obtain from the independent
      auditor a written report in which the independent auditor attests to and
      reports on the assessment of the Company’s internal controls made by the
      Company’s management.  The Committee shall review and discuss
      with management, the independent auditor, and the Company’s independent
      auditor (i) the adequacy and effectiveness of the Company’s internal
      controls (including any significant deficiencies and significant changes
      in internal controls reported to the Committee by the independent auditor
      or management; (ii) the Company’s internal audit procedures; and (iii) the
      adequacy and effectiveness of the Company’s disclosures controls and
      procedures, and management reports
thereon.





National Office
      Consultation.  The Committee shall discuss with the
      national office of the independent auditor issues on which they were
      consulted by the Company’s audit team and matters of audit quality and
      consistency.





Audit
      Planning.  The Committee shall review and discuss with
      the independent auditors their audit plan and engagement letter and
      discuss with the independent auditors and the internal auditor the scope
      of the audit, staffing, locations, reliance upon management, and internal
      audit and general audit approach.




Annual Information
Form   INTEROIL CORPORATION   55







Accounting
      Principles.  The Committee shall consider the independent
      auditors’ judgments about the quality and appropriateness of the Company’s
      accounting principles as applied in its financial reporting, including
      critical accounting policies and practices used by the Company, GAAP
      alternatives discussed with management (including the ramifications and
      the auditor’s preferred treatment) and any other material written
      communications between the independent auditor and
    management.





Auditor
      Assurance.  The Committee shall obtain from the
      independent auditor assurance that Section 10A of the Securities Exchange
      Act of 1934, addressing the reporting of illegal acts, has not been
      implicated.





Additional
      Auditors.  The Committee shall review the use of auditors
      other than the independent auditor where management has requested a second
      opinion or another auditor is proposed to be engaged for other
      reasons.





6.
            Internal Audit Department and
      Legal Compliance.





Budget and
      Plan.  The Committee shall review the budget, plan,
      changes in plan, activities, organizational structure, and qualifications
      of the internal auditor.  The internal auditor function shall be
      responsible to senior management, but shall have a direct reporting
      responsibility to the Board through the Committee.  The internal
      auditor will be responsible for contacting the Chairperson of the
      Committee directly (i) to review items of a sensitive nature that can
      impact the accuracy of financial reporting or (ii) to discuss significant
      issues relative to the overall Board responsibility that have been
      communicated to management but, in the internal auditor’s judgment, may
      warrant follow-up by the Committee.





Approval of Internal
      Auditor.  The Committee shall review and approve the
      appointment, performance, dismissal and replacement of the internal
      auditor or the entity retained to provide internal audit
      services.





Internal Audit
      Review.  The Committee shall review a summary of findings
      from completed internal audits and, where appropriate, review significant
      reports prepared by the internal audit department together with
      management’s response and follow-up to these
  reports.





7.
            General Audit Committee
      Responsibilities.





Code of Ethics for the Chief
      Executive Officer and Senior Financial Officers.  The
      Committee shall inquire of management, the independent auditor and the
      internal auditor as to their knowledge of (i) any violation of the Code of
      Ethics for the Chief Executive Officer and Senior Financial Officers, (ii)
      any waiver of compliance with such code, and (iii) any investigations
      undertaken with regard to compliance with such code.  The
      Committee may make recommendations to the Board regarding the waiver of
      any provision of the Code of Ethics for the Chief Executive Officer and
      Senior Financial Officers, however any waiver of such code may only be
      granted by the Board.  All waivers granted by the Board shall be
      promptly publicly disclosed as required by the rules and regulations of
      the SEC and the NYSE.





Complaints
      Procedure.  The Committee shall establish procedures to
      (i) receive, process, retain and treat complaints received by the Company
      regarding accounting, internal audit controls or auditing matters and (ii)
      the confidential and anonymous submission by employees of concerns
      regarding questionable accounting or audit
  practices.





Related Party
      Transactions.  The Committee shall approve all related
      party transactions after a review of the transactions by the Committee for
      potential conflicts of interest and transaction will be considered a
      “related party transaction” if the transaction would be required to be
      disclosed in the Company’s Management’s Discussion and Analysis or any
      other filings with Canadian Securities Administrators or the
      SEC.





Use of
      Assets.  The Committee shall review Company policies and
      procedures with respect to executive officers’ expense accounts and
      prerequisites, including their use of corporate assets, and consider the
      results of any review of these areas by the internal auditors or the
      independent accountant.




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Form   INTEROIL CORPORATION   56







General
      Activities.  The Committee shall perform any other
      activities consistent with this Charter, the Company’s bylaws, the
      Company’s Code of Ethics and Business Conduct and governing law, as the
      Committee or the Board deems necessary or appropriate, including reviewing
      the Company’s corporate compliance
activities.





8.
            Reports and
      Assessments.





8.1.
            Board
      Reports.  The Chairperson shall, periodically at his or
      her discretion, report to the Board on Committee actions and on the
      fulfillment of the Committee’s responsibilities under this
      Charter.  Such reports shall include any issues that arise with
      respect to the quality or integrity of the Company’s financial statements,
      the Company’s compliance with legal or regulatory requirements, the
      performance and independence of the Company’s independent auditors and the
      performance of the Company’s internal audit
  function.





8.2.
            Charter
      Assessment.  The Committee shall annually assess the
      adequacy of this Charter and advise the Board of its assessment and of its
      recommendation for any changes to the Charter.  The Committee
      shall, if requested by management, assist management with the preparation
      of a certification to be presented annually to the NYSE affirming that the
      Committee reviewed and reassessed the adequacy of this
      Charter.





8.3.
            Committee
      Self-Assessment.  The Committee shall regularly make a
      self-assessment of its performance, which shall include eliciting input
      from management, the Board and the General Counsel on the performance of
      the Committee.





8.4.
            Audit Committee
      Report.  The Committee shall prepare any Audit Committee
      Reports required by the rules of the Canadian Securities Administrators or
      the SEC to be included in the Company’s filings with such
      agencies.





The
duties and responsibilities of a member of the Audit Committee are in addition
to those duties set out for a member of the Board.  While the
Committee has the responsibilities and powers set forth by this Charter, it is
the responsibility of management to prepare the financials and it is the
responsibility of the independent auditor to plan or conduct audits or to
determine that the Company’s financial statements are complete and accurate in
accordance with GAAP.





The
material in this Charter is not soliciting material, is not deemed filed with
the SEC and is not incorporated by reference in any filing of the Company under
the Securities Exchange Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date this Charter is first
included in the Company’s filings with the SEC and irrespective of any general
incorporation language in such filings.




Annual
Information Form   INTEROIL
CORPORATION   57