##### 



InterOil Corporation Year Ended 2005
 Managements Discussion and Analysis
 March 31, 2006
 Overview
    
    
    2Summary of Annual Results
    
    
    2Business Environment
    
    
    4Risk Factors
    
    
    4Forward-looking statements
    
    
    4Results of Operations
    
    
    5UpstreamExploration and Production
    
    
    6MidstreamRefining and Marketing
    
    
    7DownstreamWholesale and Retail Distribution
    
    
    14Corporate and Consolidation
    
    
    15Summary of Quarterly Results
    
    
    17Non-GAAP Measures
    
    
    19Capital Resources
    
    
    20Operating Activities
    
    
    20Investing Activities
    
    
    20Financing Activities
    
    
    21Upstream Capital Expenditure
    
    
    21Midstream Capital Expenditures
    
    
    21Downstream Capital Expenditures
    
    
    21Liquidity
    
    
    22Sources of Capital
    
    
    22Capital Requirements
    
    
    23Contractual Obligations and Commitments
    
    
    24Off-Balance Sheet Arrangements
    
    
    24Transactions with Related Parties
    
    
    24Share Capital
    
    
    25Financial and Derivative Instruments
    
    
    26Foreign Currency Hedge Contracts
    
    
    26Commodity Hedge Contracts
    
    
    26Critical Accounting Estimates
    
    
    27New Accounting Standards
    
    
    29Pending Accounting Standards
    
    
    29Public Securities Filings
    
    
    29
 InterOil CorporationPage 1 of 29




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##### 



March 31, 2006Managements Discussion and Analysis
    
(INTEROIL LOGO)
  
 Overview
  
    
    Exploration and Production. Our upstream business segment explores for oil and natural
gas in Papua New Guinea.
    
    Refining and Marketing. Our midstream business segment operates our refinery in Papua
New Guinea and markets the refined products it produces both domestically in Papua New
Guinea and for export.
    
    Wholesale and Retail Distribution. Our downstream business segment is engaged in the
wholesale and retail distribution of refined products in Papua New Guinea.
 
 Summary of Annual Results
  Summary Annual Results
    
    Years ended December 31,($ thousands)
    
    2005
    
    2004
    
    2003Total revenue
    
    
    483,540
    
    
    
    71,223
    
    
    
    259Sales and operating revenues
    
    
    481,181
    
    
    
    70,644
    
    
    
    Cash flows used in operations
    
    
    (22,713
    )
    
    
    (79,767
    )
    
    
    (3,519
    )Net loss (1)
    
    
    (39,282
    )
    
    
    (52,940
    )
    
    
    (3,518
    )Net loss per share
    
    
    (1.36
    )
    
    
    (2.09
    )
    
    
    (0.16
    )Net loss per diluted share
    
    
    (1.36
    )
    
    
    (2.09
    )
    
    
    (0.16
    )Total assets
    
    
    429,557
    
    
    
    385,842
    
    
    
    260,340Long term debt
    
    
    112,273
    
    
    
    87,472
    
    
    
    90,600Cash dividends declared per share
    
    
    
    
    
    
    
    
    
    
    
 InterOil CorporationPage 2 of 29




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##### 






|    |  |                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------
|   
|(1) |  | We did not have any discontinued operations or extraordinary items during the periods covered
by this table.






    
    the processing of eight different crude feedstocks to determine which crude feedstocks
our refinery can most profitably process;
    
    a full review of operational procedures and the implementation of changes to procedures
that were identified as capable of improving our refinerys efficiency; and
    
    an analysis of equipment modifications that would support our ongoing optimization efforts.





    
    reducing the net amount of low margin naphtha and low sulfur waxy residue that we sell.
    
    improving the percentage of higher margin products, jet fuel, diesel and gasoline, which
our refinery produces per barrel of crude feedstock processed.








InterOil CorporationPage 3 of 29




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##### 



Business Environment
 
 Risk Factors
  
 Forward-looking statements
  
    
    our lack of a substantial operating history;
    
    the ability of our refinery to operate at full capacity and to operate profitability;
    
    our ability to market refinery output;
    
    uncertainty involving the geology of oil and gas deposits and reserve estimates;
    
    the results of our exploration program and our ability to transport crude oil and natural gas to markets;
    
    delays and changes in plans with respect to exploration or development projects or
capital expenditures;
    
    political, legal and economic risks related to Papua New Guinea;
    
    our dependence on exclusive relationships with our suppliers and customers;
    
    our ability to obtain necessary licenses, permits and other approvals;
    
    the impact of competition;
    
    the enforceability of your legal rights;
    
    the volatility of prices for crude oil and refined products, and the volatility of the
difference between our purchase price for oil feedstocks and the sales price of our refined
products;
    
    adverse weather, explosions, fires, natural disasters and other operating risks and
hazards, some of which may not be insured;
    
    the uncertainty of our ability to attract capital;
    
    covenants in our financing and other agreements that may limit our ability to engage in
business activities, raise additional financing or respond to changes in markets or
competition; and
    
    the risks described under the heading Risk Factors in our 2005 Annual Information Form
dated March 31, 2006.
   InterOil CorporationPage 4 of 29




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##### 



Results of Operations
 Summary Annual Results
    
    Years ended December 31,($ thousands)
    
    2005
    
    
    2004
    
    
    2003Total revenue
    
    
    483,540
    
    
    
    71,223
    
    
    
    259Upstream
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    436,421
    
    
    
    26,310
    
    
    
    Downstream
    
    
    124,860
    
    
    
    62,899
    
    
    
    Corporate & Consolidated
    
    
    (77,741
    )
    
    
    (17,986
    )
    
    
    259Cost of sales and operating expenses
    
    
    467,247
    
    
    
    65,345
    
    
    
    Upstream
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    436,491
    
    
    
    27,686
    
    
    
    Downstream
    
    
    110,857
    
    
    
    53,159
    
    
    
    Corporate & Consolidated
    
    
    (80,101
    )
    
    
    (15,500
    )
    
    
    Revenue less cost of sales and
operating expenses
    
    
    16,293
    
    
    
    5,878
    
    
    
    259Upstream
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    (70
    )
    
    
    (1,376
    )
    
    
    Downstream
    
    
    14,003
    
    
    
    9,740
    
    
    
    Corporate & Consolidated
    
    
    2,360
    
    
    
    (2,486
    )
    
    
    259Office and administration and other
expenses
    
    
    23,296
    
    
    
    14,701
    
    
    
    3,420Upstream
    
    
    1,738
    
    
    
    1,649
    
    
    
    521Midstream
    
    
    10,639
    
    
    
    3,133
    
    
    
    222Downstream
    
    
    4,726
    
    
    
    3,147
    
    
    
    25Corporate & Consolidated
    
    
    6,193
    
    
    
    6,772
    
    
    
    2,652Exploration costs (impairment and
accretion expense)
    
    
    7,791
    
    
    
    38,470
    
    
    
    165Earnings before interest, taxes,
depreciation and amortization
(unaudited) (1)
    
    
    (14,794
    )
    
    
    (47,293
    )
    
    
    (3,326
    )Upstream
    
    
    (9,530
    )
    
    
    (40,119
    )
    
    
    (686
    )Midstream
    
    
    (10,708
    )
    
    
    (4,509
    )
    
    
    (222
    )Downstream
    
    
    9,278
    
    
    
    6,593
    
    
    
    (25
    )Corporate & Consolidated
    
    
    (3,834
    )
    
    
    (9,258
    )
    
    
    (2,393
    )Interest expense
    
    
    10,987
    
    
    
    3,203
    
    
    
    105Upstream
    
    
    
    
    
    
    5
    
    
    
    Midstream
    
    
    10,162
    
    
    
    844
    
    
    
    Downstream
    
    
    225
    
    
    
    455
    
    
    
    Corporate & Consolidated
    
    
    600
    
    
    
    1,899
    
    
    
    105Income taxes & non-controlling
interest
    
    
    2,464
    
    
    
    1,805
    
    
    
    14Upstream
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,756
    
    
    
    1,900
    
    
    
    Corporate & Consolidated
    
    
    (292
    )
    
    
    (95
    )
    
    
    14Depreciation & amortization
    
    
    11,037
    
    
    
    639
    
    
    
    73Upstream
    
    
    314
    
    
    
    13
    
    
    
    10Midstream
    
    
    10,598
    
    
    
    312
    
    
    
    8Downstream
    
    
    205
    
    
    
    224
    
    
    
    Corporate & Consolidated
    
    
    (80
    )
    
    
    90
    
    
    
    55Net income/(loss) per segment
    
    
    (39,282
    )
    
    
    (52,940
    )
    
    
    (3,518
    )Upstream
    
    
    (9,844
    )
    
    
    (40,137
    )
    
    
    (696
    )Midstream
    
    
    (31,468
    )
    
    
    (5,665
    )
    
    
    (230
    )Downstream
    
    
    6,092
    
    
    
    4,014
    
    
    
    (25
    )Corporate & Consolidated
    
    
    (4,062
    )
    
    
    (11,152
    )
    
    
    (2,567
    )Net loss per share
    
    
    (1.36
    )
    
    
    (2.09
    )
    
    
    (0.16
    )Net loss per diluted share
    
    
    (1.36
    )
    
    
    (2.09
    )
    
    
    (0.16
    )Total assets
    
    
    429,557
    
    
    
    385,842
    
    
    
    260,340Long term debt
    
    
    112,273
    
    
    
    87,472
    
    
    
    90,600
 
 (1)
    
    Earnings before interest, taxes, depreciation and amortization, commonly referred to as
EBITDA, represents our net income (loss) plus total interest expense (excluding amortization
of debt issuance costs), income tax expense, depreciation and amortization expense. For a
reconciliation of net income (loss), a Canadian generally accepted accounting principles
measure, to EBITDA, a non-GAAP measure, see Non-GAAP Measures. InterOil CorporationPage 5 of 29




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UpstreamExploration and Production
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
   Upstream  Operating results
    
    Years ended December 31,($ thousands)
    
    2005
    
    2004External sales
    
    
    
    
    
    
    Inter-segment revenue
    
    
    
    
    
    
    Total segment revenue
    
    
    
    
    
    
    Cost of sales and operating expenses
    
    
    
    
    
    
    Office and administration and other expenses
    
    
    1,738
    
    
    
    1,649Geological and geophysical expenses
    
    
    
    
    
    
    2,903Depreciation and amortization
    
    
    314
    
    
    
    13Exploration impairment
    
    
    2,144
    
    
    
    35,567Accretion expense
    
    
    5,647
    
    
    
    Interest expense
    
    
    
    
    
    
    5Loss from ordinary activities before income taxes
    
    
    (9,844
    )
    
    
    (40,137
    )Income tax expenses
    
    
    
    
    
    
    Total net loss
    
    
    (9,844
    )
    
    
    (40,137
    )
 Revenues
  Expenses
    InterOil CorporationPage 6 of 29




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MidstreamRefining and Marketing
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
   Midstream  Operating results
    
    Years ended December 31,($ thousands)
    
    2005
    
    2004External sales
    
    
    356,327
    
    
    
    26,310Inter-segment revenue
    
    
    80,094
    
    
    
    Total segment revenue
    
    
    436,421
    
    
    
    26,310Cost of sales and operating expenses
    
    
    436,491
    
    
    
    27,686Office and administration and other expenses
    
    
    10,639
    
    
    
    3,133Earnings before interest, taxes, depreciation
and amortization (1) (unaudited)
    
    
    (10,708
    )
    
    
    (4,509
    )Depreciation and amortization
    
    
    10,597
    
    
    
    312Interest expense
    
    
    10,162
    
    
    
    844Loss from ordinary activities before income taxes
    
    
    (31,468
    )
    
    
    (5,665
    )Income tax expenses
    
    
    
    
    
    
    Total net loss
    
    
    (31,468
    )
    
    
    (5,665
    )
 
 (1)
    
    Earnings before interest, taxes, depreciation and amortization, commonly referred to
as EBITDA, represents our net income (loss) plus total interest expense (excluding
amortization of debt issuance costs), income tax expense, depreciation and amortization
expense. For a reconciliation of net income (loss), a Canadian generally accepted
accounting principles measure, to EBITDA, a non-GAAP measure, see Non-GAAP Measures. Revenues
   InterOil CorporationPage 7 of 29




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Cost of Sales and Operating Expenses
   Office and Administration and Other Expenses
  Crude Prices
  InterOil CorporationPage 8 of 29




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Market Pricing
   InterOil CorporationPage 9 of 29




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Production Slate, Optimization of Crude Diet & Run Rates
   InterOil CorporationPage 10 of 29




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Naphtha and Low Sulfur Waxy Residue (LSWR) Production
  InterOil CorporationPage 11 of 29




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Refinery Throughput
   InterOil CorporationPage 12 of 29




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Commodity Derivatives
     InterOil CorporationPage 13 of 29




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DownstreamWholesale and Retail Distribution
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
   Downstream  Operating results
    
    Years ended December 31,($thousands)
    
    2005
    
    2004External sales
    
    
    124,854
    
    
    
    62,410Inter-segment revenue
    
    
    6
    
    
    
    489Total segment revenue
    
    
    124,860
    
    
    
    62,899Cost of sales and operating expenses
    
    
    110,857
    
    
    
    53,159Office and administration and other expenses
    
    
    4,725
    
    
    
    3,147Depreciation and amortization
    
    
    204
    
    
    
    224Interest expense
    
    
    225
    
    
    
    455Net income from ordinary activities
before income taxes
    
    
    8,848
    
    
    
    5,914Income tax expenses
    
    
    (2,756
    )
    
    
    (1,900
    )Total net income
    
    
    6,092
    
    
    
    4,014
 Revenues
  Expenses
   InterOil CorporationPage 14 of 29




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Corporate and Consolidation
 Year Ended December 31, 2005 compared to Year Ended December 31, 2004
  Corporate and consolidation
    
    Years ended December 31,($ thousands)
    
    2005
    
    2004External saleselimination
    
    
    
    
    
    
    (18,075
    )Inter-segment revenue elimination (1)
    
    
    (80,101
    )
    
    
    (489
    )Interest revenue
    
    
    1,831
    
    
    
    382Other unallocated revenue
    
    
    528
    
    
    
    196Total segment revenue
    
    
    (77,742
    )
    
    
    (17,986
    )Cost of
sales and operating expenses elimination (1)
    
    
    (80,101
    )
    
    
    (15,500
    )Office and
administration and other expenses (2)
    
    
    6,193
    
    
    
    6,773Depreciation and amortization (3)
    
    
    (80
    )
    
    
    90Interest expense (4)
    
    
    600
    
    
    
    1,899Loss from ordinary activities before income taxes
    
    
    (4,354
    )
    
    
    (11,248
    )Income tax expenses
    
    
    (76
    )
    
    
    25Non-controlling interest
    
    
    368
    
    
    
    70Total net loss
    
    
    (4,062
    )
    
    
    (11,153
    )
 
 (1)
    
    Represents the elimination upon consolidation of our refinery sales to other
segments and other minor inter-company product sales.(2)
    
    Includes the elimination of inter-segment administration service fees.(3)
    
    Represents the amortization of a portion of costs capitalized to assets on
consolidation.(4)
    
    Includes the elimination of interest accrued between segments. Expenses
  InterOil CorporationPage 15 of 29




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Consolidated income taxes
  Consolidated Income Taxes
    
    Years ended December 31,($ thousands)
    
    2005
    
    2004Loss before income taxes and non controlling interest
    
    
    (36,818
    )
    
    
    (51,135
    )Statutory income tax rate
    
    
    35.10
    %
    
    
    35.12
    %Computed tax expense (benefit)
    
    
    (12,923
    )
    
    
    (17,959
    )Effect on income tax of:Non-deductible losses in foreign jurisdictions
    
    
    2,835
    
    
    
    2,274Non-deductible stock compensation expense
    
    
    586
    
    
    
    425Gains and losses on foreign exchange
    
    
    269
    
    
    
    59Tax rate differential in foreign jurisdictions
    
    
    1,224
    
    
    
    (342
    )Over provision for tax in prior years
    
    
    (114
    )
    
    
    (43
    )Tax losses for which no future tax benefit has been recognized
    
    
    9,845
    
    
    
    2,696Temporary differences for which no future tax benefit has
been recognized
    
    
    1,123
    
    
    
    14,553Temporary differences recognized on acquisition of subsidiary
    
    
    (35
    )
    
    
    (488
    )Othernet
    
    
    22
    
    
    
    700Income tax expense
    
    
    2,832
    
    
    
    1,875


InterOil CorporationPage 16 of 29




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Summary of Quarterly Results
   Quarters ended
    
    2005
    
    2004($ thousands, except pershare data) (unaudited)
    
    Dec 31
    
    Sept 30
    
    June 30
    
    Mar 31(1)
    
    Dec 31
    
    Sep 30(2)
    
    Jun 30(3)
    
    Mar 31Sales and operating
revenues
    
    
    130,200
    
    
    
    124,481
    
    
    
    125,275
    
    
    
    103,584
    
    
    
    22,151
    
    
    
    36,226
    
    
    
    12,691
    
    
    
    156Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    108,488
    
    
    
    115,203
    
    
    
    114,734
    
    
    
    97,996
    
    
    
    
    
    
    
    26,310
    
    
    
    
    
    
    
    Downstream
    
    
    43,741
    
    
    
    27,470
    
    
    
    30,062
    
    
    
    23,588
    
    
    
    39,811
    
    
    
    10,134
    
    
    
    12,954
    
    
    
    Corporate & Consolidated
    
    
    (22,029
    )
    
    
    (18,192
    )
    
    
    (19,521
    )
    
    
    (18,000
    )
    
    
    (17,660
    )
    
    
    (218
    )
    
    
    (264
    )
    
    
    156Earnings before interest,
taxes, depreciation and
amortization (4)
    
    
    (7,848
    )
    
    
    11,634
    
    
    
    (13,812
    )
    
    
    (4,769
    )
    
    
    (40,306
    )
    
    
    (3,534
    )
    
    
    (1,856
    )
    
    
    (1,597
    )Upstream
    
    
    (5,262
    )
    
    
    6,105
    
    
    
    (9,770
    )
    
    
    (603
    )
    
    
    (37,395
    )
    
    
    (360
    )
    
    
    (1,883
    )
    
    
    (482
    )Midstream
    
    
    (6,470
    )
    
    
    6,001
    
    
    
    (6,778
    )
    
    
    (3,461
    )
    
    
    (2,684
    )
    
    
    (1,538
    )
    
    
    (205
    )
    
    
    (82
    )Downstream
    
    
    3,673
    
    
    
    2,527
    
    
    
    2,448
    
    
    
    629
    
    
    
    3,441
    
    
    
    1,734
    
    
    
    1,451
    
    
    
    (32
    )Corporate & Consolidated
    
    
    211
    
    
    
    (2,999
    )
    
    
    288
    
    
    
    (1,334
    )
    
    
    (3,668
    )
    
    
    (3,370
    )
    
    
    (1,219
    )
    
    
    (1,001
    )Net income (loss) per
segment (5)
    
    
    (14,207
    )
    
    
    5,251
    
    
    
    (19,972
    )
    
    
    (10,354
    )
    
    
    (43,856
    )
    
    
    (4,917
    )
    
    
    (2,522
    )
    
    
    (1,645
    )Upstream
    
    
    (5,352
    )
    
    
    5,890
    
    
    
    (9,774
    )
    
    
    (608
    )
    
    
    (37,405
    )
    
    
    (362
    )
    
    
    (1,879
    )
    
    
    (492
    )Midstream
    
    
    (11,887
    )
    
    
    1,017
    
    
    
    (12,155
    )
    
    
    (8,443
    )
    
    
    (3,840
    )
    
    
    (1,400
    )
    
    
    (334
    )
    
    
    (91
    )Downstream
    
    
    2,515
    
    
    
    1,465
    
    
    
    1,857
    
    
    
    255
    
    
    
    2,347
    
    
    
    761
    
    
    
    938
    
    
    
    (32
    )Corporate & Consolidated
    
    
    517
    
    
    
    (3,121
    )
    
    
    100
    
    
    
    (1,558
    )
    
    
    (4,960
    )
    
    
    (3,916
    )
    
    
    (1,247
    )
    
    
    (1,030
    )Net income (loss) per
share (5)Per shareBasic
    
    
    (0.49
    )
    
    
    0.18
    
    
    
    (0.69
    )
    
    
    (0.36
    )
    
    
    (1.73
    )
    
    
    (0.19
    )
    
    
    (0.10
    )
    
    
    (0.07
    )Per shareDiluted
    
    
    (0.49
    )
    
    
    0.18
    
    
    
    (0.69
    )
    
    
    (0.36
    )
    
    
    (1.73
    )
    
    
    (0.19
    )
    
    
    (0.10
    )
    
    
    (0.07
    )
 
 (1)
    
    Practical completion of our refinery occurred in the first quarter of 2005. For quarterly
comparative purposes as well as for the years ended December 2005 and the 2004, the
commencement of refining operations should be taken into account when analyzing the respective
financial statements. Refining operations on a progressive start-up basis commenced in the
first quarter of 2005.(2)
    
    It was identified in the fourth quarter 2004 that the statement of operations for the quarter
ending September 30, 2004 included sales and cost of sales of our refined products sold by our
downstream business segment during the commissioning of our refinery. These sales and costs
of sales were adjusted to plant and equipment in the fourth quarter of 2004. For comparative
purposes, the September 30, 2004 amounts in the table include subsequent period adjustments of
revenue ($11,336,839) and cost of sales ($9,397,373). The net impact of these adjustments has
increased the net loss by $1,939,466.(3)
    
    We acquired our downstream business on April 28, 2004. For quarterly comparative purposes as
well as for the years ended December 2005 and 2004, the date we acquired our downstream
business segment should be taken into account when analyzing the respective financial
statements.(4)
    
    Earnings before interest, taxes, depreciation and amortization, commonly referred to as
EBITDA, represents our net income (loss) plus total interest expense (excluding amortization
of debt issuance costs), income tax expense, depreciation and amortization expense. For a
reconciliation of net income (loss), a Canadian generally accepted accounting principles
measure, to EBITDA, a non-GAAP measure; see Non-GAAP Measures below.(5)
    
    We did not have any discontinued operations or extraordinary items during the periods covered
by this table. InterOil CorporationPage 17 of 29




---



##### 




    
    the testing and processing of a new crude feedstock during the fourth quarter of 2005
which produced a poor yield; and
    
    a reduction in throughput as a result of unplanned shutdowns due to delays in receiving
crude feedstocks that were beyond our control;
    
    increased prices for crude feedstocks acquired during the third and early in the fourth
quarter of 2005 which were used to produce the refined products sold during the fourth
quarter of 2005 and, consequently, reduced our refining margins; and
    
    higher crude feedstock financing fees as a result of higher crude prices.
   InterOil CorporationPage 18 of 29




---



##### 



Non-GAAP Measures
   Summary Annual Results (unaudited)
    
    Years ended December 31,($ thousands)
    
    2005
    
    
    2004
    
    
    2003Earnings before interest, taxes,
depreciation and amortization
(unaudited)
    
    
    (14,794
    )
    
    
    (47,293
    )
    
    
    (3,326
    )Upstream
    
    
    (9,530
    )
    
    
    (40,119
    )
    
    
    (686
    )Midstream
    
    
    (10,708
    )
    
    
    (4,509
    )
    
    
    (222
    )Downstream
    
    
    9,278
    
    
    
    6,593
    
    
    
    (25
    )Corporate & Consolidated
    
    
    (3,834
    )
    
    
    (9,258
    )
    
    
    (2,393
    )Subtract:Interest expense
    
    
    10,987
    
    
    
    3,203
    
    
    
    105Upstream
    
    
    
    
    
    
    5
    
    
    
    Midstream
    
    
    10,162
    
    
    
    844
    
    
    
    Downstream
    
    
    225
    
    
    
    455
    
    
    
    Corporate & Consolidated
    
    
    600
    
    
    
    1,899
    
    
    
    105Income taxes & non-controlling
interest
    
    
    2,464
    
    
    
    1,805
    
    
    
    14Upstream
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    2,756
    
    
    
    1,900
    
    
    
    Corporate & Consolidated
    
    
    (292
    )
    
    
    (95
    )
    
    
    14Depreciation & amortization
    
    
    11,037
    
    
    
    639
    
    
    
    73Upstream
    
    
    314
    
    
    
    13
    
    
    
    10Midstream
    
    
    10,598
    
    
    
    312
    
    
    
    8Downstream
    
    
    205
    
    
    
    224
    
    
    
    Corporate & Consolidated
    
    
    (80
    )
    
    
    90
    
    
    
    55Net income/(loss) per segment
    
    
    (39,282
    )
    
    
    (52,940
    )
    
    
    (3,518
    )Upstream
    
    
    (9,844
    )
    
    
    (40,137
    )
    
    
    (696
    )Midstream
    
    
    (31,468
    )
    
    
    (5,665
    )
    
    
    (230
    )Downstream
    
    
    6,092
    
    
    
    4,014
    
    
    
    (25
    )Corporate & Consolidated
    
    
    (4,062
    )
    
    
    (11,152
    )
    
    
    (2,567
    )
 Interoil CorporationPage 19 of  29




---



##### 



Quarters ended
    
    2005
    
    2004($ thousands) (unaudited)
    
    Dec 31
    
    Sept 30
    
    June 30
    
    Mar 31
    
    Dec 31
    
    Sep 30
    
    Jun 30
    
    Mar 31Earnings before interest,
taxes, depreciation and
amortization
    
    
    (7,847
    )
    
    
    11,634
    
    
    
    (13,812
    )
    
    
    (4,769
    )
    
    
    (40,306
    )
    
    
    (3,534
    )
    
    
    (1,856
    )
    
    
    (1,597
    )Upstream
    
    
    (5,262
    )
    
    
    6,105
    
    
    
    (9,770
    )
    
    
    (603
    )
    
    
    (37,395
    )
    
    
    (360
    )
    
    
    (1,883
    )
    
    
    (482
    )Midstream
    
    
    (6,470
    )
    
    
    6,001
    
    
    
    (6,778
    )
    
    
    (3,461
    )
    
    
    (2,684
    )
    
    
    (1,538
    )
    
    
    (205
    )
    
    
    (82
    )Downstream
    
    
    3,674
    
    
    
    2,527
    
    
    
    2,448
    
    
    
    629
    
    
    
    3,441
    
    
    
    1,734
    
    
    
    1,451
    
    
    
    (32
    )Corporate & Consolidated
    
    
    211
    
    
    
    (2,999
    )
    
    
    288
    
    
    
    (1,334
    )
    
    
    (3,668
    )
    
    
    (3,370
    )
    
    
    (1,219
    )
    
    
    (1,001
    )Subtract:Interest expense
    
    
    2,989
    
    
    
    2,454
    
    
    
    2,997
    
    
    
    2,547
    
    
    
    2,605
    
    
    
    573
    
    
    
    23
    
    
    
    2Upstream
    
    
    (6
    )
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    2,755
    
    
    
    2,320
    
    
    
    2,736
    
    
    
    2,351
    
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    43
    
    
    
    42
    
    
    
    140
    
    
    
    
    
    
    
    423
    
    
    
    31
    
    
    
    1
    
    
    
    Corporate & Consolidated
    
    
    197
    
    
    
    90
    
    
    
    119
    
    
    
    194
    
    
    
    1,333
    
    
    
    542
    
    
    
    22
    
    
    
    2Income taxes &
non-controlling interest
    
    
    673
    
    
    
    984
    
    
    
    635
    
    
    
    172
    
    
    
    687
    
    
    
    622
    
    
    
    496
    
    
    
    Upstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Midstream
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Downstream
    
    
    1,061
    
    
    
    965
    
    
    
    571
    
    
    
    159
    
    
    
    772
    
    
    
    625
    
    
    
    502
    
    
    
    Corporate & Consolidated
    
    
    (388
    )
    
    
    19
    
    
    
    64
    
    
    
    13
    
    
    
    (85
    )
    
    
    (3
    )
    
    
    (6
    )
    
    
    Depreciation & amortization
    
    
    2,698
    
    
    
    2,945
    
    
    
    2,528
    
    
    
    2,866
    
    
    
    258
    
    
    
    188
    
    
    
    147
    
    
    
    46Upstream
    
    
    96
    
    
    
    213
    
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    2
    
    
    
    (4
    )
    
    
    10Midstream
    
    
    2,662
    
    
    
    2,664
    
    
    
    2,641
    
    
    
    2,631
    
    
    
    312
    
    
    
    (138
    )
    
    
    129
    
    
    
    9Downstream
    
    
    55
    
    
    
    55
    
    
    
    (120
    )
    
    
    215
    
    
    
    (103
    )
    
    
    317
    
    
    
    10
    
    
    
    Corporate & Consolidated
    
    
    (115
    )
    
    
    13
    
    
    
    5
    
    
    
    17
    
    
    
    44
    
    
    
    7
    
    
    
    12
    
    
    
    27Net income (loss) per segment
    
    
    (14,207
    )
    
    
    5,251
    
    
    
    (19,972
    )
    
    
    (10,354
    )
    
    
    (43,856
    )
    
    
    (4,917
    )
    
    
    (2,522
    )
    
    
    (1,645
    )Upstream
    
    
    (5,352
    )
    
    
    5,890
    
    
    
    (9,774
    )
    
    
    (608
    )
    
    
    (37,405
    )
    
    
    (362
    )
    
    
    (1,879
    )
    
    
    (492
    )Midstream
    
    
    (11,887
    )
    
    
    1,017
    
    
    
    (12,155
    )
    
    
    (8,443
    )
    
    
    (3,840
    )
    
    
    (1,400
    )
    
    
    (334
    )
    
    
    (91
    )Downstream
    
    
    2,515
    
    
    
    1,465
    
    
    
    1,857
    
    
    
    255
    
    
    
    2,347
    
    
    
    761
    
    
    
    938
    
    
    
    (32
    )Corporate & Consolidated
    
    
    517
    
    
    
    (3,121
    )
    
    
    100
    
    
    
    (1,558
    )
    
    
    (4,960
    )
    
    
    (3,916
    )
    
    
    (1,247
    )
    
    
    (1,030
    )
 
 Capital Resources
 
 Operating Activities
  
 Investing Activities
  Interoil CorporationPage 20 of  29




---



##### 



Financing Activities
  
 Upstream Capital Expenditure
  
 Midstream Capital Expenditures
  
 Downstream Capital Expenditures
  Interoil CorporationPage 21 of  29




---



##### 



Liquidity
 
 Sources of Capital
 Upstream
  Midstream
  Downstream
  Corporate
  Interoil CorporationPage 22 of  29




---



##### 



Capital Requirements
 Upstream
   Midstream
   Downstream
  Interoil CorporationPage 23 of  29




---



##### 



Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    1 - 2
    
    2 - 3
    
    3 - 4
    
    4 - 5
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    years
    
    years
    
    years
    
    years
    
    5 yearsLong-term debt obligations
    
    $
    80,500
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    35,500Indirect participation
interest (non-current)
(1)
    
    $
    5,500
    
    
    
    
    
    
    $
    5,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Indirect participation
interest (current)
    
    $
    65,259
    
    
    $
    35,093
    
    
    $
    30,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unsecured term loan
    
    $
    21,453
    
    
    $
    21,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditure
commitments relating to
refinery optimization
program
    
    $
    4,600
    
    
    $
    4,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Petroleum prospecting and
retention licenses (2)
    
    $
    160
    
    
    $
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    177,472
    
    
    $
    70,306
    
    
    $
    44,666
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    9,000
    
    
    $
    35,500
 
 (1)
    
    The terms of the indirect participation interest agreement provide for various conversion
options. The amount provided is the maximum amount that can be converted to debt and differs
from the amount presented in the December 31, 2005 Consolidated Balance Sheet due to
conversion requirements into our fully paid common shares.(2)
    
    The amount pertaining to the petroleum prospecting and retention licenses represents the
amount we are required to spend over the next two years to maintain the exploration licenses.
The committed amount can be spent in any proportion over the two years. In addition, we have
an obligation to drill an exploration well in Petroleum Prospecting License 237 prior to the
end of March 2007. The costs to drill this well are not included in the above table because
they cannot be estimated at this time. 
 Off-Balance Sheet Arrangements
  
 Transactions with Related Parties
    Interoil CorporationPage 24 of  29




---



##### 



Share Capital
  Share Capital
    
    Number of sharesBalance, December 31, 2002
    
    
    20,585,943Shares issued for cash
    
    
    3,817,500Shares issued for debt
    
    
    31,240Shares issued on exercise of options
    
    
    381,278Balance, December 31, 2003
    
    
    24,815,961Shares issued for debt
    
    
    3,184,828Shares issued on exercise of options
    
    
    310,095Balance, December 31, 2004
    
    
    28,310,884Shares issued on exercise of options
    
    
    781,268Shares issued on exercise of warrants
    
    
    19,168Shares issued for debt
    
    
    52,000Balance December 31, 2005
    
    
    29,163,320Shares issued from January 1, 2006 to March 16, 2006
    
    
    Balance March 16, 2006
    
    
    29,163,320Remaining stock options authorized
    
    
    911,068Remaining shares issuable upon exercise of warrants
    
    
    340,247Remaining conversion rights authorized (1)
    
    
    3,570,690Other
    
    
    5,000Balance March 16, 2006 Diluted
    
    
    33,990,325
 
 (1)
    
    In 2003 and 2005, we sold indirect participation working interests in our
exploration program. Some of the investors under our indirect participation interest
agreements still have the right to convert, under certain circumstances, their interest
to our common shares. If 100% of the investors under all of out indirect participation
interest agreements choose to convert their interests, we would be required to issue an
additional 3,570,690 common shares. Interoil CorporationPage 25 of  29




---



##### 



Financial and Derivative Instruments
  Restricted cash
    
    Years ended December 31,As at December 31, 2005
    
    2005
    
    2004Cash deposit on working capital facility (2.9%)
    
    
    16,452,216
    
    
    
    15,497,127Cash deposit on secured loan (2.1%)
    
    
    106,266
    
    
    
    Bank term deposits on Petroleum Prospecting
licenses (1.3%)
    
    
    103,786
    
    
    
    102,096Total
    
    
    16,662,268
    
    
    
    15,599,223
   
 Foreign Currency Hedge Contracts
  
 Commodity Hedge Contracts
    Interoil CorporationPage 26 of  29




---



##### 



Outstanding Hedging ContractsDerivative
    
    Type
    
    Notional Volumes (Bbls)Crude swap
    
    Sell crude
    
    
    300,000Crude swap
    
    Buy crude
    
    
    250,000Jet fuel/ kerosene crack spread swap
    
    Sell jet/ buy crude
    
    
    249,999
 
 Critical Accounting Estimates
  Income Taxes
  Oil and Gas Properties
  Asset Retirement Obligations
  Interoil CorporationPage 27 of  29




---



##### 



Environmental Remediation
  Impairment of Long-Lived Assets
  Fair value of Financial Instruments
   Legal and other contingent matters
  Interoil CorporationPage 28 of  29




---



##### 



New Accounting Standards
 Non-Monetary Transactions
  
 Pending Accounting Standards
  
    
    Section 1530, Comprehensive Income;
    
    Section 3855, Financial Instruments  Recognition and Measurement; and
    
    Section 3865, Hedges.
     
 Public Securities Filings
 www.sec.gov
 Interoil CorporationPage 29 of  29