| InterOil CorporationConsolidated Financial Statements(Expressed in United States dollars) Years ended December 31, 2010, 2009 and 2008 |  |
|---------------------------------------------------------------------------------------------------------------------------------------------|--|

----

| InterOil CorporationConsolidated Financial Statements(Expressed in United States dollars) |  |
|-------------------------------------------------------------------------------------------|--|

| Management’s Report                                                       | 1      |
|---------------------------------------------------------------------------------|--------|
|                                                                            |   |
| Auditor’s Report to the Shareholders                                      | 2      |
|                                                                            |   |
| Consolidated Balance Sheets                                                     | 5      |
|                                                                            |   |
| Consolidated Statements of Operations                                           | 6      |
|                                                                            |   |
| Consolidated Statements of Cash Flows                                           | 7      |
|                                                                            |   |
| Consolidated Statements of Shareholders’ Equity                           | 8      |
|                                                                            |   |
| Consolidated Statements of Comprehensive Income                                 | 9      |
|                                                                            |   |
| Notes to the Consolidated Financial Statements                                  | 10     |
|                                                                            |   |
| Reconciliation to accounting principles generally accepted in the United States | 51     |

----

| InterOil CorporationConsolidated Financial Statements(Expressed in United States dollars) |  |
|-------------------------------------------------------------------------------------------|--|

| /s/ Phil E. Mulacek     | /s/ Collin F. Visaggio  |
|-------------------------|-------------------------|
| Phil E. Mulacek         | Collin F. Visaggio      |
| Chief Executive Officer | Chief Financial Officer |

|   | Consolidated Financial Statements INTEROIL CORPORATION     1 |
|--------|---------------------------------------------------------------------------------------|

----

|                                                                                     |                                                                                                                                                                                                                                                                |
|------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          Independent Auditor’s Report |  PricewaterhouseCoopersABN 52 780 433 757 Freshwater Place2 Southbank BoulevardSOUTHBANK  VIC  3006GPO Box 1331MELBOURNE  VIC  3001DX 77Telephone 61 3 8603 1000Facsimile  61 3 8603 1999www.pwc.com/au |

|   | Consolidated Financial Statements INTEROIL CORPORATION     2 |
|--------|---------------------------------------------------------------------------------------|

----

|   | Consolidated Financial Statements INTEROIL CORPORATION     3 |
|--------|---------------------------------------------------------------------------------------|

----

|   | Consolidated Financial Statements INTEROIL CORPORATION     4 |
|--------|---------------------------------------------------------------------------------------|

----

| InterOil CorporationConsolidated Balance Sheets(Expressed in United States dollars) |  |
|-------------------------------------------------------------------------------------|--|

|                                                                                                                                         |   | As at        |         |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------------|
|                                                                                                                                         |   | December 31, |         |   | December 31, |   |   | December 31, |   |
|                                                                                                                                         |   | 2010              |         |   | 2009 |   |   | 2008 |   |
|                                                                                                                                         |   | $                 |         |   | $ |   |   | $ |   |
|                                                                                                                                         |   |              |         |   |   |   |   |   |   |
| Assets                                                                                                                                       |   |              |         |   |   |   |   |   |   |
| Current assets:                                                                                                                              |   |              |         |   |   |   |   |   |   |
| Cash and cash equivalents (note 6)                                                                                                           |   |              | 233,576,821  |   |   |   | 46,449,819 |   |   |   | 48,970,572 |   |
| Cash restricted (note 8)                                                                                                                     |   |              | 40,664,995   |   |   |   | 22,698,829 |   |   |   | 25,994,258 |   |
| Trade receivables (note 9)                                                                                                                   |   |              | 48,047,496   |   |   |   | 61,194,136 |   |   |   | 42,887,823 |   |
| Derivative contracts receivables (note 8)                                                                                                    |   |              | -            |   |   |   | - |   |   |   | 31,335,050 |   |
| Other assets                                                                                                                                 |   |              | 505,059      |   |   |   | 639,646 |   |   |   | 167,885 |   |
| Inventories (note 10)                                                                                                                        |   |              | 127,137,360  |   |   |   | 70,127,049 |   |   |   | 83,037,326 |   |
| Prepaid expenses                                                                                                                             |   |              | 3,593,574    |   |   |   | 6,964,950 |   |   |   | 4,489,574 |   |
| Total current assets                                                                                                                         |   |              | 453,525,305  |   |   |   | 208,074,429 |   |   |   | 236,882,488 |   |
| Non-current assets:                                                                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Cash restricted (note 8)                                                                                                                     |   |              | 6,613,074    |   |   |   | 6,609,746 |   |   |   | 290,782 |   |
| Goodwill (note 16)                                                                                                                           |   |              | 6,626,317    |   |   |   | 6,626,317 |   |   |   | - |   |
| Plant and equipment (note 11)                                                                                                                |   |              | 229,331,842  |   |   |   | 221,046,709 |   |   |   | 223,585,559 |   |
| Oil and gas properties (note 12)                                                                                                             |   |              | 255,294,738  |   |   |   | 172,483,562 |   |   |   | 128,013,959 |   |
| Future income tax benefit (note 13)                                                                                                          |   |              | 14,098,128   |   |   |   | 16,912,969 |   |   |   | 3,070,182 |   |
| Total non-current assets                                                                                                                     |   |              | 511,964,099  |   |   |   | 423,679,303 |   |   |   | 354,960,482 |   |
| Total assets                                                                                                                                 |   |              | 965,489,404  |   |   |   | 631,753,732 |   |   |   | 591,842,970 |   |
| Liabilities and shareholders' equity                                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities (note 14)                                                                                           |   |              | 76,087,954   |   |   |   | 59,372,354 |   |   |   | 78,147,736 |   |
| Derivative contracts (note 8)                                                                                                                |   |              | 178,578      |   |   |   | - |   |   |   | - |   |
| Working capital facilities (note 17)                                                                                                         |   |              | 51,254,326   |   |   |   | 24,626,419 |   |   |   | 68,792,402 |   |
| Current portion of secured and unsecured loans (note 20)                                                                                     |   |              | 14,456,757   |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |
| Current portion of Indirect participation interest (note 21)                                                                                 |   |              | 540,002      |   |   |   | 540,002 |   |   |   | 540,002 |   |
| Total current liabilities                                                                                                                    |   |              | 142,517,617  |   |   |   | 93,538,775 |   |   |   | 156,480,140 |   |
| Non-current liabilities:                                                                                                                     |   |              |         |   |   |   |   |   |   |   |   |   |
| Secured loan (note 20)                                                                                                                       |   |              | 34,813,222   |   |   |   | 43,589,278 |   |   |   | 52,365,333 |   |
| 8% subordinated debenture liability (note 24)                                                                                                |   |              | -            |   |   |   | - |   |   |   | 65,040,067 |   |
| 2.75% convertible notes liability (note 25)                                                                                                  |   |              | 52,425,489   |   |   |   | - |   |   |   | - |   |
| Deferred gain on contributions to LNG project (note 15)                                                                                      |   |              | 13,076,272   |   |   |   | 13,076,272 |   |   |   | 17,497,110 |   |
| Indirect participation interest (note 21)                                                                                                    |   |              | 34,134,387   |   |   |   | 39,559,718 |   |   |   | 73,321,158 |   |
| Total non-current liabilities                                                                                                                |   |              | 134,449,370  |   |   |   | 96,225,268 |   |   |   | 208,223,668 |   |
| Total liabilities                                                                                                                            |   |              | 276,966,987  |   |   |   | 189,764,043 |   |   |   | 364,703,808 |   |
| Non-controlling interest (note 22)                                                                                                           |   |              | 20,099       |   |   |   | 13,596 |   |   |   | 5,235 |   |
| Shareholders' equity:                                                                                                                        |   |              |         |   |   |   |   |   |   |   |   |   |
| Share capital (note 23)Authorised – unlimitedIssued and outstanding - 47,800,552(Dec 31, 2009 - 43,545,654)(Dec 31, 2008 - 35,923,692) |   |              | 895,651,052  |   |   |   | 613,361,363 |   |   |   | 373,904,356 |   |
| 8% subordinated debentures (note 24)                                                                                                         |   |              | -            |   |   |   | - |   |   |   | 10,837,394 |   |
| 2.75% convertible notes (note 25)                                                                                                            |   |              | 14,298,036   |   |   |   | - |   |   |   | - |   |
| Contributed surplus                                                                                                                          |   |              | 16,738,417   |   |   |   | 21,297,177 |   |   |   | 15,621,767 |   |
| Warrants (note 27)                                                                                                                           |   |              | -            |   |   |   | - |   |   |   | 2,119,034 |   |
| Accumulated Other Comprehensive Income                                                                                                       |   |              | 9,261,177    |   |   |   | 8,150,976 |   |   |   | 27,698,306 |   |
| Conversion options (note 21)                                                                                                                 |   |              | 12,150,880   |   |   |   | 13,270,880 |   |   |   | 17,140,000 |   |
| Accumulated deficit                                                                                                                          |   |              | (259,597,244 | ) |   |   | (214,104,303 | ) |   |   | (220,186,930 | ) |
| Total shareholders' equity                                                                                                                   |   |              | 688,502,318  |   |   |   | 441,976,093 |   |   |   | 227,133,927 |   |
| Total liabilities and shareholders' equity                                                                                                   |   |              | 965,489,404  |   |   |   | 631,753,732 |   |   |   | 591,842,970 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     5 |
|--------|---------------------------------------------------------------------------------------|

----

| InterOil CorporationConsolidated Statement of Operations(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------|--|

|                                                          |   | Year ended   |        |
|---------------------------------------------------------------|--------|-------------------|-------------|
|                                                          |   | December 31, |        |   | December 31, |   |   | December 31, |   |
|                                                          |   | 2010              |        |   | 2009 |   |   | 2008 |   |
|                                                          |   | $                 |        |   | $ |   |   | $ |   |
|                                                          |   |              |        |   |   |   |   |   |   |
| Revenue                                                       |   |              |        |   |   |   |   |   |   |
| Sales and operating revenues                                  |   |              | 802,374,399 |   |   |   | 688,478,965 |   |   |   | 915,578,709 |   |
| Interest                                                      |   |              | 150,816     |   |   |   | 350,629 |   |   |   | 931,785 |   |
| Other                                                         |   |              | 4,470,048   |   |   |   | 4,228,415 |   |   |   | 3,216,445 |   |
|                                                          |   |              | 806,995,263 |   |   |   | 693,058,009 |   |   |   | 919,726,939 |   |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Expenses                                                      |   |              |        |   |   |   |   |   |   |   |   |   |
| Cost of sales and operating expenses                          |   |              | 701,556,650 |   |   |   | 601,983,432 |   |   |   | 888,623,109 |   |
| Administrative and general expenses                           |   |              | 41,047,949  |   |   |   | 33,254,708 |   |   |   | 31,227,627 |   |
| Derivative losses/(gains)                                     |   |              | 1,065,188   |   |   |   | (1,008,585 | ) |   |   | (24,038,550 | ) |
| Legal and professional fees                                   |   |              | 6,902,241   |   |   |   | 9,067,413 |   |   |   | 11,523,045 |   |
| Exploration costs, excluding exploration impairment (note 12) |   |              | 16,981,929  |   |   |   | 208,694 |   |   |   | 995,532 |   |
| Exploration impairment (note 12)                              |   |              | -           |   |   |   | - |   |   |   | 107,788 |   |
| Short term borrowing costs                                    |   |              | 7,568,550   |   |   |   | 3,776,590 |   |   |   | 6,514,060 |   |
| Long term borrowing costs                                     |   |              | 4,496,432   |   |   |   | 8,788,041 |   |   |   | 17,459,186 |   |
| Depreciation and amortization                                 |   |              | 14,274,922  |   |   |   | 14,321,775 |   |   |   | 14,142,546 |   |
| Gain on sale of oil and gas properties (note 12)              |   |              | (2,140,783  | ) |   |   | (7,364,468 | ) |   |   | (11,235,084 | ) |
| Loss on extinguishment of IPI liability (note 21)             |   |              | 30,568,710  |   |   |   | 31,710,027 |   |   |   | - |   |
| Litigation settlement expense (note 29)                       |   |              | 12,000,000  |   |   |   | - |   |   |   | - |   |
| Foreign exchange losses/(gains)                               |   |              | 10,776,823  |   |   |   | 3,305,383 |   |   |   | (3,878,150 | ) |
|                                                          |   |              | 845,098,611 |   |   |   | 698,043,010 |   |   |   | 931,441,109 |   |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Loss before income taxes and non-controlling interest         |   |              | (38,103,348 | ) |   |   | (4,985,001 | ) |   |   | (11,714,170 | ) |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Income taxes                                                  |   |              |        |   |   |   |   |   |   |   |   |   |
| Current expense                                               |   |              | (3,898,067  | ) |   |   | (2,272,645 | ) |   |   | (1,564,038 | ) |
| Future (expense)/benefit                                      |   |              | (3,485,024  | ) |   |   | 13,348,634 |   |   |   | 1,482,074 |   |
|                                                          |   |              | (7,383,091  | ) |   |   | 11,075,989 |   |   |   | (81,964 | ) |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| (Loss)/profit before non-controlling interest                 |   |              | (45,486,439 | ) |   |   | 6,090,988 |   |   |   | (11,796,134 | ) |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Non-controlling interest (note 22)                            |   |              | (6,502      | ) |   |   | (8,361 | ) |   |   | (943 | ) |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Net (loss)/profit                                             |   |              | (45,492,941 | ) |   |   | 6,082,627 |   |   |   | (11,797,077 | ) |
|                                                          |   |              |        |   |   |   |   |   |   |   |   |   |
| Basic (loss)/earnings per share (note 28)                     |   |              | (1.03       | ) |   |   | 0.15 |   |   |   | (0.35 | ) |
| Diluted (loss)/earnings per share (note 28)                   |   |              | (1.03       | ) |   |   | 0.15 |   |   |   | (0.35 | ) |
| Weighted average number of common shares outstanding          |   |              |        |   |   |   |   |   |   |   |   |   |
| Basic (Expressed in number of common shares)                  |   |              | 44,329,670  |   |   |   | 39,900,583 |   |   |   | 33,632,390 |   |
| Diluted (Expressed in number of common shares)                |   |              | 44,329,670  |   |   |   | 40,681,586 |   |   |   | 33,632,390 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     6 |
|--------|---------------------------------------------------------------------------------------|

----

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

|                                                                                          |   | Year ended   |         |
|-----------------------------------------------------------------------------------------------|--------|-------------------|--------------|
|                                                                                          |   | December 31, |         |   | December 31, |   |   | December 31, |   |
|                                                                                          |   | 2010              |         |   | 2009 |   |   | 2008 |   |
|                                                                                          |   | $                 |         |   | $ |   |   | $ |   |
|                                                                                          |   |              |         |   |   |   |   |   |   |
| Cash flows provided by (used in):                                                             |   |              |         |   |   |   |   |   |   |
|                                                                                          |   |              |         |   |   |   |   |   |   |
| Operating activities                                                                          |   |              |         |   |   |   |   |   |   |
| Net (loss)/income                                                                             |   |              | (45,492,941  | ) |   |   | 6,082,627 |   |   |   | (11,797,077 | ) |
| Adjustments for non-cash and non-operating transactions                                       |   |              |         |   |   |   |   |   |   |   |   |   |
| Non-controlling interest                                                                      |   |              | 6,502        |   |   |   | 8,361 |   |   |   | 943 |   |
| Depreciation and amortization                                                                 |   |              | 14,274,922   |   |   |   | 14,321,775 |   |   |   | 14,142,546 |   |
| Future income tax asset                                                                       |   |              | 2,814,841    |   |   |   | (13,842,787 | ) |   |   | (202,870 | ) |
| Gain on sale of plant and equipment                                                           |   |              | -            |   |   |   | - |   |   |   | (16,250 | ) |
| Gain on sale of exploration assets                                                            |   |              | (2,140,783   | ) |   |   | (7,364,468 | ) |   |   | (11,235,084 | ) |
| Accretion of convertible notes/debentures liability                                           |   |              | 432,632      |   |   |   | 1,212,262 |   |   |   | 1,915,910 |   |
| Amortization of deferred financing costs                                                      |   |              | 1,223,944    |   |   |   | 223,945 |   |   |   | 260,400 |   |
| (Gain)/loss on hedge contracts                                                                |   |              | -            |   |   |   | (851,500 | ) |   |   | 851,500 |   |
| Timing difference between derivatives recognised and settled                                  |   |              | 178,578      |   |   |   | 15,074,050 |   |   |   | (17,034,350 | ) |
| Stock compensation expense, including restricted stock                                        |   |              | 11,804,000   |   |   |   | 8,290,681 |   |   |   | 5,741,086 |   |
| Inventory revaluation                                                                         |   |              | -            |   |   |   | 140,278 |   |   |   | 8,379,587 |   |
| Non-cash interest on secured loan facility                                                    |   |              | -            |   |   |   | - |   |   |   | 2,189,907 |   |
| Non-cash interest settlement on preference shares                                             |   |              | -            |   |   |   | - |   |   |   | 372,950 |   |
| Non-cash interest settlement on debentures                                                    |   |              | -            |   |   |   | 2,352,084 |   |   |   | 2,620,628 |   |
| Oil and gas properties expensed                                                               |   |              | 16,981,929   |   |   |   | 208,694 |   |   |   | 1,103,320 |   |
| Loss on extinguishment of IPI Liability                                                       |   |              | 30,568,710   |   |   |   | 31,710,027 |   |   |   | - |   |
| Non-cash litigation settlement expense                                                        |   |              | 12,000,000   |   |   |   | - |   |   |   | - |   |
| Loss/(gain) on proportionate consolidation of LNG project                                     |   |              | -            |   |   |   | 724,357 |   |   |   | (811,765 | ) |
| Unrealized foreign exchange gain                                                              |   |              | (72,456      | ) |   |   | (574,778 | ) |   |   | (3,728,721 | ) |
| Change in operating working capital                                                           |   |              |         |   |   |   |   |   |   |   |   |   |
| (Increase)/decrease in trade receivables                                                      |   |              | (9,224,005   | ) |   |   | (9,523,370 | ) |   |   | 18,684,422 |   |
| (Decrease)/increase in unrealised hedge gains                                                 |   |              | -            |   |   |   | (900,000 | ) |   |   | 900,000 |   |
| Decrease/(increase) in other assets and prepaid expenses                                      |   |              | 3,505,963    |   |   |   | (2,947,137 | ) |   |   | 592,073 |   |
| (Increase)/decrease in inventories                                                            |   |              | (56,115,637  | ) |   |   | 12,226,616 |   |   |   | (3,189,859 | ) |
| Increase/(decrease) in accounts payable and accrued liabilities                               |   |              | 5,692,543    |   |   |   | (12,071,350 | ) |   |   | 5,846,860 |   |
| Net cash (used in)/from operating activities                                                  |   |              | (13,561,258  | ) |   |   | 44,500,367 |   |   |   | 15,586,156 |   |
|                                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Investing activities                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Expenditure on oil and gas properties                                                         |   |              | (113,128,916 | ) |   |   | (91,788,438 | ) |   |   | (63,890,512 | ) |
| Proceeds from IPI cash calls                                                                  |   |              | 23,723,752   |   |   |   | 15,406,022 |   |   |   | 18,323,365 |   |
| Expenditure on plant and equipment, net of disposals                                          |   |              | (22,560,055  | ) |   |   | (11,782,925 | ) |   |   | (5,172,133 | ) |
| Proceeds received on sale of assets                                                           |   |              | -            |   |   |   | - |   |   |   | 312,500 |   |
| Proceeds received on sale of exploration assets                                               |   |              | 15,544,465   |   |   |   | - |   |   |   | 6,500,000 |   |
| Increase in restricted cash held as security on borrowings                                    |   |              | (17,969,494  | ) |   |   | (3,023,535 | ) |   |   | (3,900,680 | ) |
| Change in non-operating working capital                                                       |   |              |         |   |   |   |   |   |   |   |   |   |
| Increase in accounts payable and accrued liabilities                                          |   |              | 3,232,029    |   |   |   | 5,621,530 |   |   |   | 436,775 |   |
| Net cash used in investing activities                                                         |   |              | (111,158,219 | ) |   |   | (85,567,346 | ) |   |   | (47,390,685 | ) |
|                                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Financing activities                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Repayments of OPIC secured loan                                                               |   |              | (9,000,000   | ) |   |   | (9,000,000 | ) |   |   | (9,000,000 | ) |
| Proceeds from Mitsui for Condensate Stripping Plant                                           |   |              | 11,913,514   |   |   |   | - |   |   |   | - |   |
| Proceeds from/(repayments of) Clarion Finanz secured loan, net of transaction costs (note 20) |   |              | (1,000,000   | ) |   |   | - |   |   |   | - |   |
| Repayments of bridging facility, net of transaction costs                                     |   |              | -            |   |   |   | - |   |   |   | (70,000,000 | ) |
| Proceeds from PNG LNG cash call                                                               |   |              | 866,600      |   |   |   | - |   |   |   | 9,447,250 |   |
| Proceeds from Clarion Finanz for Elk option agreement                                         |   |              | -            |   |   |   | 3,577,288 |   |   |   | 5,500,000 |   |
| Proceeds from Petromin for Elk and Antelope field development                                 |   |              | 5,000,000    |   |   |   | 6,435,000 |   |   |   | 4,000,000 |   |
| Proceeds from/(repayments of) working capital facility                                        |   |              | 26,627,907   |   |   |   | (44,165,983 | ) |   |   | 2,291,030 |   |
| Proceeds from issue of common shares/conversion of debt, net of transaction costs             |   |              | 211,147,565  |   |   |   | 81,699,921 |   |   |   | (104,975 | ) |
| Proceeds from issue of convertible notes/debentures, net of transaction costs                 |   |              | 66,290,893   |   |   |   | - |   |   |   | 94,780,034 |   |
|   Net cash from financing activities                                                |   |              | 311,846,479  |   |   |   | 38,546,226 |   |   |   | 36,913,339 |   |
|                                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| Increase/(decrease) in cash and cash equivalents                                              |   |              | 187,127,002  |   |   |   | (2,520,753 | ) |   |   | 5,108,810 |   |
| Cash and cash equivalents, beginning of period                                                |   |              | 46,449,819   |   |   |   | 48,970,572 |   |   |   | 43,861,762 |   |
| Cash and cash equivalents, end of period (note 6)                                             |   |              | 233,576,821  |   |   |   | 46,449,819 |   |   |   | 48,970,572 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     7 |
|--------|---------------------------------------------------------------------------------------|

----

| InterOil CorporationConsolidated Statements of Shareholders' Equity(Expressed in United States dollars) |  |
|---------------------------------------------------------------------------------------------------------|--|

|                                                                                         |   | Year ended   |         |
|----------------------------------------------------------------------------------------------|--------|-------------------|--------------|
|                                                                                         |   | December 31, |         |   | December 31, |   |   | December 31, |   |
|                                                                                         |   | 2010              |         |   | 2009 |   |   | 2008 |   |
|                                                                                         |   | $                 |         |   | $ |   |   | $ |   |
| Share capital                                                                                |   |              |         |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | 613,361,363  |   |   |   | 373,904,356 |   |   |   | 259,324,133 |   |
| Issue of capital stock (note 23)                                                             |   |              | 282,289,689  |   |   |   | 239,457,007 |   |   |   | 114,580,223 |   |
| At end of period                                                                             |   |              | 895,651,052  |   |   |   | 613,361,363 |   |   |   | 373,904,356 |   |
| Preference shares                                                                            |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | -            |   |   |   | - |   |   |   | 6,842,688 |   |
| Conversion to common shares during the period                                                |   |              | -            |   |   |   | - |   |   |   | (6,842,688 | ) |
| At end of period                                                                             |   |              | -            |   |   |   | - |   |   |   | - |   |
| 2.75% convertible notes                                                                      |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | -            |   |   |   | - |   |   |   | - |   |
| Issue of convertible notes (note 25)                                                         |   |              | 14,298,036   |   |   |   | - |   |   |   | - |   |
| At end of period                                                                             |   |              | 14,298,036   |   |   |   | - |   |   |   | - |   |
| 8% subordinated debentures                                                                   |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | -            |   |   |   | 10,837,394 |   |   |   | - |   |
| Issue of debentures                                                                          |   |              | -            |   |   |   | - |   |   |   | 13,036,434 |   |
| Conversion to common shares during the period (note 24)                                      |   |              | -            |   |   |   | (10,837,394 | ) |   |   | (2,199,040 | ) |
| At end of period                                                                             |   |              | -            |   |   |   | - |   |   |   | 10,837,394 |   |
| Contributed surplus                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | 21,297,177   |   |   |   | 15,621,767 |   |   |   | 10,337,548 |   |
| Fair value of options and restricted stock  transferred to share capital (note 26) |   |              | (8,454,758   | ) |   |   | (2,185,642 | ) |   |   | (456,867 | ) |
| Stock compensation expense (note 26)                                                         |   |              | 11,804,000   |   |   |   | 8,290,681 |   |   |   | 5,741,086 |   |
| Loss on extinguishment of IPI conversion options (note 21)                                   |   |              | (7,908,002   | ) |   |   | (649,187 | ) |   |   | - |   |
| Lapsed warrants transferred to contributed surplus                                           |   |              | -            |   |   |   | 219,558 |   |   |   | - |   |
| At end of period                                                                             |   |              | 16,738,417   |   |   |   | 21,297,177 |   |   |   | 15,621,767 |   |
| Warrants                                                                                     |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | -            |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |
| Conversion to common shares (note 27)                                                        |   |              | -            |   |   |   | (1,899,476 | ) |   |   | - |   |
| Lapsed warrants transferred to contributed surplus                                           |   |              | -            |   |   |   | (219,558 | ) |   |   | - |   |
| At end of period                                                                             |   |              | -            |   |   |   | - |   |   |   | 2,119,034 |   |
| Accumulated Other Comprehensive Income                                                       |   |              |         |   |   |   |   |   |   |   |   |   |
| Deferred hedge gain                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | -            |   |   |   | 18,012,500 |   |   |   | - |   |
| Deferred hedge movement for the period, net of tax (note 8)                                  |   |              | -            |   |   |   | (18,012,500 | ) |   |   | 18,012,500 |   |
| Deferred hedge gain at end of period                                                         |   |              | -            |   |   |   | - |   |   |   | 18,012,500 |   |
| Foreign currency translation reserve                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | 8,150,976    |   |   |   | 9,685,806 |   |   |   | 6,025,019 |   |
| Foreign currency translation movement for the period, net of tax                             |   |              | 1,110,201    |   |   |   | (1,534,830 | ) |   |   | 3,660,787 |   |
| Foreign currency translation reserve at end of period                                        |   |              | 9,261,177    |   |   |   | 8,150,976 |   |   |   | 9,685,806 |   |
| Accumulated other comprehensive income at end of period                                      |   |              | 9,261,177    |   |   |   | 8,150,976 |   |   |   | 27,698,306 |   |
| Conversion options                                                                           |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | 13,270,880   |   |   |   | 17,140,000 |   |   |   | 19,840,000 |   |
| Movement for the period (note 21)                                                            |   |              | (1,120,000   | ) |   |   | (3,869,120 | ) |   |   | (2,700,000 | ) |
| At end of period                                                                             |   |              | 12,150,880   |   |   |   | 13,270,880 |   |   |   | 17,140,000 |   |
| Accumulated deficit                                                                          |   |              |         |   |   |   |   |   |   |   |   |   |
|                                                                                         |   |              |         |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                                       |   |              | (214,104,303 | ) |   |   | (220,186,930 | ) |   |   | (208,389,853 | ) |
| Net (loss)/income for the period                                                             |   |              | (45,492,941  | ) |   |   | 6,082,627 |   |   |   | (11,797,077 | ) |
| At end of period                                                                             |   |              | (259,597,244 | ) |   |   | (214,104,303 | ) |   |   | (220,186,930 | ) |
| Shareholders' equity at end of period                                                        |   |              | 688,502,318  |   |   |   | 441,976,093 |   |   |   | 227,133,927 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     8 |
|--------|---------------------------------------------------------------------------------------|

----

| InterOil CorporationConsolidated Statements of Comprehensive Income(Expressed in United States dollars) |  |
|---------------------------------------------------------------------------------------------------------|--|

|                                             |   | Year ended   |        |
|--------------------------------------------------|--------|-------------------|-------------|
|                                             |   | December 31, |        |   | December 31, |   |   | December 31, |   |
|                                             |   | 2010              |        |   | 2009 |   |   | 2008 |   |
|                                             |   | $                 |        |   | $ |   |   | $ |   |
|                                             |   |              |        |   |   |   |   |   |   |
| Net (loss)/income as per Statement of Operations |   |              | (45,492,941 | ) |   |   | 6,082,627 |   |   |   | (11,797,077 | ) |
|                                             |   |              |        |   |   |   |   |   |   |   |   |   |
| Other comprehensive income/(loss), net of tax    |   |              | 1,110,201   |   |   |   | (19,547,330 | ) |   |   | 21,673,287 |   |
|                                             |   |              |        |   |   |   |   |   |   |   |   |   |
| Comprehensive (loss)/income                      |   |              | (44,382,740 | ) |   |   | (13,464,703 | ) |   |   | 9,876,210 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     9 |
|--------|---------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 1. | Nature of operations and organization |
|----|---------------------------------------|

| 2. | Significant accounting policies |
|----|---------------------------------|

| (a)  | Basis of preparation |
|-----------|----------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     10 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| (b) | Going concern |
|-----|---------------|

| (c) | Principles of consolidation |
|-----|-----------------------------|

| - | Subsidiaries:  The consolidated financial statements of the Company incorporates the assets, liabilities and results of InterOil Corporation and of all subsidiaries as at December 31, 2010, December 31, 2009, December 31, 2008 and for the years then ended.  Subsidiaries of InterOil Corporation as at December 31, 2010 included SP InterOil LDC (99.9%), SPI Exploration and Production Corporation (100% - one share held by PIE Corp), SPI Distribution Limited (100% - one share held by PIE Corp), InterOil LNG Holdings Inc. (100%), InterOil Australia Pty Ltd (100%), SPI InterOil Holdings Limited (100%), Direct Employment Services Company (100%), InterOil New York Inc. (100%), InterOil Singapore Pte Ltd (100%), InterOil Finance Inc. (100%), InterOil Shipping Pte Ltd (100%) and theirsubsidiaries.  InterOil Corporation and its subsidiaries together are referred to in these financial statements as the Company or the consolidated entity. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     11 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| - | Proportionate consolidation of Joint Venture interests:  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..  Further shareholder transactions have taken place since this date which has impacted the shareholding of each of these joint venture partners (refer to note 15 below).  The signing of this Shareholders’ Agreement meant that PNG LNG Inc. was no longer a subsidiary of InterOil and was a jointly controlled entity, between the parties to the Shareholders’ Agreement, from the date of the agreement.  As the entity became a joint venture in July 2007, guidance under CICA 3055 – ‘Interest in Joint Ventures’ hasbeen followed and the entity has been proportionately consolidated in InterOil’s consolidated financial statements from the date of the Shareholders’ Agreement.  The consolidated results of InterOil’s proportionate shareholding in the LNG Project has been disclosed separately within the segment notes under Midstream - Liquefaction, refer to note 5. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (d) | Changes in accounting policies |
|-----|--------------------------------|

| (e) | New standards issued but not yet effective, and transition to IFRS |
|-----|--------------------------------------------------------------------|

| (f) | Segment reporting |
|-----|-------------------|

| - | that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other segments of the same enterprise), |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | whose operating results are regularly reviewed by the Company’s management to make decisions about resources to be allocated to the segment and assess its performance, and |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | for which discrete financial information is available. |
|---|--------------------------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     12 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| (g) | Foreign currency translation |
|-----|------------------------------|

| - | Functional and reporting currency:  Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”).  The consolidated financial statements are presented in United States Dollars (“USD”) which is InterOil’s functional and reporting currency. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Self Sustaining and Integrated Foreign Operations:  For subsidiaries considered to be self-sustaining foreign operations, all assets and liabilities denominated in foreign currency are translated to USD at exchange rates in effect at the balance sheet date and all revenue and expense items are translated at the rates of exchange in effect at the time of the transactions.  Foreign exchange gains or losses are reported as a separate component of shareholders' equity as a Foreign currency translation adjustment. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (h) | Revenue recognition |
|-----|---------------------|

| - | Revenue from Midstream Refining operations:  Revenue from sales of products is recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.  Sales between the business segments of the Company have been eliminated from sales and operating revenues and cost of sales. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Revenue from Downstream operations:  Sales of goods are recognized when the Company has delivered products to the customer, the customer takes ownership and assumes risk of loss, collection of the receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixed or determinable. It is not the Company’s policy to sell products with a right of return. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Interest income:  Interest income is recognized on a time-proportionate basis. |
|---|------------------------------------------------------------------------------------------|

| (i) | Income tax |
|-----|------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     13 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| (j) | Acquisitions of assets |
|-----|------------------------|

| (k) | Impairment of assets |
|-----|----------------------|

| (l) | Cash and cash equivalents |
|-----|---------------------------|

| (m) | Restricted cash |
|-----|-----------------|

| (n) | Trade receivables |
|-----|-------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     14 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| (o) | Inventory |
|-----|-----------|

| - | Raw materials and stores:  Raw materials are stated at the lower of costs and net realizable value.  Costs comprise direct materials, direct labor and an appropriate proportion of variable and fixed overhead expenditure.  Net realizable value is the estimated selling price in the ordinary course of the business less the estimated costs of completion and the estimated costs necessary to make the sale.  Stores are stated at cost less provision for obsolescence. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Crude oil and refined petroleum products:  Crude oil and refined petroleum products are recorded on a first-in, first-out basis and the net realizable value test for crude oil and refined petroleum products are performed separately.  The cost of Midstream Refining petroleum products consist of raw material, labor, direct overheads and transportation costs.  The cost of Downstream petroleum products includes the cost of the product plus related freight, wharfage and insurance. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (p) | Assets held for sale |
|-----|----------------------|

| (q) | Derivative financial instruments |
|-----|----------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     15 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| (r) | Deferred financing costs |
|-----|--------------------------|

| (s) | Plant and equipment |
|-----|---------------------|

| - | Refinery assets:  The Company’s most significant item of plant and equipment is the oil refinery in PNG which is included within Midstream Refining assets.  The pre-operating stage of the refinery ceased on January 1, 2005.  Project costs, net of any recoveries, incurred during the pre-operating stage were capitalized as part of plant and equipment.  Development costs and the costs of acquiring or constructing support facilities and equipment are also capitalized. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Other assets:  Property, plant and equipment are recorded at cost.  Depreciation of assets begins when the asset is in place and ready for its intended use.  Assets under construction and deferred project costs are not depreciated.  Depreciation of plant and equipment is calculated using the straight line method, based on the estimated service life of the asset.  Maintenance and repair costs are expensed as incurred.  Improvements that increase the capacity or prolong the service life of an asset are capitalized. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|       |   | Between |     |
|------------|--------|---------|----------|
| Downstream |   |    | 1% - 25  | % |
| Midstream  |   |    | 1% - 33  | % |
| Upstream   |   |    | 4% - 100 | % |
| Corporate  |   |    | 13% - 33 | % |

| - | Leased assets:  Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases.  Finance leases are classified at the inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments.  The corresponding rental obligations, net of finance charges, are included in other long term payables.  Each lease payment is allocated between the liability and the finance charges so as to achieve a constant rate on the finance balance outstanding.  The interest element of the finance cost is charged to the statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance ofthe liability for each period.  The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Asset retirement obligations:  Estimated costs of future dismantlement, site restoration and abandonment of properties are provided based upon current regulations and economic circumstances at year end.  Management estimates there are no material obligations relating to future restoration and closure costs. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Environmental remediation:  Remediation costs are accrued based on estimates of known environmental remediation exposure.  Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred.  Provisions are determined on an assessment of current costs, current legal requirements and current technology.  Changes in estimates are dealt with on a prospective basis.  As at December 31, 2010, no provision has been raised. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     16 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| - | Disposal of property, plant and equipment:  At the time of disposition of plant and equipment, the carrying values of the assets are written off along with accumulated depreciation and any resulting gain or loss is included in the statement of operations. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | IT Development and software:  Costs incurred in development products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalized.  Costs capitalized include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.  Amortization is calculated on a straight line basis over periods generally ranging from 3 to 5 years.  IT development costs include only those costs directly attributable to the development phase and are only recognized following completion of technical feasibility and where the Company has an intention and ability to use the asset. These amounts are capitalizedas part of property, plant and equipment in the Corporate segment. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (t) | Oil and gas properties |
|-----|------------------------|

| (u) | Accounts payable and accrued liabilities |
|-----|------------------------------------------|

| (v) | Employee entitlements |
|-----|-----------------------|

| - | Wages and salaries, and annual leave:  Liabilities for wages and salaries, including annual leave expected to be settled within 12 months of the reporting date are recognized in accounts payable and accrued liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when liabilities are settled. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Long Service Leave:  The liability for long service leave is recognized in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date.  Consideration is given to expected future wage and salary levels, experience of employee departures, periods of service and statutory obligations. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Retirement benefit obligations:  The Company contributed to a defined contribution plan and the Company’s legal or constructive obligation is limited to these contributions.  Contributions to the defined contribution fund are recognized as an expense as they become payable. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Stock-based compensation:  Stock-based compensation benefits are provided to employees and directors pursuant to the 2009 Stock Incentive Plan (with options still in existence having been granted under the now superseded 2006 Stock Incentive Plan).  The Company currently issues stock options and restricted stock units as part of its stock-based compensation plan.  The fair value of stock options at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the terms of the option, the vesting criteria, the share price at grant date and expected price volatility of the underlying share, the expected yield and risk-free interest rate for the term of the option.  Upon exercise of options, the balance of the contributed surplusrelating to those options is transferred to share capital.  The fair value of restricted stock on grant date is the market value of the stock.  The Company uses the fair value based method to account for employee stock based compensation benefits.  Under the fair value based method, compensation expense is measured at fair value at the date of grant and is expensed over the award's vesting period. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     17 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 2. | Significant accounting policies (cont’d) |
|----|------------------------------------------------|

| - | Profit-sharing and bonus plans:  The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (w) | Earnings per share |
|-----|--------------------|

| - | Basic earnings per share:  Basic common shares outstanding are the weighted average number of common shares outstanding for each period.  The calculation of basic earnings per share amounts is based on net profit/(loss) divided by the weighted average of common shares outstanding. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Diluted earnings per share:  Diluted earnings per share amounts are computed similarly to basic per share amounts except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, conversion options and warrants, if dilutive.  The number of additional shares is calculated by assuming that outstanding stock options were exercised and the proceeds from such exercises were used to acquire shares of common stock at the average price during the reporting period.  The dilutive per share amounts are also computed by adjusting the basic per share amounts for the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (x) | Reclassification |
|-----|------------------|

| 3. | Transition to International Financial Reporting Standards (“IFRS”) |
|----|--------------------------------------------------------------------------------|

| - | Business Combinations: A first-time adopter may elect not to apply IFRS 3 - ‘Business Combinations’ (as revised in 2008) retrospectively to past business combinations (business combinations that occurred before the date of transition to IFRSs).  However, if a first-time adopter restates any business combination to comply with IFRS 3 (as revised in 2008), it shall restate all later business combinations and shall also apply IAS 27 (as amended in 2008) from that same date.  InterOil has made the election not to apply IFRS 3 retrospectively to past business combinations. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Property, Plant and Equipment: An entity may elect to measure an item of property, plant and equipment at the date of transition to IFRSs at its fair value and use that fair value as its deemed cost at that date.  InterOil has made the election not to revalue its Property, plant and equipment to fair value or deemed cost.  Historical cost will be maintained as plant and equipment cost base on transition. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     18 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 3. | Transition to International Financial Reporting Standards (“IFRS”) |
|----|--------------------------------------------------------------------------------|

| - | Foreign currency translation reserve: Consistent with the Company’s Canadian GAAP treatment, as noted under 2(g) above, IAS 21 requires an entity: (a) to recognize some translation differences in other comprehensive income and accumulate these in a separate component of equity; and (b) on disposal of a foreign operation, to reclassify the cumulative translation difference for that foreign operation (including, if applicable, gains and losses on related hedges) from equity to profit or loss as part of the gain or loss on disposal.  An election can be made to be exempted from this requirement on transition and start with 'zero' translation differences.  InterOil has not made the election to restate its cumulative translation differences balance to zero, and has elected to continue with thecurrent translation differences in Comprehensive income as these are already in compliance with IAS 21.  As the Company is maintaining the Foreign Currency Translation Reserve, deferred tax on the balance will also have to be recognized by crediting opening equity balances as under IFRS the translation reserve should be disclosed net of taxes.  There will be no profit and loss impact due to the deferred tax recognition. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Oil and Gas assets: Oil and Gas industry specific accounting under IFRS or Canadian GAAP is currently not as comprehensive as the guidance provided under U.S. GAAP accounting for industry specific oil and gas transactions. Para D1 of IFRS 1 provides an exemption in relation to Oil and Gas assets by allowing Companies to continue using the same policies as used under the previous GAAP and carrying forward the carrying amounts of the Oil and Gas assets under Canadian GAAP into IFRS.  InterOil has availed this exemption and elected to maintain the Company’s Oil and Gas assets at carrying amount under Canadian GAAP, which will be the deemed cost under IFRS. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Interests in Joint Ventures: CICA Section 3055 differs from IAS 31 as IAS 31 permits the use of either the proportionate consolidation method or the equity method to account for joint ventures.  IAS 31 recommends the use of proportionate consolidation as it better reflects the substance and economic reality, however, it does permit the use of equity method.  CICA Section 3055 only allows the use of proportionate consolidation method to account for joint ventures.  InterOil has elected to maintain its joint venture accounting under the proportionate consolidation model for both its incorporated and unincorporated joint venture interests. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4. | Financial Risk Management |
|----|---------------------------|

| (a)  | Market risk |
|-----------|-------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     19 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                      |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|---------------------------|--------|-------------------|------------|--------|-------------------|--------|------------|-------------------|--------|
|                      |   | 2010              |       |   | 2009              |   |       | 2008              |   |
|                      |   | $                 |       |   | $                 |   |       | $                 |   |
| Financial Assets          |   |              |       |   |              |   |       |              |   |
| Cash and cash equivalents |   |              | 11,789,931 |   |              |   | 19,026,270 |              |   |   | 28,865,339 |   |
| Cash restricted           |   |              | 130,486    |   |              |   | 124,858    |              |   |   | 124,097 |   |
| Receivables               |   |              | 42,006,504 |   |              |   | 36,841,246 |              |   |   | 39,307,624 |   |
| Other financial assets    |   |              | 1,771,866  |   |              |   | 6,459,541  |              |   |   | 3,348,716 |   |
|                      |   |              |       |   |              |   |       |              |   |   |   |   |
| Financial liabilities     |   |              |       |   |              |   |       |              |   |   |   |   |
| Payables                  |   |              | 16,980,909 |   |              |   | 19,808,982 |              |   |   | 17,766,660 |   |
| Working capital facility  |   |              | 1,230,767  |   |              |   | 7,832,266  |              |   |   | 15,405,627 |   |

|                             |   | Year ended             |    |   | Year ended                                              |   |      | Year ended             |   |
|----------------------------------|--------|-----------------------------|---------|--------|--------------------------------------------------------------|--------|-----------|-----------------------------|--------|
|                             |   | December 31, 2010 |    |   | December 31, 2009                                  |   |      | December 31, 2008 |   |
|                             |   | Impact on profit  |    |   | Impact on equity- excludingprofit impact |   |      | Impact on profit  |   |   | Impact on equity- excludingprofit impact |   |   | Impact on profit |   |   | Impact on equity- excludingprofit impact |   |
|                             |   | $                           |    |   | $                                                            |   |      | $                           |   |   | $ |   |   | $ |   |   | $ |   |
|                             |   |                        |    |   |                                                         |   |      |                        |   |   |   |   |   |   |   |   |   |   |
| Post-tax gain/(loss)             |   |                        |    |   |                                                         |   |      |                        |   |   |   |   |   |   |   |   |   |   |
| Effect of 5% appreciation of PGK |   |                        | 212,281 |   |                                                         |   | 1,662,074 |                        |   |   | 144,031 |   |   |   | 1,596,502 |   |   |   | 758,204 |   |   |   | 1,165,471 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     20 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                              |   | Year ended             |     |   | Year ended                                              |   |   | Year ended             |   |
|-----------------------------------|--------|-----------------------------|----------|--------|--------------------------------------------------------------|--------|--------|-----------------------------|--------|
|                              |   | December 31, 2010 |     |   | December 31, 2009                                  |   |   | December 31, 2008 |   |
|                              |   | Impact on profit  |     |   | Impact on equity- excludingprofit impact |   |   | Impact on profit  |   |   | Impact on equity- excludingprofit impact |   |   | Impact on profit |   |   | Impact on equity- excludingprofit impact |   |
|                              |   | $                           |     |   | $                                                            |   |   | $                           |   |   | $ |   |   | $ |   |   | $ |   |
|                              |   |                        |     |   |                                                         |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Post-tax gain/(loss)              |   |                        |     |   |                                                         |   |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $10 increase in benchmark pricing |   |                        | (540,000 | )      |                                                         |   | -      |                        |   |   | - |   |   |   | - |   |   |   | (2,300,000 | ) |   |   | - |   |

|                             |   | December 31, 2010 |        |   | December 31, 2009 |   |       | December 31, 2008 |   | Cash flow/fair value  |
|----------------------------------|--------|-----------------------------|-------------|--------|-----------------------------|--------|------------|-----------------------------|--------|--------------------------------------|
|                             |   | $                           |        |   | $                           |   |       | $                           |   | interest rate risk         |
| Financial Assets            |   |                        |        |   |                        |   |       |                        |   |                                 |
| Cash and cash equivalents        |   |                        | 1,205,304   |   |                        |   | 1,484,987  |                        |   |                                 | 6,571,375 |   | fair value interest rate risk |
| Cash and cash equivalents        |   |                        | 232,371,517 |   |                        |   | 44,964,832 |                        |   |                                 | 42,399,197 |   | cash flow interest rate risk |
| Cash restricted                  |   |                        | 309,926     |   |                        |   | 282,555    |                        |   |                                 | 290,782 |   | fair value interest rate risk |
| Cash restricted                  |   |                        | 46,968,143  |   |                        |   | 29,026,020 |                        |   |                                 | 25,994,258 |   | cash flow interest rate risk |
| Financial liabilities            |   |                        |        |   |                        |   |       |                        |   |                                 |   |   |   |
| OPIC secured loan                |   |                        | 44,500,000  |   |                        |   | 53,500,000 |                        |   |                                 | 62,500,000 |   | fair value interest rate risk |
| Mitsui unsecured loan            |   |                        | 5,456,757   |   |                        |   | -          |                        |   |                                 | - |   | cash flow interest rate risk |
| BNP working capital facility     |   |                        | 50,023,559  |   |                        |   | 16,794,153 |                        |   |                                 | 53,386,775 |   | cash flow interest rate risk |
| Westpac working capital facility |   |                        | 1,230,767   |   |                        |   | 7,832,266  |                        |   |                                 | 15,405,627 |   | cash flow interest rate risk |
| 2.75% convertible notes          |   |                        | 70,000,000  |   |                        |   | -          |                        |   |                                 | - |   | fair value interest rate risk |
| 8% subordinated debentures       |   |                        | -           |   |                        |   | -          |                        |   |                                 | 78,975,000 |   | fair value interest rate risk |

|   | Consolidated Financial Statements INTEROIL CORPORATION     21 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                 |   | Year ended             |    |   | Year ended                                              |   |   | Year ended             |   |
|----------------------|--------|-----------------------------|---------|--------|--------------------------------------------------------------|--------|--------|-----------------------------|--------|
|                 |   | December 31, 2010 |    |   | December 31, 2009                                  |   |   | December 31, 2008 |   |
|                 |   | Impact on profit  |    |   | Impact on equity- excludingprofit impact |   |   | Impact on profit  |   |   | Impact on equity- excludingprofit impact |   |   | Impact on profit |   |   | Impact on equity- excludingprofit impact |   |
|                 |   | $                           |    |   | $                                                            |   |   | $                           |   |   | $ |   |   | $ |   |   | $ |   |
|                 |   |                        |    |   |                                                         |   |   |                        |   |   |   |   |   |   |   |   |   |   |
| Post-tax loss/(gain) |   |                        |    |   |                                                         |   |   |                        |   |   |   |   |   |   |   |   |   |   |
| LIBOR Increase by 1% |   |                        | 338,291 |   |                                                         |   | -      |                        |   |   | 252,242 |   |   |   | - |   |   |   | 260,944 |   |   |   | - |   |

| (b)  | Liquidity risk |
|-----------|----------------|

|   | · | sufficient cash and marketable securities; |
|--------|--------|--------------------------------------------|

|   | · | access to, or availability of, funding through an adequate amount of committed credit facilities; and |
|--------|--------|-------------------------------------------------------------------------------------------------------|

|   | · | the ability to close-out any open market positions. |
|--------|--------|-----------------------------------------------------|

|                                                          |   |                |        |   | Undrawn Amount         |   |
|---------------------------------------------------------------|--------|---------------------|-------------|--------|-----------------------------|--------|
|                                                          |   | Total Facility |        |   | December 31, 2010 |   |
|                                                          |   | $                   |        |   | $                           |   |
| Facility                                                      |   |                |        |   |                        |   |
| OPIC secured loan                                             |   |                | 44,500,000  |   |                        |   | - |   |
| Mitsui unsecured loan                                         |   |                | 5,456,757   |   |                        |   | - |   |
| 2.75% convertible notes                                       |   |                | 70,000,000  |   |                        |   | - |   |
| BNP Paribas working capital facility 1                        |   |                | 130,000,000 |   |                        |   | 1,164,294 |   |
| BNP Paribas working capital facility 2                        |   |                | 60,000,000  |   |                        |   | 45,102,147 |   |
| Westpac working capital facility  (PGK denominated) |   |                | 30,280,000  |   |                        |   | 29,049,233 |   |
| BSP working capital facility (PGK denominated)                |   |                | 18,925,000  |   |                        |   | 18,925,000 |   |
|                                                          |   |                | 359,161,757 |   |                        |   | 94,240,674 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     22 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                                               |   | Less than 1year |        |   | Between 1 and 5years |   |        | More than 5years |   |   | Totalcontractualcash flow |   |
|----------------------------------------------------|--------|-----------------|-------------|--------|----------------------|--------|-------------|------------------|--------|--------|---------------------------|--------|
| Non-derivatives                                    |   |            |        |   |                 |   |        |             |   |   |                      |   |
| Accounts payable and accrued liabilities (note 14) |   |            | 76,087,954  |   |                 |   | -           |             |   |   | -                         |   |   |   | 76,087,954 |   |
| Working capital facility (note 17)                 |   |            | 51,254,326  |   |                 |   | -           |             |   |   | -                         |   |   |   | 51,254,326 |   |
| Secured and unsecured loans (note 20)              |   |            | 14,456,757  |   |                 |   | 35,500,000  |             |   |   | -                         |   |   |   | 49,956,757 |   |
| 2.75% convertible notes (note 25)                  |   |            | -           |   |                 |   | 70,000,000  |             |   |   | -                         |   |   |   | 70,000,000 |   |
| Total non-derivatives                              |   |            | 141,799,037 |   |                 |   | 105,500,000 |             |   |   | -                         |   |   |   | 247,299,037 |   |
|                                               |   |            |        |   |                 |   |        |             |   |   |                      |   |   |   |   |   |
| Derivatives                                        |   |            |        |   |                 |   |        |             |   |   |                      |   |   |   |   |   |
| Derivative contracts (note 8)                      |   |            | 178,578     |   |                 |   | -           |             |   |   | -                         |   |   |   | 178,578 |   |
| Total derivatives                                  |   |            | 178,578     |   |                 |   | -           |             |   |   | -                         |   |   |   | 178,578 |   |
|                                               |   |            | 141,977,615 |   |                 |   | 105,500,000 |             |   |   | -                         |   |   |   | 247,477,615 |   |

|                                                               |   |   |       |   | Payable ageing between |   |
|--------------------------------------------------------------------|--------|--------|------------|--------|----------------------------------|--------|
| Accounts payable and accrued liabilities  |   | Total  |       |   | <30 days                 |   |   | 30-60 days |   |   | >60 days |   |
|                                                               |   | $      |       |   | $                                |   |   | $ |   |   | $ |   |
| December 31, 2010                                                  |   |   | 76,087,954 |   |                             |   | 71,743,138 |   |   |   | 1,766,354 |   |   |   | 2,578,462 |   |
| December 31, 2009                                                  |   |   | 59,372,354 |   |                             |   | 57,048,258 |   |   |   | 838,973 |   |   |   | 1,485,123 |   |
| December 31, 2008                                                  |   |   | 78,147,736 |   |                             |   | 76,556,334 |   |   |   | 1,181,334 |   |   |   | 410,068 |   |

| (c)  | Credit risk |
|-----------|-------------|

|                           |   | December 31, |        |   | December 31, |   |       | December 31, |   |
|--------------------------------|--------|-------------------|-------------|--------|-------------------|--------|------------|-------------------|--------|
|                           |   | 2010              |        |   | 2009              |   |       | 2008              |   |
|                           |   | $                 |        |   | $                 |   |       | $                 |   |
| Current                        |   |              |        |   |              |   |       |              |   |
| Cash and cash equivalents      |   |              | 233,576,821 |   |              |   | 46,449,819 |              |   |   | 48,970,572 |   |
| Cash restricted                |   |              | 40,664,995  |   |              |   | 22,698,829 |              |   |   | 25,994,258 |   |
| Trade receivables              |   |              | 48,047,496  |   |              |   | 61,194,136 |              |   |   | 42,887,823 |   |
| Commodity derivative contracts |   |              | -           |   |              |   | -          |              |   |   | 31,335,050 |   |
| Non-current                    |   |              |        |   |              |   |       |              |   |   |   |   |
| Cash restricted                |   |              | 6,613,074   |   |              |   | 6,609,746  |              |   |   | 290,782 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     23 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                            |   |   |       |   | Receivable ageing |   |
|---------------------------------|--------|--------|------------|--------|------------------------|--------|
|                            |   | Total  |       |   | Current                |   |   | <30 days |   |   | 30-60 days |   |   | >60 days |   |
| Net trade receivables |   | $      |       |   | $                      |   |   | $ |   |   | $ |   |   | $ |   |
| December 31, 2010               |   |   | 48,047,496 |   |                   |   | 22,964,018 |   |   |   | 19,239,373 |   |   |   | 3,198,155 |   |   |   | 2,645,950 |   |
| December 31, 2009               |   |   | 61,194,136 |   |                   |   | 49,805,924 |   |   |   | 4,844,492 |   |   |   | 1,666,797 |   |   |   | 4,876,923 |   |
| December 31, 2008               |   |   | 42,887,823 |   |                   |   | 18,592,467 |   |   |   | 14,923,208 |   |   |   | 5,128,127 |   |   |   | 4,244,022 |   |

|                              |   |   |       |   |    |   |       | Overdue             |   |   | Overdue    |   |
|-----------------------------------|--------|--------|------------|--------|---------|--------|------------|---------------------|--------|--------|------------|--------|
|                              |   | Total  |       |   | Current |   |       | (not impaired) |   |   | (impaired) |   |
| Gross trade receivables |   | $      |       |   | $       |   |       | $                   |   |   | $          |   |
| December 31, 2010                 |   |   | 50,553,439 |   |    |   | 22,964,018 |                |   |   | 25,083,478 |   |   |   | 2,505,943 |   |
| December 31, 2009                 |   |   | 64,797,478 |   |    |   | 49,805,924 |                |   |   | 11,388,212 |   |   |   | 3,603,342 |   |
| December 31, 2008                 |   |   | 47,496,119 |   |    |   | 18,592,467 |                |   |   | 24,295,356 |   |   |   | 4,608,296 |   |

|                                          |   |                  |      |   | Year ended       |   |       |                  |   |
|-----------------------------------------------|--------|-----------------------|-----------|--------|-----------------------|--------|------------|-----------------------|--------|
|                                          |   | December 31,2010 |      |   | December 31,2009 |   |       | December 31,2008 |   |
|                                          |   | $                     |      |   | $                     |   |       | $                     |   |
|                                          |   |                  |      |   |                  |   |       |                  |   |
| Trade receivables - Impairment provisions     |   |                  |      |   |                  |   |       |                  |   |
| Opening balance                               |   |                  | 3,603,342 |   |                  |   | 4,608,296  |                  |   |   | 3,176,806 |   |
| Amounts written off during the year           |   |                  | (666,034  | )      |                  |   | (1,262,699 | )                     |   |   | - |   |
| Movement in provisions, net of reversals made |   |                  | (431,365  | )      |                  |   | 257,745    |                  |   |   | 1,431,490 |   |
| Closing balance                               |   |                  | 2,505,943 |   |                  |   | 3,603,342  |                  |   |   | 4,608,296 |   |

| (d)  | Geographic risk |
|-----------|-----------------|

| (e)  | Financing facilities |
|-----------|----------------------|

| - | BNP working capital facility (refer note 17) |
|---|----------------------------------------------|

| - | Westpac working capital facility (refer note 17) |
|---|--------------------------------------------------|

| - | OPIC secured loan facility (refer note 20) |
|---|--------------------------------------------|

| - | Mitsui unsecured loan facility (refer note 20) |
|---|------------------------------------------------|

| - | 2.75% convertible notes (refer note 25) |
|---|-----------------------------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     24 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                                                 |   | December 31, |        |   | December 31, |   |       | December 31, |   |
|------------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|------------|-------------------|--------|
|                                                 |   | 2010              |        |   | 2009              |   |       | 2008              |   |
|                                                 |   | $                 |        |   | $                 |   |       | $                 |   |
| Due:                                                 |   |              |        |   |              |   |       |              |   |
| No later than one year                               |   |              | 65,711,083  |   |              |   | 33,626,419 |              |   |   | 77,792,402 |   |
| Later than one year but not later than two years     |   |              | 9,000,000   |   |              |   | 9,000,000  |              |   |   | 9,000,000 |   |
| Later than two years but not later than three years  |   |              | 9,000,000   |   |              |   | 9,000,000  |              |   |   | 9,000,000 |   |
| Later than three years but not later than four years |   |              | 9,000,000   |   |              |   | 9,000,000  |              |   |   | 9,000,000 |   |
| Later than four years but not later than five years  |   |              | 78,500,000  |   |              |   | 9,000,000  |              |   |   | 87,975,000 |   |
| Later than five years                                |   |              | -           |   |              |   | 8,500,000  |              |   |   | 17,500,000 |   |
|                                                 |   |              | 171,211,083 |   |              |   | 78,126,419 |              |   |   | 210,267,402 |   |

| (f)  | Effective interest rates and maturity profile |
|-----------|-----------------------------------------------|

|                              |   | Floating |        |   | Fixed interest maturing between |   |      |   |   |   |      |   |   | Effective |      |
|-----------------------------------|--------|----------|-------------|--------|------------------------------------------------|--------|-----------|--------|--------|--------|-----------|--------|--------|-----------|-----------|
|                              |   | interest |        |   | 1 year                                    |   |      |   |   |   |      |   |   |      |      |   |   |   |   | more than |   |   | Non-interest |   |   |   |   |   | interest |   |
|                              |   | rate     |        |   | or less                                   |   |      | 1-2    |   |   | 2-3       |   |   | 3-4       |      |   | 4-5 |   |   | 5 years |   |   | bearing |   |   | Total |   |   | rate |   |
| December 31, 2010  |   | $        |        |   | $                                              |   |      | $      |   |   | $         |   |   | $         |      |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | % |   |
|                              |   |     |        |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial assets                  |   |     |        |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents         |   |     | 232,371,517 |   |                                           |   | 1,205,304 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 233,576,821 |   |   |   | 0.21 | % |
| Cash restricted                   |   |     | 46,968,143  |   |                                           |   | 309,926   |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 47,278,069 |   |   |   | 2.89 | % |
| Receivables                       |   |     | -           |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 48,047,496 |   |   |   | 48,047,496 |   |   |   | - |   |
| Other financial assets            |   |     | -           |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,593,574 |   |   |   | 3,593,574 |   |   |   | - |   |
|                              |   |     | 279,339,660 |   |                                           |   | 1,515,230 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 51,641,070 |   |   |   | 332,495,960 |   |   |   |   |   |
| Financial liabilities             |   |     |        |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payables                          |   |     | -           |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 76,087,954 |   |   |   | 76,087,954 |   |   |   | - |   |
| Interest bearing liabilities      |   |     | 56,711,083  |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 8,500,000 |   |   |   | - |   |   |   | - |   |   |   | 101,211,083 |   |   |   | 6.80 | % |
| Convertible notes liability       |   |     | -           |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | 70,000,000 |   |   |   | - |   |   |   | - |   |   |   | 70,000,000 |   |   |   | 7.91 | % |
| Other financial liabilities       |   |     | -           |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 178,578 |   |   |   | 178,578 |   |   |   | - |   |
|                              |   |     | 56,711,083  |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 78,500,000 |   |   |   | - |   |   |   | 76,266,532 |   |   |   | 247,477,615 |   |   |   |   |   |

|                              |   | Floating |       |   | Fixed interest maturing between |   |      |   |   |   |      |   |   | Effective |      |
|-----------------------------------|--------|----------|------------|--------|------------------------------------------------|--------|-----------|--------|--------|--------|-----------|--------|--------|-----------|-----------|
|                              |   | interest |       |   | 1 year                                    |   |      |   |   |   |      |   |   |      |      |   |   |   |   | more than |   |   | Non-interest |   |   |   |   |   | interest |   |
|                              |   | rate     |       |   | or less                                   |   |      | 1-2    |   |   | 2-3       |   |   | 3-4       |      |   | 4-5 |   |   | 5 years |   |   | bearing |   |   | Total |   |   | rate |   |
| December 31, 2009  |   | $        |       |   | $                                              |   |      | $      |   |   | $         |   |   | $         |      |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | % |   |
|                              |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial assets                  |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents         |   |     | 44,964,832 |   |                                           |   | 1,484,987 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 46,449,819 |   |   |   | 0.57 | % |
| Cash restricted                   |   |     | 29,026,019 |   |                                           |   | 282,556   |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 29,308,575 |   |   |   | 2.40 | % |
| Receivables                       |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 61,194,136 |   |   |   | 61,194,136 |   |   |   | - |   |
| Other financial assets            |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,964,950 |   |   |   | 6,964,950 |   |   |   | - |   |
|                              |   |     | 73,990,851 |   |                                           |   | 1,767,543 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 68,159,086 |   |   |   | 143,917,480 |   |   |   |   |   |
| Financial liabilities             |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payables                          |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 59,372,354 |   |   |   | 59,372,354 |   |   |   | - |   |
| Interest bearing liabilities      |   |     | 24,626,419 |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 8,500,000 |   |   |   | - |   |   |   | 78,126,419 |   |   |   | 6.89 | % |
|                              |   |     | 24,626,419 |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 8,500,000 |   |   |   | 59,372,354 |   |   |   | 137,498,773 |   |   |   |   |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     25 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

|                              |   | Floating |       |   | Fixed interest maturing between |   |      |   |   |   |      |   |   | Effective |      |
|-----------------------------------|--------|----------|------------|--------|------------------------------------------------|--------|-----------|--------|--------|--------|-----------|--------|--------|-----------|-----------|
|                              |   | interest |       |   | 1 year                                    |   |      |   |   |   |      |   |   |      |      |   |   |   |   | more than |   |   | Non-interest |   |   |   |   |   | interest |   |
|                              |   | rate     |       |   | or less                                   |   |      | 1-2    |   |   | 2-3       |   |   | 3-4       |      |   | 4-5 |   |   | 5 years |   |   | bearing |   |   | Total |   |   | rate |   |
| December 31, 2008  |   | $        |       |   | $                                              |   |      | $      |   |   | $         |   |   | $         |      |   | $ |   |   | $ |   |   | $ |   |   | $ |   |   | % |   |
|                              |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial assets                  |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents         |   |     | 42,108,415 |   |                                           |   | 6,862,157 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 48,970,572 |   |   |   | 3.21 | % |
| Cash restricted                   |   |     | 25,994,258 |   |                                           |   | 290,782   |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 26,285,040 |   |   |   | 4.15 | % |
| Receivables                       |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 42,887,823 |   |   |   | 42,887,823 |   |   |   | - |   |
| Other financial assets            |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 35,824,624 |   |   |   | 35,824,624 |   |   |   | - |   |
|                              |   |     | 68,102,673 |   |                                           |   | 7,152,939 |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 78,712,447 |   |   |   | 153,968,059 |   |   |   |   |   |
| Financial liabilities             |   |     |       |   |                                           |   |      |   |   |   |      |   |   |      |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payables                          |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 78,147,736 |   |   |   | 78,147,736 |   |   |   | - |   |
| Interest bearing liabilities      |   |     | 68,792,402 |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 17,500,000 |   |   |   | - |   |   |   | 131,292,402 |   |   |   | 6.30 | % |
| Debentures liability              |   |     | -          |   |                                           |   | -         |   |   |   | -         |   |   |      | -         |   |   |   | - |   |   |   | 78,975,000 |   |   |   | - |   |   |   | - |   |   |   | 78,975,000 |   |   |   | 13.50 | % |
|                              |   |     | 68,792,402 |   |                                           |   | 9,000,000 |   |   |   | 9,000,000 |   |   |      | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 87,975,000 |   |   |   | 17,500,000 |   |   |   | 78,147,736 |   |   |   | 288,415,138 |   |   |   |   |   |

| (g)  | Fair values |
|-----------|-------------|

|                                                     |   | December 31, 2010 |        |   | December 31, 2009 |   |        | December 31, 2008 |   | Fair value |            |   |
|----------------------------------------------------------|--------|-----------------------------|-------------|--------|-----------------------------|--------|-------------|-----------------------------|--------|-----------------|-----------------|--------|
|                                                     |   | Carrying amount        |        |   | Fair value             |   |        | Carrying amount        |   |            | Fair value |   |   | Carrying amount |   |   | Fair value |   | hierarchy level |   | Method of |
|                                                     |   | $                           |        |   | $                           |   |        | $                           |   |            | $               |   |   | $ |   |   | $ |   | (as required) * |   | valuation  |
| Financial instruments                                    |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |
| Loans and receivables                                    |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |
| Receivables                                              |   |                        | 48,047,496  |   |                        |   | 48,047,496  |                        |   |            | 61,194,136      |   |   |   | 61,194,136 |   |   |   | 42,887,823 |   |   |   | 42,887,823 |   |   |   |  Amortized Cost |
| Held for trading                                         |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Derivative contracts (note 8)                            |   |                        | (178,578    | )      |                        |   | (178,578    | )                           |   |            | -               |   |   |   | - |   |   |   | 31,335,050 |   |   |   | 31,335,050 |   |  Level 2 |   |  Fair Value - See (1) below |
| Financial assets                                         |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                |   |                        | 233,576,821 |   |                        |   | 233,576,821 |                        |   |            | 46,449,819      |   |   |   | 46,449,819 |   |   |   | 48,970,572 |   |   |   | 48,970,572 |   |   |   |  Cost |
| Cash restricted                                          |   |                        | 47,278,069  |   |                        |   | 47,278,069  |                        |   |            | 29,308,575      |   |   |   | 29,308,575 |   |   |   | 26,285,040 |   |   |   | 26,285,040 |   |   |   |  Cost |
|                                                     |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financial liabilities at amortized cost                  |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                     |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities (note 14)       |   |                        | 76,087,954  |   |                        |   | 76,087,954  |                        |   |            | 59,372,354      |   |   |   | 59,372,354 |   |   |   | 78,147,736 |   |   |   | 78,147,736 |   |   |   |  Cost |
| Working capital facility (note 17)                       |   |                        | 51,254,326  |   |                        |   | 51,254,326  |                        |   |            | 24,626,419      |   |   |   | 24,626,419 |   |   |   | 68,792,402 |   |   |   | 68,792,402 |   |   |   |  Cost |
| Current portion of secured and unsecured loans (note 20) |   |                        | 14,456,757  |   |                        |   | 14,583,922  |                        |   |            | 9,000,000       |   |   |   | 9,255,632 |   |   |   | 9,000,000 |   |   |   | 9,012,228 |   |   |   |  Amortized cost See (2) below |
| Non-current liabilities                                  |   |                        |        |   |                        |   |        |                        |   |            |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured loan (note 20)                                   |   |                        | 34,813,222  |   |                        |   | 38,879,426  |                        |   |            | 43,589,278      |   |   |   | 47,696,040 |   |   |   | 52,365,333 |   |   |   | 58,753,276 |   |   |   |  Amortized cost See (2) below |
| 2.75% Convertible notes liability (note 25)              |   |                        | 52,425,489  |   |                        |   | 52,425,489  |                        |   |            | -               |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   |  Amortized Cost |
| 8% Subordinated debenture liability (note 24)            |   |                        | -           |   |                        |   | -           |                        |   |            | -               |   |   |   | - |   |   |   | 65,040,067 |   |   |   | 65,040,067 |   |   |   |  Amortized Cost |

|   | Consolidated Financial Statements INTEROIL CORPORATION     26 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 4. | Financial Risk Management (cont’d) |
|----|------------------------------------------|

| (h)  | Capital management |
|-----------|--------------------|

|   | Consolidated Financial Statements INTEROIL CORPORATION     27 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 5. | Segmented financial information |
|----|---------------------------------|

|                                                |   |     |        |   | Midstream - |   |        | Midstream -  |   |   |       |   |   |      |        |   | Consolidation |   |        |   |   |
|-----------------------------------------------------|--------|----------|-------------|--------|-------------|--------|-------------|--------------|--------|--------|------------|--------|--------|-----------|-------------|--------|---------------|--------|-------------|--------|--------|
| Year ended December 31, 2010                        |   | Upstream |        |   | Refining    |   |        | Liquefaction |   |   | Downstream |   |   | Corporate |        |   | adjustments   |   |        | Total  |   |
| Revenues from external customers                    |   |     | -           |   |        |   | 298,070,718 |         |   |   | -          |   |   |      | 504,303,681 |   |          |   | -           |   |   |   | - |   |   |   | 802,374,399 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Intersegment revenues                               |   |     | -           |   |        |   | 379,343,999 |         |   |   | -          |   |   |      | 483,134     |   |          |   | 32,563,686  |   |   |   | (412,390,819 | ) |   |   | - |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest revenue                                    |   |     | 14,757      |   |        |   | 58,229      |         |   |   | 643        |   |   |      | 23,490      |   |          |   | 24,334,629  |   |   |   | (24,280,932 | ) |   |   | 150,816 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Other revenue                                       |   |     | 3,290,721   |   |        |   | 107,714     |         |   |   | -          |   |   |      | 1,048,251   |   |          |   | 23,362      |   |   |   | - |   |   |   | 4,470,048 |   |
| Total segment revenue                               |   |     | 3,305,478   |   |        |   | 677,580,660 |         |   |   | 643        |   |   |      | 505,858,556 |   |          |   | 56,921,677  |   |   |   | (436,671,751 | ) |   |   | 806,995,263 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Cost of sales and operating expenses                |   |     | -           |   |        |   | 605,602,656 |         |   |   | -          |   |   |      | 470,771,827 |   |          |   | -           |   |   |   | (374,817,833 | ) |   |   | 701,556,650 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Administrative, professional and general expenses   |   |     | 13,746,219  |   |        |   | 11,939,500  |         |   |   | 7,022,644  |   |   |      | 15,975,882  |   |          |   | 40,291,485  |   |   |   | (36,324,778 | ) |   |   | 52,650,952 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Derivative loss/(gain)                              |   |     | -           |   |        |   | 1,591,878   |         |   |   | -          |   |   |      | -           |   |          |   | (526,690    | )      |   |   | - |   |   |   | 1,065,188 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Foreign exchange loss/(gain)                        |   |     | 3,043,907   |   |        |   | 7,517,961   |         |   |   | 90,367     |   |   |      | 1,175,894   |   |          |   | (1,051,306  | )      |   |   | - |   |   |   | 10,776,823 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Gain on sale of exploration assets                  |   |     | (2,140,783  | )      |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | (2,140,783 | ) |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Loss on extinguishment of IPI liability             |   |     | 30,568,710  |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 30,568,710 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Litigation settlement expense                       |   |     | -           |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | 12,000,000  |   |   |   | - |   |   |   | 12,000,000 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Exploration costs, excluding exploration impairment |   |     | 16,981,929  |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 16,981,929 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Depreciation and amortisation                       |   |     | 1,132,118   |   |        |   | 10,355,057  |         |   |   | 25,227     |   |   |      | 2,786,500   |   |          |   | 105,988     |   |   |   | (129,968 | ) |   |   | 14,274,922 |   |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest expense                                    |   |     | 18,527,881  |   |        |   | 6,584,584   |         |   |   | 1,252,796  |   |   |      | 3,739,297   |   |          |   | 1,540,594   |   |   |   | (24,280,932 | ) |   |   | 7,364,220 |   |
| Total segment expenses                              |   |     | 81,859,981  |   |        |   | 643,591,636 |         |   |   | 8,391,034  |   |   |      | 494,449,400 |   |          |   | 52,360,071  |   |   |   | (435,553,511 | ) |   |   | 845,098,611 |   |
| (Loss)/income before income taxes and non-          |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| controlling interest                                |   |     | (78,554,503 | )      |        |   | 33,989,024  |         |   |   | (8,390,391 | )      |   |      | 11,409,156  |   |          |   | 4,561,606   |   |   |   | (1,118,240 | ) |   |   | (38,103,348 | ) |
| Income tax (expense)/benefit                        |   |     | -           |   |        |   | (1,477,755  | )            |   |   | 35,905     |   |   |      | (4,701,386  | )      |          |   | (1,239,855  | )      |   |   | - |   |   |   | (7,383,091 | ) |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Non controlling interest                            |   |     | -           |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | (6,502 | ) |   |   | (6,502 | ) |
| Total net (loss)/income                             |   |     | (78,554,503 | )      |        |   | 32,511,269  |         |   |   | (8,354,486 | )      |   |      | 6,707,770   |   |          |   | 3,321,751   |   |   |   | (1,124,742 | ) |   |   | (45,492,941 | ) |
|                                                |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Total assets                                        |   |     | 266,171,335 |   |        |   | 338,319,052 |         |   |   | 11,950,015 |   |   |      | 117,545,885 |   |          |   | 946,692,856 |   |   |   | (715,189,739 | ) |   |   | 965,489,404 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     28 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 5. | Segmented financial information (cont’d) |
|----|------------------------------------------------|

|                                                           |   |     |        |   | Midstream - |   |        | Midstream -  |   |   |       |   |   |      |        |   | Consolidation |   |        |   |   |
|----------------------------------------------------------------|--------|----------|-------------|--------|-------------|--------|-------------|--------------|--------|--------|------------|--------|--------|-----------|-------------|--------|---------------|--------|-------------|--------|--------|
| Year ended December 31, 2009                                   |   | Upstream |        |   | Refining    |   |        | Liquefaction |   |   | Downstream |   |   | Corporate |        |   | adjustments   |   |        | Total  |   |
| Revenues from external customers                               |   |     | -           |   |        |   | 299,672,617 |         |   |   | -          |   |   |      | 388,806,348 |   |          |   | -           |   |   |   | - |   |   |   | 688,478,965 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Intersegment revenues                                          |   |     | -           |   |        |   | 274,735,845 |         |   |   | -          |   |   |      | 184,799     |   |          |   | 21,194,362  |   |   |   | (296,115,006 | ) |   |   | - |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest revenue                                               |   |     | 15,862      |   |        |   | 175,377     |         |   |   | 7,741      |   |   |      | 118,119     |   |          |   | 15,825,196  |   |   |   | (15,791,666 | ) |   |   | 350,629 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Other revenue                                                  |   |     | 3,293,325   |   |        |   | 18,618      |         |   |   | -          |   |   |      | 916,472     |   |          |   | -           |   |   |   | - |   |   |   | 4,228,415 |   |
| Total segment revenue                                          |   |     | 3,309,187   |   |        |   | 574,602,457 |         |   |   | 7,741      |   |   |      | 390,025,738 |   |          |   | 37,019,558  |   |   |   | (311,906,672 | ) |   |   | 693,058,009 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Cost of sales and operating expenses                           |   |     | -           |   |        |   | 516,349,148 |         |   |   | -          |   |   |      | 359,622,975 |   |          |   | -           |   |   |   | (273,988,691 | ) |   |   | 601,983,432 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Administrative,  professional and general expenses        |   |     | 7,111,918   |   |        |   | 9,900,754   |         |   |   | 7,107,900  |   |   |      | 12,910,852  |   |          |   | 29,241,213  |   |   |   | (21,379,162 | ) |   |   | 44,893,475 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Derivative gain                                                |   |     | -           |   |        |   | (1,008,585  | )            |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | (1,008,585 | ) |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Foreign exchange loss/(gain)                                   |   |     | 1,304,072   |   |        |   | 3,789,685   |         |   |   | (41,053    | )      |   |      | (831,891    | )      |          |   | (915,430    | )      |   |   | - |   |   |   | 3,305,383 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Gain on sale of exploration assets                             |   |     | (7,364,468  | )      |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | (7,364,468 | ) |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Loss on extinguishment of IPI liability                        |   |     | 31,710,027  |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 31,710,027 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Exploration costs, excluding exploration impairment            |   |     | 208,694     |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 208,694 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Depreciation and amortisation                                  |   |     | 538,551     |   |        |   | 10,931,886  |         |   |   | 56,996     |   |   |      | 2,649,715   |   |          |   | 274,596     |   |   |   | (129,969 | ) |   |   | 14,321,775 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest expense                                               |   |     | 9,334,719   |   |        |   | 7,149,584   |         |   |   | 1,218,258  |   |   |      | 4,130,250   |   |          |   | 3,952,132   |   |   |   | (15,791,666 | ) |   |   | 9,993,277 |   |
| Total segment expenses                                         |   |     | 42,843,513  |   |        |   | 547,112,472 |         |   |   | 8,342,101  |   |   |      | 378,481,901 |   |          |   | 32,552,511  |   |   |   | (311,289,488 | ) |   |   | 698,043,010 |   |
| (Loss)/income before income taxes and non-controlling interest |   |     | (39,534,326 | )      |        |   | 27,489,985  |         |   |   | (8,334,360 | )      |   |      | 11,543,837  |   |          |   | 4,467,047   |   |   |   | (617,184 | ) |   |   | (4,985,001 | ) |
| Income tax benefit/(expense)                                   |   |     | -           |   |        |   | 14,316,055  |         |   |   | (54,670    | )      |   |      | (3,026,953  | )      |          |   | (158,443    | )      |   |   | - |   |   |   | 11,075,989 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Non controlling interest                                       |   |     | -           |   |        |   | -           |         |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | (8,361 | ) |   |   | (8,361 | ) |
| Total net (loss)/income                                        |   |     | (39,534,326 | )      |        |   | 41,806,040  |         |   |   | (8,389,030 | )      |   |      | 8,516,884   |   |          |   | 4,308,604   |   |   |   | (625,545 | ) |   |   | 6,082,627 |   |
|                                                           |   |     |        |   |        |   |        |         |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Total assets                                                   |   |     | 202,296,520 |   |        |   | 286,827,021 |         |   |   | 10,647,678 |   |   |      | 110,986,705 |   |          |   | 603,881,348 |   |   |   | (582,885,540 | ) |   |   | 631,753,732 |   |

|                                                           |   |     |        |   | Midstream - |   |        | Midstream - |   |   |       |   |   |      |        |   | Consolidation |   |        |   |   |
|----------------------------------------------------------------|--------|----------|-------------|--------|------------------|--------|-------------|------------------|--------|--------|------------|--------|--------|-----------|-------------|--------|---------------|--------|-------------|--------|--------|
| Year ended December 31, 2008               |   | Upstream |        |   | Refining         |   |        | Liquefaction     |   |   | Downstream |   |   | Corporate |        |   | adjustments   |   |        | Total  |   |
| Revenues from external customers                               |   |     | -           |   |             |   | 358,895,683 |             |   |   | -          |   |   |      | 556,683,026 |   |          |   | -           |   |   |   | - |   |   |   | 915,578,709 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Intersegment revenues                                          |   |     | -           |   |             |   | 427,218,086 |             |   |   | -          |   |   |      | 185,474     |   |          |   | 24,567,895  |   |   |   | (451,971,455 | ) |   |   | - |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest revenue                                               |   |     | 190,195     |   |             |   | 78,023      |             |   |   | 90,757     |   |   |      | 17,566      |   |          |   | 10,302,959  |   |   |   | (9,747,715 | ) |   |   | 931,785 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Other revenue                                                  |   |     | 2,507,499   |   |             |   | 11,623      |             |   |   | -          |   |   |      | 697,323     |   |          |   | -           |   |   |   | - |   |   |   | 3,216,445 |   |
| Total segment revenue                                          |   |     | 2,697,694   |   |             |   | 786,203,415 |             |   |   | 90,757     |   |   |      | 557,583,389 |   |          |   | 34,870,854  |   |   |   | (461,719,170 | ) |   |   | 919,726,939 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Cost of sales and operating expenses                           |   |     | -           |   |             |   | 779,831,893 |             |   |   | -          |   |   |      | 536,919,622 |   |          |   | -           |   |   |   | (428,128,406 | ) |   |   | 888,623,109 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Administrative, professional and general expenses              |   |     | 5,919,528   |   |             |   | 10,080,835  |             |   |   | 7,022,363  |   |   |      | 14,669,401  |   |          |   | 33,752,746  |   |   |   | (24,753,366 | ) |   |   | 46,691,507 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Derivative (gain)/loss                                         |   |     | -           |   |             |   | (24,038,550 | )                |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | (24,038,550 | ) |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Foreign exchange (gain)/loss                                   |   |     | 132,874     |   |             |   | (5,263,901  | )                |   |   | 559,793    |   |   |      | 206,614     |   |          |   | 486,470     |   |   |   | - |   |   |   | (3,878,150 | ) |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Gain on sale of exploration assets                             |   |     | (11,235,084 | )      |             |   | -           |             |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | (11,235,084 | ) |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Exploration costs, excluding exploration impairment            |   |     | 995,532     |   |             |   | -           |             |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 995,532 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Exploration impairment                                         |   |     | 107,788     |   |             |   | -           |             |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | - |   |   |   | 107,788 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Depreciation and amortisation                                  |   |     | 597,343     |   |             |   | 10,969,099  |             |   |   | 69,142     |   |   |      | 2,570,503   |   |          |   | 66,427      |   |   |   | (129,968 | ) |   |   | 14,142,546 |   |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Interest expense                                               |   |     | 4,027,223   |   |             |   | 9,908,268   |             |   |   | 240,782    |   |   |      | 4,838,094   |   |          |   | 10,765,759  |   |   |   | (9,747,715 | ) |   |   | 20,032,411 |   |
| Total segment expenses                                         |   |     | 545,204     |   |             |   | 781,487,644 |             |   |   | 7,892,080  |   |   |      | 559,204,234 |   |          |   | 45,071,402  |   |   |   | (462,759,455 | ) |   |   | 931,441,109 |   |
| Income/(loss) before income taxes and non-controlling interest |   |     | 2,152,490   |   |             |   | 4,715,771   |             |   |   | (7,801,323 | )      |   |      | (1,620,845  | )      |          |   | (10,200,548 | )      |   |   | 1,040,285 |   |   |   | (11,714,170 | ) |
| Income tax (expense)/benefit                                   |   |     | -           |   |             |   | -           |             |   |   | (110,037   | )      |   |      | 414,193     |   |          |   | (386,120    | )      |   |   | - |   |   |   | (81,964 | ) |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Non controlling interest                                       |   |     | -           |   |             |   | -           |             |   |   | -          |   |   |      | -           |   |          |   | -           |   |   |   | (943 | ) |   |   | (943 | ) |
| Total net income/(loss)                                        |   |     | 2,152,490   |   |             |   | 4,715,771   |             |   |   | (7,911,360 | )      |   |      | (1,206,652  | )      |          |   | (10,586,668 | )      |   |   | 1,039,342 |   |   |   | (11,797,077 | ) |
|                                                           |   |     |        |   |             |   |        |             |   |   |       |   |   |      |        |   |          |   |        |   |   |   |   |   |   |   |   |   |
| Total assets                                                   |   |     | 134,485,386 |   |             |   | 326,007,879 |             |   |   | 7,269,000  |   |   |      | 100,452,756 |   |          |   | 442,464,921 |   |   |   | (418,836,972 | ) |   |   | 591,842,970 |   |

|   | Consolidated Financial Statements INTEROIL CORPORATION     29 |
|--------|----------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 6. | Cash and cash equivalents |
|----|---------------------------|

|                             |   | December 31, |        |   | December 31, |   |       | December 31, |   |
|----------------------------------|--------|-------------------|-------------|--------|-------------------|--------|------------|-------------------|--------|
|                        |   | 2010              |        |   | 2009              |   |       | 2008              |   |
|                        |   | $                 |        |   | $                 |   |       | $                 |   |
| Cash on deposit                  |   |              | 233,576,821 |   |              |   | 46,449,819 |              |   |   | 46,761,362 |   |
| Bank term deposits               |   |              |        |   |              |   |       |              |   |   |   |   |
| - Papua New Guinea kina deposits |   |              | -           |   |              |   | -          |              |   |   | 2,209,210 |   |
|                             |   |              | 233,576,821 |   |              |   | 46,449,819 |              |   |   | 48,970,572 |   |

| 7. | Supplemental cash flow information |
|----|------------------------------------|

|                                                                 |   | Year ended   |       |
|----------------------------------------------------------------------|--------|-------------------|------------|
|                                                            |   | December 31, |       |   | December 31, |   |   | December 31, |   |
|                                                            |   | 2010              |       |   | 2009 |   |   | 2008 |   |
|                                                            |   | $                 |       |   | $ |   |   | $ |   |
| Cash paid during the year                                            |   |              |       |   |   |   |   |   |   |
| Interest                                                             |   |              | 5,827,959  |   |   |   | 5,192,882 |   |   |   | 10,705,499 |   |
| Income taxes                                                         |   |              | 3,254,382  |   |   |   | 1,889,441 |   |   |   | 6,738,175 |   |
| Interest received                                                    |   |              | 143,315    |   |   |   | 349,082 |   |   |   | 926,878 |   |
| Non-cash investing activities:                                       |   |              |       |   |   |   |   |   |   |   |   |   |
| (Decrease)/increase in deferred gain on contributions to LNG project |   |              | -          |   |   |   | (4,420,838 | ) |   |   | 8,400,573 |   |
| Increase in goodwill on acquisition of additional LNG interest       |   |              | -          |   |   |   | 864,377 |   |   |   | - |   |
| Increase in share capital from:                                      |   |              |       |   |   |   |   |   |   |   |   |   |
| buyback of Merrill Lynch interest in LNG Project                     |   |              | -          |   |   |   | 11,250,000 |   |   |   | - |   |
| Non-cash financing activities:                                       |   |              |       |   |   |   |   |   |   |   |   |   |
| Increase in share capital from:                                      |   |              |       |   |   |   |   |   |   |   |   |   |
| the exercise of share options and vesting of restricted stock        |   |              | 8,454,757  |   |   |   | 2,185,642 |   |   |   | 456,867 |   |
| the exercise of warrants                                             |   |              | -          |   |   |   | 1,899,476 |   |   |   | - |   |
| buyback of IPI #3 investor rights                                    |   |              | 50,687,368 |   |   |   | 62,980,161 |   |   |   | - |   |
| conversion of debentures into share capital                          |   |              | -          |   |   |   | 77,089,723 |   |   |   | 15,118,483 |   |
| conversion of preference shares into share capital                   |   |              | -          |   |   |   | - |   |   |   | 14,640,000 |   |
| conversion of indirect participation interest into share capital     |   |              | -          |   |   |   | - |   |   |   | 15,776,270 |   |
| conversion of debt into share capital                                |   |              | -          |   |   |   | - |   |   |   | 60,000,000 |   |
| placement fee obligation on conversion of debt                       |   |              | -          |   |   |   | - |   |   |   | 1,800,000 |   |
| preference share interest obligation settled in shares               |   |              | -          |   |   |   | - |   |   |   | 372,950 |   |
| placement fee obligation on debentures issued                        |   |              | -          |   |   |   | - |   |   |   | 5,700,000 |   |
| debentures interest obligation settled in shares                     |   |              | -          |   |   |   | 2,352,084 |   |   |   | 2,620,628 |   |
| litigation settlement settled in shares                              |   |              | 12,000,000 |   |   |   | - |   |   |   | - |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     30 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 8. | Financial instruments |
|----|-----------------------|

| (a) | Cash and cash equivalents |
|-----|---------------------------|

|                                                        |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|-------------------------------------------------------------|--------|--------------|------------|--------|--------------|--------|------------|--------------|--------|
|                                                        |   | 2010         |       |   | 2009         |   |       | 2008         |   |
|                                                        |   | $            |       |   | $            |   |       | $            |   |
| Cash deposit on working capital facility (0.0%)             |   |         | 40,664,995 |   |         |   | 22,698,829 |         |   |   | 25,994,258 |   |
| Cash restricted - Current                                   |   |         | 40,664,995 |   |         |   | 22,698,829 |         |   |   | 25,994,258 |   |
|                                                        |   |         |       |   |         |   |       |         |   |   |   |   |
| Bank term deposits on Petroleum Prospecting Licenses (2.5%) |   |         | 130,486    |   |         |   | 124,858    |         |   |   | 124,097 |   |
| Cash deposit on office premises (4.9%)                      |   |         | 179,440    |   |         |   | 157,698    |         |   |   | 166,685 |   |
| Cash deposit on secured loan (0.1%)                         |   |         | 6,303,148  |   |         |   | 6,327,190  |         |   |   | - |   |
| Cash restricted - Non-current                               |   |         | 6,613,074  |   |         |   | 6,609,746  |         |   |   | 290,782 |   |
|                                                        |   |         | 47,278,069 |   |         |   | 29,308,575 |         |   |   | 26,285,040 |   |

| (b) | Commodity derivative contracts |
|-----|--------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     31 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 8. | Financial instruments (cont’d) |
|----|--------------------------------------|

|                                                                       |   |    |    | Notional |    |   |   |    |            |                                       | Fair Value             |   |
|---------------------------------------------------------------------------------|--------|--------------|---------|----------|---------|--------|--------|---------|----------------------|--------------------------------------------|-----------------------------|--------|
|                                                                       |   |    |    | Volumes  |    |   |   |    |            |                                       | December 31, 2008 |   |
| Derivative                                                                      |   | Type         |    | (bbls)   |    |   | Expiry |    | Derivative type |                                       | $                           |   |
|                                                                       |   |    |    |     |    |   |   |    |                 |                                       |                        |   |   |
| Crude Swap                                                                      |   | Buy Brent    |    |     | 300,000 |   |   | Q1 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | (25,493,100 | ) |
| Crude Swap                                                                      |   | Buy Brent    |    |     | 300,000 |   |   | Q2 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | (19,529,200 | ) |
| Crude Swap                                                                      |   | Buy Brent    |    |     | 300,000 |   |   | Q3 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | (18,441,700 | ) |
| Crude Swap                                                                      |   | Buy Brent    |    |     | 300,000 |   |   | Q4 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | (17,682,200 | ) |
| Gasoil Swap                                                                     |   | Sell Gasoil  |    |     | 300,000 |   |   | Q1 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | 29,068,800 |   |
| Gasoil Swap                                                                     |   | Sell Gasoil  |    |     | 300,000 |   |   | Q2 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | 23,425,400 |   |
| Gasoil Swap                                                                     |   | Sell Gasoil  |    |     | 300,000 |   |   | Q3 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | 22,461,200 |   |
| Gasoil Swap                                                                     |   | Sell Gasoil  |    |     | 300,000 |   |   | Q4 2009 |                 | Cash flow hedge - Manages the crack spread |                        |   | 21,672,800 |   |
|                                                                            |   |         |    |     |    |   |   |    |                 |                                       |                        |   | 15,482,000 |   |
| Add: Priced out but unsettled hedge accounted contracts as at December 31, 2008 |   |         | 779,000 |     |
|                                                                            |   |         |    |     |    |   |   |    |                 |                                       |                        |   | 16,261,000 |   |

|                                                             |   |                    |     | Notional |   |   |   |    |            |                                                       | Fair Value        |   |
|-----------------------------------------------------------------------|--------|-------------------------|----------|----------|--------|--------|--------|---------|-----------------|------------------------------------------------------------|-------------------|--------|
|                                                                  |   |                    |     | Volumes  |   |   |   |    |            |                                                       | December 31, 2010 |   |
| Derivative                                                            |   | Type                    |     | (bbls)   |   |   | Expiry |    | Derivative type |                                                       | $                 |   |
| Naphtha Swap                                                          |   | Sell Naphtha            |     |     | 54,000 |   |   | Q1 2011 |            | Cash flow hedge - Manages the export price risk of naphtha |              |   | (275,958 | ) |
| Brent Swap                                                            |   | Buy Brent               |     |     | 54,000 |   |   | Q1 2011 |            | Cash flow hedge - Manages the export price risk of naphtha |              |   | 179,118 |   |
| Naphtha/Brent Swap                                                    |   | Sell Naphtha/ Buy Brent |     |     | 54,000 |   |   | Q1 2011 |            | Cash flow hedge - Manages the export price risk of naphtha |              |   | (81,738 | ) |
|                                                                  |   |                    | (178,578 | )        |
| Add: Priced out non-hedge accounted contracts as at December 31, 2010 |   |                    | -        |     |
|                                                                  |   |                    | (178,578 | )        |

|                                                                  |   |    |       | Notional |    |   |    |    |            |                                                    | Fair Value        |   |
|-----------------------------------------------------------------------|--------|--------------|------------|----------|---------|--------|--------------|---------|-----------------|---------------------------------------------------------|-------------------|--------|
|                                                                  |   |         |       | Volumes  |    |   |         |    |            |                                                    | December 31, 2008 |   |
| Derivative                                                            |   | Type         |       | (bbls)   |    |   | Expiry       |    | Derivative type |                                                    | $                 |   |
|                                                                  |   |         |       |     |    |   |         |    |            |                                                    |              |   |
| Brent Swap                                                            |   | Sell Brent   |       |     | 195,000 |   |         | Q1 2009 |            | Cash flow hedge - Manages the export price risk of LSWR |              |   | 3,965,000 |   |
| Brent Swap                                                            |   | Buy Brent    |       |     | 130,000 |   |         | Q1 2009 |            | Cash flow hedge - Manages the export price risk of LSWR |              |   | (1,129,750 | ) |
| Brent Swap                                                            |   | Sell Brent   |       |     | 165,000 |   |         | Q2 2009 |            | Cash flow hedge - Manages the export price risk of LSWR |              |   | (413,200 | ) |
|                                                                  |   |         | 2,422,050  |     |
| Add: Priced out non-hedge accounted contracts as at December 31, 2008 |   |         | 12,652,000 |     |
|                                                                  |   |         | 15,074,050 |     |

| Consolidated Financial Statements   INTEROIL CORPORATION     32 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 8. | Financial instruments (cont’d) |
|----|--------------------------------------|

| (c) | Currency derivative contracts |
|-----|-------------------------------|

| 9. | Trade receivables |
|----|-------------------|

| 10. | Inventories |
|-----|-------------|

|                                             |   | December 31, |        |   | December 31, |   |       | December 31, |   |
|--------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|------------|-------------------|--------|
|                                        |   | 2010              |        |   | 2009              |   |       | 2008              |   |
|                                             |   | $                 |        |   | $                 |   |       | $                 |   |
| Midstream - Refining (crude oil feedstock)       |   |              | 23,004,883  |   |              |   | 5,006,608  |              |   |   | 25,556,463 |   |
| Midstream - Refining (refined petroleum product) |   |              | 67,006,941  |   |              |   | 32,983,010 |              |   |   | 30,167,417 |   |
| Midstream - Refining (parts inventory)           |   |              | 673,283     |   |              |   | 559,667    |              |   |   | 288,643 |   |
| Downstream (refined petroleum product)           |   |              | 36,452,253  |   |              |   | 31,577,764 |              |   |   | 27,024,803 |   |
|                                             |   |              | 127,137,360 |   |              |   | 70,127,049 |              |   |   | 83,037,326 |   |

| 11. | Plant and equipment |
|-----|---------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     33 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 11. | Plant and equipment (cont’d) |
|-----|------------------------------------|

| December 31, 2010                          |   | Upstream |    |   | Midstream -Refining |   |        | Midstream -Liquefaction |   |   | Downstream |   |   | Corporate &Consolidated |        |   | Totals |   |
|------------------------------------------------------|--------|----------|---------|--------|--------------------------|--------|-------------|------------------------------|--------|--------|------------|--------|--------|----------------------------------|-------------|--------|--------|--------|
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |
| Plant and equipment                                  |   |     | 47,315  |   |                     |   | 252,379,834 |                         |   |   | 99,953     |   |   |                             | 54,194,414  |   |   |   | 699,412 |   |   |   | 307,420,928 |   |
| Deferred project costs and work in progress          |   |     | -       |   |                     |   | 2,766,704   |                         |   |   | 4,126,415  |   |   |                             | 7,236,584   |   |   |   | 5,904,385 |   |   |   | 20,034,088 |   |
| Consolidation entries                                |   |     | -       |   |                     |   | -           |                         |   |   | -          |   |   |                             | -           |   |   |   | (2,469,390 | ) |   |   | (2,469,390 | ) |
| Accumulated depreciation and amortisation            |   |     | (47,315 | )      |                     |   | (63,376,616 | )                            |   |   | (61,391    | )      |   |                             | (31,645,379 | )      |   |   | (523,083 | ) |   |   | (95,653,784 | ) |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Net book value                                       |   |     | -       |   |                     |   | 191,769,922 |                         |   |   | 4,164,977  |   |   |                             | 29,785,619  |   |   |   | 3,611,324 |   |   |   | 229,331,842 |   |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Capital expenditure for year ended December 31, 2010 |   |     | -       |   |                     |   | 6,972,505   |                         |   |   | 1,876,736  |   |   |                             | 7,623,024   |   |   |   | 3,661,267 |   |   |   | 20,133,532 |   |

| December 31, 2009                          |   | Upstream |    |   | Midstream -Refining |   |        | Midstream -Liquefaction |   |   | Downstream |   |   | Corporate &Consolidated |        |   | Totals |   |
|------------------------------------------------------|--------|----------|---------|--------|--------------------------|--------|-------------|------------------------------|--------|--------|------------|--------|--------|----------------------------------|-------------|--------|--------|--------|
|                                            |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |
| Plant and equipment                                  |   |     | 47,315  |   |                     |   | 248,863,701 |                         |   |   | 97,572     |   |   |                             | 47,647,154  |   |   |   | 561,038 |   |   |   | 297,216,780 |   |
| Deferred project costs and work in progress          |   |     | -       |   |                     |   | 926,089     |                         |   |   | 2,252,060  |   |   |                             | 5,308,056   |   |   |   | 2,381,493 |   |   |   | 10,867,698 |   |
| Consolidation entries                                |   |     | -       |   |                     |   | -           |                         |   |   | -          |   |   |                             | -           |   |   |   | (2,599,361 | ) |   |   | (2,599,361 | ) |
| Accumulated depreciation and amortisation            |   |     | (47,037 | )      |                     |   | (54,715,462 | )                            |   |   | (36,164    | )      |   |                             | (29,222,654 | )      |   |   | (417,091 | ) |   |   | (84,438,408 | ) |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Net book value                                       |   |     | 278     |   |                     |   | 195,074,328 |                         |   |   | 2,313,468  |   |   |                             | 23,732,556  |   |   |   | (73,921 | ) |   |   | 221,046,709 |   |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Capital expenditure for year ended December 31, 2009 |   |     | -       |   |                     |   | 2,242,017   |                         |   |   | -          |   |   |                             | 6,919,197   |   |   |   | 2,456,903 |   |   |   | 11,618,117 |   |

| December 31, 2008                          |   | Upstream |    |   | Midstream -Refining |   |        | Midstream -Liquefaction |   |   | Downstream |   |   | Corporate &Consolidated |        |   | Totals |   |
|------------------------------------------------------|--------|----------|---------|--------|--------------------------|--------|-------------|------------------------------|--------|--------|------------|--------|--------|----------------------------------|-------------|--------|--------|--------|
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |
| Plant and equipment                                  |   |     | 47,315  |   |                     |   | 247,520,562 |                         |   |   | 219,315    |   |   |                             | 46,299,775  |   |   |   | 485,628 |   |   |   | 294,572,595 |   |
| Deferred project costs and work in progress          |   |     | -       |   |                     |   | 27,211      |                         |   |   | 2,134,858  |   |   |                             | 1,979,253   |   |   |   | - |   |   |   | 4,141,322 |   |
| Consolidation entries                                |   |     | -       |   |                     |   | -           |                         |   |   | -          |   |   |                             | -           |   |   |   | (2,729,327 | ) |   |   | (2,729,327 | ) |
| Accumulated depreciation and amortisation            |   |     | (43,568 | )      |                     |   | (43,768,810 | )                            |   |   | (80,554    | )      |   |                             | (28,363,540 | )      |   |   | (142,559 | ) |   |   | (72,399,031 | ) |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Net book value                                       |   |     | 3,747   |   |                     |   | 203,778,963 |                         |   |   | 2,273,619  |   |   |                             | 19,915,488  |   |   |   | (2,386,258 | ) |   |   | 223,585,559 |   |
|                                                 |   |     |    |   |                     |   |        |                         |   |   |       |   |   |                             |        |   |   |   |   |   |   |   |   |   |
| Capital expenditure for year ended December 31, 2008 |   |     | -       |   |                     |   | 529,033     |                         |   |   | 92,494     |   |   |                             | 4,108,630   |   |   |   | 95,493 |   |   |   | 4,825,650 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     34 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 12. | Oil and gas properties |
|-----|------------------------|

|                                                       |   | December 31, |        |   | December 31, |   |        | December 31, |   |
|------------------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|-------------|-------------------|--------|
|                                                  |   | 2010              |        |   | 2009              |   |        | 2008              |   |
|                                                       |   | $                 |        |   | $                 |   |        | $                 |   |
| Drilling equipment                                         |   |              | 28,653,929  |   |              |   | 17,344,759  |              |   |   | 13,857,772 |   |
| Drilling consumables and spares                            |   |              | 10,924,708  |   |              |   | 11,467,237  |              |   |   | 10,113,808 |   |
| Petroleum Prospecting License drilling programs (Unproved) |   |              | 215,716,101 |   |              |   | 143,671,566 |              |   |   | 104,042,379 |   |
| Gross Capitalized Costs                                    |   |              | 255,294,738 |   |              |   | 172,483,562 |              |   |   | 128,013,959 |   |
| Accumulated depletion and amortization                     |   |              |        |   |              |   |        |              |   |   |   |   |
| Unproved oil and gas properties                            |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Proved oil and gas properties                              |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Net Capitalized Costs                                      |   |              | 255,294,738 |   |              |   | 172,483,562 |              |   |   | 128,013,959 |   |

|                                             |   | Year ended   |      |
|--------------------------------------------------|--------|-------------------|-----------|
|                                        |   | December 31, |      |   | December 31, |   |   | December 31, |   |
|                                             |   | 2010              |      |   | 2009 |   |   | 2008 |   |
|                                             |   | $                 |      |   | $ |   |   | $ |   |
| Gain on sale of oil and gas properties           |   |              |      |   |   |   |   |   |   |
| Sale of PRL 4 interest (43.13% of the property)  |   |              | -         |   |   |   | - |   |   |   | 1,500,000 |   |
| Sale of PRL 5 interest (28.576% of the property) |   |              | -         |   |   |   | - |   |   |   | 5,000,000 |   |
| Sale of PPL 244 interest (15% of the property)   |   |              | 2,140,783 |   |   |   | - |   |   |   | - |   |
| Conveyance accounting of IPI Agreement (note 21) |   |              | -         |   |   |   | 7,364,468 |   |   |   | 4,735,084 |   |
|                                             |   |              | 2,140,783 |   |   |   | 7,364,468 |   |   |   | 11,235,084 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     35 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 12. | Oil and gas properties (cont’d) |
|-----|---------------------------------------|

|                                                                                                          |   | December 31, |        |   | December 31, |   |        | December 31, |   |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|-------------|-------------------|--------|
|                                                                                                     |   | 2010              |        |   | 2009              |   |        | 2008              |   |
|                                                                                                          |   | $                 |        |   | $                 |   |        | $                 |   |
| Property Acquisition Costs                                                                                    |   |              |        |   |              |   |        |              |   |
| Unproved                                                                                                      |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Proved                                                                                                        |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Total acquisition costs                                                                                       |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Exploration Costs                                                                                             |   |              | 207,054     |   |              |   | (85,793     | )                 |   |   | 9,622,780 |   |
| Development Costs                                                                                             |   |              | 96,325,176  |   |              |   | 99,678,973  |              |   |   | 52,491,537 |   |
| Add: Amounts capitalized in relation to the appraisal program cash calls on IPI interest buyback transactions |   |              | 3,922,683   |   |              |   | 8,013,434   |              |   |   | - |   |
| Add: Premium paid on IPI buyback transactions                                                                 |   |              | 1,550,020   |   |              |   | -           |              |   |   | - |   |
| Less: Conveyance accounting offset against properties                                                         |   |              | (192,622    | )      |              |   | (31,837,809 | )                 |   |   | (5,798,347 | ) |
| Less: Costs allocated against cash calls                                                                      |   |              | (19,001,135 | )      |              |   | (31,299,202 | )                 |   |   | (13,167,138 | ) |
| Total Costs capitalized                                                                                       |   |              | 82,811,176  |   |              |   | 44,469,603  |              |   |   | 43,148,832 |   |
| Charged to expense                                                                                            |   |              |        |   |              |   |        |              |   |   |   |   |
| Dry hole expense                                                                                              |   |              | -           |   |              |   | -           |              |   |   | 107,788 |   |
| Geophysical and other costs                                                                                   |   |              | 16,981,929  |   |              |   | 208,694     |              |   |   | 995,532 |   |
| Total charged to expense                                                                                      |   |              | 16,981,929  |   |              |   | 208,694     |              |   |   | 1,103,320 |   |
| Oil and Gas Property Additions (capitalised and expensed)                                                     |   |              | 99,793,105  |   |              |   | 44,678,297  |              |   |   | 44,252,152 |   |

| - | Pacific LNG Operations Limited (“Pacific LNG”) direct participation in Elk and Antelope fields:  During September 2009, InterOil sold a 2.5% direct working interest in the Elk and Antelope fields to Pacific LNG in furtherance of the option granted to it on May 24, 2007.  The 2.5% direct interest in these fields was sold in exchange for a net $25,000,000 (of which $15,000,000 had been received up to December 31, 2009 and previously classified as financing activities in the statement of cash flows – all payments received after the sale transaction has been classified as investing activities) plus payment of historical costs incurred in exploring these fields.  During the quarter ended March 31, 2010, the remaining $10,000,000 was received and has been classified asinvesting activities in the statement of cash flows.  In addition to these amounts, Pacific LNG also transferred to the Company 2.5% of their economic interest in the Joint Venture Company.  The total consideration received for this transaction was valued at $29,019,716, consisting of $25,000,000 cash consideration, $864,377 being the fair value of 2.5% of Pacific LNG’s economic interest in PNG LNG Inc., and $3,155,339 representing 2.5% of all appraisal costs incurred in the Elk and Antelope fields to be reimbursed.  The Company has applied the guidance in ASC 932-360 paragraph 55-8 in relation to the sale of these unproved properties.  Based on the guidance, the sale proceeds were fully applied against the cost base of the Elk and Antelope fields as recovery of cost. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     36 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 13. | Income taxes |
|-----|--------------|

|                                                                                    |   | December 31, |        |   | December 31, |   |        | December 31, |   |
|-----------------------------------------------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|-------------|-------------------|--------|
|                                                                                    |   | 2010              |        |   | 2009              |   |        | 2008              |   |
|                                                                                    |   | $                 |        |   | $                 |   |        | $                 |   |
| Loss before income taxes and non controlling interest                                   |   |              | (38,103,348 | )      |              |   | (4,985,001  | )                 |   |   | (11,714,170 | ) |
| Statutory income tax rate                                                               |   |              | 33.00       | %      |              |   | 34.00       | %                 |   |   | 34.50 | % |
| Computed tax (benefit)                                                                  |   |              | (12,574,105 | )      |              |   | (1,694,900  | )                 |   |   | (4,041,389 | ) |
|                                                                                    |   |              |        |   |              |   |        |              |   |   |   |   |
| Effect on income tax of:                                                                |   |              |        |   |              |   |        |              |   |   |   |   |
| Income/(losses) in foreign jurisdictions not assessable/(deductible)                    |   |              | 2,073,636   |   |              |   | 440,552     |              |   |   | (61,702 | ) |
| Non-deductible stock compensation expense                                               |   |              | 317,671     |   |              |   | 521,091     |              |   |   | 720,825 |   |
| Non-deductible pre-LNG Project Agreement costs                                          |   |              | 1,146,936   |   |              |   | 1,471,176   |              |   |   | 2,584,562 |   |
| Non-deductible premium paid on buyback of IPI interest                                  |   |              | 10,087,674  |   |              |   | 10,781,409  |              |   |   | - |   |
| Non-taxable gain on sale of exploration assets                                          |   |              | (706,458    | )      |              |   | (2,503,919  | )                 |   |   | (3,876,104 | ) |
| Unrealized foreign exchange gains/(losses)                                              |   |              | (1,222,919  | )      |              |   | 2,366,045   |              |   |   | (14,059,228 | ) |
| Tax rate differential in foreign jurisdictions                                          |   |              | (1,379,226  | )      |              |   | (2,072,630  | )                 |   |   | (134,619 | ) |
| Over provision for income tax in prior years                                            |   |              | 153,432     |   |              |   | (88,681     | )                 |   |   | 148,823 |   |
| Midstream - Refining tax exempt income as per Refinery Project Agreement                |   |              | (8,925,164  | )      |              |   | (13,406,325 | )                 |   |   | - |   |
| Tax losses for which no future tax benefit has been brought to account                  |   |              | 7,927,006   |   |              |   | 2,857,963   |              |   |   | 19,569,753 |   |
| Temporary differences for which no future tax benefit has been brought to account       |   |              | 12,605,774  |   |              |   | 7,160,543   |              |   |   | (1,639,042 | ) |
| Movement in temporary differences in relation to inventory revaluations                 |   |              | -           |   |              |   | (1,385,779  | )                 |   |   | 1,385,779 |   |
| Initial recognition of future tax assets/liabilities based on recoverability assessment |   |              | -           |   |              |   | (15,138,174 | )                 |   |   | - |   |
| Other - net                                                                             |   |              | (2,121,166  | )      |              |   | (384,360    | )                 |   |   | (515,694 | ) |
|                                                                                    |   |              | 7,383,091   |   |              |   | (11,075,989 | )                 |   |   | 81,964 |   |

|                                         |   | December 31, |        |   | December 31, |   |        | December 31, |   |
|----------------------------------------------|--------|--------------|-------------|--------|--------------|--------|-------------|--------------|--------|
|                                         |   | 2010         |        |   | 2009         |   |        | 2008         |   |
|                                         |   | $            |        |   | $            |   |        | $            |   |
| Future tax assets                            |   |         |        |   |         |   |        |         |   |
| Temporary differences                        |   |         |        |   |         |   |        |         |   |
| Plant and equipment                          |   |         | (10,229,037 | )      |         |   | (7,870,673  | )            |   |   | (7,051,509 | ) |
| Exploration expenditure                      |   |         | 69,408,046  |   |         |   | 39,459,350  |         |   |   | 26,901,138 |   |
| Unrealised foreign exchange losses / (gains) |   |         | 1,438,966   |   |         |   | 3,162,307   |         |   |   | (17,177,649 | ) |
| Other - net                                  |   |         | 1,913,865   |   |         |   | 2,789,832   |         |   |   | 1,820,931 |   |
|                                         |   |         | 62,531,840  |   |         |   | 37,540,816  |         |   |   | 4,492,911 |   |
| Losses carried forward                       |   |         | 45,236,646  |   |         |   | 34,975,557  |         |   |   | 28,679,655 |   |
|                                         |   |         | 107,768,486 |   |         |   | 72,516,373  |         |   |   | 33,172,566 |   |
| Less valuation allowance                     |   |         | (93,670,358 | )      |         |   | (55,603,404 | )            |   |   | (30,102,384 | ) |
|                                         |   |         | 14,098,128  |   |         |   | 16,912,969  |         |   |   | 3,070,182 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     37 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 13. | Income taxes (cont’d) |
|-----|-----------------------------|

| 14. | Accounts payable and accrued liabilities |
|-----|------------------------------------------|

|                                            |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|-------------------------------------------------|--------|--------------|------------|--------|--------------|--------|------------|--------------|--------|
|                                            |   | 2010         |       |   | 2009         |   |       | 2008         |   |
|                                            |   | $            |       |   | $            |   |       | $            |   |
| Accounts payable - crude import                 |   |         | -          |   |         |   | -          |         |   |   | 25,233,525 |   |
| Accounts payable - product import               |   |         | 5,241,216  |   |         |   | -          |         |   |   | - |   |
| Other accounts payable and accrued liabilities* |   |         | 47,999,907 |   |         |   | 48,937,354 |         |   |   | 48,914,211 |   |
| Petromin cash calls received                    |   |         | 15,435,000 |   |         |   | 10,435,000 |         |   |   | 4,000,000 |   |
| Mitsui cash calls received                      |   |         | 6,456,757  |   |         |   | -          |         |   |   | - |   |
| Income tax payable                              |   |         | 955,074    |   |         |   | -          |         |   |   | - |   |
| Total accounts payable and accrued liabilities  |   |         | 76,087,954 |   |         |   | 59,372,354 |         |   |   | 78,147,736 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     38 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 15. | Deferred gain on contributions to LNG Project |
|-----|-----------------------------------------------|

| 16.  | Goodwill |
|-----------|----------|

| Consolidated Financial Statements   INTEROIL CORPORATION     39 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 17. | Working capital facilities |
|-----|----------------------------|

|                                             |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|--------------------------------------------------|--------|-------------------|------------|--------|-------------------|--------|------------|-------------------|--------|
|                                        |   | 2010              |       |   | 2009              |   |       | 2008              |   |
| Amounts drawn down                     |   | $                 |       |   | $                 |   |       | $                 |   |
| BNP Paribas working capital facility - midstream |   |              | 50,023,559 |   |              |   | 16,794,153 |              |   |   | 53,386,775 |   |
| Westpac working capital facility - downstream    |   |              | 1,230,767  |   |              |   | 7,832,266  |              |   |   | 15,405,627 |   |
| BSP working capital facility - downstream        |   |              | -          |   |              |   | -          |              |   |   | - |   |
| Total working capital facility                   |   |              | 51,254,326 |   |              |   | 24,626,419 |              |   |   | 68,792,402 |   |

|                                                             |   | December 31, |        |   | December 31, |   |        | December 31, |   |
|------------------------------------------------------------------|--------|-------------------|-------------|--------|-------------------|--------|-------------|-------------------|--------|
|                                                             |   | 2010              |        |   | 2009              |   |        | 2008              |   |
|                                                             |   | $                 |        |   | $                 |   |        | $                 |   |
| Working capital credit facility                                  |   |              | 190,000,000 |   |              |   | 190,000,000 |              |   |   | 190,000,000 |   |
|                                                             |   |              |        |   |              |   |        |              |   |   |   |   |
| Less amounts included in the working capital facility liability: |   |              |        |   |              |   |        |              |   |   |   |   |
| Short term advances/facilities drawn down                        |   |              | (50,023,559 | )      |              |   | (16,794,153 | )                 |   |   | (50,245,537 | ) |
| Discounted receivables (note 9)                                  |   |              | -           |   |              |   | -           |              |   |   | (3,141,238 | ) |
|                                                             |   |              | (50,023,559 | )      |              |   | (16,794,153 | )                 |   |   | (53,386,775 | ) |
| Less: other amounts outstanding under the facility:              |   |              |        |   |              |   |        |              |   |   |   |   |
| Letters of credit outstanding                                    |   |              | (93,710,000 | )      |              |   | (56,700,000 | )                 |   |   | (27,600,000 | ) |
| Bank guarantees on hedging facility                              |   |              | -           |   |              |   | -           |              |   |   | - |   |
| Working capital credit facility available for use                |   |              | 46,266,441  |   |              |   | 116,505,847 |              |   |   | 109,013,225 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     40 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 17. | Working capital facility (cont’d) |
|-----|-----------------------------------------|

| 18. | Establishment of subsidiaries |
|-----|-------------------------------|

| 19. | Related parties |
|-----|-----------------|

| 20. | Secured and unsecured loans |
|-----|-----------------------------|

|                                                      |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|-----------------------------------------------------------|--------|-------------------|------------|--------|-------------------|--------|------------|-------------------|--------|
|                                                      |   | 2010              |       |   | 2009              |   |       | 2008              |   |
|                                                      |   | $                 |       |   | $                 |   |       | $                 |   |
| Secured loan (OPIC)  - current portion          |   |              | 9,000,000  |   |              |   | 9,000,000  |              |   |   | 9,000,000 |   |
| Unsecured loan (Mitsui)                                   |   |              | 5,456,757  |   |              |   | -          |              |   |   | - |   |
| Total current portion of loans                            |   |              | 14,456,757 |   |              |   | 9,000,000  |              |   |   | 9,000,000 |   |
|                                                      |   |              |       |   |              |   |       |              |   |   |   |   |
| Secured loan (OPIC)  - non current portion      |   |              | 35,500,000 |   |              |   | 44,500,000 |              |   |   | 53,500,000 |   |
| Secured loan (OPIC)  - deferred financing costs |   |              | (686,778   | )      |              |   | (910,722   | )                 |   |   | (1,134,667 | ) |
| Total non current secured loan                            |   |              | 34,813,222 |   |              |   | 43,589,278 |              |   |   | 52,365,333 |   |
|                                                      |   |              |       |   |              |   |       |              |   |   |   |   |
| Total secured and unsecured loans                         |   |              | 49,269,979 |   |              |   | 52,589,278 |              |   |   | 61,365,333 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     41 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 20. | Secured and unsecured loans (cont’d) |
|-----|--------------------------------------------|

| As at December 31, 2010, two installment payments amounting to $4,500,000 each which will be due for payment on June 30, 2011 and December 31, 2011 have been classified into the current portion of the liability.  The agreement contains certain financial covenants which include the maintenance of minimum levels of tangible net worth and limitations on the incurrence of additional indebtedness for the refining operations.  A deposit is also required to be maintained to cover the next installment and interest payment.  As of December 31, 2010, the company was in compliance with all applicable covenants. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 21. | Indirect participation interests |
|-----|----------------------------------|

|                                                          |   | December 31, |       |   | December 31, |   |       | December 31, |   |
|---------------------------------------------------------------|--------|-------------------|------------|--------|-------------------|--------|------------|-------------------|--------|
|                                                          |   | 2010              |       |   | 2009              |   |       | 2008              |   |
|                                                          |   | $                 |       |   | $                 |   |       | $                 |   |
| Indirect participation interest (PNGDV) - current portion     |   |              | 540,002    |   |              |   | 540,002    |              |   |   | 540,002 |   |
| Total current indirect participation interest                 |   |              | 540,002    |   |              |   | 540,002    |              |   |   | 540,002 |   |
|                                                          |   |              |       |   |              |   |       |              |   |   |   |   |
| Indirect participation interest (PNGDV) - non current portion |   |              | 844,490    |   |              |   | 844,490    |              |   |   | 844,490 |   |
| Indirect participation interest ("IPI")                       |   |              | 33,289,897 |   |              |   | 38,715,228 |              |   |   | 72,476,668 |   |
| Total non current indirect participation interest             |   |              | 34,134,387 |   |              |   | 39,559,718 |              |   |   | 73,321,158 |   |
|                                                          |   |              |       |   |              |   |       |              |   |   |   |   |
| Total indirect participation interest                         |   |              | 34,674,389 |   |              |   | 40,099,720 |              |   |   | 73,861,160 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     42 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 21. | Indirect participation interests (cont’d) |
|-----|-------------------------------------------------|

| - | Conversion of IPI interests:  Certain IPI investors representing a 3.575% interest in the IPI agreement have exercised their right to convert their interest into common shares resulting in issuance of 476,667 InterOil common shares.  These conversions reduced the initial IPI liability balance by $13,851,160 and the initial conversion option balance by $2,860,000. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | Buyback of IPI interests by the Company:  Certain IPI investors representing a 6.2864% interest in the IPI agreement have sold their interest to the Company. Detailed disclosure of this transaction is provided in the section ‘Extinguishment of IPI liability’ below. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     43 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 21. | Indirect participation interests (cont’d) |
|-----|-------------------------------------------------|

| - | Certain IPI investors representing a 12.585% interest in the IPI agreement have waived their right to convert their IPI percentage into 1,678,000 common shares.  As a result, conveyance was triggered on this portion of the IPI agreement, which reduced the IPI liability by $25,363,858.  A further $23,396,100 is retained in the balance sheet representing the future remaining obligations in relation to this 12.585% interest. |
|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | During December 2010, the Company bought a combined 1.05% interest in the IPI Agreement from two investors, out of which 0.05% related to interests that had already been waived by the investor in the prior year, hence conveyance accounting was followed for this interest and any premium paid was capitalized to Oil and Gas properties.  This 0.05% was bought for $1,881,959 which was settled through the issue of 25,805 InterOil common shares.  The excess of this consideration over the book value of the IPI liability and the appraisal costs previously cash called from this investor was $1,550,020 and has been capitalized to Oil and Gas properties. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | As at December 31, 2010, IPI investors with a combined 2.5536% interest in the IPI agreement still have the conversion rights outstanding resulting in a maximum of 340,480 common shares being issued if all these IPI investors choose to exercise their conversion options. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | cash calls made from the IPI investors in relation to the completion, appraisal and development program undertaken in Elk and Antelope fields as part of the IPI agreement.  These cash call amounts were previously offset against the capitalized oil and gas properties, and have been reinstated in the oil and gas properties asset to their full historical cost basis for those programs following this exchange transaction. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| - | fair value of the conversion options extinguished as part of the exchange transactions. |
|---|-----------------------------------------------------------------------------------------|

| - | IPI liability extinguished as part of the exchange transactions whereby the difference between the fair value of the shares issued and the book value of the IPI liability post allocation to the other components mentioned above has been recorded as an expense in the statement of operations. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     44 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 21. | Indirect participation interests (cont’d) |
|-----|-------------------------------------------------|

|                                                                                                              |   | Year ended   |       |
|-------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                         |   | December 31, |       |   | December 31, |   |   | December 31, |   |
|                                                                                                              |   | 2010              |       |   | 2009 |   |   | 2008 |   |
|                                                                                                              |   | $                 |       |   | $ |   |   | $ |   |
|                                                                                                              |   |              |       |   |   |   |   |   |   |
| Loss on extinguishment of IPI liability                                                                           |   |              |       |   |   |   |   |   |   |
| Consideration paid for exchange transactions                                                                      |   |              | 48,805,409 |   |   |   | 62,980,161 |   |   |   | - |   |
| less amounts capitalized in relation to the appraisal program cash calls                                          |   |              | (3,784,466 | ) |   |   | (8,013,434 | ) |   |   | - |   |
| less book value of IPI liability extinguished                                                                     |   |              | (5,424,231 | ) |   |   | (18,738,392 | ) |   |   | - |   |
| less book value of conversion options extinguished                                                                |   |              | (1,120,000 | ) |   |   | (3,869,121 | ) |   |   | - |   |
| less difference between book value and fair value of conversion options extinguished taken to contributed surplus |   |              | (7,908,002 | ) |   |   | (649,187 | ) |   |   | - |   |
|                                                                                                              |   |              | 30,568,710 |   |   |   | 31,710,027 |   |   |   | - |   |

| 22. | Non controlling interest |
|-----|--------------------------|

| 23. | Share capital |
|-----|---------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     45 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 23. | Share capital (cont’d) |
|-----|------------------------------|

|                                                                          |   | Number of shares |       |   | $      |   |
|-------------------------------------------------------------------------------|--------|----------------------------|------------|--------|--------|--------|
| January 1, 2008                                                               |   |                       | 31,026,356 |   |   |   | 259,324,133 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| Shares issued on Private Placement                                            |   |                       | 2,728,477  |   |   |   | 58,938,305 |   |
| Shares issued on exercise of options under Stock Incentive Plan               |   |                       | 58,000     |   |   |   | 1,413,587 |   |
| Shares issued on preference share conversion and interest payments            |   |                       | 532,754    |   |   |   | 15,012,950 |   |
| Share issued as placement fee on debenture issue                              |   |                       | 228,000    |   |   |   | 5,700,000 |   |
| Share issued on debenture conversions                                         |   |                       | 641,000    |   |   |   | 15,118,483 |   |
| Shares issued on debenture interest payments                                  |   |                       | 259,105    |   |   |   | 2,620,628 |   |
| Shares issued on conversion of indirect participation interest                |   |                       | 450,000    |   |   |   | 15,776,270 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| December 31, 2008                                                             |   |                       | 35,923,692 |   |   |   | 373,904,356 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| Shares issued on exercise of options under Stock Incentive Plan               |   |                       | 231,750    |   |   |   | 6,818,814 |   |
| Shares issued on buyback of LNG Interest (note 15)                            |   |                       | 499,834    |   |   |   | 11,250,000 |   |
| Shares issued on debenture conversions (note 24)                              |   |                       | 3,159,000  |   |   |   | 77,089,722 |   |
| Shares issued on debenture interest payments (note 24)                        |   |                       | 70,548     |   |   |   | 2,352,084 |   |
| Shares issued on registered direct offering                                   |   |                       | 2,013,815  |   |   |   | 70,443,248 |   |
| Shares issued on exercise of warrants                                         |   |                       | 302,305    |   |   |   | 8,522,978 |   |
| Shares issued on buyback of IPI#3 Interest                                    |   |                       | 1,344,710  |   |   |   | 62,980,161 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| December 31, 2009                                                             |   |                       | 43,545,654 |   |   |   | 613,361,363 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| Shares issued on exercise of options under Stock Incentive Plan               |   |                       | 479,733    |   |   |   | 19,310,657 |   |
| Shares issued on vesting of restricted stock units under Stock Incentive Plan |   |                       | 20,700     |   |   |   | 1,418,985 |   |
| Shares issued on buyback of IPI#3 Interest                                    |   |                       | 754,788    |   |   |   | 50,687,368 |   |
| Shares issued on litigation settlement                                        |   |                       | 199,677    |   |   |   | 12,000,000 |   |
| Shares issued on public offering                                              |   |                       | 2,800,000  |   |   |   | 198,872,679 |   |
|                                                                          |   |                       |       |   |   |   |   |   |
| December 31, 2010                                                             |   |                       | 47,800,552 |   |   |   | 895,651,052 |   |

| 24. | 8% subordinated debentures |
|-----|----------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     46 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 24. | 8% subordinated debentures (cont’d) |
|-----|-------------------------------------------|

| 25. | 2.75% convertible notes |
|-----|-------------------------|

| 26. | Stock compensation |
|-----|--------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     47 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 26. | Stock compensation (cont’d) |
|-----|-----------------------------------|

|                                |   | December 31, 2010 |      |   | December 31, 2009 |   |   | December 31, 2008 |   |
|-------------------------------------|--------|-----------------------------|-----------|--------|-----------------------------|--------|--------|-----------------------------|--------|
|                           |   |                        |      |   | Weighted                    |   |   |                        |   |   | Weighted |   |   |   |   |   | Weighted |   |
|                           |   |                        |      |   | average                     |   |   |                        |   |   | average |   |   |   |   |   | average |   |
|                           |   | Number of              |      |   | exercise                    |   |   | Number of              |   |   | exercise |   |   | Number of |   |   | exercise |   |
| Stock options outstanding |   | options                     |      |   | price $                |   |   | options                     |   |   | price $ |   |   | options |   |   | price $ |   |
| Outstanding at beginning of period  |   |                        | 1,838,500 |   |                        |   | 22.07  |                        |   |   | 1,839,500 |   |   |   | 20.18 |   |   |   | 1,200,500 |   |   |   | 23.70 |   |
| Granted                             |   |                        | 330,000   |   |                        |   | 54.02  |                        |   |   | 325,500 |   |   |   | 28.68 |   |   |   | 952,500 |   |   |   | 18.48 |   |
| Exercised                           |   |                        | (479,733  | )      |                        |   | (25.59 | )                           |   |   | (231,750 | ) |   |   | (19.94 | ) |   |   | (58,000 | ) |   |   | (16.50 | ) |
| Forfeited                           |   |                        | -         |   |                        |   | -      |                        |   |   | (49,000 | ) |   |   | (30.39 | ) |   |   | (11,500 | ) |   |   | (28.68 | ) |
| Expired                             |   |                        | (500      | )      |                        |   | (28.68 | )                           |   |   | (45,750 | ) |   |   | (34.09 | ) |   |   | (244,000 | ) |   |   | (25.80 | ) |
| Outstanding at end of period        |   |                        | 1,688,267 |   |                        |   | 27.31  |                        |   |   | 1,838,500 |   |   |   | 22.07 |   |   |   | 1,839,500 |   |   |   | 20.18 |   |

| Options issued and outstanding |   |                        | Options exercisable |   |
|-----------------------------------------------|--------|-----------------------------|--------------------------|--------|
|                                     |   |                        |                     |   |   |   |   | Weighted average |   |   |   |   |   |   |   |
| Range of exercise                   |   |                        |                     |   | Weighted average |   |   | remaining term |   |   |   |   |   | Weighted average |   |
| prices $                                 |   | Number of options |                     |   | exercise price $ |   |   | (years) |   |   | Number of options |   |   | exercise price $ |   |
| 8.01 to 12.00                                 |   |                        | 506,100                  |   |   |   | 9.80 |   |   |   | 2.90 |   |   |   | 271,100 |   |   |   | 9.81 |   |
| 12.01 to 24.00                                |   |                        | 395,000                  |   |   |   | 16.88 |   |   |   | 1.60 |   |   |   | 305,000 |   |   |   | 15.78 |   |
| 24.01 to 31.00                                |   |                        | 103,000                  |   |   |   | 27.76 |   |   |   | 2.41 |   |   |   | 100,000 |   |   |   | 27.67 |   |
| 31.01 to 41.00                                |   |                        | 234,167                  |   |   |   | 35.46 |   |   |   | 2.20 |   |   |   | 117,500 |   |   |   | 36.58 |   |
| 41.01 to 51.00                                |   |                        | 120,000                  |   |   |   | 45.79 |   |   |   | 3.66 |   |   |   | 55,000 |   |   |   | 43.97 |   |
| 51.01 to 61.00                                |   |                        | 300,000                  |   |   |   | 52.76 |   |   |   | 4.47 |   |   |   | - |   |   |   | - |   |
| 61.01 to 71.00                                |   |                        | 30,000                   |   |   |   | 66.58 |   |   |   | 4.63 |   |   |   | - |   |   |   | - |   |
|                                     |   |                        | 1,688,267                |   |   |   | 27.31 |   |   |   | 3.26 |   |   |   | 848,600 |   |   |   | 19.98 |    |

| Consolidated Financial Statements   INTEROIL CORPORATION     48 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 26. | Stock compensation (cont’d) |
|-----|-----------------------------------|

|         |   |                      |   |                         |   |   |                |   |   |                |   |   | Weighted average       |   |
|--------------|--------|--------------------------------|--------|------------------------------|--------|--------|---------------------|--------|--------|---------------------|--------|--------|-----------------------------|--------|
|    |   |                      |   | Risk free interest |   |   |                |   |   |                |   |   | expected life for |   |
| Year         |   | Period                         |   | rate (%)                |   |   | Dividend yield |   |   | Volatility (%) |   |   | options                     |   |
| 2010         |   | Jul 1 to Dec 31 |   |                         | 0.8    |   |                |   | -      |                |   |   | 86                          |   |   |   | 5.0 |   |
| 2010         |   | Jan 1 to Jun 30                |   |                         | 1.2    |   |                |   | -      |                |   |   | 86                          |   |   |   | 5.0 |   |
| 2009         |   | Oct 1 to Dec 31                |   |                         | 1.5    |   |                |   | -      |                |   |   | 89                          |   |   |   | 6.0 |   |
| 2009         |   | Jul 1 to Sep 30                |   |                         | 1.7    |   |                |   | -      |                |   |   | 83                          |   |   |   | 3.0 |   |
| 2009         |   | Apr 1 to Jun 30                |   |                         | 1.4    |   |                |   | -      |                |   |   | 83                          |   |   |   | 5.0 |   |
| 2009         |   | Jan 1 to Mar 31                |   |                         | 1.1    |   |                |   | -      |                |   |   | 83                          |   |   |   | 5.0 |   |
| 2008         |   | Oct 1 to Dec 31                |   |                         | 1.5    |   |                |   | -      |                |   |   | 83                          |   |   |   | 4.3 |   |
| 2008         |   | Apr 1 to Sep 30                |   |                         | 2.7    |   |                |   | -      |                |   |   | 80                          |   |   |   | 5.0 |   |
| 2008         |   | Jan 1 to Mar 31                |   |                         | 2.2    |   |                |   | -      |                |   |   | 73                          |   |   |   | 5.0 |   |

|                               |   | December 31, 2010 |    |   | December 31, 2009 |   |   | December 31, 2008 |   |
|------------------------------------|--------|-----------------------------|---------|--------|-----------------------------|--------|--------|-----------------------------|--------|
|                          |   |                        |    |   | Weighted                    |   |   |                        |   |   | Weighted |   |   |   |   |   | Weighted |   |
|                          |   |                        |    |   | Average                     |   |   |                        |   |   | Average |   |   |   |   |   | Average |   |
|                          |   |                        |    |   | Grant Date             |   |   |                        |   |   | Grant Date |   |   |   |   |   | Grant Date |   |
|                          |   |                        |    |   | Fair Value             |   |   |                        |   |   | Fair Value |   |   |   |   |   | Fair Value |   |
|                          |   | Number of              |    |   | per                         |   |   | Number of              |   |   | per |   |   | Number of |   |   | per |   |
| Restricted stock units   |   | restricted                  |    |   | restricted                  |   |   | restricted                  |   |   | restricted |   |   | restricted |   |   | restricted |   |
| outstanding                        |   | stock units            |    |   | stock unit $      |   |   | stock units            |   |   | stock unit $ |   |   | stock units |   |   | stock unit $ |   |
| Outstanding at beginning of period |   |                        | 41,400  |   |                        |   | 68.55  |                        |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Granted                            |   |                        | 107,483 |   |                        |   | 54.73  |                        |   |   | 41,400 |   |   |   | 68.55 |   |   |   | - |   |   |   | - |   |
| Exercised                          |   |                        | (20,700 | )      |                        |   | (68.55 | )                           |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Forfeited                          |   |                        | (3,991  | )      |                        |   | (56.13 | )                           |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Expired                            |   |                        | -       |   |                        |   | -      |                        |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total                              |   |                        | 124,192 |   |                        |   | 56.99  |                        |   |   | 41,400 |   |   |   | 68.55 |   |   |   | - |   |   |   | - |   |

| 27. | Warrants |
|-----|----------|

| Consolidated Financial Statements   INTEROIL CORPORATION     49 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 28. | Earnings/(Loss) per share |
|-----|---------------------------|

|                                                      |   | Number of shares  |      |   | Number of shares  |   |      | Number of shares  |   |
|-----------------------------------------------------------|--------|-----------------------------|-----------|--------|-----------------------------|--------|-----------|-----------------------------|--------|
| Potential dilutive instruments outstanding |   | December 31, 2010 |      |   | December 31, 2009 |   |      | December 31, 2008 |   |
| Employee stock options                                    |   |                        | 1,688,267 |   |                        |   | 1,838,500 |                        |   |   | 1,839,500 |   |
| Employee Restricted Stock                                 |   |                        | 124,192   |   |                        |   | 41,400    |                        |   |   | - |   |
| IPI Indirect Participation interest - conversion options  |   |                        | 340,480   |   |                        |   | 527,147   |                        |   |   | 2,160,000 |   |
| 8% Convertible debentures                                 |   |                        | -         |   |                        |   | -         |                        |   |   | 3,159,000 |   |
| 2.75% Convertible notes                                   |   |                        | 732,025   |   |                        |   | -         |                        |   |   | - |   |
| Warrants                                                  |   |                        | -         |   |                        |   | -         |                        |   |   | 337,252 |   |
| Others                                                    |   |                        | 5,000     |   |                        |   | 5,000     |                        |   |   | 5,000 |   |
| Total stock options/shares outstanding                    |   |                        | 2,889,964 |   |                        |   | 2,412,047 |                        |   |   | 7,500,752 |   |

|                                           |   | Year ended   |       |
|------------------------------------------------|--------|-------------------|------------|
|                                      |   | December 31, |       |   | December 31, |   |   | December 31, |   |
|                                      |   | 2010              |       |   | 2009 |   |   | 2008 |   |
|                                           |   |              |       |   |   |   |   |   |   |
| Basic                                          |   |              | 44,329,670 |   |   |   | 39,900,583 |   |   |   | 33,632,390 |   |
| Employee options (using Treasury Stock method) |   |              | -          |   |   |   | 697,811 |   |   |   | - |   |
| Warrants (using Treasury Stock method)         |   |              | -          |   |   |   | 83,192 |   |   |   | - |   |
| Diluted                                        |   |              | 44,329,670 |   |   |   | 40,681,586 |   |   |   | 33,632,390 |   |

| 29. | Commitments and contingencies |
|-----|-------------------------------|

|                                         |   | Total  |    |   | Less than1 year |   |   | 1-2 years |   |   | 2-3 years |   |   | 3-4years |   |   | 4-5years |   |   | Morethan 5years |   |
|---------------------------------------------------|--------|--------|---------|--------|---------------------------|--------|--------|----------------|--------|--------|----------------|--------|--------|----------|--------|--------|----------|--------|--------|----------------------|--------|
|                                              |   | '000   |    |   | '000                      |   |   | '000           |   |   | '000           |   |   | '000     |   |   | '000     |   |   | '000                 |   |
| Secured and unsecured loans (b)                   |   |   | 49,957  |   |                      |   | 14,457 |           |   |   | 9,000          |   |   |     | 9,000  |   |     |   | 9,000  |                 |   |   | 8,500 |   |   |   | - |   |
| Convertible notes obligations                     |   |   | 70,000  |   |                      |   | -      |           |   |   | -              |   |   |     | -      |   |     |   | -      |                 |   |   | 70,000 |   |   |   | - |   |
| Indirect participation interest - PNGDV (note 21) |   |   | 1,384   |   |                      |   | 540    |           |   |   | 844            |   |   |     | -      |   |     |   | -      |                 |   |   | - |   |   |   | - |   |
| Petroleum prospecting and retention licenses (a)  |   |   | 156,000 |   |                      |   | 31,000 |           |   |   | 31,000         |   |   |     | 34,900 |   |     |   | 24,750 |                 |   |   | 34,350 |   |   |   | - |   |
|                                              |   |   | 277,341 |   |                      |   | 45,997 |           |   |   | 40,844         |   |   |     | 43,900 |   |     |   | 33,750 |                 |   |   | 112,850 |   |   |   | - |   |

|   | (a) | The amount pertaining to the petroleum prospecting and retention licenses represents the amount InterOil has committed as a condition on renewal of these licenses.  Company is committed to spend a further $83.0 million as a condition of renewal of our petroleum prospecting licenses up to 2014.  Of this $83.0 million commitment, as at December 31, 2010, management estimates that satisfying this license commitment would also satisfy our commitments to the IPI investors in relation to drilling the final four wells and satisfy the commitments in relation to the IPI agreement.  In addition, the terms of grant of PRL15, requires the Company to spend a further $73.0 million on the development of the Elk and Antelope fields by the end of 2014. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | This excludes the contractual interest payments on the principal amount. The effective interest rate on this loan for the year ended December 31, 2010 was 6.80%.  The annual effective interest rate will be applied to the outstanding balance for the contractual interest payment calculation. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     50 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 29. | Commitments and contingencies (cont’d) |
|-----|----------------------------------------------|

| 30. | Subsequent events |
|-----|-------------------|

| - | Agreement with Energy World Corporation: |
|---|------------------------------------------|

| - | Renewal of BNP Paribas working capital facility |
|---|-------------------------------------------------|

| 31. | Reconciliation to generally accepted accounting principles in the United States |
|-----|---------------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     51 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

| Consolidated Balance Sheets                        |   | As at             |         |
|----------------------------------------------------|--------|-------------------|--------------|
|                                               |   | December 31, 2010 |         |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                               |   | $                 |         |   | $ |   |   | $ |   |
|                                               |   | Canadian GAAP     |         |   | US GAAP |   |   | Canadian GAAP |   |   | US GAAP |   |   | Canadian GAAP |   |   | US GAAP |   |
|                                               |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Assets                                             |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                    |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents (5)                      |   |              | 233,576,821  |   |   |   | 232,424,858 |   |   |   | 46,449,819 |   |   |   | 44,754,405 |   |   |   | 48,970,572 |   |   |   | 44,051,224 |   |
| Cash restricted                                    |   |              | 40,664,995   |   |   |   | 40,664,995 |   |   |   | 22,698,829 |   |   |   | 22,698,829 |   |   |   | 25,994,258 |   |   |   | 25,933,184 |   |
| Trade receivables                                  |   |              | 48,047,496   |   |   |   | 48,047,496 |   |   |   | 61,194,136 |   |   |   | 61,194,136 |   |   |   | 42,887,823 |   |   |   | 42,887,823 |   |
| Derivative contracts receivables                   |   |              | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 31,335,050 |   |   |   | 31,335,050 |   |
| Other assets (5)                                   |   |              | 505,059      |   |   |   | 1,455,472 |   |   |   | 639,646 |   |   |   | 1,496,621 |   |   |   | 167,885 |   |   |   | 125,119 |   |
| Inventories                                        |   |              | 127,137,360  |   |   |   | 127,137,360 |   |   |   | 70,127,049 |   |   |   | 70,127,049 |   |   |   | 83,037,326 |   |   |   | 83,037,326 |   |
| Prepaid expenses                                   |   |              | 3,593,574    |   |   |   | 3,593,574 |   |   |   | 6,964,950 |   |   |   | 6,964,950 |   |   |   | 4,489,574 |   |   |   | 4,489,574 |   |
| Total current assets                               |   |              | 453,525,305  |   |   |   | 453,323,755 |   |   |   | 208,074,429 |   |   |   | 207,235,990 |   |   |   | 236,882,488 |   |   |   | 231,859,300 |   |
| Non-current assets:                                |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash restricted                                    |   |              | 6,613,074    |   |   |   | 6,613,074 |   |   |   | 6,609,746 |   |   |   | 6,609,746 |   |   |   | 290,782 |   |   |   | 290,782 |   |
| Goodwill (5)                                       |   |              | 6,626,317    |   |   |   | 864,377 |   |   |   | 6,626,317 |   |   |   | 864,377 |   |   |   | - |   |   |   | - |   |
| Deferred financing costs (6)                       |   |              | -            |   |   |   | 686,778 |   |   |   | - |   |   |   | 910,722 |   |   |   | - |   |   |   | 1,279,145 |   |
| Investment in LNG Project (5)                      |   |              | -            |   |   |   | 13,006,020 |   |   |   | - |   |   |   | 13,121,141 |   |   |   | - |   |   |   | 6,610,480 |   |
| Plant and equipment (1), (5)                       |   |              | 229,331,842  |   |   |   | 215,594,986 |   |   |   | 221,046,709 |   |   |   | 208,703,247 |   |   |   | 223,585,559 |   |   |   | 210,803,013 |   |
| Oil and gas properties (2)                         |   |              | 255,294,738  |   |   |   | 254,006,238 |   |   |   | 172,483,562 |   |   |   | 171,220,062 |   |   |   | 128,013,959 |   |   |   | 127,653,411 |   |
| Future income tax benefit (7)                      |   |              | 14,098,128   |   |   |   | 16,969,692 |   |   |   | 16,912,969 |   |   |   | 16,912,969 |   |   |   | 3,070,182 |   |   |   | 3,070,182 |   |
| Total non-current assets                           |   |              | 511,964,099  |   |   |   | 507,741,165 |   |   |   | 423,679,303 |   |   |   | 418,342,264 |   |   |   | 354,960,482 |   |   |   | 349,707,013 |   |
| Total assets                                       |   |              | 965,489,404  |   |   |   | 961,064,920 |   |   |   | 631,753,732 |   |   |   | 625,578,254 |   |   |   | 591,842,970 |   |   |   | 581,566,313 |   |
| Liabilities                                        |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                               |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable and accrued liabilities (5)       |   |              | 76,087,954   |   |   |   | 73,476,455 |   |   |   | 59,372,354 |   |   |   | 58,090,593 |   |   |   | 78,147,736 |   |   |   | 77,460,413 |   |
| Derivative contracts payables                      |   |              | 178,578      |   |   |   | 178,578 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Working capital facility                           |   |              | 51,254,326   |   |   |   | 51,254,326 |   |   |   | 24,626,419 |   |   |   | 24,626,419 |   |   |   | 68,792,402 |   |   |   | 68,792,402 |   |
| Current portion of loans                           |   |              | 14,456,757   |   |   |   | 14,456,757 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |   |   | 9,000,000 |   |
| Current portion of indirect participation interest |   |              | 540,002      |   |   |   | 540,002 |   |   |   | 540,002 |   |   |   | 540,002 |   |   |   | 540,002 |   |   |   | 540,002 |   |
| Total current liabilities                          |   |              | 142,517,617  |   |   |   | 139,906,118 |   |   |   | 93,538,775 |   |   |   | 92,257,014 |   |   |   | 156,480,140 |   |   |   | 155,792,817 |   |
| Non-current liabilities:                           |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Secured loan (6)                                   |   |              | 34,813,222   |   |   |   | 35,500,000 |   |   |   | 43,589,278 |   |   |   | 44,500,000 |   |   |   | 52,365,333 |   |   |   | 53,500,000 |   |
| 8% subordinated debenture liability (3)            |   |              | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 65,040,067 |   |   |   | 69,710,182 |   |
| 2.75% convertible notes liability (4)              |   |              | 52,425,489   |   |   |   | 66,391,278 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Deferred gain on contributions to LNG project (5)  |   |              | 13,076,272   |   |   |   | - |   |   |   | 13,076,272 |   |   |   | - |   |   |   | 17,497,110 |   |   |   | - |   |
| Indirect participation interest (2)                |   |              | 34,134,387   |   |   |   | 42,469,767 |   |   |   | 39,559,718 |   |   |   | 49,040,098 |   |   |   | 73,321,158 |   |   |   | 89,055,610 |   |
| Total non-current liabilities                      |   |              | 134,449,370  |   |   |   | 144,361,045 |   |   |   | 96,225,268 |   |   |   | 93,540,098 |   |   |   | 208,223,668 |   |   |   | 212,265,792 |   |
| Total liabilities                                  |   |              | 276,966,987  |   |   |   | 284,267,163 |   |   |   | 189,764,043 |   |   |   | 185,797,112 |   |   |   | 364,703,808 |   |   |   | 368,058,609 |   |
| Non-controlling interest (8)                       |   |              | 20,099       |   |   |   | - |   |   |   | 13,596 |   |   |   | - |   |   |   | 5,235 |   |   |   | - |   |
| Equity                                             |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| InterOil Corporation shareholders' equity:         |   |              |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share capital (3)                                  |   |              | 895,651,052  |   |   |   | 898,032,422 |   |   |   | 613,361,363 |   |   |   | 615,742,733 |   |   |   | 373,904,356 |   |   |   | 373,514,356 |   |
| 8% subordinated debentures (3)                     |   |              | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 10,837,394 |   |   |   | - |   |
| 2.75% convertible notes (4)                        |   |              | 14,298,036   |   |   |   | - |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contributed surplus (3)                            |   |              | 16,738,417   |   |   |   | 34,096,501 |   |   |   | 21,297,177 |   |   |   | 30,747,259 |   |   |   | 15,621,767 |   |   |   | 24,422,662 |   |
| Warrants                                           |   |              | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |
| Accumulated Other Comprehensive Income             |   |              | 9,261,177    |   |   |   | 9,261,177 |   |   |   | 8,150,976 |   |   |   | 8,150,976 |   |   |   | 27,698,306 |   |   |   | 27,698,306 |   |
| Conversion options (2)                             |   |              | 12,150,880   |   |   |   | - |   |   |   | 13,270,880 |   |   |   | - |   |   |   | 17,140,000 |   |   |   | - |   |
| Accumulated deficit                                |   |              | (259,597,244 | ) |   |   | (264,613,395 | ) |   |   | (214,104,303 | ) |   |   | (214,873,709 | ) |   |   | (220,186,930 | ) |   |   | (214,252,081 | ) |
| Total InterOil Corporation shareholders' equity    |   |              | 688,502,318  |   |   |   | 676,776,705 |   |   |   | 441,976,093 |   |   |   | 439,767,259 |   |   |   | 227,133,927 |   |   |   | 213,502,277 |   |
| Non-controlling interest (8)                       |   |              | -            |   |   |   | 21,052 |   |   |   | - |   |   |   | 13,883 |   |   |   | - |   |   |   | 5,427 |   |
| Total equity                                       |   |              | 688,502,318  |   |   |   | 676,797,757 |   |   |   | 441,976,093 |   |   |   | 439,781,142 |   |   |   | 227,133,927 |   |   |   | 213,507,704 |   |
| Total liabilities and shareholders' equity         |   |              | 965,489,404  |   |   |   | 961,064,920 |   |   |   | 631,753,732 |   |   |   | 625,578,254 |   |   |   | 591,842,970 |   |   |   | 581,566,313 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     52 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

|                                                                 |   | Year ended             |        |
|---------------------------------------------------------------------------|--------|-----------------------------|-------------|
|                                                                 |   | December 31, 2010 |        |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                                                 |   | $                           |        |   | $ |   |   | $ |   |
|                                                                 |   | Canadian GAAP          |        |   | U.S. GAAP |   |   | Canadian GAAP |   |   | U.S. GAAP |   |   | Canadian GAAP |   |   | U.S. GAAP |   |
| Revenue                                                                   |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and operating revenues                                              |   |                        | 802,374,399 |   |   |   | 802,374,399 |   |   |   | 688,478,965 |   |   |   | 688,478,965 |   |   |   | 915,578,709 |   |   |   | 915,578,709 |   |
| Interest income                                                           |   |                        | 150,816     |   |   |   | - |   |   |   | 350,629 |   |   |   | - |   |   |   | 931,785 |   |   |   | - |   |
| Other income                                                              |   |                        | 4,470,048   |   |   |   | - |   |   |   | 4,228,415 |   |   |   | - |   |   |   | 3,216,445 |   |   |   | - |   |
|                                                                      |   |                        | 806,995,263 |   |   |   | 802,374,399 |   |   |   | 693,058,009 |   |   |   | 688,478,965 |   |   |   | 919,726,939 |   |   |   | 915,578,709 |   |
|                                                                      |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Expenses                                                                  |   |                        |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of sales and operating expenses (excluding depreciation shown below) |   |                        | 701,556,650 |   |   |   | 701,556,650 |   |   |   | 601,983,432 |   |   |   | 601,983,432 |   |   |   | 888,623,109 |   |   |   | 888,623,109 |   |
| Administrative and general expenses (5)                                   |   |                        | 41,047,949  |   |   |   | 40,303,912 |   |   |   | 33,254,708 |   |   |   | 30,087,894 |   |   |   | 31,227,627 |   |   |   | 28,354,064 |   |
| Derivative loss/(gain)                                                    |   |                        | 1,065,188   |   |   |   | 1,065,188 |   |   |   | (1,008,585 | ) |   |   | (1,008,585 | ) |   |   | (24,038,550 | ) |   |   | (24,038,550 | ) |
| Legal and professional fees (5)                                           |   |                        | 6,902,241   |   |   |   | 6,610,204 |   |   |   | 9,067,413 |   |   |   | 6,490,539 |   |   |   | 11,523,045 |   |   |   | 7,692,045 |   |
| Exploration costs, excluding exploration impairment                       |   |                        | 16,981,929  |   |   |   | 16,981,929 |   |   |   | 208,694 |   |   |   | 208,694 |   |   |   | 995,532 |   |   |   | 995,532 |   |
| Exploration impairment                                                    |   |                        | -           |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 107,788 |   |   |   | 107,788 |   |
| Short term borrowing costs                                                |   |                        | 7,568,550   |   |   |   | 7,568,550 |   |   |   | 3,776,590 |   |   |   | 3,776,590 |   |   |   | 6,514,060 |   |   |   | 6,514,060 |   |
| Long term borrowing costs (3), (4)                                        |   |                        | 4,496,432   |   |   |   | 4,164,185 |   |   |   | 8,788,041 |   |   |   | 17,871,168 |   |   |   | 17,459,186 |   |   |   | 19,529,798 |   |
| Depreciation and amortization (1), (5)                                    |   |                        | 14,274,922  |   |   |   | 13,791,582 |   |   |   | 14,321,775 |   |   |   | 13,785,845 |   |   |   | 14,142,546 |   |   |   | 13,594,481 |   |
| Loss on equity accounted investment (5)                                   |   |                        | -           |   |   |   | 1,115,121 |   |   |   | - |   |   |   | 4,739,339 |   |   |   | - |   |   |   | (1,047,795 | ) |
| Gain on sale of oil and gas properties (2)                                |   |                        | (2,140,783  | ) |   |   | (2,140,783 | ) |   |   | (7,364,468 | ) |   |   | (8,846,468 | ) |   |   | (11,235,084 | ) |   |   | (12,280,084 | ) |
| Loss on extinguishment of IPI liability (2)                               |   |                        | 30,568,710  |   |   |   | 38,476,712 |   |   |   | 31,710,027 |   |   |   | 32,359,214 |   |   |   | - |   |   |   | - |   |
| Litigation settlement expense                                             |   |                        | 12,000,000  |   |   |   | 12,000,000 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Foreign exchange loss (5)                                                 |   |                        | 10,776,823  |   |   |   | 10,686,456 |   |   |   | 3,305,383 |   |   |   | 3,346,436 |   |   |   | (3,878,150 | ) |   |   | (4,437,943 | ) |
| Non-controlling interest (8)                                              |   |                        | 6,502       |   |   |   | - |   |   |   | 8,361 |   |   |   | - |   |   |   | 943 |   |   |   | - |   |
| Interest income (5)                                                       |   |                        | -           |   |   |   | (150,173 | ) |   |   | - |   |   |   | (342,888 | ) |   |   | - |   |   |   | (841,028 | ) |
| Other income                                                              |   |                        | -           |   |   |   | (4,470,048 | ) |   |   | - |   |   |   | (4,228,415 | ) |   |   | - |   |   |   | (3,216,445 | ) |
|                                                                      |   |                        | 845,105,113 |   |   |   | 847,559,485 |   |   |   | 698,051,371 |   |   |   | 700,222,795 |   |   |   | 931,442,052 |   |   |   | 919,549,032 |   |
| Loss before income taxes                                                  |   |                        | (38,109,850 | ) |   |   | (45,185,086 | ) |   |   | (4,993,362 | ) |   |   | (11,743,830 | ) |   |   | (11,715,113 | ) |   |   | (3,970,323 | ) |
| Income tax (expense)/benefit (5), (7)                                     |   |                        | (7,383,091  | ) |   |   | (4,547,432 | ) |   |   | 11,075,989 |   |   |   | 11,130,659 |   |   |   | (81,964 | ) |   |   | 28,073 |   |
| Net (loss)/profit                                                         |   |                        | (45,492,941 | ) |   |   | (49,732,518 | ) |   |   | 6,082,627 |   |   |   | (613,171 | ) |   |   | (11,797,077 | ) |   |   | (3,942,250 | ) |
| Less: Net profit attributable to the non-controlling interest (8)         |   |                        | -           |   |   |   | (7,168 | ) |   |   | - |   |   |   | (8,457 | ) |   |   | - |   |   |   | (1,040 | ) |
| Net (loss)/profit attributable to InterOil Corporation                    |   |                        | (45,492,941 | ) |   |   | (49,739,686 | ) |   |   | 6,082,627 |   |   |   | (621,628 | ) |   |   | (11,797,077 | ) |   |   | (3,943,290 | ) |

| Consolidated Financial Statements   INTEROIL CORPORATION     53 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

|                                                                                                                                                                  |   | Year ended   |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                                             |   | December 31, |        |   | December 31, |   |   | December 31, |   |
|                                                                                                                                                             |   | 2010              |        |   | 2009 |   |   | 2008 |   |
|                                                                                                                                                                  |   | $                 |        |   | $ |   |   | $ |   |
| Net profit as shown in the Canadian GAAP financial statements                                                                                                         |   |              | (45,492,941 | ) |   |   | 6,082,627 |   |   |   | (11,797,077 | ) |
| Description of items having the effect of increasing reported income                                                                                                  |   |              |        |   |   |   |   |   |   |   |   |   |
| Decrease in depreciation and amortization due to difference in date of commencement of operations of refinery (1)                                                     |   |              | 458,112     |   |   |   | 478,934 |   |   |   | 478,923 |   |
| Decrease in non-controlling interest expense (8)                                                                                                                      |   |              | (666        | ) |   |   | (96 | ) |   |   | (96 | ) |
| Increase in reporting income due to reversal of proportionate consolidation of LNG Project and equity accounting the investment (5)                                   |   |              | -           |   |   |   | 1,067,221 |   |   |   | 8,400,571 |   |
| Increase in reporting income due to the movement in future income tax benefit in relation to the refinery plant and equipment (7)                                     |   |              | 2,871,564   |   |   |   | - |   |   |   | - |   |
| Decrease in long term borrowing costs relating to decreased accretion expense on 2.75% convertible notes liability (4)                                                |   |              | 332,247     |   |   |   | - |   |   |   | - |   |
| Decrease in long term borrowing costs relating to dividends paid to preference share holders expensed under Canadian GAAP                                             |   |              | -           |   |   |   | - |   |   |   | 418,526 |   |
| Decrease in long term borrowing costs relating to reduced accretion expense on increased 8% subordinated debentures liability (3)                                     |   |              | -           |   |   |   | - |   |   |   | 291,137 |   |
| Increase in gain on sale of oil and gas properties arising from conveyance accounting due to the initial IPI proceeds not being bifurcated under U.S. GAAP (2)        |   |              | -           |   |   |   | 1,482,000 |   |   |   | 1,045,000 |   |
| Description of items having the effect of decreasing reported income                                                                                                  |   |              |        |   |   |   |   |   |   |   |   |   |
| Increase in long term borrowing costs relating to immediate expense of portion of placement fees and accretion of BCF on conversion of 8% subordinated debentures (3) |   |              | -           |   |   |   | (9,083,127 | ) |   |   | (2,780,274 | ) |
| Increase in loss on extinguishment of IPI liability arising from IPI buyback due to the initial IPI proceeds not being bifurcated under U.S. GAAP (2)                 |   |              | (7,908,002  | ) |   |   | (649,187 | ) |   |   | - |   |
|                                                                                                                                                                  |   |              |        |   |   |   |   |   |   |   |   |   |
| Net profit/(loss) according to US GAAP                                                                                                                                |   |              | (49,739,686 | ) |   |   | (621,628 | ) |   |   | (3,943,290 | ) |

|                                                                              |   | Year ended   |        |
|-----------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                         |   | December 31, |        |   | December 31, |   |   | December 31, |   |
|                                                                         |   | 2010              |        |   | 2009 |   |   | 2008 |   |
|                                                                         |   | $                 |        |   | $ |   |   | $ |   |
| Net loss before non-controlling interest in accordance with U.S. GAAP, net of tax |   |              | (49,732,518 | ) |   |   | (613,171 | ) |   |   | (3,942,250 | ) |
| Foreign currency translation reserve, net of tax                                  |   |              | 1,110,201   |   |   |   | (1,534,830 | ) |   |   | 3,660,787 |   |
| Deferred hedge (loss)/gain, net of tax                                            |   |              | -           |   |   |   | (18,012,500 | ) |   |   | 18,012,500 |   |
| Total other comprehensive income/(loss), net of tax                               |   |              | 1,110,201   |   |   |   | (19,547,330 | ) |   |   | 21,673,287 |   |
| Comprehensive (loss)/income, net of tax                                           |   |              | (48,622,317 | ) |   |   | (20,160,501 | ) |   |   | 17,731,037 |   |
| Comprehensive income attribuable to the non-controlling interest, net of tax      |   |              | (7,168      | ) |   |   | (8,457 | ) |   |   | (1,040 | ) |
| Comprehensive (loss)/income attributable to InterOil Corporation, net of tax      |   |              | (48,629,485 | ) |   |   | (20,168,958 | ) |   |   | 17,729,997 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     54 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

|                                                                                                                                    |   | Year ended             |         |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------------|
|                                                                                                                                    |   | December 31, 2010 |         |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                                                                                                                    |   | $                           |         |   | $ |   |   | $ |   |
| Cash flows provided by (used in):                                                                                                            |   |                        |         |   |   |   |   |   |   |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |
| Operating activities - Canadian GAAP (as per consolidated cash flows)                                                                        |   |                        | (13,561,258  | ) |   |   | 44,500,367 |   |   |   | 15,586,156 |   |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| Reconciling items:                                                                                                                           |   |                        |         |   |   |   |   |   |   |   |   |   |
| Reclass exploration costs expensed as item classified as operating activity for US GAAP                                                      |   |                        | (16,981,929  | ) |   |   | (208,694 | ) |   |   | (1,103,320 | ) |
| Being LNG project related operating cash flows reversed for US GAAP cash flow statement                                                      |   |                        | 533,316      |   |   |   | 3,188,162 |   |   |   | 8,666,724 |   |
| Operating activities - U.S. GAAP                                                                                                             |   |                        | (30,009,871  | ) |   |   | 47,479,835 |   |   |   | 23,149,560 |   |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| Investing activities - Canadian GAAP (as per consolidated cash flows)                                                                        |   |                        | (111,158,219 | ) |   |   | (85,567,346 | ) |   |   | (47,390,685 | ) |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| Reconciling items:                                                                                                                           |   |                        |         |   |   |   |   |   |   |   |   |   |
| Reclass exploration costs expensed as item classified as operating activity for US GAAP                                                      |   |                        | 16,981,929   |   |   |   | 208,694 |   |   |   | 1,103,320 |   |
| Being reversal of LNG Project expenditure for US GAAP cash flows                                                                             |   |                        | 1,876,735    |   |   |   | 96,846 |   |   |   | (404,594 | ) |
| Being reversal of movement in restricted cash held relating to LNG Project for US GAAP cash flows                                            |   |                        | -            |   |   |   | (61,074 | ) |   |   | (24,492 | ) |
| Investing activities - U.S. GAAP                                                                                                             |   |                        | (92,299,555  | ) |   |   | (85,322,880 | ) |   |   | (46,716,451 | ) |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| Financing activities - Canadian GAAP (as per consolidated cash flows)                                                                        |   |                        | 311,846,479  |   |   |   | 38,546,226 |   |   |   | 36,913,339 |   |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| Reconciling items:                                                                                                                           |   |                        |         |   |   |   |   |   |   |   |   |   |
| Being cash investment in LNG Project                                                                                                         |   |                        | (1,000,000   | ) |   |   | - |   |   |   | - |   |
| Being reversal of PNG LNG cash calls from unrelated joint venture partners proportionately consolidated in Canadian GAAP cash flow statement |   |                        | (866,600     | ) |   |   | - |   |   |   | (9,447,250 | ) |
| Financing activities - U.S. GAAP                                                                                                             |   |                        | 309,979,879  |   |   |   | 38,546,226 |   |   |   | 27,466,089 |   |
|                                                                                                                                         |   |                        |         |   |   |   |   |   |   |   |   |   |
| (Decrease)/increase in cash and cash equivalents                                                                                             |   |                        | 187,670,453  |   |   |   | 703,181 |   |   |   | 3,899,198 |   |
| Cash and cash equivalents, beginning of period (U.S.GAAP)                                                                                    |   |                        | 44,754,405   |   |   |   | 44,051,224 |   |   |   | 40,152,026 |   |
| Cash and cash equivalents, end of period (U.S. GAAP)                                                                                         |   |                        | 232,424,858  |   |   |   | 44,754,405 |   |   |   | 44,051,224 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     55 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

|                                                               |   | Year ended             |         |
|-------------------------------------------------------------------------|--------|-----------------------------|--------------|
|                                                               |   | December 31, 2010 |         |   | December 31, 2009 |   |   | December 31, 2008 |   |
|                                                               |   | $                           |         |   | $ |   |   | $ |   |
|                                                               |   | Canadian GAAP          |         |   | US GAAP |   |   | Canadian GAAP |   |   | US GAAP |   |   | Canadian GAAP |   |   | US GAAP |   |
| Share capital                                                           |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | 613,361,363  |   |   |   | 615,742,733 |   |   |   | 373,904,356 |   |   |   | 373,514,356 |   |   |   | 259,324,133 |   |   |   | 259,324,133 |   |
| Issue of capital stock                                                  |   |                        | 282,289,689  |   |   |   | 282,289,689 |   |   |   | 239,457,007 |   |   |   | 242,228,377 |   |   |   | 114,580,223 |   |   |   | 114,190,223 |   |
| At end of period                                                        |   |                        | 895,651,052  |   |   |   | 898,032,422 |   |   |   | 613,361,363 |   |   |   | 615,742,733 |   |   |   | 373,904,356 |   |   |   | 373,514,356 |   |
| Preference Shares                                                       |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 6,842,688 |   |   |   | - |   |
| Converted to common shares                                              |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (6,842,688 | ) |   |   | - |   |
| At end of period                                                        |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| 2.75% convertible notes                                                 |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Issue of convertible notes                                              |   |                        | 14,298,036   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| At end of period                                                        |   |                        | 14,298,036   |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| 8% subordinated debentures                                              |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | - |   |   |   | 10,837,394 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Issue of debentures                                                     |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 13,036,434 |   |   |   | - |   |
| Conversion to common shares                                             |   |                        | -            |   |   |   | - |   |   |   | (10,837,394 | ) |   |   | - |   |   |   | (2,199,040 | ) |   |   | - |   |
| At end of period                                                        |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 10,837,394 |   |   |   | - |   |
| Contributed surplus                                                     |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | 21,297,177   |   |   |   | 30,747,259 |   |   |   | 15,621,767 |   |   |   | 24,422,662 |   |   |   | 10,337,548 |   |   |   | 10,337,548 |   |
| Fair value of options and restricted stock transferred to share capital |   |                        | (8,454,758   | ) |   |   | (8,454,758 | ) |   |   | (2,185,642 | ) |   |   | (2,185,642 | ) |   |   | (456,867 | ) |   |   | (456,867 | ) |
| Stock compensation expense                                              |   |                        | 11,804,000   |   |   |   | 11,804,000 |   |   |   | 8,290,681 |   |   |   | 8,290,681 |   |   |   | 5,741,086 |   |   |   | 5,741,086 |   |
| Loss on extinguishment of IPI conversion options                        |   |                        | (7,908,002   | ) |   |   | - |   |   |   | (649,187 | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Lapsed warrants transferred to contributed surplus                      |   |                        | -            |   |   |   | - |   |   |   | 219,558 |   |   |   | 219,558 |   |   |   | - |   |   |   | - |   |
| 8% Debenture issue BCF (note 3)                                         |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 8,800,895 |   |
| At end of period                                                        |   |                        | 16,738,417   |   |   |   | 34,096,501 |   |   |   | 21,297,177 |   |   |   | 30,747,259 |   |   |   | 15,621,767 |   |   |   | 24,422,662 |   |
| Warrants                                                                |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | - |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |
| Conversion to common shares                                             |   |                        | -            |   |   |   | - |   |   |   | (1,899,476 | ) |   |   | (1,899,476 | ) |   |   | - |   |   |   | - |   |
| Lapsed warrants transferred to contributed surplus                      |   |                        | -            |   |   |   | - |   |   |   | (219,558 | ) |   |   | (219,558 | ) |   |   | - |   |   |   | - |   |
| At end of period                                                        |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 2,119,034 |   |   |   | 2,119,034 |   |
| Accumulated Other Comprehensive Income                                  |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred hedge gain/(loss)                                              |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | - |   |   |   | 18,012,500 |   |   |   | 18,012,500 |   |   |   | - |   |   |   | - |   |
| Deferred hedge (loss)/gain movement for period, net of tax              |   |                        | -            |   |   |   | - |   |   |   | (18,012,500 | ) |   |   | (18,012,500 | ) |   |   | 18,012,500 |   |   |   | 18,012,500 |   |
| Deferred hedge gain/(loss) at end of period                             |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 18,012,500 |   |   |   | 18,012,500 |   |
| Foreign currency translation reserve                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | 8,150,976    |   |   |   | 8,150,976 |   |   |   | 9,685,806 |   |   |   | 9,685,806 |   |   |   | 6,025,019 |   |   |   | 6,025,019 |   |
| Foreign currency translation adjustment movement for period, net of tax |   |                        | 1,110,201    |   |   |   | 1,110,201 |   |   |   | (1,534,830 | ) |   |   | (1,534,830 | ) |   |   | 3,660,787 |   |   |   | 3,660,787 |   |
| Foreign currency translation reserve at end of period                   |   |                        | 9,261,177    |   |   |   | 9,261,177 |   |   |   | 8,150,976 |   |   |   | 8,150,976 |   |   |   | 9,685,806 |   |   |   | 9,685,806 |   |
| Accumulated other comprehensive income at end of period                 |   |                        | 9,261,177    |   |   |   | 9,261,177 |   |   |   | 8,150,976 |   |   |   | 8,150,976 |   |   |   | 27,698,306 |   |   |   | 27,698,306 |   |
| Conversion options                                                      |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | 13,270,880   |   |   |   | - |   |   |   | 17,140,000 |   |   |   | - |   |   |   | 19,840,000 |   |   |   | - |   |
| Movement for period                                                     |   |                        | (1,120,000   | ) |   |   | - |   |   |   | (3,869,120 | ) |   |   | - |   |   |   | (2,700,000 | ) |   |   | - |   |
| At end of period                                                        |   |                        | 12,150,880   |   |   |   | - |   |   |   | 13,270,880 |   |   |   | - |   |   |   | 17,140,000 |   |   |   | - |   |
| Accumulated deficit                                                     |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | (214,104,303 | ) |   |   | (214,873,709 | ) |   |   | (220,186,930 | ) |   |   | (214,252,081 | ) |   |   | (208,389,853 | ) |   |   | (209,890,265 | ) |
| Net profit/(loss) for period                                            |   |                        | (45,492,941  | ) |   |   | (49,739,686 | ) |   |   | 6,082,627 |   |   |   | (621,628 | ) |   |   | (11,797,077 | ) |   |   | (3,943,290 | ) |
| Deduct:                                                                 |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Preference Share Dividends                                              |   |                        | -            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (418,526 | ) |
| At end of period                                                        |   |                        | (259,597,244 | ) |   |   | (264,613,395 | ) |   |   | (214,104,303 | ) |   |   | (214,873,709 | ) |   |   | (220,186,930 | ) |   |   | (214,252,081 | ) |
| InterOil Corporation shareholders' equity at end of period              |   |                        | 688,502,318  |   |   |   | 676,776,705 |   |   |   | 441,976,093 |   |   |   | 439,767,259 |   |   |   | 227,133,927 |   |   |   | 213,502,277 |   |
| Non-controlling interest                                                |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| At beginning of period                                                  |   |                        | -            |   |   |   | 13,883 |   |   |   | - |   |   |   | 5,427 |   |   |   | - |   |   |   | 4,387 |   |
| Movement for period                                                     |   |                        | -            |   |   |   | 7,169 |   |   |   | - |   |   |   | 8,456 |   |   |   | - |   |   |   | 1,040 |   |
| At end of period                                                        |   |                        | -            |   |   |   | 21,052 |   |   |   | - |   |   |   | 13,883 |   |   |   | - |   |   |   | 5,427 |   |
| Total equity at end of period                                           |   |                        | 688,502,318  |   |   |   | 676,797,757 |   |   |   | 441,976,093 |   |   |   | 439,781,142 |   |   |   | 227,133,927 |   |   |   | 213,507,704 |   |

| Consolidated Financial Statements   INTEROIL CORPORATION     56 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

|                                                                                                                    |   | Year ended   |       |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
| Weighted average number of shares on which earnings per share calculations |   | December 31, |       |   | December 31, |   |   | December 31, |   |
| are based in accordance with U.S. GAAP                                                                                       |   | 2010              |       |   | 2009 |   |   | 2008 |   |
| Basic                                                                                                                        |   |              | 44,329,670 |   |   |   | 39,900,583 |   |   |   | 33,632,390 |   |
| Effect of dilutive options                                                                                                   |   |              | -          |   |   |   | - |   |   |   | - |   |
| Diluted                                                                                                                      |   |              | 44,329,670 |   |   |   | 39,900,583 |   |   |   | 33,632,390 |   |
| Net profit/(loss) per share in accordance with U.S. GAAP                                                                     |   |              |       |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                        |   |              | (1.12      | ) |   |   | (0.02 | ) |   |   | (0.12 | ) |
| Diluted                                                                                                                      |   |              | (1.12      | ) |   |   | (0.02 | ) |   |   | (0.12 | ) |

| (1) | Operations |
|-----|------------|

| (2) | Indirect participation interest |
|-----|---------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     57 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

| (3) | 8% subordinated debentures |
|-----|----------------------------|

| (4) | 2.75% convertible notes |
|-----|-------------------------|

| (5) | Investment in LNG Project/Deferred gain on contributions to LNG Project |
|-----|-------------------------------------------------------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     58 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

| Midstream - liquefaction            |   |               |        |   | GAAP        |   |        |         |   |
|-----------------------------------------------|--------|--------------------|-------------|--------|-------------|--------|-------------|--------------|--------|
| Consolidated Balance Sheet          |   | Canadian GAAP |        |   | Adjustments |   |        | US GAAP |   |
|                                          |   |               |        |   |        |   |        |         |   |
| Cash and cash equivalents                     |   |               | 1,151,963   |   |        |   | (1,151,963  | )            |   |   | - |   |
| Other assets                                  |   |               | 6,757       |   |        |   | (6,757      | )            |   |   | - |   |
| Current assets                                |   |               | 1,158,720   |   |        |   | (1,158,720  | )            |   |   | - |   |
|                                          |   |               |        |   |        |   |        |         |   |   |   |   |
| Investment in LNG Project                     |   |               | -           |   |        |   | 13,006,020  |         |   |   | 13,006,020 |   |
| Goodwill                                      |   |               | 6,626,317   |   |        |   | (5,761,940  | )            |   |   | 864,377 |   |
| Plant and equipment                           |   |               | 4,164,977   |   |        |   | (4,164,977  | )            |   |   | - |   |
| Total assets                                  |   |               | 11,950,014  |   |        |   | 1,920,383   |         |   |   | 13,870,397 |   |
|                                          |   |               |        |   |        |   |        |         |   |   |   |   |
| Accounts payable and accrued liabilities      |   |               | 2,611,506   |   |        |   | (2,611,506  | )            |   |   | - |   |
| Intercompany payables                         |   |               | 15,412,381  |   |        |   | (957,170    | )            |   |   | 14,455,211 |   |
| Current liabilities                           |   |               | 18,023,887  |   |        |   | (3,568,676  | )            |   |   | 14,455,211 |   |
|                                          |   |               |        |   |        |   |        |         |   |   |   |   |
| Deferred gain on contributions to LNG project |   |               | 13,076,272  |   |        |   | (13,076,272 | )            |   |   | - |   |
| Total non-current liabilities                 |   |               | 13,076,272  |   |        |   | (13,076,272 | )            |   |   | - |   |
|                                          |   |               |        |   |        |   |        |         |   |   |   |   |
| Share capital                                 |   |               | 12,000,000  |   |        |   | -           |         |   |   | 12,000,000 |   |
| Accumulated deficit                           |   |               | (31,150,145 | )      |        |   | 18,565,331  |         |   |   | (12,584,814 | ) |
| Shareholders' Equity                          |   |               | (19,150,145 | )      |        |   | 18,565,331  |         |   |   | (584,814 | ) |
| Total liabilities and Shareholders' equity    |   |               | 11,950,014  |   |        |   | 1,920,383   |         |   |   | 13,870,397 |   |

| Midstream - liquefaction            |   |          |       |   | GAAP        |   |      |    |   |
|-------------------------------------|--------|---------------|------------|--------|-------------|--------|-----------|---------|--------|
| Consolidated Statement of Operation |   | Canadian GAAP |       |   | Adjustments |   |      | US GAAP |   |
|                                |   |          |       |   |        |   |      |    |   |
| Interest income                     |   |          | 643        |   |        |   | (643      | )       |   |   | - |   |
| Total revenues                      |   |          | 643        |   |        |   | (643      | )       |   |   | - |   |
|                                |   |          |       |   |        |   |      |    |   |   |   |   |
| Administrative and general expenses |   |          | 6,729,729  |   |        |   | (744,038  | )       |   |   | 5,985,691 |   |
| Depreciation and amortization       |   |          | 25,227     |   |        |   | (25,227   | )       |   |   | - |   |
| Legal and professional fees         |   |          | 292,916    |   |        |   | (292,037  | )       |   |   | 879 |   |
| Borrowing costs                     |   |          | 1,252,796  |   |        |   | -         |    |   |   | 1,252,796 |   |
| Foreign exchange loss/(gain)        |   |          | 90,367     |   |        |   | (90,367   | )       |   |   | - |   |
| Loss on equity accounted investment |   |          | -          |   |        |   | 1,115,121 |    |   |   | 1,115,121 |   |
| Income taxes                        |   |          | (35,905    | )      |        |   | 35,905    |    |   |   | - |   |
| Total expenses                      |   |          | 8,355,130  |   |        |   | (643      | )       |   |   | 8,354,487 |   |
|                                |   |          |       |   |        |   |      |    |   |   |   |   |
| Net (loss)/gain                     |   |          | (8,354,487 | )      |        |   | -         |    |   |   | (8,354,487 | ) |

| Consolidated Financial Statements   INTEROIL CORPORATION     59 |
|---------------------------------------------------------------------------------------------------------|

----

| InterOil CorporationNotes to Consolidated Financial Statements(Expressed in United States dollars) |  |
|----------------------------------------------------------------------------------------------------|--|

| 31. | Reconciliation to generally accepted accounting principles in the United States (cont’d) |
|-----|------------------------------------------------------------------------------------------------|

| (6) | Deferred Financing costs |
|-----|--------------------------|

| (7) | Income tax effect of adjustments |
|-----|----------------------------------|

| (8) | Non controlling interest |
|-----|--------------------------|

| Consolidated Financial Statements   INTEROIL CORPORATION     60 |
|---------------------------------------------------------------------------------------------------------|

----