UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


________________




FORM
10-K/A


(Amendment
No. 1)


(Mark
One)


x
            ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2007





Or








 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the Transition Period From to





Commission
File Number 0-7406





PrimeEnergy
Corporation


(Exact
name of registrant as specified in its charter)





Delaware
              84-0637348(state
      or other jurisdiction of  incorporation or
      organization)
              (I.R.S.
      Employer  Identification
No.)





One
      Landmark Square,
                Stamford,
      CT
              06901(Address
      of principal executive offices)
              (Zip
      Code)





Registrant’s
telephone number, including area code: (203) 358-5700





Securities
registered pursuant to Section 12(b) of the Act:


None





Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, par value $.10 per share


(Title of
Class)





Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





Yes   ̈  No  x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 of Section 15 (d) of the Act.





Yes   ̈  No  x





Indicate
whether Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.





Yes  x  No   ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.


x





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.


Large
      Accelerated Filer   ̈
              Accelerated
      Filer   ̈
              Non-Accelerated
      Filer   ̈
              Smaller
      Reporting Company  x





Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes   ̈  No  x





The
aggregate market value of the voting stock of the Registrant held by
non-affiliates, computed by reference to the average bid and asked price of such
common equity as of the last business day of the Registrant’s most recently
completed second fiscal quarter, was $36,534,839.





The
number of shares outstanding of each class of the Registrant’s Common Stock as
of March 21, 2008, was: 3,075,079 shares, Common Stock, $0.10 par
value,


DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the Registrant’s proxy statement to be furnished to stockholders in
connection with its Annual Meeting of Stockholders to be held in June 2008, are
incorporated by reference in Part III hereof.







1





TABLE OF CONTENTS




PART
      IItem 1. BUSINESS
                  4Item 1A. RISK FACTORS
                  12Item 1B. UNRESOLVED STAFF COMMENTS
                  16Item 2. PROPERTIES
                  16Item 3. LEGAL PROCEEDINGS
                  21Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                  21PART
      IIItem
      5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                  22Item 6. SELECTED FINANCIAL DATA
                  23Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
                  23Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
                  27Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA
                  29Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
                  29Item 9A. INTERNAL CONTROLS AND
    PROCEDURES
                  29Item 9B. OTHER INFORMATION
                  30PART
      IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
                  31Item 11. EXECUTIVE COMPENSATION
                  31Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
      AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
                  31Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
      DIRECTOR INDEPENDENCE
                  31Item 14. PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
                  31PART
      IVItem 15. EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES
                  32SIGNATURES
                  35





2
 Table of Contents





EXPLANATORY
NOTE





This
Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) amends the Annual Report on
Form 10-K for the year ended December 31, 2007 (the “2007 Annual Report”) filed
by PrimeEnergy Corporation. (the “Company”) originally filed with the Securities
and Exchange Commission on March 27, 2008. The Form 10-K/A includes amended and
restated consolidated financial statements and related financial information for
the years ended December 31, 2007, 2006 and 2005, including the financial
results in each of the quarterly periods in 2007 and 2006. This information is
disclosed in Notes 2 and 17 to the consolidated financial
statements.





The
restatement provides detail of the change in accounting method from
proportionate consolidation of partnerships that the Company controls to the
full consolidation method and the recognition of gain on the sale of assets to a
partnership in which the Company acquired a twenty percent non-controlling
interest.





The
following items are included in this amendment:





PART
      I -
            ITEM
      1. Business


ITEM
      2. Properties





PART
      II -
            ITEM
      6. Selected Financial Data


ITEM
      7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations


ITEM
      8. Financial Statements and Supplemental
Data





All other
information contained in the original Form 10-K remains unchanged. However, the
entire report with all Items is included in this Form 10-K/A-1 for the
convenience of the reader. This Amendment No.1 on Form 10-K/A does not reflect
events occurring after the filing of our Annual Report on Form 10-K on March 27,
2008 or include, or otherwise modify or update, the disclosure contained therein
in any way except as expressly indicated above.





3
 Table of Contents





PrimeEnergy
Corporation





FORM
10-K ANNUAL REPORT


For
the Fiscal Year Ended


December
31, 2007





PART
I





Item 1. BUSINESS.





General





This
Report contains forward-looking statements that are based on management’s
current expectations, estimates and projections. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “projects” and “estimates,” and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, and
are subject to the safe harbors created thereby. These statements are not
guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove inaccurate and,
therefore, there can be no assurance that they will prove to be accurate. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements due to various risks and uncertainties. These risks and
uncertainties include, among other things, volatility of oil and gas prices,
competition, risks inherent in the Company’s oil and gas operations, the inexact
nature of interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, the Company’s ability to replace and expand
oil and gas reserves, and such other risks and uncertainties described from time
to time in the Company’s periodic reports and filings with the Securities and
Exchange Commission. Accordingly, stockholders and potential investors are
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected.





PrimeEnergy
Corporation (the “Company”) was organized in March, 1973, under the laws of the
State of Delaware.





The
Company is engaged in the oil and gas business through the acquisition,
exploration, development, and production of crude oil and natural gas. The
Company’s properties are located primarily in Texas, Oklahoma, West Virginia,
the Gulf of Mexico, New Mexico, Colorado and Louisiana. The Company, through its
subsidiaries Prime Operating Company, Southwest Oilfield Construction Company,
Eastern Oil Well Service Company and EOWS Midland Company, acts as operator and
provides well servicing support operations for many of the onshore oil and gas
wells in which the Company has an interest, as well as for third parties. The
Company owns and operates properties in the Gulf of Mexico through its
subsidiary Prime Offshore L.L.C., formerly F-W Oil Exploration L.L.C. The
Company is also active in the acquisition of producing oil and gas properties
through joint ventures with industry partners. The Company’s subsidiary,
PrimeEnergy Management Corporation (“PEMC”), acts as the managing general
partner of 18 oil and gas limited partnerships (the “Partnerships”), and acts as
the managing trustee of two asset and income business trusts (“the
Trusts”).





Exploration, Development and
Recent Activities





The
Company’s activities include development and exploratory drilling. The Company’s
strategy is to develop a balanced portfolio of drilling prospects that includes
lower risk wells with a high probability of success and higher risk wells with
greater economic potential.





As of
December 31, 2007, the Company had net capitalized costs related to oil and gas
properties of $237.9 million, including $4.5 million of undeveloped properties.
Total expenditures for the acquisition, exploration and development of the
Company’s properties during 2007 were $109.8 million of which $633,000 related
to exploration costs expensed during 2007. Proved reserves as of December 31,
2007, were 101 BCFe of gas which consisted of 92% proved developed reserves and
8% proved undeveloped reserves.





For 2008
we have budgeted $60 million for exploration and development in our core
operating areas. As of March, 2008, the Company has committed approximately $11
million on wells in these areas that have been spudded since January 1,
2008.





4
 Table of Contents





Significant 2007
activity





During
2007, we participated in drilling a total of 31 gross wells, 30 successful wells
and 1 dry hole.





The
Company believes that its diversified portfolio approach to its drilling
activities results in more consistent and predictable economic results than
might be experienced with a less diversified or higher risk drilling program
profile.





The
Company attempts to assume the position of operator in all acquisitions of
producing properties. The Company will continue to evaluate prospects for
leasehold acquisitions and for exploration and development operations in areas
in which it owns interests and is actively pursuing the acquisition of producing
properties. In order to diversify and broaden its asset base, the Company will
consider acquiring the assets or stock in other entities and companies in the
oil and gas business. The main objective of the Company in making any such
acquisitions will be to acquire income producing assets so as to increase the
Company’s net worth and increase the Company’s oil and gas reserve
base.





The
Company presently owns producing and non-producing properties located primarily
in Texas, Oklahoma, West Virginia, the Gulf of Mexico, New Mexico, Colorado and
Louisiana, and owns a substantial amount of well servicing equipment. The
Company does not own any refinery or marketing facilities, and does not
currently own or lease any bulk storage facilities or pipelines other than
adjacent to and used in connection with producing wells and the interests in
certain gas gathering systems. All of the Company’s oil and gas properties and
interests are located in the United States.





In the
past, the supply of gas has exceeded demand on a cyclical basis, and the Company
is subject to a combination of shut-in and/or reduced takes of gas production
during summer months. Prolonged shut-ins could result in reduced field operating
income from properties in which the Company acts as operator.





Exploration
for oil and gas requires substantial expenditures particularly in exploratory
drilling in undeveloped areas, or “wildcat drilling.” As is customary in the oil
and gas industry, substantially all of the Company’s exploration and development
activities are conducted through joint drilling and operating agreements with
others engaged in the oil and gas business.





Summaries
of the Company’s oil and gas drilling activities, oil and gas production, and
undeveloped leasehold, mineral and royalty interests are set forth under Item
2., “Properties,” below. Summaries of the Company’s oil and gas reserves, future
net revenue and present value of future net revenue are also set forth under
Item 2., “Properties - Reserves” below.





Well
Operations





The
Company’s operations are conducted through a central office in Houston, Texas,
and district offices in Houston and Midland, Texas, Oklahoma City, Oklahoma, and
Charleston, West Virginia. The Company currently operates 1,580 oil and gas
wells, 417 through the Houston office, 219 through the Midland office, 446
through the Oklahoma City office and 498 through the Charleston, West Virginia
office. Substantially all of the wells operated by the Company are wells in
which the Company has an interest.





The
Company operates wells pursuant to operating agreements which govern the
relationship between the Company as operator and the other owners of working
interests in the properties, including the Partnerships, Trusts and joint
venture participants. For each operated well, the Company receives monthly fees
that are competitive in the areas of operations and also is reimbursed for
expenses incurred in connection with well operations.





The Partnerships, Trusts and
Joint Ventures





Since
1975, PEMC has acted as managing general partner of various partnerships, trusts
and joint ventures.





PEMC, as
managing general partner of the Partnerships and managing trustee of the Trusts,
is responsible for all Partnership and Trust activities, the drilling of
development wells and the production and sale of oil and gas from productive
wells. PEMC also provides administration, accounting and tax preparation for the
Partnerships and Trusts. PEMC is liable for all debts and liabilities of the
Partnerships and Trusts, to the extent that the assets of a given limited
partnership or trust are not sufficient to satisfy its obligations. The Company
stopped sponsoring partnerships and trusts in 1992. Today there are only 18
partnerships and two trusts remaining. The aggregate number of limited partners
in the Partnerships and beneficial owners of the Trusts now administered by PEMC
is approximately 2,680. This number, as well as the number of remaining
partnerships noted above, has decreased in recent years as the Company continues
to buy back limited partner interests.





5
 Table of Contents





Regulation





Regulation
of Transportation and Sale of Natural Gas:





Historically,
the transportation and sale for resale of natural gas in interstate commerce
have been regulated pursuant to the Natural Gas Act of 1938, as amended (“NGA”),
the Natural Gas Policy Act of 1978, as amended (“NGPA”), and regulations
promulgated there under by the Federal Energy Regulatory Commission (“FERC”) and
its predecessors. In the past, the federal government has regulated the prices
at which natural gas could be sold. While sales by producers of natural gas can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future. Deregulation of wellhead natural gas sales began with
the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead
Decontrol Act, as amended (the “Decontrol Act”). The Decontrol Act removed all
NGA and NGPA price and non-price controls affecting wellhead sales of natural
gas effective January 1, 1993.





Since
1985, FERC has endeavored to make natural gas transportation more accessible to
natural gas buyers and sellers on an open and non-discriminatory basis. FERC has
stated that open access policies are necessary to improve the competitive
structure of the interstate natural gas pipeline industry and to create a
regulatory framework that will put natural gas sellers into more direct
contractual relations with natural gas buyers by, among other things, unbundling
the sale of natural gas from the sale of transportation and storage services.
Beginning in 1992, FERC issued Order No. 636 and a series of related orders
(collectively, “Order No. 636”) to implement its open access policies. As a
result of the Order No. 636 program, the marketing and pricing of natural gas
have been significantly altered. The interstate pipelines’ traditional role as
wholesalers of natural gas has been eliminated and replaced by a structure under
which pipelines provide transportation and storage service on an open access
basis to others who buy and sell natural gas. Although FERC’s orders do not
directly regulate natural gas producers, they are intended to foster increased
competition within all phases of the natural gas industry.





In 2000,
FERC issued Order No. 637 and subsequent orders (collectively, “Order No. 637”),
which imposed a number of additional reforms designed to enhance competition in
natural gas markets. Among other things, Order No. 637 revised FERC pricing
policy by waiving price ceilings for short-term released capacity for a two-year
experimental period, and effected changes in FERC regulations relating to
scheduling procedures, capacity segmentation, penalties, rights of first refusal
and information reporting. Most major aspects of Order No. 637 have been upheld
on judicial review, and most pipelines’ tariff filings to implement the
requirements of Order No. 637 have been accepted by the FERC and placed into
effect.





The Outer
Continental Shelf Lands Act (“OCSLA”), which FERC implements as to
transportation and pipeline issues, requires that all pipelines operating on or
across the outer continental shelf (“OCS”) provide open access,
non-discriminatory transportation service. One of FERC’s principal goals in
carrying out OCSLA’s mandate is to increase transparency in the market to
provide producers and shippers on the OCS with greater assurance of open access
service on pipelines located on the OCS and non-discriminatory rates and
conditions of service on such pipelines.





It should
be noted that FERC currently is considering whether to reformulate its test for
defining non-jurisdictional gathering in the shallow waters of the OCS and, if
so, what form that new test should take. The stated purpose of this initiative
is to devise an objective test that furthers the goals of the NGA by protecting
producers from the unregulated market power of third-party transporters of gas,
while providing incentives for investment in production, gathering and
transportation infrastructure offshore. While we cannot predict whether FERC’s
gathering test ultimately will be revised and, if so, what form such revised
test will take, any test that refunctionalizes as FERC-jurisdictional
transmission facilities currently classified as gathering would impose an
increased regulatory burden on the owner of those facilities by subjecting the
facilities to NGA certificate and abandonment requirements and rate
regulation.





6
 Table of Contents





We cannot
accurately predict whether FERC’s actions will achieve the goal of increasing
competition in markets in which our natural gas is sold. Additional proposals
and proceedings that might affect the natural gas industry are pending before
FERC and the courts. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by FERC will continue. However, we do not believe that
any action taken will affect us in a way that materially differs from the way it
affects other natural gas producers, gatherers and marketers.





Intrastate
natural gas transportation is subject to regulation by state regulatory
agencies. The basis for intrastate regulation of natural gas transportation and
the degree of regulatory oversight and scrutiny given to intrastate natural gas
pipeline rates and services varies from state to state. Insofar as such
regulation within a particular state will generally affect all intrastate
natural gas shippers within the state on a comparable basis, we believe that the
regulation of similarly situated intrastate natural gas transportation in any
states in which we operate and ship natural gas on an intrastate basis will not
affect our operations in any way that is materially different from the effect of
such regulation on our competitors.





Regulation
of Transportation of Oil:





Sales of
crude oil, condensate and natural gas liquids are not currently regulated and
are made at negotiated prices. The transportation of oil in common carrier
pipelines is also subject to rate regulation. FERC regulates interstate oil
pipeline transportation rates under the Interstate Commerce Act. In general,
interstate oil pipeline rates must be cost-based, although settlement rates
agreed to by all shippers are permitted and market-based rates may be permitted
in certain circumstances. Effective January 1, 1995, FERC implemented
regulations establishing an indexing system (based on inflation) for
transportation rates for oil that allowed for an increase or decrease in the
cost of transporting oil to the purchaser. A review of these regulations by the
FERC in 2000 was successfully challenged on appeal by an association of oil
pipelines. On remand, the FERC in February 2003 increased the index slightly,
effective July 2001. Intrastate oil pipeline transportation rates are subject to
regulation by state regulatory commissions. The basis for intrastate oil
pipeline regulation, and the degree of regulatory oversight and scrutiny given
to intrastate oil pipeline rates, varies from state to state. Insofar as
effective interstate and intrastate rates are equally applicable to all
comparable shippers, we believe that the regulation of oil transportation rates
will not affect our operations in any way that is materially different from the
effect of such regulation on our competitors.





Further,
interstate and intrastate common carrier oil pipelines must provide service on a
non-discriminatory basis. Under this open access standard, common carriers must
offer service to all shippers requesting service on the same terms and under the
same rates. When oil pipelines operate at full capacity, access is governed by
prorationing provisions set forth in the pipelines’ published tariffs.
Accordingly, we believe that access to oil pipeline transportation services
generally will be available to us to the same extent as to our
competitors.





Regulation
of Production:





The
production of oil and natural gas is subject to regulation under a wide range of
local, state and federal statutes, rules, orders and regulations. Federal, state
and local statutes and regulations require permits for drilling operations and
plugging and abandonment, drilling bonds and reports concerning operations. The
states in which we own and operate properties have regulations governing
conservation matters, including provisions for the unitization or pooling of oil
and natural gas properties, the establishment of maximum allowable rates of
production from oil and natural gas wells, the regulation of well spacing, and
plugging and abandonment of wells. Many states also restrict production to the
market demand for oil and natural gas, and states have indicated interest in
revising applicable regulations. The effect of these regulations is to limit the
amount of oil and natural gas that we can produce from our wells and to limit
the number of wells or the locations at which we can drill. Moreover, each state
generally imposes a production or severance tax with respect to the production
and sale of oil, natural gas and natural gas liquids within its
jurisdiction.





Some of
our offshore operations are conducted on federal leases that are administered by
Minerals Management Service (“MMS”) and are required to comply with the
regulations and orders promulgated by MMS under OCSLA. Among other things, we
are required to obtain prior MMS approval for any exploration plans we pursue
and our development and production plans for these leases. MMS regulations also
establish construction requirements for production facilities located on our
federal offshore leases and govern the plugging and abandonment of wells and the
removal of production facilities from these leases. Under limited circumstances,
MMS could require us to suspend or terminate our operations on a federal
lease.





7
 Table of Contents





MMS also
establishes the basis for royalty payments due under federal oil and natural gas
leases through regulations issued under applicable statutory authority. State
regulatory authorities establish similar standards for royalty payments due
under state oil and natural gas leases. The basis for royalty payments
established by MMS and the state regulatory authorities is generally applicable
to all federal and state oil and natural gas lessees. Accordingly, we believe
that the impact of royalty regulation on our operations should generally be the
same as the impact on our competitors.





The
failure to comply with these rules and regulations can result in substantial
penalties. The regulatory burden on the oil and natural gas industry increases
our cost of doing business and, consequently, affects our profitability. Our
competitors in the oil and natural gas industry are subject to the same
regulatory requirements and restrictions that affect our
operations.





Taxation





The
Company’s oil and gas operations are affected by federal income tax laws
applicable to the petroleum industry. The Company is permitted to deduct
currently, rather than capitalize, intangible drilling and development costs
incurred or borne by it. As an independent producer, the Company is also
entitled to a deduction for percentage depletion with respect to the first 1,000
barrels per day of domestic crude oil (and/or equivalent units of domestic
natural gas) produced by it, if such percentage depletion exceeds cost
depletion. Generally, this deduction is computed based upon the lesser of 100%
of the net income, or 15% of the gross income from a property, without reference
to the basis in the property. The amount of the percentage depletion deduction
so computed which may be deducted in any given year is limited to 65% of taxable
income. Any percentage depletion deduction disallowed due to the 65% of taxable
income test may be carried forward indefinitely.





See Notes
1 and 9 to the consolidated financial statements included in this Report for a
discussion of accounting for income taxes.





Competition and
Markets





The
business of acquiring producing properties and non-producing leases suitable for
exploration and development is highly competitive. Competitors of the Company,
in its efforts to acquire both producing and non-producing properties, include
oil and gas companies, independent concerns, income programs and individual
producers and operators, many of which have financial resources, staffs and
facilities substantially greater than those available to the Company.
Furthermore, domestic producers of oil and gas must not only compete with each
other in marketing their output, but must also compete with producers of
imported oil and gas and alternative energy sources such as coal, nuclear power
and hydroelectric power. Competition among petroleum companies for favorable oil
and gas properties and leases can be expected to increase.





The
availability of a ready market for any oil and gas produced by the Company at
acceptable prices per unit of production will depend upon numerous factors
beyond the control of the Company, including the extent of domestic production
and importation of oil and gas, the proximity of the Company’s producing
properties to gas pipelines and the availability and capacity of such pipelines,
the marketing of other competitive fuels, fluctuation in demand, governmental
regulation of production, refining, transportation and sales, general national
and worldwide economic conditions, and use and allocation of oil and gas and
their substitute fuels. There is no assurance that the Company will be able to
market all of the oil or gas produced by it or that favorable prices can be
obtained for the oil and gas production.





Listed
below are the percent of the Company’s total oil and gas sales made to each of
the customers whose purchases represented more than 10% of the Company’s oil and
gas sales.





Oil
      Purchasers:Texon
      Distributing L.P.
                  
                  
                  30
                  %Plains
      All American Inc.
                  
                  
                  54
                  %Gas
      Purchasers:Unimark
      LLC
                  
                  
                  12
                  %Cokinos
      Energy Corporation
                  
                  
                  57
                  %





Although
there are no long-term purchasing agreements with these purchasers, the Company
believes that they will continue to purchase its oil and gas products and, if
not, could be replaced by other purchasers.





8
 Table of Contents





Environmental
Matters





Various
federal, state and local laws and regulations governing the protection of the
environment, such as the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (“CERCLA”), the Federal Water Pollution
Control Act of 1972, as amended (the “Clean Water Act”), and the Federal Clean
Air Act, as amended (the “Clean Air Act”), affect our operations and costs. In
particular, our exploration, development and production operations, our
activities in connection with storage and transportation of oil and other
hydrocarbons and our use of facilities for treating, processing or otherwise
handling hydrocarbons and related wastes may be subject to regulation under
these and similar state legislation. These laws and regulations:





-
            restrict
      the types, quantities and concentration of various substances that can be
      released into the environment in connection with drilling and production
      activities;





-
            limit
      or prohibit drilling activities on certain lands lying within wilderness,
      wetlands and other protected areas;
and





-
            Impose
      substantial liabilities for pollution resulting from our
      operations.





Failure
to comply with these laws and regulations may result in the assessment of
administrative, civil and criminal fines and penalties or the imposition of
injunctive relief. Changes in environmental laws and regulations occur
regularly, and any changes that result in more stringent and costly waste
handling, storage, transport, disposal or cleanup requirements could materially
adversely affect our operations and financial position, as well as those in the
oil and natural gas industry in general. While we believe that we are in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements would not
have a material adverse impact on us, there is no assurance that this trend will
continue in the future.





As with
the industry generally, compliance with existing regulations increases our
overall cost of business. The areas affected include:





-
            unit
      production expenses primarily related to the control and limitation of air
      emissions and the disposal of produced
water;





-
            capital
      costs to drill exploration and development wells primarily related to the
      management and disposal of drilling fluids and other oil and natural gas
      exploration wastes; and





-
            capital
      costs to construct, maintain and upgrade equipment and
      facilities.





Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”).
CERCLA, also known as “Superfund,” imposes liability for response costs and
damages to natural resources, without regard to fault or the legality of the
original act, on some classes of persons that contributed to the release of a
“hazardous substance” into the environment. These persons include the “owner” or
“operator” of a disposal site and entities that disposed or arranged for the
disposal of the hazardous substances found at the site. CERCLA also authorizes
the Environmental Protection Agency (“EPA”) and, in some instances, third
parties to act in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs they
incur. It is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. In the course of our
ordinary operations, we may generate waste that may fall within CERCLA’s
definition of a “hazardous substance.” We may be jointly and severally liable
under CERCLA or comparable state statutes for all or part of the costs required
to clean up sites at which these wastes have been disposed.





We
currently own or lease properties that for many years have been used for the
exploration and production of oil and natural gas. Although we and our
predecessors have used operating and disposal practices that were standard in
the industry at the time, hydrocarbons or other wastes may have been disposed or
released on, under or from the properties owned or leased by us or on, under or
from other locations where these wastes have been taken for disposal. In
addition, many of these properties have been operated by third parties whose
actions with respect to the treatment and disposal or release of hydrocarbons or
other wastes were not under our control. These properties and wastes disposed on
these properties may be subject to CERCLA and analogous state laws. Under these
laws, we could be required:





9
 Table of Contents





-
            to
      remove or remediate previously disposed wastes, including wastes disposed
      or released by prior owners or
operators;





-
            to
      clean up contaminated property, including contaminated groundwater; or to
      perform remedial operations to prevent future
    contamination.





At this
time, we do not believe that we are associated with any Superfund site and we
have not been notified of any claim, liability or damages under
CERCLA.





Oil
Pollution Act of 1990. The Oil Pollution Act of 1990, as amended (the “OPA”),
and regulations there under impose liability on “responsible parties” for
damages resulting from oil spills into or upon navigable waters, and adjoining
shorelines or in the exclusive economic zone of the United States. Liability
under OPA is strict, and under certain circumstances joint and several, and
potentially unlimited. A “responsible party” includes the owner or operator of
an onshore facility and the lessee or permittee of the area in which an offshore
facility is located. The OPA also requires the lessee or permittee of the
offshore area in which a covered offshore facility is located to establish and
maintain evidence of financial responsibility in the amount of $35.0 million
($10.0 million if the offshore facility is located landward of the seaward
boundary of a state) to cover liabilities related to an oil spill for which such
person is statutorily responsible. The amount of required financial
responsibility may be increased above the minimum amounts to an amount not
exceeding $150.0 million depending on the risk represented by the quantity or
quality of oil that is handled by the facility. We carry insurance coverage to
meet these obligations, which we believe is customary for comparable companies
in our industry. A failure to comply with OPA’s requirements or inadequate
cooperation during a spill response action may subject a responsible party to
civil or criminal enforcement actions. We are not aware of any action or event
that would subject us to liability under OPA, and we believe that compliance
with OPA’s financial responsibility and other operating requirements will not
have a material adverse effect on us.





U.S.
Environmental Protection Agency. The U.S. Environmental Protection Agency
regulations address the disposal of oil and natural gas operational wastes under
three federal acts more fully discussed in the paragraphs that follow. The
Resource Conservation and Recovery Act of 1976, as amended (“RCRA”), provides a
framework for the safe disposal of discarded materials and the management of
solid and hazardous wastes. The direct disposal of operational wastes into
offshore waters is also limited under the authority of the Clean Water Act. When
injected underground, oil and natural gas wastes are regulated by the
Underground Injection Control program under Safe Drinking Water Act. If wastes
are classified as hazardous, they must be properly transported, using a uniform
hazardous waste manifest, documented, and disposed at an approved hazardous
waste facility. We have coverage under the Region VI National Production
Discharge Elimination System Permit for discharges associated with exploration
and development activities. We take the necessary steps to ensure all offshore
discharges associated with a proposed operation, including produced waters, will
be conducted in accordance with the permit.





Resource
Conservation Recovery Act. RCRA is the principal federal statute governing the
treatment, storage and disposal of hazardous wastes. RCRA imposes stringent
operating requirements and liability for failure to meet such requirements on a
person who is either a “generator” or “transporter” of hazardous waste or an
“owner” or “operator” of a hazardous waste treatment, storage or disposal
facility. At present, RCRA includes a statutory exemption that allows most oil
and natural gas exploration and production waste to be classified as
nonhazardous waste. A similar exemption is contained in many of the state
counterparts to RCRA. As a result, we are not required to comply with a
substantial portion of RCRA’s requirements because our operations generate
minimal quantities of hazardous wastes. At various times in the past, proposals
have been made to amend RCRA to rescind the exemption that excludes oil and
natural gas exploration and production wastes from regulation as hazardous
waste. Repeal or modification of the exemption by administrative, legislative or
judicial process, or modification of similar exemptions in applicable state
statutes, would increase the volume of hazardous waste we are required to manage
and dispose of and would cause us to incur increased operating
expenses.





Clean
Water Act. The Clean Water Act imposes restrictions and controls on the
discharge of produced waters and other wastes into navigable waters. Permits
must be obtained to discharge pollutants into state and federal waters and to
conduct construction activities in waters and wetlands. Certain state
regulations and the general permits issued under the Federal National Pollutant
Discharge Elimination System program prohibit the discharge of produced waters
and sand, drilling fluids, drill cuttings and certain other substances related
to the oil and natural gas industry into certain coastal and offshore waters.
Further, the EPA has adopted regulations requiring certain oil and natural gas
exploration and production facilities to obtain permits for storm water
discharges.





10
 Table of Contents





Costs may
be associated with the treatment of wastewater or developing and implementing
storm water pollution prevention plans. The Clean Water Act and comparable state
statutes provide for civil, criminal and administrative penalties for
unauthorized discharges for oil and other pollutants and impose liability on
parties responsible for those discharges for the costs of cleaning up any
environmental damage caused by the release and for natural resource damages
resulting from the release. We believe that our operations comply in all
material respects with the requirements of the Clean Water Act and state
statutes enacted to control water pollution.





Safe
Drinking Water Act. Underground injection is the subsurface placement of fluid
through a well, such as the reinjection of brine produced and separated from oil
and natural gas production. The Safe Drinking Water Act of 1974, as amended,
establishes a regulatory framework for underground injection, with the main goal
being the protection of usable aquifers. The primary objective of injection well
operating requirements is to ensure the mechanical integrity of the injection
apparatus and to prevent migration of fluids from the injection zone into
underground sources of drinking water. Hazardous-waste injection well operations
are strictly controlled, and certain wastes, absent an exemption, cannot be
injected into underground injection control wells. In Louisiana and Texas, no
underground injection may take place except as authorized by permit or rule. We
currently own and operate various underground injection wells. Failure to abide
by our permits could subject us to civil and/or criminal enforcement. We believe
that we are in compliance in all material respects with the requirements of
applicable state underground injection control programs and our
permits.





Marine
Protected Areas. Executive Order 13158, issued on May 26, 2000, directs federal
agencies to safeguard existing Marine Protected Areas (“MPAs”) in the United
States and establish new MPAs. The order requires federal agencies to avoid harm
to MPAs to the extent permitted by law and to the maximum extent practicable. It
also directs the EPA to propose new regulations under the Clean Water Act to
ensure appropriate levels of protection for the marine environment. This order
has the potential to adversely affect our operations by restricting areas in
which we may carry out future development and exploration projects and/or
causing us to incur increased operating expenses.





Marine
Mammal and Endangered Species. Federal Lease Stipulations address the reduction
of potential taking of protected marine species (sea turtles, marine mammals,
Gulf Sturgen and other listed marine species). MMS permit approvals will be
conditioned on collection and removal of debris resulting from activities
related to exploration, development and production of offshore leases. MMS has
issued Notices to Lessees and Operators (“NTL”) 2003-G06 advising of
requirements for posting of signs in prominent places on all vessels and
structures and of an observing training program.





Consideration
of Environmental Issues in Connection with Governmental Approvals. Our
operations frequently require licenses, permits and/or other governmental
approvals. Several federal statutes, including OCSLA, the National Environmental
Policy Act (“NEPA”), and the Coastal Zone Management Act (“CZMA”) require
federal agencies to evaluate environmental issues in connection with granting
such approvals and/or taking other major agency actions. OCSLA, for instance,
requires the U.S. Department of Interior (“DOI”) to evaluate whether certain
proposed activities would cause serious harm or damage to the marine, coastal or
human environment. Similarly, NEPA requires DOI and other federal agencies to
evaluate major agency actions having the potential to significantly impact the
environment. In the course of such evaluations, an agency would have to prepare
an environmental assessment and, potentially, an environmental impact statement.
CZMA, on the other hand, aids states in developing a coastal management program
to protect the coastal environment from growing demands associated with various
uses, including offshore oil and natural gas development. In obtaining various
approvals from the DOI, we must certify that we will conduct our activities in a
manner consistent with an applicable program.





Lead-Based
Paints. Various pieces of equipment and structures owned by us may have been
coated with lead-based paints as was customary in the industry at the time these
pieces of equipment were fabricated and constructed. These paints may contain
lead at a concentration high enough to be considered a regulated hazardous waste
when removed. If we need to remove such paints in connection with maintenance or
other activities and they qualify as a regulated hazardous waste, this would
increase the cost of disposal. High lead levels in the paint might also require
us to institute certain administrative and/or engineering controls required by
the Occupational Safety and Health Act and MMS to ensure worker safety during
paint removal.





Air
Pollution Control. The Clean Air Act and state air pollution laws adopted to
fulfill its mandates provide a framework for national, state and local efforts
to protect air quality. Our operations utilize equipment that emits air
pollutants subject to federal and state air pollution control laws. These laws
require utilization of air emissions abatement equipment to achieve prescribed
emissions limitations and ambient air quality standards, as well as operating
permits for existing equipment and construction permits for new and modified
equipment. Air emissions associated with offshore activities are projected using
a matrix and formula supplied by MMS, which has primacy from the Environmental
Protection Agency for regulating such emissions.





11
 Table of Contents





Naturally
Occurring Radioactive Materials (“NORM”). NORM are materials not covered by the
Atomic Energy Act, whose radioactivity is enhanced by technological processing
such as mineral extraction or processing through exploration and production
conducted by the oil and natural gas industry. NORM wastes are regulated under
the RCRA framework, but primary responsibility for NORM regulation has been a
state function. Standards have been developed for worker protection, treatment,
storage and disposal of NORM waste, management of waste piles, containers and
tanks, and limitations upon the release of NORM contaminated land for
unrestricted use. We believe that our operations are in material compliance with
all applicable NORM standards established by the states, as
applicable.





Employees





At March
2008, the Company had 233 full-time and 12 part-time employees, 20 of whom were
employed by the Company at its principal offices in Stamford, Connecticut, 28 in
Houston, Texas, at the offices of Prime Operating Company, Eastern Oil Well
Service Company, EOWS Midland Company and Prime Offshore L.L.C., and 197
employees who were primarily involved in the district operations of the Company
in Houston and Midland, Texas, Oklahoma City, Oklahoma and Charleston, West
Virginia.





Item 1A. RISK
FACTORS.





Natural gas and oil prices fluctuate
widely, and low prices for an extended period of time are likely to
have a material adverse impact on our business.





Our
revenues, operating results, financial condition and ability to borrow funds or
obtain additional capital depend substantially on prevailing prices for natural
gas and, to a lesser extent, oil. Lower commodity prices may reduce the amount
of natural gas and oil that we can produce economically. Historically, natural
gas and oil prices and markets have been volatile, with prices fluctuating
widely, and they are likely to continue to be volatile. Depressed prices in the
future would have a negative impact on our future financial results. Because our
reserves are predominantly natural gas, changes in natural gas prices may have a
particularly large impact on our financial results.





Prices
for natural gas and oil are subject to wide fluctuations in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond our
control. These factors include:





-
            the
      level of consumer product demand;





-
            weather
      conditions;





-
            political
      conditions in natural gas and oil producing regions, including the Middle
      East;





-
            the
      ability of the members of the Organization of Petroleum Exporting
      Countries to agree to and maintain oil price and production
      controls;





-
            the
      price of foreign imports;





-
            actions
      of governmental authorities;





-
            pipeline
      capacity constraints;





-
            inventory
      storage levels;





-
            domestic
      and foreign governmental
regulations;





-
            the
      price, availability and acceptance of alternative fuels;
    and





-
            overall
      economic conditions





12
 Table of Contents





These
factors and the volatile nature of the energy markets make it impossible to
predict with any certainty the future prices of natural gas and oil. If natural
gas prices decline significantly for a sustained period of time, the lower
prices may adversely affect our ability to make planned expenditures, raise
additional capital or meet our financial obligations.





Drilling natural gas and oil wells is
a high-risk activity.





Our
growth is materially dependent upon the success of our drilling program.
Drilling for natural gas and oil involves numerous risks, including the risk
that no commercially productive natural gas or oil reservoirs will be
encountered. The cost of drilling, completing and operating wells is substantial
and uncertain, and drilling operations may be curtailed, delayed or cancelled as
a result of a variety of factors beyond our control, including:





-
            unexpected
      drilling conditions, pressure or irregularities in
    formations;





-
            equipment
      failures or accidents;





-
            adverse
      weather conditions;





-
            compliance
      with governmental requirements; and





-
            shortages
      or delays in the availability of drilling rigs or crews and the delivery
      of equipment.





Our
future drilling activities may not be successful and, if unsuccessful, such
failure will have an adverse effect on our future results of operations and
financial condition. Our overall drilling success rate or our drilling success
rate for activity within a particular geographic area may decline. We may
ultimately not be able to lease or drill identified or budgeted prospects within
our expected time frame, or at all. We may not be able to lease or drill a
particular prospect because, in some cases, we identify a prospect or drilling
location before seeking an option or lease rights in the prospect or location.
Similarly, our drilling schedule may vary from our capital budget. The final
determination with respect to the drilling of any scheduled or budgeted wells
will be dependent on a number of factors, including:





-
            the
      results of exploration efforts and the acquisition, review and analysis of
      the seismic data;





-
            the
      availability of sufficient capital resources to us and the other
      participants for the drilling of the
prospects;





-
            the
      approval of the prospects by other participants after additional data has
      been compiled;





-
            economic
      and industry conditions at the time of drilling, including prevailing and
      anticipated prices for natural gas and oil and the availability of
      drilling rigs and crews;





-
            our
      financial resources and results;
and





-
            the
      availability of leases and permits on reasonable terms for the
      prospects.





These
projects may not be successfully developed and the wells, if drilled, may not
encounter reservoirs of commercially productive natural gas or oil.





13
 Table of Contents





Reserve
estimates depend on many assumptions that may prove to be inaccurate. Any
material inaccuracies in our reserve estimates or underlying assumptions could
cause the quantities and net present value of our reserves to be
overstated.





Reserve
engineering is a subjective process of estimating underground accumulations of
natural gas and crude oil that cannot be measured in an exact manner. The
process of estimating quantities of proved reserves is complex and inherently
uncertain, and the reserve data included in this document are only estimates.
The process relies on interpretations of available geologic, geophysic,
engineering and production data. As a result, estimates of different engineers
may vary. In addition, the extent, quality and reliability of this technical
data can vary. The differences in the reserve estimation process are
substantially due to the geological conditions in which the wells are drilled.
The process also requires certain economic assumptions, some of which are
mandated by the SEC, such as natural gas and oil prices. Additional assumptions
include drilling and operating expenses, capital expenditures, taxes and
availability of funds. The accuracy of a reserve estimate is a function
of:





-
            the
      quality and quantity of available
data;





-
            the
      interpretation of that data;





-
            the
      accuracy of various mandated economic assumptions;
  and





-
            the
      judgment of the persons preparing the
estimate.





Results
of drilling, testing and production subsequent to the date of an estimate may
justify revising the original estimate. Accordingly, initial reserve estimates
often vary from the quantities of natural gas and crude oil that are ultimately
recovered, and such variances may be material. Any significant variance could
reduce the estimated quantities and present value of our reserves. You should
not assume that the present value of future net cash flows from our proved
reserves is the current market value of our estimated natural gas and oil
reserves. In accordance with SEC requirements, we base the estimated discounted
future net cash flows from our proved reserves on prices and costs in effect on
the date of the estimate, holding the prices and costs constant throughout the
life of the properties. Actual future prices and costs may differ materially
from those used in the net present value estimate, and future net present value
estimates using then current prices and costs may be significantly less than the
current estimate. In addition, the 10% discount factor we use when calculating
discounted future net cash flows for reporting requirements in compliance with
the Financial Accounting Standards Board in Statement of Financial Accounting
Standards No. 69 may not be the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with us or the
natural gas and oil industry in general.





Our future performance depends on our
ability to find or acquire additional natural gas and oil
reserves that are economically recoverable.





In
general, the production rate of natural gas and oil properties declines as
reserves are depleted, with the rate of decline depending on reservoir
characteristics. Unless we successfully replace the reserves that we produce,
our reserves will decline, eventually resulting in a decrease in natural gas and
oil production and lower revenues and cash flow from operations. Our future
natural gas and oil production is, therefore, highly dependent on our level of
success in finding or acquiring additional reserves. We may not be able to
replace reserves through our exploration, development and exploitation
activities or by acquiring properties at acceptable costs. Low natural gas and
oil prices may further limit the kinds of reserves that we can develop
economically. Lower prices also decrease our cash flow and may cause us to
decrease capital expenditures.





Exploration,
development and exploitation activities involve numerous risks that may result
in dry holes, the failure to produce natural gas and oil in commercial
quantities and the inability to fully produce discovered reserves.





We are
continually identifying and evaluating opportunities to acquire natural gas and
oil properties. We may not be able to successfully consummate any acquisition,
to acquire producing natural gas and oil properties that contain economically
recoverable reserves, or to integrate the properties into our operations
profitably.





14
 Table of Contents





We face a variety of hazards and
risks that could cause substantialfinancial  losses.





Our
business involves a variety of operating risks, including:





-
            blowouts,
      cratering and explosions;





-
            mechanical
      problems;





-
            uncontrolled
      flows of natural gas, oil or well
fluids;





-
            formations
      with abnormal pressures;





-
            pollution
      and other environmental risks; and





-
            natural
      disasters.





In
addition, we conduct operations in shallow offshore areas, which are subject to
additional hazards of marine operations, such as capsizing, collision and damage
from severe weather. Any of these events could result in injury or loss of human
life, loss of hydrocarbons, significant damage to or destruction of property,
environmental pollution, regulatory investigations and penalties, impairment of
our operations and substantial losses to us.





Our
operation of natural gas gathering and pipeline systems also involves various
risks, including the risk of explosions and environmental hazards caused by
pipeline leaks and ruptures.





We have limited control over the
activities on properties we do not operate.





Other
companies operate some of the properties in which we have an interest. We have
limited ability to influence or control the operation or future development of
these non-operated properties or the amount of capital expenditures that we are
required to fund with respect to them. The failure of an operator of our wells
to adequately perform operations, an operator’s breach of the applicable
agreements or an operator’s failure to act in ways that are in our best interest
could reduce our production and revenues. Our dependence on the operator and
other working interest owners for these projects and our limited ability to
influence or control the operation and future development of these properties
could materially adversely affect the realization of our targeted returns on
capital in drilling or acquisition activities and lead to unexpected future
costs.





Terrorist activities and the
potential for military and other actions could adversely affect our
business.





The
threat of terrorism and the impact of military and other action have caused
instability in world financial markets and could lead to increased volatility in
prices for natural gas and oil, all of which could adversely affect the markets
for our operations. Future acts of terrorism could be directed against companies
operating in the United States. The U.S. government has issued public warnings
that indicate that energy assets might be specific targets of terrorist
organizations. These developments have subjected our operations to increased
risk and, depending on their ultimate magnitude, could have a material adverse
effect on our business.





Our ability to sell our natural gas
and oil production could be materially harmed if we fail to obtain adequate
services such as transportation and processing.





The sale
of our natural gas and oil production depends on a number of factors beyond our
control, including the availability and capacity of transportation and
processing facilities. Our failure to obtain these services on acceptable terms
could materially harm our business.





15
 Table of Contents





Competition in our industry is
intense, and many of our competitors have substantially greater financial and
technological resources than we do, which could adversely affect our
competitive position.





Competition
in the natural gas and oil industry is intense. Major and independent natural
gas and oil companies actively bid for desirable natural gas and oil properties,
as well as for the equipment and labor required to operate and develop these
properties. Our competitive position is affected by price, contract terms and
quality of service, including pipeline connection times, distribution
efficiencies and reliable delivery record. Many of our competitors have
financial and technological resources and exploration and development budgets
that are substantially greater than ours. These companies may be able to pay
more for exploratory projects and productive natural gas and oil properties and
may be able to define, evaluate, bid for and purchase a greater number of
properties and prospects than our financial or human resources permit. In
addition, these companies may be able to expend greater resources on the
existing and changing technologies that we believe are and will be increasingly
important to attaining success in the industry.





We may have hedging arrangements that
expose us to risk of financial loss and limit the benefit to us of
increases in prices for natural gas and oil.





From time
to time, when we believe that market conditions are favorable, we use certain
derivative financial instruments to manage price risks associated with our
production in all of our regions. These hedging arrangements limit the benefit
to us of increases in prices. We will continue to evaluate the benefit of
employing derivatives in the future.





The loss of key personnel could
adversely affect our ability to operate.





Our
operations are dependent upon a relatively small group of key management and
technical personnel, and one or more of these individuals could leave our
employment. The unexpected loss of the services of one or more of these
individuals could have a detrimental effect on us. In addition, our drilling
success and the success of other activities integral to our operations will
depend, in part, on our ability to attract and retain experienced geologists,
engineers and other professionals. Competition for experienced geologists,
engineers and some other professionals is extremely intense. If we cannot retain
our technical personnel or attract additional experienced technical personnel,
our ability to compete could be harmed.





We are subject to complex laws and
regulations, including environmental regulations, which can adversely
affect the cost, manner or feasibility of doing business.





Our
operations are subject to extensive federal, state and local laws and
regulations, including tax laws and regulations and those relating to the
generation, storage, handling, emission, transportation and discharge of
materials into the environment. These laws and regulations can adversely affect
the cost, manner or feasibility of doing business. Many laws and regulations
require permits for the operation of various facilities, and these permits are
subject to revocation, modification and renewal. Governmental authorities have
the power to enforce compliance with their regulations, and violations could
subject us to fines, injunctions or both. These laws and regulations have
increased the costs of planning, designing, drilling, installing and operating
natural gas and oil facilities. In addition, we may be liable for environmental
damages caused by previous owners of property we purchase or lease. Risks of
substantial costs and liabilities related to environmental compliance issues are
inherent in natural gas and oil operations. It is possible that other
developments, such as stricter environmental laws and regulations, and claims
for damages to property or persons resulting from natural gas and oil
production, would result in substantial costs and liabilities.





Item 1 B.
UNRESOLVED STAFF COMMENTS.





The
Company is a non-accelerated filer and no response is required pursuant to this
Item.





Item 2. PROPERTIES.





The
Company’s executive offices are located in leased premises at One Landmark
Square, Stamford, Connecticut. The executive offices of Prime Operating Company,
Eastern Oil Well Service Company, EOWS Midland Company and Prime Offshore
L.L.C., are located in leased premises in Houston, Texas, and the offices of
Southwest Oilfield Construction Company are in Oklahoma City,
Oklahoma.





16
 Table of Contents





The
Company maintains district offices in Houston and Midland, Texas, Oklahoma City,
Oklahoma and Charleston, West Virginia, and has field offices in Carrizo Springs
and Midland, Texas, Kingfisher and Garvin, Oklahoma and Orma, West
Virginia.





Substantially
all of the Company’s oil and gas properties are subject to a mortgage given to
collateralize indebtedness of the Company, or are subject to being mortgaged
upon request by the Company’s lender for additional collateral.





The
information set forth below concerning the Company’s properties, activities, and
oil and gas reserves include the Company’s interests in affiliated
entities.





The
following table sets forth the exploratory and development drilling experience
with respect to wells in which the Company participated during the three years
ended December 31, 2007.





2007
                      
                      
                      2006
                      
                      
                      2005Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      Net
                      
                      
                      Gross
                      
                      
                      NetExploratory:Oil
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1
                      
                      
                      
                      .500Gas
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      5
                      
                      
                      
                      3.750
                      
                      
                      
                      11
                      
                      
                      
                      3.510Dry
                      
                      
                      1
                      
                      
                      
                      .375
                      
                      
                      
                      1
                      
                      
                      
                      .400
                      
                      
                      
                      1
                      
                      
                      
                      1.000Development:Oil
                      
                      
                      30
                      
                      
                      
                      13.88
                      
                      
                      
                      41
                      
                      
                      
                      22.141
                      
                      
                      
                      17
                      
                      
                      
                      8.500Gas
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      28
                      
                      
                      
                      11.664
                      
                      
                      
                      15
                      
                      
                      
                      7.790Dry
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4
                      
                      
                      
                      2.410Total:Oil
                      
                      
                      30
                      
                      
                      
                      13.88
                      
                      
                      
                      41
                      
                      
                      
                      22.141
                      
                      
                      
                      18
                      
                      
                      
                      9.000Gas
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      33
                      
                      
                      
                      15.414
                      
                      
                      
                      26
                      
                      
                      
                      11.300Dry
                      
                      
                      1
                      
                      
                      
                      .375
                      
                      
                      
                      1
                      
                      
                      
                      .400
                      
                      
                      
                      5
                      
                      
                      
                      3.41031
                      
                      
                      
                      14.255
                      
                      
                      
                      75
                      
                      
                      
                      37.955
                      
                      
                      
                      49
                      
                      
                      
                      23.710





Oil and Gas
Production





As of
December 31, 2007, the Company had ownership interests in the following numbers
of gross and net producing oil and gas wells and gross and net producing acres
(1).





Gross
                  
                  
                  NetProducing
      wells (1)Oil
      Wells
                  
                  
                  926
                  
                  
                  
                  365Gas
      Wells
                  
                  
                  1,186
                  
                  
                  
                  517Producing
      Acres
                  
                  
                  315,640.83
                  
                  
                  
                  106,589.27





(1)
            A
      gross well or gross acre is a well or an acre in which a working interest
      is owned. A net well or net is the sum of the fractional revenue interests
      owned in gross wells or gross acres. Wells are classified by their primary
      product. Some wells produce both oil and
gas.





The
following table shows the Company’s net production of crude oil and natural gas
for each of the three years ended December 31, 2007. “Net” production is net
after royalty interests of others are deducted and is determined by multiplying
the gross production volume of properties in which the Company has an interest
by percentage of the leasehold, mineral or royalty interest owned by the
Company.




2007
                  
                  
                  2006
                  
                  
                  2005Oil
      (barrels)
                  
                  
                  561,000
                  
                  
                  
                  456,000
                  
                  
                  
                  443,000Gas
      (Mcf)
                  
                  
                  11,312,000
                  
                  
                  
                  6,411,000
                  
                  
                  
                  5,641,000





17
 Table of Contents





The
following table sets forth the Company’s average sales price per barrel of crude
oil and average sales prices per one thousand cubic feet (“Mcf”) of gas,
together with the Company’s average production costs per unit of production for
the three years ended December 31, 2007.




2007
                  
                  
                  2006
                  
                  
                  2005Average
      sales price per barrel
                  
                  $
                  66.94
                  
                  
                  
                  61.10
                  
                  
                  
                  52.75Average
      sales price Per Mcf
                  
                  $
                  7.50
                  
                  
                  
                  6.83
                  
                  
                  
                  7.44Average
      production costs per net equivalent barrel (1)
                  
                  $
                  14.24
                  
                  
                  
                  16.62
                  
                  
                  
                  16.80





(1)
            Net
      equivalent barrels are computed at a rate of 6 Mcf per
    barrel.





Undeveloped
Acreage





The
following table sets forth the approximate gross and net undeveloped acreage in
which the Company has leasehold, mineral and royalty interests as of December
31, 2007. “Undeveloped acreage” is that acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether or not such acreage contains
proved reserves.





LeaseholdInterests
                
                
                MineralInterests
                
                
                RoyaltyInterestsState
                
                GrossAcres
                
                
                NetAcres
                
                
                GrossAcres
                
                
                NetAcres
                
                
                GrossAcres
                
                
                NetAcresColorado
                
                
                22
                
                
                
                11
                
                
                
                799
                
                
                
                23
                
                
                
                --
                
                
                
                --Gulf
      of Mexico
                
                
                58,837
                
                
                
                43,454
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Montana
                
                
                --
                
                
                
                --
                
                
                
                13,984
                
                
                
                59
                
                
                
                786
                
                
                
                5Nebraska
                
                
                --
                
                
                
                --
                
                
                
                2,553
                
                
                
                331
                
                
                
                --
                
                
                
                --North
      Dakota
                
                
                --
                
                
                
                --
                
                
                
                640
                
                
                
                1
                
                
                
                --
                
                
                
                --Oklahoma
                
                
                5,942
                
                
                
                3,754
                
                
                
                320
                
                
                
                1
                
                
                
                --
                
                
                
                --Texas
                
                
                8,388
                
                
                
                5,138
                
                
                
                680
                
                
                
                16
                
                
                
                --
                
                
                
                --New
      Mexico
                
                
                116
                
                
                
                38
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --West
      Virginia
                
                
                603
                
                
                
                603
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Wyoming
                
                
                1,000
                
                
                
                125
                
                
                
                5,043
                
                
                
                35
                
                
                
                140
                
                
                
                35TOTAL
                
                
                74,907
                
                
                
                53,123
                
                
                
                24,019
                
                
                
                466
                
                
                
                926
                
                
                
                40





Reserves





The
Company’s interests in proved developed and undeveloped oil and gas properties
have been evaluated by Ryder Scott Company, L.P. for each of the three years
ended December 31, 2007. All of the Company’s reserves are located within the
continental United States. The following table summarizes the Company’s oil and
gas reserves at each of the respective dates (figures rounded):





Reserve CategoryProved Developed
                
                
                Proved Undeveloped
                
                
                TotalAs
      of
                  12-31
                
                Oil(bbls)
                
                
                Gas(Mcf)
                
                
                Oil(bbls)
                
                
                Gas(Mcf)
                
                
                Oil(bbls)
                
                
                Gas(Mcf)2005
                
                
                4,529,000
                
                
                
                54,373,000
                
                
                
                183,000
                
                
                
                968,000
                
                
                
                4,712,000
                
                
                
                55,341,0002006
                
                
                4,986,000
                
                
                
                75,434,000
                
                
                
                219,000
                
                
                
                2,479,000
                
                
                
                5,205,000
                
                
                
                77,913,0002007
                
                
                5,640,000
                
                
                
                58,814,000
                
                
                
                952,000
                
                
                
                2,598,000
                
                
                
                6,592,000
                
                
                
                61,412,000





18
 Table of Contents





The
estimated future net revenue (using current prices and costs as of those dates)
and the present value of future net revenue (at a 10% discount for estimated
timing of cash flow) for the Company’s proved developed and proved undeveloped
oil and gas reserves at the end of each of the three years ended December 31,
2007, are summarized as follows (figures rounded):





Proved Developed
                
                
                Proved Undeveloped
                
                
                TotalAs
      of
                  12-31
                
                Future
      Net
                  Revenue
                
                
                Present
      Value
                  Of
      Future
                  Net Revenue
                
                
                Future
      Net
                  Revenue
                
                
                Present
      Value 10
                  Of
      Future
                  Net Revenue
                
                
                Future
      Net
                  Revenue
                
                
                Present
      Value 10
                  Of
      Future
                  Net Revenue
                
                
                Present
      Value 10
                  Of
      Future
                  Income Taxes
                
                
                Standardized
                  Measure
      of
                  Discounted Cash flow2005
                
                $
                435,525,000
                
                
                
                244,817,000
                
                
                
                12,510,000
                
                
                
                6,663,000
                
                
                
                448,035,000
                
                
                
                251,480,000
                
                
                
                77,991,000
                
                
                
                173,489,0002006
                
                $
                409,525,000
                
                
                
                269,139,000
                
                
                
                13,836,000
                
                
                
                7,077,000
                
                
                
                423,361,000
                
                
                
                276,216,000
                
                
                
                60,028,000
                
                
                
                216,188,0002007
                
                $
                449,372,000
                
                
                
                266,405,000
                
                
                
                60,392,000
                
                
                
                21,062,000
                
                
                
                509,764,000
                
                
                
                287,467,000
                
                
                
                62,007,000
                
                
                
                225,460,000





The PV 10
Value represents the discounted future net cash flows attributable to our proved
oil and gas reserves before income tax, discounted at 10%. Although it is a
non-GAAP measure, we believe that the presentation of the PV 10 Value is
relevant and useful to our investors because it presents the discounted future
net cash flow attributable to our proved reserves prior to taking into account
corporate future income taxes and our current tax structure. We use this measure
when assessing the potential return on investment related to our oil and gas
properties. The standardized measure of discounted future net cash flows
represents the present value of future cash flows attributable to our proved oil
and natural gas reserves after income tax, discounted at 10%.





“Proved
developed” oil and gas reserves are reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
“Proved undeveloped” oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.





In
accordance with FASB Statement No. 69, December 31 market prices are determined
using the daily oil price or daily gas sales price (“spot price”) adjusted for
oilfield or gas gathering hub and wellhead price differentials (e.g. grade,
transportation, gravity, sulfur, and BS&W) as appropriate. Also in
accordance with SEC and FASB specifications, changes in market prices subsequent
to December 31 are not considered.





The spot
price for gas at December 31, 2007 and 2006 was $6.79 and $5.62 per MMBTU,
respectively. The range of spot prices during the year 2007 was a low of $5.35
and a high of $8.98 and the average was $6.97. The range during the first
quarter of 2008 has been from $5.75 to $9.87, with an average of $8.51. The
recent futures market prices have traded above $9.09 per MMBTU.





The NYMEX
price for oil at December 31, 2007 and 2006, was $96.01 and $61.06 per barrel,
respectively. The range of NYMEX prices during the year 2007 was a low of $50.48
and a high of $98.18 and the average was $71.95. The range during the first
quarter of 2008 has been from $86.99 to $110.33, with an average of $97.09. The
recent futures market prices have fluctuated around $104.48.





While it
may reasonably be anticipated that the prices received by the Company for the
sale of its production may be higher or lower than the prices used in this
evaluation, as described above, and the operating costs relating to such
production may also increase or decrease from existing levels, such possible
changes in prices and costs were, in accordance with rules adopted by the SEC,
omitted from consideration in making this evaluation for the SEC case. Actual
volumes produced, prices received and costs incurred by the Company may vary
significantly from the SEC case.





Since
January 1, 2008, the Company has not filed any estimates of its oil and gas
reserves with, nor were any such estimates included in any reports to, any
federal authority or agency, other than the Securities and Exchange Commission,
except Form EIA-23, Annual Survey of Domestic Oil and Gas Reserves, filed with
The Energy Information Administration of the U.S. Department of
Energy.





19
 Table of Contents





District
Information





The
following table presents certain reserve, production and well information as of
December 31, 2007.





Appalachian
                    
                    
                    Gulf Coast
                    
                    
                    Mid-
                      Continent
                    
                    
                    West Texas
                    
                    
                    Offshore
                    
                    
                    Other
                    
                    
                    TotalProved
      Reserves at Year End (Mmcfe)Developed
                    
                    
                    13,162
                    
                    
                    
                    7,078
                    
                    
                    
                    29,251
                    
                    
                    
                    27,793
                    
                    
                    
                    14,162
                    
                    
                    
                    1,208
                    
                    
                    
                    92,654Undeveloped
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,309
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,309Total
                    
                    
                    13,162
                    
                    
                    
                    7,078
                    
                    
                    
                    29,251
                    
                    
                    
                    36,102
                    
                    
                    
                    14,162
                    
                    
                    
                    1,208
                    
                    
                    
                    100,963Average
      Daily Production (Mmcfe per day)
                    
                    
                    3
                    
                    
                    
                    3
                    
                    
                    
                    7
                    
                    
                    
                    8
                    
                    
                    
                    18
                    
                    
                    
                    1
                    
                    
                    
                    40Gross
      Wells
                    
                    
                    732
                    
                    
                    
                    505
                    
                    
                    
                    734
                    
                    
                    
                    324
                    
                    
                    
                    21
                    
                    
                    
                    81
                    
                    
                    
                    2,397Net
      Wells
                    
                    
                    377
                    
                    
                    
                    180
                    
                    
                    
                    280
                    
                    
                    
                    106
                    
                    
                    
                    11
                    
                    
                    
                    15
                    
                    
                    
                    969Gross
      Operated Wells
                    
                    
                    498
                    
                    
                    
                    332
                    
                    
                    
                    446
                    
                    
                    
                    219
                    
                    
                    
                    17
                    
                    
                    
                    68
                    
                    
                    
                    1,580





District
Information





Appalachian
Region


Our
Appalachian activities are concentrated primarily in West Virginia. In this
region, our assets include a large acreage position and a high concentration of
wells. At December 31, 2007, we had 732 wells (377 net), of which 498 wells are
operated by us. There are multiple producing intervals that include the Big
Lime, Injun, Blue Monday, Weir, Berea, Gordon and Devonian Shale formations at
depths primarily ranging from 1,600 to 5,600 feet. Average net daily production
in 2007 was 2,762 Mcfe. While natural gas production volumes from Appalachian
reservoirs are relatively low on a per-well basis compared to other areas of the
United States, the productive life of Appalachian reserves is relatively long.
At December 31, 2007, we had 13.2 Bcfe of proved reserves (substantially all
natural gas) in the Appalachian region, constituting 13% of our total proved
reserves. This region is managed from our office in Charleston, West
Virginia.





Gulf
Coast Region


Our
development, exploitation, exploration and production activities in the Gulf
Coast region are primarily concentrated in Louisiana, southeast Texas and south
Texas. This region is managed from our office in Houston.  Principal
producing intervals are in the Marg Tex, Wilcox, Pettit, Glenrose, Woodbine, San
Miguel, Olmos, and Yegua formations at depths ranging from 3,000 to 12,500 feet.
We had 504 wells (179 net) in the Gulf Coast region as of December 31, 2007, of
which 332 wells are operated by us. Average daily production in 2007 was 3,172
Mcfe.  At December 31, 2007, we had 7.1 Bcfe of proved reserves (66%
natural gas) in the Gulf Coast region, which represented 7% of our total proved
reserves.





Mid-Continent
Region


Our
Mid-Continent activities are concentrated in central Oklahoma.  As of
December 31, 2007, we had 734 wells (280 net) in the Mid-Continent area, of
which 446 wells are operated by us. Principal producing intervals in the
Mid-Continent are in the Roberson, Avant, Skinner, Sycamore, Bromide, McLish,
Hunton, Mississippian, Oswego, Red Fork, and Chester formations at depths
ranging from 1,100 to 10,500 feet. Average net daily production in 2007 was
7,675 Mcfe. At December 31, 2007, we had 29.3 Bcfe of proved reserves (60%
natural gas) in the Mid-Continent area, or 29% of our total proved
reserves.  This region is managed from our office in Oklahoma
City.





West
Texas Region


Our West
Texas activities are concentrated in the Permian Basin in Texas and New
Mexico.  As of December 31, 2007, we had 324 wells (106 net) in the
West Texas  area, of which 219 wells are operated by us. Principal
producing intervals in the West Texas are in the Spraberry, Wolfcamp and San
Andres formations at depths ranging from 5,500 to 12,500 feet. Average net daily
production in 2007 was 8,492 Mcfe. At December 31, 2007, we had 36.1 Bcfe of
proved reserves (33% natural gas) in the West Texas area, or 36% of our total
proved reserves. This region is managed from our office in Midland,
Texas.





20
 Table of Contents





Offshore
Gulf of Mexico


Our
development, exploitation, exploration and production activities in the Offshore
Gulf of Mexico are primarily concentrated in the western gulf area in shallow
water. This region is managed from our office in Houston.  Principal
producing intervals are in the Pleistocene to Miocene formations at depths
ranging from 750 to 12,500 feet.  We had 21 wells (11 net) in the
Offshore Gulf of Mexico region as of December 31, 2007, of which 17 wells are
operated by us. Average daily production in 2007 was 18,229 Mcfe.  At
December 31, 2007, we had 14.2 Bcfe of proved reserves (substantially all
natural gas) in the Offshore Gulf of Mexico region, which represented 14% of our
total proved reserves.





Acreage
subject to Expiration in the next three years





2008
                  
                  
                  2009
                  
                  
                  2010State
                  
                  Gross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  NetGULF
      OF MEXICO
                  
                  
                  11,520
                  
                  
                  
                  8,640
                  
                  
                  
                  12,757
                  
                  
                  
                  8,894
                  
                  
                  
                  --
                  
                  
                  
                  --OKLAHOMA
                  
                  
                  1,660
                  
                  
                  
                  1,455
                  
                  
                  
                  799
                  
                  
                  
                  799
                  
                  
                  
                  85
                  
                  
                  
                  85TEXAS
                  
                  
                  319
                  
                  
                  
                  112
                  
                  
                  
                  3,520
                  
                  
                  
                  2,974
                  
                  
                  
                  877
                  
                  
                  
                  877NEW
      MEXICO
                  
                  
                  163
                  
                  
                  
                  54
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --WEST
      VIRGINIA
                  
                  
                  121
                  
                  
                  
                  121
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  11COLORADO
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  22
                  
                  
                  
                  11TOTAL
                  
                  
                  13,783
                  
                  
                  
                  10,382
                  
                  
                  
                  17,077
                  
                  
                  
                  12,668
                  
                  
                  
                  1,544
                  
                  
                  
                  984





Item 3.LEGAL
PROCEEDINGS.





From time
to time, the Company is party to certain legal actions and claims arising in the
ordinary course of business. While the outcome of these events cannot be
predicted with certainty, management does not expect these matters to have a
materially adverse effect on the financial position or results of operations of
the Company.





Item 4.SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS.





No
matters were submitted during the fourth quarter of the fiscal year ended
December 31, 2007, to a vote of the Company’s security-holders through the
solicitation of proxies or otherwise.




21
 Table of Contents





PART
II





Item 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.





The
Company’s Common Stock is traded in the NASDAQ Stock Market, trading symbol
“PNRG”. The high and low bid quotations for each quarterly period during the two
years ended December 31, 2007, were as follows:




2007
                      
                      
                      High
                      
                      
                      Low
                      
                      2006
                      
                      
                      High
                      
                      
                      LowFirst
      Quarter
                      
                      
                      $
                      64.97
                      
                      
                      $
                      50.10
                      
                      First
      Quarter
                      
                      
                      $
                      83.42
                      
                      
                      $
                      48.83Second
      Quarter
                      
                      
                      $
                      64.90
                      
                      
                      $
                      54.75
                      
                      Second
      Quarter
                      
                      
                      $
                      86.75
                      
                      
                      $
                      66.35Third
      Quarter
                      
                      
                      $
                      58.60
                      
                      
                      $
                      53.00
                      
                      Third
      Quarter
                      
                      
                      $
                      81.26
                      
                      
                      $
                      59.09Fourth
      Quarter
                      
                      
                      $
                      56.95
                      
                      
                      $
                      52.43
                      
                      Fourth
      Quarter
                      
                      
                      $
                      72.98
                      
                      
                      $
                      64.05





The above
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions.





The
number of record holders of the Company’s Common Stock as of March 21, 2008, was
746.





No
dividends have been declared or paid during the past two years on the Company’s
Common Stock. Provisions of the Company’s line of credit agreement restrict the
Company’s ability to pay dividends. Such dividends may be declared out of funds
legally available therefore, when and as declared by the Company’s Board of
Directors.





Issuer
Purchases of Equity Securities





In
December 1993, we announced that our Board of Directors authorized a stock
repurchase program whereby we may purchase outstanding shares of our Common
Stock from time-to-time, in open market transactions or negotiated sales. A
total of 2,700,000 shares have been authorized, to date, under this program.
Through December 31, 2007, we repurchased a total of 2,414,445 shares under this
program for $29,109,072 at an average price of $12.06 per share. Additional
purchases of shares may occur as market conditions warrant. We expect future
purchases will be funded with internally generated cash flow or from working
capital.





Number of
                    
                    
                    Average Price Paid
                    
                    
                    Maximum
      Number of
                      Shares
      that May Yet
                      Be Purchased Under The2007 Month
                    
                    Shares
                    
                    
                    per share
                    
                    
                    ProgramJanuary
                    
                    
                    40
                    
                    
                    $
                    60.00
                    
                    
                    
                    365,854February
                    
                    
                    2,986
                    
                    
                    
                    55.15
                    
                    
                    
                    362,868March
                    
                    
                    19,478
                    
                    
                    
                    54.24
                    
                    
                    
                    343,390April
                    
                    
                    3,000
                    
                    
                    
                    55.05
                    
                    
                    
                    340,390May
                    
                    
                    8,000
                    
                    
                    
                    55.00
                    
                    
                    
                    332,390June
                    
                    
                    10,000
                    
                    
                    
                    55.45
                    
                    
                    
                    322,390July
                    
                    
                    11,000
                    
                    
                    
                    55.02
                    
                    
                    
                    311,390August
                    
                    
                    12,282
                    
                    
                    
                    55.00
                    
                    
                    
                    299,108September
                    
                    
                    88
                    
                    
                    
                    55.05
                    
                    
                    
                    299,020October
                    
                    
                    1
                    
                    
                    
                    55.05
                    
                    
                    
                    299,019November
                    
                    
                    13,012
                    
                    
                    
                    55.01
                    
                    
                    
                    286,007December
                    
                    
                    452
                    
                    
                    
                    55.19
                    
                    
                    
                    285,555Total/Average/Remainder
                    
                    
                    80,339
                    
                    
                    $
                    54.89





22
 Table of Contents





Item 6. SELECTEDFINANCIAL DATA





The
following table summarizes certain selected financial data to highlight
significant trends in the Company’s financial condition and results of
operations for the periods indicated. The selected financial data should be read
in conjunction with the Financial Statements and related notes included
elsewhere in this Report.





2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004
                  
                  
                  2003Revenues
                  
                  $
                  156,146,000
                  
                  
                  
                  101,823,000
                  
                  
                  
                  87,224,000
                  
                  
                  
                  62,379,000
                  
                  
                  
                  46,673,000Income
      from operations
                  
                  $
                  26,690,000
                  
                  
                  
                  35,904,000
                  
                  
                  
                  44,721,000
                  
                  
                  
                  11,385,000
                  
                  
                  
                  8,982,000Net
      income
                  
                  $
                  7,920,000
                  
                  
                  
                  18,708,000
                  
                  
                  
                  23,604,000
                  
                  
                  
                  7,275,000
                  
                  
                  
                  5,702,000Income
      per common share
                  
                  $
                  2.50
                  
                  
                  
                  5.65
                  
                  
                  
                  6.95
                  
                  
                  
                  2.04
                  
                  
                  
                  1.56Diluted
      net income per common share
                  
                  $
                  2.02
                  
                  
                  
                  4.60
                  
                  
                  
                  5.70
                  
                  
                  
                  1.70
                  
                  
                  
                  1.31Total
      assets
                  
                  $
                  305,655,000
                  
                  
                  
                  300,108,000
                  
                  
                  
                  117,336,000
                  
                  
                  
                  69,926,000
                  
                  
                  
                  58,255,000Long-term
      obligations
                  
                  $
                  166,377,000
                  
                  
                  
                  167,624,000
                  
                  
                  
                  43,267,000
                  
                  
                  
                  30,290,000
                  
                  
                  
                  26,925,000Cash
      dividends
                  
                  None
                  
                  
                  None
                  
                  
                  None
                  
                  
                  None
                  
                  
                  None





Item
7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS





This
discussion should be read in conjunction with the financial statements of the
Company and notes thereto. The Company’s subsidiaries are defined in Note 1 of
the financial statements.





Liquidity
And Capital Resources:





Cash flow
provided by operations for the year ended December 31, 2007, was $95 million,
compared to $38 million in the prior year.





Excluding
the effects of significant unforeseen expenses or other income, our cash flow
from operations fluctuates primarily because of variations in oil and gas
production and prices or changes in working capital accounts. Our oil and gas
production will vary based on actual well performance but may be curtailed due
to factors beyond our control. Hurricanes in the Gulf of Mexico may shut down
our production for the duration of the storm’s presence in the Gulf or damage
production facilities so that we cannot produce from a particular property for
an extended amount of time. In addition, downstream activities on major
pipelines in the Gulf of Mexico can also cause us to shut-in production for
various lengths of time.





Our
realized oil and gas prices vary due to world political events, supply and
demand of products, product storage levels, and weather patterns. We sell the
vast majority of our production at spot market prices. Accordingly, product
price volatility will affect our cash flow from operations. To mitigate price
volatility we sometimes lock in prices for some portion of our production
through the use of financial instruments.





We expect
to continue to make significant capital expenditures over the next several years
as part of our long-term growth strategy. We have budgeted $60 million for
capital expenditures in 2008.





If our
exploratory drilling results in significant new discoveries, we will have to
expend additional capital in order to finance the completion, development, and
potential additional opportunities generated by our success. We believe that,
because of the additional reserves resulting from the successful wells and our
record of reserve growth in recent years, we will be able to access sufficient
additional capital through additional bank financing.





The
Company has in place both a stock repurchase program and a limited partnership
interest repurchase program. Spending under these programs in 2007 was $4.8
million. The Company expects to expend a similar amount in 2008.





The
Company currently maintains two credit facilities totaling $360 million, with a
combined current borrowing base of $153.4 million.  The bank reviews
the borrowing base semi-annually and, at their discretion, may decrease or
propose an increase to the borrowing base relative to a redetermined estimate of
proved oil and gas reserves. Our oil and gas properties are pledged as
collateral for the line of credit and we are subject to certain financial
covenants defined in the agreement. We are currently in compliance with these
financial covenants. If we do not comply with these covenants on a continuing
basis, the lenders have the right to refuse to advance additional funds under
the facility and/or declare all principal and interest immediately due and
payable.





23
 Table of Contents





It is the
goal of the Company to increase its oil and gas reserves and production through
the acquisition and development of oil and gas properties. The Company also
continues to explore and consider opportunities to further expand its oilfield
servicing revenues through additional investment in field service equipment.
However, the majority of the Company’s capital spending is discretionary, and
the ultimate level of expenditures will be dependent on the Company’s assessment
of the oil and gas business environment, the number and quality of oil and gas
prospects available, the market for oilfield services, and oil and gas business
opportunities in general.





Critical
Accounting Estimates:





Proved
Oil and Gas Reserves





Proved
oil and gas reserves directly impact financial accounting estimates, including
depreciation, depletion and amortization. Proved reserves represent estimated
quantities of natural gas, crude oil, condensate, and natural gas liquids that
geological and engineering data demonstrate, with reasonable certainty, to be
recoverable in future years from known reservoirs under economic and operating
conditions existing at the time the estimates were made. The process of
estimating quantities of proved oil and gas reserves is very complex, requiring
significant subjective decisions in the evaluation of all available geological,
engineering and economic data for each reservoir. The data for a given reservoir
may also change substantially over time as a result of numerous factors
including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. Consequently, material revisions (upward or
downward) to existing reserve estimates may occur from time to
time.





Depreciation,
Depletion and Amortization for Oil and Gas Properties





The
quantities of estimated proved oil and gas reserves are a significant component
of our calculation of depletion expense and revisions in such estimates may
alter the rate of future expense. Holding all other factors constant, if
reserves were revised upward or downward, earnings would increase or decrease
respectively.





Depreciation,
depletion and amortization of the cost of proved oil and gas properties are
calculated using the unit-of-production method. The reserve base used to
calculate depletion, depreciation or amortization is the sum of proved developed
reserves and proved undeveloped reserves for leasehold acquisition costs and the
cost to acquire proved properties. The reserve base includes only proved
developed reserves for lease and well equipment costs, which include development
costs and successful exploration drilling costs. Estimated future dismantlement,
restoration and abandonment costs, net of salvage values, are taken into
account.





Results
of Operations:





2007 as compared to
2006





The
Company had net income of $7,920,000 in 2007 as compared to $18,708,000 in
2006.  The significant components of net income are discussed
below.





Oil and gas saleswere
$122,361,000 in 2007 as compared to $71,650,000 in 2006. A chart summarizing oil
and gas production and revenue is presented below.





2007
                  
                  
                  2006
                  
                  
                  Increase (Decrease)Barrels
      of Oil Produced
                  
                  
                  561,000
                  
                  
                  
                  456,000
                  
                  
                  
                  105,000Average
      Price Received (rounded)
                  
                  $
                  66.94
                  
                  
                  $
                  61.10
                  
                  
                  $
                  5.84Oil
      Revenue
                  
                  $
                  37,553,000
                  
                  
                  $
                  27,863,000
                  
                  
                  $
                  9,690,000Mcf
      of Gas Produced
                  
                  
                  11,312,000
                  
                  
                  
                  6,411,000
                  
                  
                  
                  4,901,000Average
      Price Received (rounded)
                  
                  $
                  7.50
                  
                  
                  $
                  6.83
                  
                  
                  $
                  0.67Gas
      Revenue
                  
                  $
                  84,808,000
                  
                  
                  $
                  43,787,000
                  
                  
                  $
                  41,021,000Total
      Oil & Gas Revenue
                  
                  $
                  122,361,000
                  
                  
                  $
                  71,650,000
                  
                  
                  $
                  50,711,000





24
 Table of Contents





Changes in Productionare due
to additional production from properties added throughout 2007.  The
increase in gas production is primarily related to our offshore properties and
the increase in oil production is from our West Texas properties.





Field Service Incomeincreased to $24,340,000 in 2007 from $20,357,000 in 2006. This increase
reflects higher utilization of equipment during 2007 combined with rate
increases.





Lease operating expensesincreased by 37% to $34,841,000 in 2007 as compared to $25,337,000 in
2006. The difference is attributable to costs associated with properties added
during 2007 and repairs made to marginal wells currently economic due to higher
product price levels. This increase also reflects the overall price increase in
oil field services.





General and administrative expensesdecreased to $12,349,000 in 2007 as compared to $12,977,000 in 2006,
reflecting reduced compensation expense.





Depreciation and depletionincreased to $64,507,000 in 2007 from $14,370,000 in 2006. This increase
is directly attributed to the majority of the Company’s offshore properties
coming on line during 2007.





Exploration costsof $633,000
were incurred in 2007 as compared to $1,162,000 in 2006.





Interest expenseincreased to
$11,062,000 in 2007 from $2,091,000 in 2006 due to increased average outstanding
debt. The average interest rates paid on outstanding borrowings subject to
interest during 2007 and 2006 were 8.77% and 8.80% respectively. As of December
31, 2007 and 2006, the total outstanding borrowings were $155,000,000 and
$136,460,000, respectively.





Income tax expenseof
$3,832,000 in 2007 represents a 33% effective rate as compared to the effective
rate of 36% in 2006. The primary reason for the lower effective rate was higher
percentage depletion deductions.  These deductions which create a
permanent difference are more significant as a percentage of book income when
book income is lower, as it was in 2007. Current tax expense in 2007 was
$1,227,000 with the remainder being attributable to an increase in the Company’s
deferred tax liability.





The
current federal tax expense for 2007 is below the statutory rate because the
Company is allowed to deduct currently, rather than capitalize, intangible
drilling costs as incurred. The current deduction of these costs, which are
capitalized for financial accounting purposes, is also the primary reason for
the increase in the Company’s deferred tax liability between 2007 and
2006.





25
 Table of Contents





2006 as compared to
2005





The
Company had net income of $18,708,000 in 2006 as compared to $23,604,000 in
2005.





Oil and gas saleswere
$71,650,000 in 2006 as compared to $65,320,000 in 2005. A chart summarizing oil
and gas production and revenue is presented below.





Changes in Productionare due
to additional production from properties added during late 2005 and throughout
2006.





2006
                  
                  
                  2005
                  
                  
                  Increase(Decrease)Barrels
      of Oil Produced
                  
                  
                  456,000
                  
                  
                  
                  443,000
                  
                  
                  
                  13,000Average
      Price Received (rounded)
                  
                  $
                  61.10
                  
                  
                  $
                  52.75
                  
                  
                  $
                  8.35Oil
      Revenue
                  
                  $
                  27,863,000
                  
                  
                  $
                  23,370,000
                  
                  
                  $
                  4,493,000Mcf
      of Gas Produced
                  
                  
                  6,411,000
                  
                  
                  
                  5,641,000
                  
                  
                  
                  770,000Average
      Price Received (rounded)
                  
                  $
                  6.83
                  
                  
                  $
                  7.44
                  
                  
                  $
                  (0.61
                  )Gas
      Revenue
                  
                  $
                  43,787,000
                  
                  
                  $
                  41,950,000
                  
                  
                  $
                  1,837,000Total
      Oil & Gas Revenue
                  
                  $
                  71,650,000
                  
                  
                  $
                  65,320,000
                  
                  
                  $
                  6,330,000





Field Service Incomeincreased to $20,357,000 in 2006 from $15,226,000 in 2005. This increase
reflects higher utilization of equipment during 2006 combined with rate
increases.





Lease operating expensesincreased by 9% to $25,337,000 in 2006 as compared to $23,241,000 in
2005. The difference is attributable to costs on properties added during late
2005 and throughout 2006 and repairs made to marginal wells currently economic
due to higher product price levels. This increase also reflects the overall
price increase in oil field services.





General and administrative expensesincreased to $12,977,000 in 2006 as compared to $11,048,000 in 2005,
reflecting increases in personnel costs and professional fees. The $1,929,000
increase includes $1,313,000 representing the fair market value of subsidiary
stock issued to two key executives.





Depreciation and depletionincreased to $14,370,000 in 2006 from $11,784,000 in 2005. This increase
reflects the increased production and cost basis of the Company’s
properties.





Exploration costsof
$1,162,000 were incurred during 2006. These costs include $588,000 related to
the drilling of unsuccessful exploratory wells and $573,655 of certain
geological, geophysical and seismic costs.





Interest expenseincreased to
$2,091,000 in 2006 from $1,531,000 in 2005 due to increased average outstanding
debt combined with increased interest rates. The average interest rates paid on
outstanding borrowings subject to interest during 2006 and 2005 were 8.80% and
5.35% respectively. As of December 31, 2006 and 2005, the total outstanding
borrowings were $136,460,000 and $28,050,000, respectively.





Gain on sale and exchange of assetsdecreased to $3,729,000 in 2006 from $16,588,000 in 2005. This decrease
reflects the non-recurring gain recognized during 2005 related to the following
transaction. In August 2005, the Company completed a transaction involving its
interests in certain offshore Gulf of Mexico properties effective April 1, 2005
(the "Partners transaction"). Prime Offshore L.L.C., (Prime Offshore) formerly
F-W Oil Exploration L.L.C., a subsidiary of the Company, entered into a limited
partnership agreement (the "Partners Agreement"), wherein Prime Offshore is the
General Partner of FWOE Partners L.P. ("Partners") formed for the acquisition,
development and operation of oil and gas properties and pipelines, equipment,
facilities and fixtures appurtenant thereto, in offshore Gulf of Mexico (the
"Properties"). Prior to entering into the Partners Agreement, Prime Offshore had
distributed interests in the Properties to the minority shareholders of Prime
Offshore and the Company purchased all of the outstanding shares of such
minority shareholders for $250,000, resulting in the Company's 100% ownership of
Prime Offshore.





26
 Table of Contents





Prime
Offshore contributed all of its interest in the Properties to Partners in
exchange for an initial 20% General Partner interest in Partners and a cash
distribution of $43.2 million. Partners purchased the interests previously
distributed to the former minority shareholders for $27.7 million. The entire
$70.9 million expended by Partners was funded by a cash contribution by the
Limited Partner. The cash distribution includes adjustments for estimated net
revenues from the effective date of April 1, 2005, estimated capital
expenditures and other typical closing adjustments.





To record
this transaction, the Company applied the guidance of EITF 86-29, Non monetary
transactions: Magnitude of Boot and the Exceptions to the Use of Fair
Value.  In this transaction, the boot was significant (in excess of
25% of the fair value of the exchange), therefore, the transaction was treated
as a monetary transaction with the assets recorded at fair value. The Company
recorded proceeds of $61.2 million consisting of cash of $43.2 million and the
fair market value of the General Partner interest of $18.0
million.  The fair market value of the General Partner interest was
determined by calculating 20% of the total agreed value of all properties
acquired by the Partners. The related properties had a book value of $42.5
million resulting in a total gain of $18.7 million, however in accordance with
EITF 01-2, since the Company acquired a 20% interest in Partners the Company
recognized a gain of $15 million, representing 80% of the total
gain.   The Company uses the proportionate consolidation method
of accounting for its interest in Partners under the Guidance of EITF 00-1 as
related to the extractive industries since the Company does not control
Partners.




Income tax expenseof
$10,440,000 in 2006 represents a 36% effective rate as compared to the effective
rate of 37% in 2005. At higher rates of income, the Company’s percentage
depletion deductions, which are currently its only major permanent difference,
become less significant as a percentage of income. Current tax benefit in 2006
was $1,348,000 with the remainder being attributable to an increase in the
Company’s deferred tax liability.





The
primary reason that the Company’s current federal tax expense for 2006 is below
the statutory rate is that the Company is allowed to deduct currently, rather
than capitalize, intangible drilling costs as incurred. The current deduction of
these costs, which are capitalized for financial accounting purposes, is also
the primary reason for the increase in the Company’s deferred tax liability
between 2006 and 2005.





Item 7a.QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





The
Company is exposed to interest rate risk on its line of credit, which has
variable rates based upon the lenders base rate, as defined, and the London
Inter-Bank Offered rate. Based on the balance outstanding at December 31, 2007,
a hypothetical 2.5% increase in the applicable interest rates would increase
interest expense by approximately $3,680,000.





Derivative
Instruments and Hedging Activity.





Our
hedging strategy is designed to reduce the risk of price volatility for our
production in the natural gas and crude oil markets.  Our hedging
arrangements apply to only a portion of our production and provide only partial
price protection.  These hedging arrangements limit the benefit to us
of increases in prices, but offer protection in the event of price
declines.  Further, if our counterparties defaulted, this protection
might be limited as we might not receive the benefits of the hedges. Please read
the discussion below and note 11 of the Notes to Consolidated Financial
Statements for a more detailed discussion of our hedging
arrangements.





Hedges
on Production – Collars.





From time
to time, we enter into natural gas and crude oil collar agreements with
counterparties to hedge price risk associated with a portion of our
production.  These cash flow hedges are not held for trading purposes.
Under the collar arrangements, if the index price rises above the ceiling price,
we pay the counterparty. If the index price falls below the floor price, the
counterparty pays us.  In the case of a three-way collar, if the index
price rises above the third tier price, the counterparty pays us.





27
 Table of Contents





Hedges
on Production – Swaps.





From time
to time, we enter into natural gas and crude oil swap agreements with
counterparties to hedge price risk associated with a portion of our
production.  These cash flow hedges are not held for trading
purposes.  Under the swap agreements, if the index price rises above
the swap price, we pay the counterparty.  If the index falls below the
swap price, the counterparty pays us.





At
December 31, we had open crude oil price collar contracts covering our 2008,
2009, 2010 and 2011 production as follows:





Crude
      Oil Price CollarContract Period
                                      
                                      Volume
      In Mbbl
                                      
                                      
                                      Weighted
      Average Price Floor/Ceiling/Third Tier (per
      Bbl)
                                      
                                      
                                      Net
      Unrealized (Loss)/Gain (In
      thousands)First
      Quarter 2008
                                      
                                      
                                      23
                                      
                                      
                                      $65/ $79.25/ $100.00First
      Quarter 2008
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      60.00/ $81.25First
      Quarter 2008
                                      
                                      
                                      15
                                      
                                      
                                      $
                                      60.00/ $78.00Second
      Quarter 2008
                                      
                                      
                                      21
                                      
                                      
                                      $65/ $79.25/ $100.00Second
      Quarter 2008
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      60.00/ $81.25Second
      Quarter 2008
                                      
                                      
                                      15
                                      
                                      
                                      $
                                      60.00/ $78.00Third
      Quarter 2008
                                      
                                      
                                      20
                                      
                                      
                                      $65/ $79.25/ $100.00Third
      Quarter 2008
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      60.00/ $81.25Third
      Quarter 2008
                                      
                                      
                                      15
                                      
                                      
                                      $
                                      60.00/ $78.00Fourth
      Quarter 2008
                                      
                                      
                                      18
                                      
                                      
                                      $65/ $79.25/ $100.00Fourth
      Quarter 2008
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      60.00/ $81.25Fourth
      Quarter 2008
                                      
                                      
                                      15
                                      
                                      
                                      $
                                      60.00/ $78.00Full
      Year 2008
                                      
                                      
                                      346
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (2,779
                                      )First
      Quarter 2009
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      60/ $79.70First
      Quarter 2009
                                      
                                      
                                      6
                                      
                                      
                                      $
                                      60/ $77.75First
      Quarter 2009
                                      
                                      
                                      12
                                      
                                      
                                      $
                                      65/ $86.50Second
      Quarter 2009
                                      
                                      
                                      17
                                      
                                      
                                      $
                                      60/ $79.70Second
      Quarter 2009
                                      
                                      
                                      38
                                      
                                      
                                      $
                                      60/ $77.40Second
      Quarter 2009
                                      
                                      
                                      2
                                      
                                      
                                      $
                                      60/ $77.75Second
      Quarter 2009
                                      
                                      
                                      12
                                      
                                      
                                      $
                                      65/ $86.50Third
      Quarter 2009
                                      
                                      
                                      57
                                      
                                      
                                      $
                                      60/ $77.40Third
      Quarter 2009
                                      
                                      
                                      12
                                      
                                      
                                      $
                                      65/ $86.50Fourth
      Quarter 2009
                                      
                                      
                                      57
                                      
                                      
                                      $
                                      60/ $77.40Fourth
      Quarter 2009
                                      
                                      
                                      12
                                      
                                      
                                      $
                                      65/ $86.50Full
      Year 2009
                                      
                                      
                                      276
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (1,463
                                      )First
      Quarter 2010
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      65/ $80.90First
      Quarter 2010
                                      
                                      
                                      9
                                      
                                      
                                      $
                                      65/ $84.14Second
      Quarter 2010
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      65/ $80.90Second
      Quarter 2010
                                      
                                      
                                      9
                                      
                                      
                                      $
                                      65/ $84.14Third
      Quarter 2010
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      65/ $80.90Third
      Quarter 2010
                                      
                                      
                                      9
                                      
                                      
                                      $
                                      65/ $84.14Fourth
      Quarter 2010
                                      
                                      
                                      51
                                      
                                      
                                      $
                                      65/ $80.90Fourth
      Quarter 2010
                                      
                                      
                                      9
                                      
                                      
                                      $
                                      65/ $84.14Full
      Year 2010
                                      
                                      
                                      240
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (651
                                      )First
      Quarter 2011
                                      
                                      
                                      45
                                      
                                      
                                      $
                                      65/ $84.14Full
      Year 2011
                                      
                                      
                                      45
                                      
                                      
                                      
                                      
                                      
                                      
                                      $
                                      (41
                                      )





28
 Table of Contents





At
December 31, 2007, we had open natural gas price swap contracts covering our
2008 and 2009 production as follows:





Natural Gas Price SwapsContract Period
                              
                              Volume in Mmcf
                              
                              
                              Weighted
      Average Price (per
    Mcf)
                              
                              
                              Net
      Unrealized Gain (In
      thousands)First
      Quarter 2008
                              
                              
                              645
                              
                              
                              $
                              8.96
                              
                              
                              $
                              593Second
      Quarter 2008
                              
                              
                              1,005
                              
                              
                              
                              8.07
                              
                              
                              
                              285Third
      Quarter 2008
                              
                              
                              1,005
                              
                              
                              
                              8.07
                              
                              
                              
                              150Fourth
      Quarter 2008
                              
                              
                              1,005
                              
                              
                              
                              8.07
                              
                              
                              
                              (175
                              )Full
      Year 2008
                              
                              
                              3,660
                              
                              
                              $
                              8.23
                              
                              
                              $
                              853First
      Quarter 2009
                              
                              
                              975
                              
                              
                              $
                              9.76
                              
                              
                              $
                              463Full
      Year 2009
                              
                              
                              975
                              
                              
                              $
                              9.76
                              
                              
                              $
                              463




We are
exposed to market risk on these open contracts, to the extent of changes in
market prices of natural gas and crude oil.  However, the market risk
exposure on these hedged contracts is generally offset by the gain or loss
recognized upon the ultimate sale of the commodity that is hedged.





The
preceding paragraphs contain forward-looking information concerning future
production and projected gains and losses, which may be impacted both by
production and by changes in future market prices of energy commodities. See
“Forward-Looking Information” for further details.





Item 8.FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.





The
financial statements and supplementary information included in this Report are
described in the Index to Financial Statements at Page F-1 of this
Report.





Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.





None.





Item 9A.CONTROLS
AND PROCEDURES.





As of the
end of the period covered by this Annual Report on Form 10-K, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (Disclosure
Controls).  Disclosure Controls, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure Controls are also designed with the objective of
ensuring that such information is accumulated and communicated to our
management, including the chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required
disclosure.





29
 Table of Contents





Our
management, including the chief executive officer and chief financial officer,
does not expect that our Disclosure Controls will prevent all error and all
fraud.  A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.  Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.  Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected.  These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or
mistake.  The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.





Based
upon their controls evaluation, our chief executive officer and chief financial
officer have concluded that our Disclosure Controls are effective at a
reasonable assurance level.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934.  Our internal control over
financial reporting is a process designed to provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition,
transactions are executed in accordance with appropriate management
authorization and accounting records are reliable for the preparation of
financial statements in accordance with generally accepted accounting
principles.





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





Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2007.  Management based this assessment on criteria
for effective internal control over financial reporting described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Management’s assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial
reporting.  Management reviewed the results of its assessment with the
Audit Committee of our Board of Directors.





Based on
this assessment, management believes that PrimeEnergy Corporation maintained
effective internal control over financial reporting as of December 31,
2007.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report.





There
have been no significant changes in our internal controls over financial
reporting during the fourth fiscal quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.





Item 9B. OTHER
INFORMATION.





None.





30
 Table of Contents





PART
III





Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Information
relating to the Company’s Directors, nominees for Directors and executive
officers is included in the Company’s definitive proxy statement relating the
Company’s Annual Meeting of Stockholders to be held in June, 2008, which will be
filed with the U.S. Securities and Exchange Commission within 120 days of
December 31, 2007, and which is incorporated herein by reference.





Item 11. EXECUTIVE COMPENSATION.





Information
relating to executive compensation is included in the Company’s definitive proxy
statement relating to the Company’s Annual Meeting of Stockholders to be held in
June, 2008, which will be filed with the U. S. Securities and Exchange
Commission within 120 days of December 31, 2007, and which is incorporated
herein by reference.




Item 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.





Information
relating to security ownership of certain beneficial owners and management is
included in the Company’s definitive proxy statement relating to the Company’s
Annual Meeting of Stockholders to be held in June, 2008, which will be filed
with the U. S. Securities and Exchange Commission within 120 days of December
31, 2007, and which is incorporated herein by reference.





Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.





Information
relating to certain transactions by Directors and executive officers of the
Company is included in the Company’s definitive proxy statement relating to the
Company’s Annual Meeting of Stockholders to be held in June, 2008, which will be
filed with the U. S. Securities and Exchange Commission within 120 days of
December 31, 2007, and which is incorporated herein by reference.





Item 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.





Information
relating to principal accountant fees and services is included in the Company’s
definitive proxy statement relating to the Company’s Annual Meeting of
Stockholders to be held in June, 2008, which will be filed with the U. S.
Securities and Exchange Commission within 120 days of December 31, 2007, and
which is incorporated herein by reference.





31
 Table of Contents


PART
IV





Item 15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.





The
following documents are filed as part of this Report:





1.
Financial statements (Index to Financial Statements at page F-1 of this
Report)





2.
Financial Statement Schedules (Index to Financial Statements – Supplementary
Information at page F-1 of this Report)





3.
Exhibits:





3.1
                                    
                                    Restated
      Certificate of Incorporation of PrimeEnergy Corporation (Incorporated by
      reference to Exhibit 3.1 of PrimeEnergy Corporation Form 10-K for the year
      ended December 31, 2004)3.2
                                    
                                    Bylaws
      of PrimeEnergy Corporation (Incorporated by reference to Exhibit 3.2 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2004)10.3.1
                                    
                                    Adoption
      Agreement #003 dated 4/23/2002, MassMutual Life Insurance Company
      Flexinvest Prototype Non-Standardized 401(k) Profit-Sharing Plan; EGTRRA
      Amendment to the PrimeEnergy employees 401(k) Savings Plan; MassMutual
      Retirement Services Flexinvest Defined Contribution Prototype Plan;
      Protected Benefit Addendum; Addendum to the Administrative Services
      Agreement Loan Agreement; Addendum to Administrative Services Agreement
      GUST Restatement Provisions; General Trust Agreement (Incorporated by
      reference to Exhibit 10.3.1 of PrimeEnergy Corporation Form 10-K for the
      year ended December 31, 2002) (1)10.3.2
                                    
                                    First
      Amendment to the PrimeEnergy Corporation Employees 401(k) Savings Plan
      (Incorporated by reference to Exhibit 10.3.2 of PrimeEnergy Corporation
      Form 10-K for the year ended December 31, 2007)10.4
                                    
                                    Amended
      and Restated Agreement of Limited Partnership, FWOE Partners L.P., dated
      as of August 22, 2005 (Incorporated by reference to Exhibit 10.3 of
      PrimeEnergy Corporation Form 8-K for events of August 22,
      2005)10.4.1
                                    
                                    Contribution
      Agreement between F-W Oil Exploration L.L.C. and FWOE Partners L.P. dated
      as of August 22, 2005 (Incorporated by reference to exhibit 10.4 of
      PrimeEnergy Corporation Form 8-K for events of August 22,
      2005)10.18
                                    
                                    Composite
      copy of Non-Statutory Option Agreements (Incorporated by reference to
      Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for the year ended
      December 31, 2004) (1)10.22.5
                                    
                                    Amended
      and Restated Credit Agreement among PrimeEnergy Corporation, PrimeEnergy
      Management Corporation, Prime Operating Company, Eastern Oil Well Service
      Company, Southwest Oilfield Construction Company, EOWS Midland Company and
      Guaranty Bank, FSB as Agent and Letter of Credit Issuer and BNP Paribas,
      as Co-Documentation Agent and JPMorgan Chase Bank, N.A., as
      Co-Documentation Agent and the Lenders Signatory hereto, December 28, 2006
      (Incorporated by reference to Exhibit 10.22.5 of PrimeEnergy Corporation
      Form 10-K for the year ended December 31, 2006)10.22.5.1
                                    
                                    Letter
      from BNP Paribas regarding Amended and Restated Credit Agreement effective
      as of December 28, 2006, among PrimeEnergy Corporation, et al, and
      Guaranty Bank, FSB (Incorporated by reference to Exhibit 10.22.5.1 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.23.2
                                    
                                    Amended
      and Restated Security Agreement between PrimeEnergy Corporation,
      PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil
      Well Service Company, Southwest Oilfield Construction Company, EOWS
      Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party)
      December 28, 2006 (Incorporated by reference to Exhibit 10.23.2 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)





32
 Table of Contents




10.23.3
                                              
                                              Amended
      and Restated Security Agreement (Membership Pledge) by PrimeEnergy
      Corporation in favor of Guaranty Bank, FSB as Agent December 28, 2006
      (Incorporated by reference to Exhibit 10.23.3 of PrimeEnergy Corporation
      Form 10-K for the year ended December 31, 2006)10.23.4
                                              
                                              Amended
      and Restated Security Agreement between PrimeEnergy Corporation,
      PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil
      Well Service Company, Southwest Oilfield Construction Company, EOWS
      Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party)
      December 28, 2006 (Incorporated by reference to Exhibit 10.23.4 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.23.5
                                              
                                              Amended
      and Restated Security Agreement between Eastern Oil Well Service Company,
      EOWS Midland Company,(debtor) and Guaranty Bank, FSB as Agent (secured
      party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.5 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.23.6
                                              
                                              Security
      Agreement between Eastern Oil Well Service Company, EOWS Midland
      Company,(debtor) and Guaranty Bank, FSB as Agent (secured party) December
      28, 2006 (Incorporated by reference to Exhibit 10.23.6 of PrimeEnergy
      Corporation Form 10-K for the year ended December 31,
  2006)10.23.7
                                              
                                              Amended
      and Restated Security Agreement between Southwest Oilfield Construction
      Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December
      28, 2006 (Incorporated by reference to Exhibit 10.23.7 of PrimeEnergy
      Corporation Form 10-K for the year ended December 31,
  2006)10.23.8
                                              
                                              Amended
      and Restated Security Agreement effective between EOWS Midland Company,
      (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006
      (Incorporated by reference to Exhibit 10.23.8 of PrimeEnergy Corporation
      Form 10-K for the year ended December 31, 2006)10.25
                                              
                                              Credit
      Agreement dated as of June 1, 2006 (but effective for all purposes as of
      August 22, 2005), between Prime Offshore L.L.C. as Borrower and
      PrimeEnergy Corporation as Lender (Incorporated by reference to Exhibit
      10.25 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.26
                                              
                                              Credit
      Agreement dated June 29, 2006 between Prime Offshore L.L.C. and Guaranty
      Bank, FSB as Agent and a Lender (Incorporated by reference to Exhibit
      10.26 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.26.1
                                              
                                              Subordination
      Agreement effective as of June 29, 2006, between Prime Offshore L.L.C.,
      PrimeEnergy Corporation, and Guaranty Bank, FSB (Incorporated by reference
      to Exhibit 10.26.1 of PrimeEnergy Corporation Form 10-K for the year ended
      December 31, 2006)10.27
                                              
                                              Security
      Agreement effective June 29, 2006 between Prime Offshore L.L.C., and
      Guaranty Bank, FSB (debtor) and Guaranty Bank, FSB as Agent (secured
      party) (Incorporated by reference to Exhibit 10.27 of PrimeEnergy
      Corporation Form 10-K for the year ended December 31,
  2006)10.27.1
                                              
                                              Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production effective as of June 29, 2006, from Prime Offshore L.L.C. and
      Guaranty Bank, FSB (Incorporated by reference to Exhibit 10.27.1 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.27.2
                                              
                                              Pledge
      Agreement as of June 29, 2006, between Guaranty Bank, FSB and Prime
      Offshore L.L.C. (Incorporated by reference to Exhibit 10.27.2 of
      PrimeEnergy Corporation Form 10-K for the year ended December 31,
      2006)10.28
                                              
                                              Completion
      and Liquidity Maintenance Agreement effective as of June 29, 2006, between
      PrimeEnergy Corporation, Guaranty Bank, FSB, and Prime Offshore, L.L.C.
      (Incorporated by reference to Exhibit 10.28 of PrimeEnergy Corporation
      Form 10-K for the year ended December 31, 2006)10.29
                                              
                                              Put
      Right Agreement effective as of June 29, 2006, by and among PrimeEnergy
      Corporation and Prime Offshore L.L.C. (Incorporated by reference to
      Exhibit 10.29of PrimeEnergy Corporation Form 10-K for the year ended
      December 31,
2006)





33
 Table of Contents




14
                            
                            PrimeEnergy
      Corporation Code of Business Conduct and Ethics (Incorporated by reference
      to Exhibit 14 of PrimeEnergy Corporation Form 10-K for the year ended
      December 31, 2006)21
                            
                            Subsidiaries
      (filed herewith)23
                            
                            Consent
      of Ryder Scott & Company L.P. (filed herewith)31.1
                            
                            Certification
      of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended (filed
    herewith)31.2
                            
                            Certification
      of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended (filed
    herewith)32.1
                            
                            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith)32.2
                            
                            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith)





(1)
            Management
      contract or compensatory plan or arrangement required to be filed as an
      Exhibit to this Form 10-K





34
 Table of Contents




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, on the 16th day of
March, 2009.





PrimeEnergy
      CorporationBy:
                  /s/ CHARLES E. DRIMAL, JRCharles
      E. Drimal, Jr.President





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated and on the 16th day of
March, 2009.





/s/ CHARLESE.DRIMAL, JR.
                                                  
                                                  Director
      and President;Charles
      E. Drimal, Jr.
                                                  
                                                  The
      Principal Executive Officer/s/ BEVERLY A. CUMMINGS
                                                  
                                                  Director,
      Vice President andBeverly
      A. Cummings
                                                  
                                                  Treasurer;
      The PrincipalFinancial
      and Accounting OfficerDirector
                                                  
                                                  /s/ CLINT HURT
                                                  
                                                  DirectorMatthias
      Eckenstein
                                                  
                                                  
                                                  
                                                  Clint
      Hurt/s/ H. GIFFORD FONG
                                                  
                                                  Director
                                                  
                                                  /s/ JAN K. SMEETS
                                                  
                                                  DirectorH.
      Gifford Fong
                                                  
                                                  
                                                  
                                                  Jan
      K. Smeets/s/ THOMAS S.T. GIMBEL
                                                  
                                                  DirectorThomas
      S.T. Gimbel





35
 Table of Contents




INDEX
TO FINANCIAL STATEMENTS





Report
      of Independent Registered Public Accounting Firm
                    
                    F-2Financial
      Statements (restated):Consolidated
      Balance Sheets – December 31, 2007 and 2006
                    
                    F-3Consolidated
      Statements of Operations - for the years ended December 31, 2007, 2006 and
      2005
                    
                    F-5Consolidated
      Statement of Stockholders’ Equity - for the years ended December 31, 2007,
      2006 and 2005
                    
                    F-6Consolidated
      Statements of Cash Flows - for the years ended December 31, 2007, 2006 and
      2005
                    
                    F-7Notes
      to Consolidated Financial Statements
                    
                    F-8Supplementary
      Information (restated):Capitalized
      Costs Relating to Oil and Gas Producing Activities, years ended December
      31, 2007, 2006 and 2005
                    
                    F-32Costs
      Incurred in Oil and Gas Property Acquisition, Exploration and Development
      Activities, years ended December 31, 2007, 2006 and 2005
                    
                    F-32Standardized
      Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas
      Reserves, years ended December 31, 2007, 2006 and 2005
                    
                    F-33Standardized
      Measure of Discounted Future Net Cash Flows and  Changes Therein
      Relating to Proved Oil and Gas Reserves, years ended December 31, 2007,
      2006 and 2005
                    
                    F-34Reserve
      Quantity Information, years ended December 31, 2007, 2006 and
      2005
                    
                    F-35Results
      of Operations from Oil and Gas Producing Activities, years ended December
      31, 2007, 2006 and 2005
                    
                    F-36Notes
      to Supplementary Information
                    
                    F-37





F-1
 Table of Contents




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Stockholders of


PrimeEnergy
Corporation and Subsidiaries:








We have
audited the accompanying consolidated balance sheets of PrimeEnergy Corporation
and Subsidiaries (the Corporation) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the years ended December 31, 2007, 2006 and 2005. These financial
statements are the responsibility of the Corporation’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Corporation is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Corporation’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide
a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PrimeEnergy
Corporation and Subsidiaries as of December 31, 2007 and 2006, and the
consolidated results of its operations and cash flows for the years ended
December 21, 2007, 2006 and 2005 in conformity with accounting principles
generally accepted in the United States of America. As discussed in Note 2 to
the financial statements, the 2007, 2006 and 2005 financial statements have been
restated to correct certain misstatements.








PUSTORINO,
PUGLISI & CO., LLP


New York,
New York


March 26,
2008, except for Note 2, as to which the date is March 23, 2009





F-2
 Table of Contents


PRIMEENERGY
CORPORATION and SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS, December 31, 2007 and 2006





2007
                  Audited
      and Restated
                
                
                2006
                  Audited
      and RestatedASSETS:Current
      assets:Cash
      and cash equivalents
                
                $
                25,373,000
                
                
                $
                29,056,000Restricted
      cash and cash equivalents
                
                
                3,633,000
                
                
                
                2,528,000Accounts
      receivable, net
                
                
                21,311,000
                
                
                
                33,664,000Due
      from related parties
                
                
                32,000
                
                
                
                429,000Prepaid
      expenses
                
                
                1,391,000
                
                
                
                1,269,000Derivative
      contracts
                
                
                1,332,000
                
                
                
                6,085,000Inventory
      at cost
                
                
                3,705,000
                
                
                
                3,518,000Deferred
      income tax
                
                
                1,582,000
                
                
                
                --Total
      current assets
                
                
                58,359,000
                
                
                
                76,549,000Property
      and equipment, at cost:Proved
      oil and gas properties at cost
                
                
                378,908,000
                
                
                
                293,837,000Unproved
      oil and gas properties at cost
                
                
                4,458,000
                
                
                
                5,047,000Less:
      Accumulated depletion and depreciation
                
                
                145,514,000
                
                
                
                83,563,000237,852,000
                
                
                
                215,321,000Field
      and office equipment
                
                
                18,029,000
                
                
                
                15,793,000Less:
      Accumulated depreciation
                
                
                9,820,000
                
                
                
                8,351,0008,209,000
                
                
                
                7,442,000Total
      net property and equipment
                
                
                246,061,000
                
                
                
                222,763,000Other
      assets
                
                
                1,245,000
                
                
                
                796,000Total
      assets
                
                $
                305,665,000
                
                
                $
                300,108,000





The
accompanying notes are an integral part of the consolidated financial
statements.





F-3
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





CONSOLIDATED
BALANCE SHEETS, December 31, 2007 and 2006





2007
                  Audited
      and Restated
                
                
                2006
                  Audited
      and RestatedLIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                
                $
                34,950,000
                
                
                $
                --Accounts
      payable
                
                
                26,780,000
                
                
                
                42,627,000Current
      portion of asset retirement and other long-term
obligations
                
                
                1,065,000
                
                
                
                345,000Derivative
      liability short term
                
                
                4,340,000
                
                
                
                1,961,000Accrued
      liabilities
                
                
                10,032,000
                
                
                
                22,098,000Due
      to related parties
                
                
                520,000
                
                
                
                165,000Total
      current liabilities
                
                
                77,687,000
                
                
                
                67,196,000Long-term
      bank debt
                
                
                120,050,000
                
                
                
                136,460,000Asset
      retirement obligations
                
                
                16,936,000
                
                
                
                6,890,000Derivative
      liability long term
                
                
                3,369,000
                
                
                
                --Deferred
      income taxes
                
                
                26,022,000
                
                
                
                24,274,000Total
      liabilities
                
                
                244,064,000
                
                
                
                234,820,000Minority
      interest
                
                
                12,929,000
                
                
                
                12,533,000Stockholders’
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares; none
      issuedCommon
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2007 and 2006
                
                
                769,000
                
                
                
                769,000Paid
      in capital
                
                
                11,024,000
                
                
                
                11,024,000Retained
      earnings
                
                
                72,885,000
                
                
                
                64,965,000Accumulated
      other comprehensive income (loss), net
                
                
                (3,618,000
                )
                
                
                3,976,00081,060,000
                
                
                
                80,734,000Treasury
      stock, at cost 4,558,544 common shares in 2007 and 4,478,145 in
      2006
                
                
                (32,388,000
                )
                
                
                (27,979,000
                )Total
      stockholders’ equity
                
                
                48,672,000
                
                
                
                52,755,000Total
      liabilities and stockholders’ equity
                
                $
                305,665,000
                
                
                $
                300,108,000





The
accompanying notes are an integral part of the consolidated financial
statements.





F-4
 Table of Contents




PRIMEENERGY
CORPORATION and SUBSIDIARIES





CONSOLIDATED
STATEMENTS of OPERATIONS





for the
years ended December 31, 2007, 2006 and 2005





2007
                  Audited
      and Restated
                
                
                2006
                  Audited
      and Restated
                
                
                2005
                  Audited
      and RestatedRevenue:Oil
      and gas sales
                
                $
                122,361,000
                
                
                $
                71,650,000
                
                
                $
                65,320,000Field
      service income
                
                
                24,340,000
                
                
                
                20,357,000
                
                
                
                15,226,000Administrative
      overhead fees
                
                
                9,041,000
                
                
                
                9,704,000
                
                
                
                7,068,000Loss
      on derivative instruments, net
                
                
                --
                
                
                
                --
                
                
                
                (415,000
                )Other
      income
                
                
                404,000
                
                
                
                112,000
                
                
                
                25,000156,146,000
                
                
                
                101,823,000
                
                
                
                87,224,000Costs
      and expenses:Lease
      operating expense
                
                
                34,841,000
                
                
                
                25,337,000
                
                
                
                23,241,000Field
      service expense
                
                
                17,724,000
                
                
                
                15,802,000
                
                
                
                12,804,000Depreciation,
      depletion and amortization
                
                
                64,507,000
                
                
                
                14,370,000
                
                
                
                11,784,000General
      and administrative expense
                
                
                12,349,000
                
                
                
                12,977,000
                
                
                
                11,048,000Exploration
      costs
                
                
                633,000
                
                
                
                1,162,000
                
                
                
                664,000130,054,000
                
                
                
                69,648,000
                
                
                
                59,541,000Add
      gain on sale and exchange of assets
                
                
                598,000
                
                
                
                3,729,000
                
                
                
                16,588,000Income
      from operations
                
                
                26,690,000
                
                
                
                35,904,000
                
                
                
                44,271,000Other
      income and expense:Less:
      Interest expense
                
                
                11,062,000
                
                
                
                2,091,000
                
                
                
                1,531,000Add
      interest income
                
                
                852,000
                
                
                
                508,000
                
                
                
                153,000Less:
      Minority interest
                
                
                4,728,000
                
                
                
                5,173,000
                
                
                
                5,613,000Income
      before provision for income taxes
                
                
                11,752,000
                
                
                
                29,148,000
                
                
                
                37,280,000Provision
      for income taxes
                
                
                3,832,000
                
                
                
                10,440,000
                
                
                
                13,676,000Net
      income
                
                $
                7,920,000
                
                
                $
                18,708,000
                
                
                $
                23,604,000Basic
      net income per common share
                
                $
                2.50
                
                
                $
                5.65
                
                
                $
                6.95Diluted
      net income per  common share
                
                $
                2.02
                
                
                $
                4.60
                
                
                $
                5.70





The
accompanying notes are an integral part of the consolidated financial
statements.





F-5
 Table of Contents


PRIMEENERGY
CORPORATION and SUBSIDIARIES





CONSOLIDATED
STATEMENT of STOCKHOLDERS’ EQUITY


(Audited
and Restated)





for the
years ended December 31, 2007, 2006 and 2005 (restated)





AccumulatedAdditional
                                    
                                    
                                    
                                    
                                    
                                    OtherCommon
      Stock
                                    
                                    
                                    Paid
      In
                                    
                                    
                                    Retained
                                    
                                    
                                    ComprehensiveShares
                                    
                                    
                                    Amount
                                    
                                    
                                    Capital
                                    
                                    
                                    Earnings
                                    
                                    
                                    Income (Loss)
                                    
                                    
                                    Treasury Stock
                                    
                                    
                                    TotalBalance
      at December 31, 2004
                                    
                                    
                                    7,694,970
                                    
                                    
                                    $
                                    769,000
                                    
                                    
                                    $
                                    11,024,000
                                    
                                    
                                    $
                                    22,653,000
                                    
                                    
                                    $
                                    --
                                    
                                    
                                    $
                                    (16,209,000
                                    )
                                    
                                    $
                                    18,237,000Purchased
      164,410 shares of common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,456,000
                                    )
                                    
                                    
                                    (4,456,000
                                    )Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23,604,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23,604,000Balance
      at December 31, 2005
                                    
                                    
                                    7,694,970
                                    
                                    
                                    $
                                    769,000
                                    
                                    
                                    $
                                    11,024,000
                                    
                                    
                                    $
                                    46,257,000
                                    
                                    
                                    $
                                    --
                                    
                                    
                                    $
                                    (20,665,000
                                    )
                                    
                                    $
                                    37,385,000Purchased
      110,990 shares of common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (7,314,000
                                    )
                                    
                                    
                                    (7,314,000
                                    )Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    18,708,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    18,708,000Other
      comprehensive income, net of taxes
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3,976,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    3,976,000Balance
      at December 31, 2006
                                    
                                    
                                    7,694,970
                                    
                                    
                                    $
                                    769,000
                                    
                                    
                                    $
                                    11,024,000
                                    
                                    
                                    $
                                    64,965,000
                                    
                                    
                                    $
                                    3,976,000
                                    
                                    
                                    $
                                    (27,979,000
                                    )
                                    
                                    $
                                    52,755,000Purchased
      80,399 shares of common stock
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (4,409,000
                                    )
                                    
                                    
                                    (4,409,000
                                    )Net
      income
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    7,920,000
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    7,920,000Other
      comprehensive income (loss), net of taxes
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (7,594,000
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (7,594,000
                                    )Balance
      as of December 31, 2007
                                    
                                    
                                    7,694,970
                                    
                                    
                                    $
                                    769,000
                                    
                                    
                                    $
                                    11,024,000
                                    
                                    
                                    $
                                    72,885,000
                                    
                                    
                                    $
                                    (3,618,000
                                    )
                                    
                                    $
                                    (32,388,000
                                    )
                                    
                                    $
                                    48,672,000





The
accompanying notes are an integral part of the consolidated financial
statements.





F-6
 Table of Contents




PRIMEENERGY
CORPORATION and SUBSIDIARIES





CONSOLIDATED
STATEMENTS of CASH FLOWS





for the
years ended December 31, 2007, 2006 and 2005





2007
                  Audited
      and Restated
                
                
                2006
                  Audited
      and Restated
                
                
                2005
                  Audited
      and RestatedCash
      flows from operating activities:Net
      income
                
                $
                7,920,000
                
                
                $
                18,708,000
                
                
                $
                23,604,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                
                
                64,507,000
                
                
                
                14,370,000
                
                
                
                11,784,000Dry
      hole and abandonment costs
                
                
                343,000
                
                
                
                510,000
                
                
                
                262,000Gain
      on sale of properties
                
                
                (598,000
                )
                
                
                (3,729,000
                )
                
                
                (16,588,000
                )Non-cash
      incentive compensation expense
                
                
                --
                
                
                
                1,313,000
                
                
                
                --Provision
      for deferred income taxes
                
                
                1,215,000
                
                
                
                11,787,000
                
                
                
                4,907,000Minority
      interest in earnings of partnerships
                
                
                4,728,000
                
                
                
                5,173,000
                
                
                
                5,613,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                14,276,000
                
                
                
                (15,480,000
                )
                
                
                (6,406,000
                )(Increase)
      decrease in due from related parties
                
                
                1,306,000
                
                
                
                484,000
                
                
                
                (207,000
                )(Increase)
      decrease in inventories
                
                
                325,000
                
                
                
                (3,136,000
                )
                
                
                (6,000
                )(Increase)
      decrease in prepaid expenses and other assets
                
                
                (175,000
                )
                
                
                6,449,000
                
                
                
                (7,251,000
                )Increase
      (decrease) in accounts payable
                
                
                126,000
                
                
                
                3,510,000
                
                
                
                5,232,000Increase
      (decrease) in accrued liabilities
                
                
                53,000
                
                
                
                (1,518,000
                )
                
                
                5,217,000Increase
      (decrease) in due to related parties
                
                
                1,088,000
                
                
                
                (620,000
                )
                
                
                431,000Net
      cash provided by operating activities
                
                
                95,114,000
                
                
                
                37,821,000
                
                
                
                26,592,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                
                
                (109,819,000
                )
                
                
                (122,704,000
                )
                
                
                (54,037,000
                )Proceeds
      from sale of properties and equipment
                
                
                598,000
                
                
                
                3,729,000
                
                
                
                43,050,000Net
      cash used in investing activities
                
                
                (109,221,000
                )
                
                
                (118,975,000
                )
                
                
                (10,987,000
                )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                
                
                (4,409,000
                )
                
                
                (7,314,000
                )
                
                
                (4,456,000
                )Increase
      in long-term bank debt and other long-term obligations
                
                
                105,867,000
                
                
                
                198,362,000
                
                
                
                65,570,000Repayment
      of long-term bank debt and other long-term obligations
                
                
                (86,960,000
                )
                
                
                (91,168,000
                )
                
                
                (67,432,000
                )Distribution
      to minority interest
                
                
                (4,074,000
                )
                
                
                (4,443,000
                )
                
                
                (3,456,000
                )Net
      cash provided by (used in) financing activities
                
                
                10,424,000
                
                
                
                95,437,000
                
                
                
                (9,774,000
                )Net
      increase(decrease) in cash and cash equivalents
                
                
                (3,683,000
                )
                
                
                14,283,000
                
                
                
                5,831,000Cash
      and cash equivalents at the beginning of the period
                
                
                29,056,000
                
                
                
                14,773,000
                
                
                
                8,942,000Cash
      and cash equivalents at the end of the period
                
                $
                25,373,000
                
                
                $
                29,056,000
                
                
                $
                14,773,000Supplemental
      disclosures:Income
      taxes paid during the year
                
                $
                1,643,000
                
                
                $
                5,713,000
                
                
                $
                5,076,000Net
      income tax refunds received during the year
                
                $
                2,623,000
                
                
                $
                —
                
                
                $
                —Interest
      paid during the year
                
                $
                11,062,000
                
                
                $
                2,091,000
                
                
                $
                1,531,000





The
accompanying notes are an integral part of the consolidated financial
statements.





F-7
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS





_________________








1.
            Description
      of Operations and Significant Accounting
  Policies





Nature of
Operations:





PrimeEnergy
Corporation (“PEC”), a Delaware corporation, was organized in March 1973. The
Company is engaged in the development, acquisition and production of oil and
natural gas properties. The Company owns leasehold, mineral and royalty
interests in producing and non-producing oil and gas properties across the
United States, including Colorado, Kansas, Louisiana, Mississippi, Montana,
Nebraska, New Mexico, North Dakota, Oklahoma, Texas, Utah, West Virginia and
Wyoming and the Gulf of Mexico. The Company operates 1,580 wells and owns
non-operating interests in over 817 additional wells. Additionally, the Company
provides well-servicing support operations, site-preparation and construction
services for oil and gas drilling and reworking operations, both in connection
with the Company’s activities and providing contract services for third parties.
The Company is publicly traded on the NASDAQ under the symbol “PNRG”. PEC owns
Eastern Oil Well Service Company (“EOWSC”), EOWS Midland Company (“EMID”) and
Southwest Oilfield Construction Company (“SOCC”), all of which perform oil and
gas field servicing. PEC also owns Prime Operating Company (“POC”), which serves
as operator for most of the producing oil and gas properties owned by the
Company and affiliated entities. PEC also owns Prime Offshore L.L.C. (Prime
Offshore), formerly F-W Oil Exploration LLC, which owns and operates properties
in the Gulf of Mexico. PrimeEnergy Corporation and its subsidiaries are herein
referred to as the “Company.” PrimeEnergy Management Corporation (“PEMC”), a
wholly-owned subsidiary, acts as the managing general partner, providing
administration, accounting and tax preparation services for 18 limited
partnerships and 2 trusts (collectively, the “Partnerships”). The markets for
the Company’s products are highly competitive, as oil and gas are commodity
products and prices depend upon numerous factors beyond the control of the
Company, such as economic, political and regulatory developments and competition
from alternative energy sources.





Consolidation
and Presentation:





The
consolidated financial statements include the accounts of PrimeEnergy
Corporation, its subsidiaries and the Partnerships, using the full consolidation
method for those partnerships which we control. The proportionate consolidation
method is used to account for those undivided interests in oil and gas
properties owned by the Company as well as interests held in unincorporated
legal entities, such as partnerships,  engaged in oil and gas
production, which we do not control. For those entities which we proportionately
consolidate our proportionate share of each entity’s assets, liabilities,
revenue and expenses are included in the appropriate classifications in the
consolidated financial statements. Reserve estimates associated with the
proportionately consolidated oil and gas interests are calculated for each
property at the Partnership level and depletion, depreciation and amortization
(DD&A) rates are determined at the Partnership level. The Company reserve
estimates are based on our ownership percentage of Partnership reserve reports.
DD&A expense and evaluation of impairment may differ from the Partnership as
our cost basis for the Partnership interests acquired may be different than the
cost basis at the Partnership level for properties acquired by the
Partnership.  Inter-company balances and transactions are eliminated
in preparing the consolidated financial statements. See Footnote 2 - Financial
Restatement.





Use of
Estimates:





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





F-8
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








Estimates
of oil and gas reserves, as determined by independent petroleum engineers, are
continually subject to revision based on price, production history and other
factors. Depletion expense, which is computed based on the units of production
method, could be significantly impacted by changes in such estimates.
Additionally, FAS144 requires that if the expected future cash flow from an
asset is less than its carrying cost, that asset must be written down to its
fair market value. As the fair market value of an oil and gas property will
usually be significantly less than the total future net revenue expected from
that property, small changes in the estimated future net revenue from an asset
could lead to the necessity of recording a significant impairment of that
asset.





Property
and Equipment:





The
Company follows the “successful efforts” method of accounting for its oil and
gas properties. Under the successful efforts method, costs of acquiring
undeveloped oil and gas leasehold acreage, including lease bonuses, brokers’
fees and other related costs are capitalized. Provisions for impairment of
undeveloped oil and gas leases are based on periodic evaluations. Annual lease
rentals and exploration expenses, including geological and geophysical expenses
and exploratory dry hole costs, are charged against income as incurred. Costs of
drilling and equipping productive wells, including development dry holes and
related production facilities, are capitalized. All other property and equipment
are carried at cost. Depreciation and depletion of oil and gas production
equipment and properties are determined under the unit-of-production method
based on estimated proved developed recoverable oil and gas reserves.
Depreciation of all other equipment is determined under the straight-line method
using various rates based on useful lives. The cost of assets and related
accumulated depreciation is removed from the accounts when such assets are
disposed of, and any related gains or losses are reflected in current
earnings.





Capitalization
of Interest:





Interest
costs related to financing major oil and gas projects in progress are
capitalized until the projects are evaluated or until the projects are
substantially complete and ready for their intended use if the projects are
evaluated and successful.





Impairment
of Long-Lived Assets:





The
Company reviews Long-Lived Assets, including oil and gas properties, for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recovered. If the carrying amounts are not expected
to be recovered by undiscounted cash flows, the assets are impaired and an
impairment loss is recorded. The amount of impairment is based on the estimated
fair value of the assets determined by discounting anticipated future net cash
flows.





Asset
Retirement Obligation:





Effective
January 1, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations.
Our asset retirement obligation primarily represents the estimated present value
of the amount the Company will incur to plug, abandon and remediate our
producing properties (including removal of our offshore platforms) at the end of
their productive lives, in accordance with applicable state laws. The Company
determined its asset retirement obligation by calculating the present value of
estimated cash flows related to the liability. The retirement obligation is
recorded as a liability at its estimated present value as of the asset’s
inception, with an offsetting increase to producing properties. Periodic
accretion of discount of the estimated liability is recorded as an expense in
the income statement.





F-9
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








Income
Taxes:





The
Company records income taxes in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” SFAS No.
109 is an asset and liability approach to accounting for income taxes, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company’s
financial statements or tax returns.





Deferred
tax liabilities or assets are established for temporary differences between
financial and tax reporting bases and are subsequently adjusted to reflect
changes in the rates expected to be in effect when the temporary differences
reverse. A valuation allowance is established for any deferred tax asset for
which realization is not likely.





General
and Administrative Expenses:





General
and administrative expenses represent cost and expenses associated with the
operation of the Company.





Income
Per Common Share:





Income
per share of common stock has been computed based on the weighted average number
of common shares outstanding during the respective periods in accordance with
SFAS No. 128, “Earnings per Share”.





Statements
of cash flows:





For
purposes of the consolidated statements of cash flows, the Company considers
short-term, highly liquid investments with original maturities of less than
ninety days to be cash equivalents.





Concentration of Credit
Risk:





The
Company maintains significant banking relationships with financial institutions
in the State of Texas. The Company limits its risk by periodically evaluating
the relative credit standing of these financial institutions. The Company’s oil
and gas production purchasers consist primarily of independent marketers and
major gas pipeline companies.





Hedging:





The
Company periodically enters into oil and gas financial instruments to manage its
exposure to oil and gas price volatility. The oil and gas reference prices upon
which the price hedging instruments are based reflect various market indices
that have a high degree of historical correlation with actual prices received by
the Company.





The
financial instruments are accounted for in accordance with Financial Accounting
Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, which established new accounting and reporting requirements for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 138 and 149, requires that all derivative instruments subject to the
requirements of the statement be measured at fair market value and recognized as
assets or liabilities in the balance sheet. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and the
resulting designation is generally established at the inception of a derivative.
For derivatives designated as cash flow hedges and meeting the effectiveness
guidelines of SFAS No. 133, changes in fair value, to the extent
effective,  are recognized in other comprehensive income until the
hedged item is recognized in earnings. Hedge effectiveness is measured at least
quarterly based on the relative changes in fair value between the derivative
contract and the hedged item over time. Any change in fair value of a derivative
resulting from ineffectiveness or an excluded component of the gain/loss is
recognized immediately in the statement of operations.





F-10
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








Recently Issued Accounting
Pronouncements:





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(ARB) No. 51.” SFAS No. 160 clarifies that a noncontrolling interest (previously
commonly referred to as a minority interest) in a subsidiary is an ownership interest
in the consolidated entity and should be reported as equity in the consolidated
financial statements. The presentation of the consolidated income statement has
been changed by SFAS No. 160, and consolidated net income attributable to both
the parent and the noncontrolling interest is now required to be reported
separately. Previously, net income attributable to the noncontrolling interest
was typically reported as an expense or other deduction in arriving at
consolidated net income and was often combined with other financial statement
amounts. In addition, the ownership interests in subsidiaries held by parties
other than the parent must be clearly identified, labeled, and presented in the
equity in the consolidated financial statements separately from the parent’s
equity. Subsequent changes in a parent’s ownership interest while the parent
retains its controlling financial interest in its subsidiary should be accounted
for consistently, and when a subsidiary is deconsolidated, any retained
noncontrolling equity interest in the former subsidiary must be initially
measured at fair value. Expanded disclosures, including a reconciliation of
equity balances of the parent and noncontrolling interest are also required.
SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 and earlier adoption is
prohibited. Prospective application is required. We do not believe that the
adoption of SFAS No. 160 will have a material impact on our financial position,
results of operations or cash flows.





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
No. 141(R) was issued in an effort to continue the movement toward the greater
use of fair values in financial reporting and increased transparency through
expanded disclosures. It changes how business acquisitions are accounted for and
will impact financial statements at the acquisition date and in subsequent
periods. Certain of these changes will introduce more volatility into earnings.
The acquirer must now record all assets and liabilities of the acquired business
at fair value, and related transaction and restructuring costs will be expensed
rather than the previous method of being capitalized as part of the acquisition.
SFAS No. 141(R) also impacts the annual goodwill impairment test associated with
acquisitions, including those that close before the effective date of SFAS No.
141(R). The definitions of a “business” and a “business combination” have been
expanded, resulting in more transactions qualifying as business combinations.
SFAS No. 141(R) is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 31, 2008 and earlier adoption is
prohibited. We cannot predict the impact that the adoption of SFAS No. 141(R)
will have on our financial position, results of operations or cash flows with
respect to any acquisitions completed after December 31, 2007.





In May
2007, the FASB issued FSP No. FIN 48-1, “Definition of Settlement in FASB
Interpretation No. 48,” which amends FIN 48 and provides guidance concerning how
an entity should determine whether a tax position is “effectively,” rather than
the previously required “ultimately,” settled for the purpose of recognizing
previously unrecognized tax benefits. In addition, FSP No. FIN 48-1 provides
guidance on determining whether a tax position has been effectively settled. The
guidance in FSP No. FIN 48-1 is effective upon the initial January 1, 2007
adoption of FIN 48. Companies that have not applied this guidance must
retroactively apply the provisions of this FSP to the date of the initial
adoption of FIN 48. We have adopted FSP No. FIN 48-1 and no retroactive
adjustments were necessary.





F-11
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








In April
2007, the FASB issued FSP No. FIN 39-1, “Amendment of FASB Interpretation No.
39,” to amend FIN 39, “Offsetting of Amounts Related to Certain Contracts.” The
terms “conditional contracts” and “exchange contracts” used in FIN 39 have been
replaced with the more general term “derivative contracts.” In addition, FSP No.
FIN 39-1 permits the offsetting of recognized fair values for the right to
reclaim cash collateral or the obligation to return cash collateral against fair
values of derivatives under certain circumstances, such as under master netting
arrangements. Additional disclosure is also required regarding a company’s
accounting policy with respect to offsetting fair value amounts. The guidance in
FSP No. FIN 39-1 is effective for fiscal years beginning after November 15,
2007, with early application allowed. The effects of initial adoption should be
recognized as a change in accounting principle through retrospective application
for all periods presented. We do not believe that the adoption of FSP No. FIN
39-1 will have a material impact on our financial position, results of
operations or cash flows.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115,” which permits companies to choose, at


specified
dates, to measure certain eligible financial instruments at fair value. The
objective of this Statement is to reduce volatility in preparer reporting that
may be caused as a result of measuring related financial assets and liabilities
differently and to expand the use of fair value measurements. The provisions of
the Statement apply only to entities that elect to use the fair value option and
to all entities with available-for-sale and trading securities. Additional
disclosures are also required for instruments for which the fair value option is
elected. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. No retrospective application is allowed, except for companies that choose
to adopt early. At the effective date, companies may elect the fair value option
for eligible items that exist at that date, and the effect of the first
remeasurement to fair value must be reported as a cumulative-effect adjustment
to the opening balance of retained earnings. The Company does not believe that
SFAS No. 159 will have an impact on our financial position or results of
operations.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a formal framework for measuring fair values of assets and
liabilities in financial statements that are already required by United States
generally accepted accounting principles (GAAP) to be measured at fair value.
SFAS No. 157 clarifies guidance in FASB Concepts Statement (CON) No. 7 which
discusses present value techniques in measuring fair value. Additional
disclosures are also required for transactions measured at fair value. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007. In November
2007, the FASB granted a one year deferral (to fiscal years beginning after
November 15, 2008) for non-financial assets and liabilities to comply with SFAS
No. 157. We do not believe that SFAS No. 157 will have a material impact on our
financial position or results of operations.





2.
            Financial
      Restatement–The restatements reflect the change in accounting method from
      proportionate consolidation of partnerships that the Company controls to
      the full consolidation method. The Company had historically accounted for
      its interests in twenty limited partnerships and trusts, which own
      interests in oil and gas properties using the proportionate consolidation
      under the guidance of EITF 00-1 as related to the extractive industries.
      Under the guidance of EITF 04-05 the interests in limited partnerships and
      trusts that we control should have been fully consolidated when EITF 04-05
      became effective.





The
restatements also reflect the correction of gain recognition related to the sale
of assets to a partnership in which the company acquired a twenty percent
non-controlling interest.  The Company recorded 100% of the gain
however under the guidance of EITF 01-2 the Company, since it acquired a 20%
interest in the partnership, should have recorded 80% of the gain.





The
effects of the restatement on reported amounts for the years ended December 31,
2007, 2006 and 2005 are presented below in the following tables:





F-12
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








RESTATED
CONSOLIDATED BALANCE SHEETS






As
      Reported
                      2007
                    
                    
                    Cumulative
      Effect of Prior Year
                      Adjustments
                    
                    
                    Current
      Year
                      Adjustments
                    
                    
                    Notes
                    
                    
                    As
      Restated
                      2007ASSETS:Current
      assets:Cash
      and cash equivalents
                    
                    $
                    21,313,000
                    
                    
                    $
                    4,403,000
                    
                    
                    $
                    (343,000
                    )
                    
                    
                    b
                    
                    
                    $
                    25,373,000Restricted
      cash and cash equivalents
                    
                    
                    3,633,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    3,633,000Accounts
      receivable, net
                    
                    
                    20,348,000
                    
                    
                    
                    694,000
                    
                    
                    
                    269,000
                    
                    
                    
                    b
                    
                    
                    
                    21,311,000Due
      from related parties
                    
                    
                    212,000
                    
                    
                    
                    (226,000
                    )
                    
                    
                    46,000
                    
                    
                    
                    b
                    
                    
                    
                    32,000Prepaid
      expenses
                    
                    
                    1,391,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    1,391,000Derivative
      contracts
                    
                    
                    1,332,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    1,332,000Inventory
      at cost
                    
                    
                    3,711,000
                    
                    
                    
                    (3,000
                    )
                    
                    
                    (3,000
                    )
                    
                    
                    b
                    
                    
                    
                    3,705,000Deferred
      income tax
                    
                    
                    1,582,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    1,582,000Total
      current assets
                    
                    
                    53,522,000
                    
                    
                    
                    4,868,000
                    
                    
                    
                    (31,000
                    )
                    
                    
                    
                    
                    
                    
                    58,359,000Property
      and equipment, at cost:Proved
      oil and gas properties at cost
                    
                    
                    368,828,000
                    
                    
                    
                    9,139,000
                    
                    
                    
                    941,000
                    
                    
                    
                    a,b
                    
                    
                    
                    378,908,000Unproved
      oil and gas properties at cost
                    
                    
                    4,458,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    4,458,000Less:
      Accumulated depletion and depreciation
                    
                    
                    140,115,000
                    
                    
                    
                    5,558,000
                    
                    
                    
                    159,000
                    
                    
                    
                    a,b
                    
                    
                    
                    145,514,000233,171,000
                    
                    
                    
                    3,581,000
                    
                    
                    
                    1,100,000
                    
                    
                    
                    
                    
                    
                    
                    237,852,000Field
      and office equipment
                    
                    
                    18,029,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    18,029,000Less:
      Accumulated depreciation
                    
                    
                    9,820,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    9,820,0008,209,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    8,209,000Total
      net property and equipment
                    
                    
                    241,380,000
                    
                    
                    
                    3,581,000
                    
                    
                    
                    1,100,000
                    
                    
                    
                    
                    
                    
                    
                    246,061,000Other
      assets
                    
                    
                    1,180,000
                    
                    
                    
                    67,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    b
                    
                    
                    
                    1,245,000Total
      assets
                    
                    $
                    296,082,000
                    
                    
                    $
                    8,516,000
                    
                    
                    $
                    1,067,000
                    
                    
                    
                    
                    
                    
                    $
                    305,665,000





F-13
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








RESTATED
CONSOLIDATED BALANCE SHEETS





As Reported 2007
                
                
                Cumulative
      Effective of Prior Year Adjustment
                
                
                Current
      Year Adjustment
                
                
                Notes
                
                
                As Restated 2007LIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                
                $
                34,950,000
                
                
                $
                --
                
                
                $
                --
                
                
                
                
                
                $
                34,950,000Accounts
      payable
                
                
                26,726,000
                
                
                
                (31,000
                )
                
                
                85,000
                
                
                
                b
                
                
                
                26,780,000Current
      portion of asset retirement and other long-term
obligations
                
                
                1,065,000
                
                
                
                31,000
                
                
                
                (31,000
                )
                
                
                b
                
                
                
                1,065,000Derivative
      liability short term
                
                
                4,340,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                4,340,000Accrued
      liabilities
                
                
                9,953,000
                
                
                
                68,000
                
                
                
                11,000
                
                
                
                b
                
                
                
                10,032,000Due
      to related parties
                
                
                1,563,000
                
                
                
                (312,000
                )
                
                
                (731,000
                )
                
                
                b
                
                
                
                520,000Total
      current liabilities
                
                
                78,597,000
                
                
                
                (244,000
                )
                
                
                (666,000
                )
                
                
                
                
                
                
                77,687,000Long-term
      bank debt
                
                
                120,050,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                120,050,000Asset
      retirement obligations
                
                
                15,538,000
                
                
                
                576,000
                
                
                
                822,000
                
                
                
                b
                
                
                
                16,936,000Derivative
      liability long term
                
                
                3,369,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                3,369,000Deferred
      income taxes
                
                
                26,930,000
                
                
                
                (1,093,000
                )
                
                
                185,000
                
                
                
                a,b
                
                
                
                26,022,000Total
      liabilities
                
                
                244,484,000
                
                
                
                (761,000
                )
                
                
                341,000
                
                
                
                
                
                
                
                244,064,000Minority
      interest
                
                
                1,313,000
                
                
                
                11,220,000
                
                
                
                396,000
                
                
                
                b
                
                
                
                12,929,000Stockholders’
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares; none
      issuedCommon
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2007 and 2006
                
                
                769,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                769,000Paid
      in capital
                
                
                11,024,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                11,024,000Retained
      earnings
                
                
                74,498,000
                
                
                
                (1,943,000
                )
                
                
                330,000
                
                
                
                a
                
                
                
                72,885,000Accumulated
      other comprehensive income (loss), net
                
                
                (3,618,000
                )
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                (3,618,000
                )82,673,000
                
                
                
                (1,943,000
                )
                
                
                330,000
                
                
                
                
                
                
                
                81,060,000Treasury
      stock, at cost 4,558,544 common shares in 2007 and 4,478,145 in
      2006
                
                
                (32,388,000
                )
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                (32,388,000
                )Total
      stockholders’ equity
                
                
                50,285,000
                
                
                
                (1,943,000
                )
                
                
                330,000
                
                
                
                
                
                
                
                48,672,000Total
      liabilities and stockholders’ equity
                
                $
                296,082,000
                
                
                $
                8,516,000
                
                
                $
                1,067,000
                
                
                
                
                
                
                $
                305,665,000




F-14
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








RESTATED
CONSOLIDATED STATEMENT of STOCKHOLDERS’ EQUITY








As
Reported:




AccumulatedAdditional
                                                
                                                
                                                
                                                
                                                
                                                OtherCommon
      Stock
                                                
                                                
                                                Paid
      In
                                                
                                                
                                                Retained
                                                
                                                
                                                comprehensiveShares
                                                
                                                
                                                Amount
                                                
                                                
                                                Capital
                                                
                                                
                                                Earnings
                                                
                                                
                                                Income
                                                
                                                
                                                Treasury Stock
                                                
                                                
                                                TotalBalance
      at December 31, 2004
                                                
                                                
                                                7,694,970
                                                
                                                
                                                $
                                                769,000
                                                
                                                
                                                $
                                                11,024,000
                                                
                                                
                                                $
                                                22,653,000
                                                
                                                
                                                $
                                                --
                                                
                                                
                                                $
                                                (16,209,000
                                                )
                                                
                                                $
                                                18,237,000Purchased
      164,410 shares of common stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (4,456,000
                                                )
                                                
                                                
                                                (4,456,000
                                                )Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                25,955,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                25,955,000Balance
      at December 31, 2005
                                                
                                                
                                                7,694,970
                                                
                                                
                                                $
                                                769,000
                                                
                                                
                                                $
                                                11,024,000
                                                
                                                
                                                $
                                                48,608,000
                                                
                                                
                                                $
                                                --
                                                
                                                
                                                $
                                                (20,665,000
                                                )
                                                
                                                $
                                                39,736,000Purchased
      110,990 shares of common stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (7,314,000
                                                )
                                                
                                                
                                                (7,314,000
                                                )Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                18,300,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                18,300,000Other
      comprehensive income, net of taxes
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,976,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                3,976,000Balance
      at December 31, 2006
                                                
                                                
                                                7,694,970
                                                
                                                
                                                $
                                                769,000
                                                
                                                
                                                $
                                                11,024,000
                                                
                                                
                                                $
                                                66,908,000
                                                
                                                
                                                $
                                                3,976,000
                                                
                                                
                                                $
                                                (27,979,000
                                                )
                                                
                                                $
                                                54,698,000Purchased
      80,399 shares of common stock
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (4,409,000
                                                )
                                                
                                                
                                                (4,409,000
                                                )Net
      income
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,590,000
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,590,000Other
      comprehensive income (loss), net of taxes
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (7,594,000
                                                )
                                                
                                                
                                                
                                                
                                                
                                                
                                                (7,594,000
                                                )Balance
      as of December 31, 2007
                                                
                                                
                                                7,694,970
                                                
                                                
                                                $
                                                769,000
                                                
                                                
                                                $
                                                11,024,000
                                                
                                                
                                                $
                                                74,498,000
                                                
                                                
                                                $
                                                (3,618,000
                                                )
                                                
                                                $
                                                (32,388,000
                                                )
                                                
                                                $
                                                50,285,000
 
 
 Restated:
 
 AccumulatedAdditional
                              
                              
                              
                              
                              
                              OtherCommon
      Stock
                              
                              
                              Paid
      In
                              
                              
                              Retained
                              
                              
                              comprehensiveShares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Earnings
                              
                              
                              Income
                              
                              
                              Treasury Stock
                              
                              
                              TotalBalance
      at December 31, 2004
                              
                              
                              7,694,970
                              
                              
                              $
                              769,000
                              
                              
                              $
                              11,024,000
                              
                              
                              $
                              22,653,000
                              
                              
                              $
                              --
                              
                              
                              $
                              (16,209,000
                              )
                              
                              $
                              18,237,000Purchased
      164,410 shares of common stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,456,000
                              )
                              
                              
                              (4,456,000
                              )Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              23,604,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              23,604,000Balance
      at December 31, 2005
                              
                              
                              7,694,970
                              
                              
                              $
                              769,000
                              
                              
                              $
                              11,024,000
                              
                              
                              $
                              46,257,000
                              
                              
                              $
                              --
                              
                              
                              $
                              (20,665,000
                              )
                              
                              $
                              37,385,000Purchased
      110,990 shares of common stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (7,314,000
                              )
                              
                              
                              (7,314,000
                              )Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              18,708,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              18,708,000Other
      comprehensive income, net of taxes
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,976,000
                              
                              
                              
                              
                              
                              
                              
                              3,976,000Balance
      at December 31, 2006
                              
                              
                              7,694,970
                              
                              
                              $
                              769,000
                              
                              
                              $
                              11,024,000
                              
                              
                              $
                              64,965,000
                              
                              
                              $
                              3,976,000
                              
                              
                              $
                              (27,979,000
                              )
                              
                              $
                              52,755,000Purchased
      80,399 shares of common stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (4,409,000
                              )
                              
                              
                              (4,409,000
                              )Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,920,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              7,920,000Other
      comprehensive income (loss), net of taxes
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (7,594,000
                              )
                              
                              
                              
                              
                              
                              
                              (7,594,000
                              )Balance
      as of December 31, 2007
                              
                              
                              7,694,970
                              
                              
                              $
                              769,000
                              
                              
                              $
                              11,024,000
                              
                              
                              $
                              72,885,000
                              
                              
                              $
                              (3,618,000
                              )
                              
                              $
                              (32,388,000
                              )
                              
                              $
                              48,672,000






F-15
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
STATEMENTS OF OPERATIONS





As
      Reported
                  
                  
                  Current
      year
                  
                  
                  
                  
                  
                  As
      Restated2007
                  
                  
                  Adjustments
                  
                  
                  Notes
                  
                  
                  2007Revenue:Oil
      and gas sales
                  
                  $
                  112,708,000
                  
                  
                  $
                  9,653,000
                  
                  
                  
                  b
                  
                  
                  $
                  122,361,000Field
      service income
                  
                  
                  24,302,000
                  
                  
                  
                  38,000
                  
                  
                  
                  b
                  
                  
                  
                  24,340,000Administrative
      overhead fees
                  
                  
                  9,041,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  9,041,000Loss
      on derivative instruments, net
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  --Other
      income
                  
                  
                  404,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  404,000146,455,000
                  
                  
                  
                  9,691,000
                  
                  
                  
                  
                  
                  
                  
                  156,146,000Costs
      and expenses:Lease
      operating expense
                  
                  
                  30,762,000
                  
                  
                  
                  4,079,000
                  
                  
                  
                  b
                  
                  
                  
                  34,841,000Field
      service expense
                  
                  
                  17,724,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  17,724,000Depreciation,
      depletion and amortization
                  
                  
                  64,488,000
                  
                  
                  
                  19,000
                  
                  
                  
                  a,b
                  
                  
                  
                  64,507,000General
      and administrative expense
                  
                  
                  11,844,000
                  
                  
                  
                  505,000
                  
                  
                  
                  b
                  
                  
                  
                  12,349,000Exploration
      costs
                  
                  
                  633,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  633,000125,451,000
                  
                  
                  
                  4,603,000
                  
                  
                  
                  
                  
                  
                  
                  130,054,000Add
      gain on sale and exchange of assets
                  
                  
                  598,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  598,000Income
      from operations
                  
                  
                  21,602,000
                  
                  
                  
                  5,088,000
                  
                  
                  
                  
                  
                  
                  
                  26,690,000Other
      income and expense:Less:
      Interest expense
                  
                  
                  11,062,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  11,062,000Add
      interest income
                  
                  
                  697,000
                  
                  
                  
                  155,000
                  
                  
                  
                  b
                  
                  
                  
                  852,000Less:
      Minority interest
                  
                  
                  --
                  
                  
                  
                  4,728,000
                  
                  
                  
                  b
                  
                  
                  
                  4,728,000Income
      before provision for income taxes
                  
                  
                  11,237,000
                  
                  
                  
                  515,000
                  
                  
                  
                  
                  
                  
                  
                  11,752,000Provision
      for income taxes
                  
                  
                  3,647,000
                  
                  
                  
                  185,000
                  
                  
                  
                  a
                  
                  
                  
                  3,832,000Net
      income
                  
                  $
                  7,590,000
                  
                  
                  $
                  330,000
                  
                  
                  
                  
                  
                  
                  $
                  7,920,000Basic
      net income per common share
                  
                  $
                  2.39
                  
                  
                  $
                  0.11
                  
                  
                  
                  
                  
                  
                  $
                  2.50Diluted
      net income per common share
                  
                  $
                  1.93
                  
                  
                  $
                  0.09
                  
                  
                  
                  
                  
                  
                  $
                  2.02





F-16
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
STATEMENTS of CASH FLOWS





for the
year ended December 31, 2007





As Reported 2007
                
                
                CurrentYear
      Adjustments
                
                
                Notes
                
                
                As Restated 2007Cash
      flows from operating activities:Net
      income
                
                $
                7,590,000
                
                
                $
                330,000
                
                
                
                a
                
                
                $
                7,920,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                
                
                64,488,000
                
                
                
                19,000
                
                
                
                a,b
                
                
                
                64,507,000Dry
      hole and abandonment costs
                
                
                343,000
                
                
                
                --
                
                
                
                
                
                
                
                343,000Gain
      on sale of properties
                
                
                (598,000
                )
                
                
                --
                
                
                
                
                
                
                
                (598,000
                )Non-cash
      incentive compensation expense
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                --Provision
      for deferred income taxes
                
                
                1,030,000
                
                
                
                185,000
                
                
                
                a
                
                
                
                1,215,000Minority
      interest in earnings of partnerships
                
                
                --
                
                
                
                4,728,000
                
                
                
                b
                
                
                
                4,728,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                13,168,000
                
                
                
                1,108,000
                
                
                
                b
                
                
                
                14,276,000(Increase)
      decrease in due from related parties
                
                
                443,000
                
                
                
                863,000
                
                
                
                b
                
                
                
                1,306,000(Increase)
      decrease in inventories
                
                
                331,000
                
                
                
                (6,000
                )
                
                
                b
                
                
                
                325,000(Increase)
      decrease in prepaid expenses and other assets
                
                
                (175,000
                )
                
                
                --
                
                
                
                
                
                
                
                (175,000
                )Increase
      (decrease) in accounts payable
                
                
                325,000
                
                
                
                (199,000
                )
                
                
                b
                
                
                
                126,000Increase
      (decrease) in accrued liabilities
                
                
                132,000
                
                
                
                (79,000
                )
                
                
                b
                
                
                
                53,000Increase
      (decrease) in due to related parties
                
                
                1,088,000
                
                
                
                --
                
                
                
                
                
                
                
                1,088,000Net
      cash provided by operating activities
                
                
                88,165,000
                
                
                
                6,949,000
                
                
                
                
                
                
                
                95,114,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                
                
                (106,601,000
                )
                
                
                (3,218,000
                )
                
                
                b
                
                
                
                (109,819,000
                )Proceeds
      from sale of properties and equipment
                
                
                598,000
                
                
                
                --
                
                
                
                
                
                
                
                598,000Net
      cash used in investing activities
                
                
                (106,003,000
                )
                
                
                (3,218,000
                )
                
                
                
                
                
                
                (109,221,000
                )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                
                
                (4,409,000
                )
                
                
                --
                
                
                
                
                
                
                
                (4,409,000
                )Increase
      in long-term bank debt and other long-term obligations
                
                
                105,867,000
                
                
                
                --
                
                
                
                
                
                
                
                105,867,000Repayment
      of long-term bank debt and other long-term obligations
                
                
                (86,960,000
                )
                
                
                --
                
                
                
                
                
                
                
                (86,960,000
                )Distribution
      to minority interest
                
                
                --
                
                
                
                (4,074,000
                )
                
                
                b
                
                
                
                (4,074,000
                )Net
      cash provided by (used in) financing activities
                
                
                14,498,000
                
                
                
                (4,074,000
                )
                
                
                
                
                
                
                10,424,000Net
      increase(decrease) in cash and cash equivalents
                
                
                (3,340,000
                )
                
                
                (343,000
                )
                
                
                
                
                
                
                (3,683,000
                )Cash
      and cash equivalents at the beginning of the period
                
                
                24,653,000
                
                
                
                4,403,000
                
                
                
                b
                
                
                
                29,056,000Cash
      and cash equivalents at the end of the period
                
                $
                21,313,000
                
                
                $
                4,060,000
                
                
                
                
                
                
                $
                25,373,000Supplemental
      disclosures:Income
      taxes paid during the year
                
                $
                1,643,000
                
                
                $
                --
                
                
                
                
                
                
                $
                1,643,000Net
      income tax refunds received during the year
                
                $
                2,623,000
                
                
                $
                --
                
                
                
                
                
                
                $
                2,623,000Interest
      paid during the year
                
                $
                11,062,000
                
                
                $
                --
                
                
                
                
                
                
                $
                11,062,000





F-17
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
BALANCE SHEETS





As
      Reported
                
                
                Cumulative
      Effect of Prior Year
                
                
                Current
      Year
                
                
                
                
                
                As
      Restated2006
                
                
                Adjustments
                
                
                Adjustments
                
                
                Notes
                
                
                2006ASSETS:Current
      assets:Cash
      and cash equivalents
                
                $
                24,653,000
                
                
                $
                3,654,000
                
                
                $
                749,000
                
                
                
                b
                
                
                $
                29,056,000Restricted
      cash and cash Equivalents
                
                
                2,528,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                2,528,000Accounts
      receivable, net
                
                
                32,970,000
                
                
                
                1,117,000
                
                
                
                (423,000
                )
                
                
                b
                
                
                
                33,664,000Due
      from related parties
                
                
                655,000
                
                
                
                (255,000
                )
                
                
                (29,000
                )
                
                
                b
                
                
                
                429,000Prepaid
      expenses
                
                
                1,269,000
                
                
                
                --
                
                
                
                
                
                
                
                
                
                
                
                1,269,000Derivative
      contracts
                
                
                6,085,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                6,085,000Inventory
      at cost
                
                
                3,521,000
                
                
                
                (6,000
                )
                
                
                3,000
                
                
                
                b
                
                
                
                3,518,000Deferred
      income tax
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                --Total
      current assets
                
                
                71,681,000
                
                
                
                4,510,000
                
                
                
                358,000
                
                
                
                
                
                
                
                76,549,000Property
      and equipment, at cost:Proved
      oil and gas properties at cost
                
                
                284,698,000
                
                
                
                9,564,000
                
                
                
                (425,000
                )
                
                
                a,b
                
                
                
                293,837,000Unproved
      oil and gas properties at cost
                
                
                5,047,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                5,047,000Less:
      Accumulated depletion and depreciation
                
                
                78,005,000
                
                
                
                (6,190,000
                )
                
                
                632,000
                
                
                
                a,b
                
                
                
                (83,563,000
                )211,740,000
                
                
                
                3,374,000
                
                
                
                207,000
                
                
                
                
                
                
                
                215,321,000Field
      and office equipment
                
                
                15,793,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                15,793,000Less:
      Accumulated depreciation
                
                
                8,351,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                8,351,0007,442,000
                
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                7,442,000Total
      net property and equipment
                
                
                219,182,000
                
                
                
                3,374,000
                
                
                
                207,000
                
                
                
                
                
                
                
                222,763,000Other
      assets
                
                
                729,000
                
                
                
                69,000
                
                
                
                (2,000
                )
                
                
                b
                
                
                
                796,000Total
      assets
                
                $
                291,592,000
                
                
                $
                7,953,000
                
                
                $
                563,000
                
                
                
                
                
                
                $
                300,108,000





F-18
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
BALANCE SHEETS





As Reported 2006
                    
                    
                    Cumulative
      Effective of Prior Year Adjustment
                    
                    
                    Current
      Year Adjustment
                    
                    
                    Notes
                    
                    
                    As Restated 2006LIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    $
                    --
                    
                    
                    
                    
                    
                    $
                    --Accounts
      payable
                    
                    
                    42,658,000
                    
                    
                    
                    (2,000
                    )
                    
                    
                    (29,000
                    )
                    
                    
                    b
                    
                    
                    
                    42,627,000Current
      portion of asset retirement and other long-term
obligations
                    
                    
                    314,000
                    
                    
                    
                    102,000
                    
                    
                    
                    (71,000
                    )
                    
                    
                    b
                    
                    
                    
                    345,000Derivative
      liability short term
                    
                    
                    1,961,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    1,961,000Accrued
      liabilities
                    
                    
                    22,030,000
                    
                    
                    
                    168,000
                    
                    
                    
                    (100,000
                    )
                    
                    
                    b
                    
                    
                    
                    22,098,000Due
      to related parties
                    
                    
                    477,000
                    
                    
                    
                    (779,000
                    )
                    
                    
                    467,000
                    
                    
                    
                    b
                    
                    
                    
                    165,000Total
      current liabilities
                    
                    
                    67,440,000
                    
                    
                    
                    (511,000
                    )
                    
                    
                    267,000
                    
                    
                    
                    
                    
                    
                    
                    67,196,000Long-term
      bank debt
                    
                    
                    136,460,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    136,460,000Asset
      retirement obligations
                    
                    
                    6,314,000
                    
                    
                    
                    464,000
                    
                    
                    
                    112,000
                    
                    
                    
                    b
                    
                    
                    
                    6,890,000Derivative
      liability long term
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    --Deferred
      income taxes
                    
                    
                    25,367,000
                    
                    
                    
                    (1,323,000
                    )
                    
                    
                    230,000
                    
                    
                    
                    a,b
                    
                    
                    
                    24,274,000Total
      liabilities
                    
                    
                    235,581,000
                    
                    
                    
                    (1,370,000
                    )
                    
                    
                    609,000
                    
                    
                    
                    
                    
                    
                    
                    234,820,000Minority
      interest
                    
                    
                    1,313,000
                    
                    
                    
                    11,674,000
                    
                    
                    
                    (454,000
                    )
                    
                    
                    b
                    
                    
                    
                    12,533,000Stockholders’
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares; none
      issuedCommon
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2007 and 2006
                    
                    
                    769,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    769,000Paid
      in capital
                    
                    
                    11,024,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    11,024,000Retained
      earnings
                    
                    
                    66,908,000
                    
                    
                    
                    (2,351,000
                    )
                    
                    
                    408,000
                    
                    
                    
                    a
                    
                    
                    
                    64,965,000Accumulated
      other comprehensive income (loss), net
                    
                    
                    3,976,000
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    3,976,00082,677,000
                    
                    
                    
                    (2,351,000
                    )
                    
                    
                    408,000
                    
                    
                    
                    
                    
                    
                    
                    80,734,000Treasury
      stock, at cost 4,558,544 common shares in 2007 and 4,478,145 in
      2006
                    
                    
                    (27,979,000
                    )
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (27,979,000
                    )Total
      stockholders’ equity
                    
                    
                    54,698,000
                    
                    
                    
                    (2,351,000
                    )
                    
                    
                    408,000
                    
                    
                    
                    
                    
                    
                    
                    52,755,000Total
      liabilities and stockholders’ equity
                    
                    $
                    291,592,000
                    
                    
                    $
                    7,953,000
                    
                    
                    $
                    563,000
                    
                    
                    
                    
                    
                    
                    $
                    300,108,000





F-19
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
STATEMENTS OF OPERATIONS





As
      Reported 2006
                
                
                Current
      year Adjustments
                
                
                Notes
                
                
                As
      Restated 2006Revenue:Oil
      and gas sales
                
                $
                61,924,000
                
                
                $
                9,726,000
                
                
                
                b
                
                
                $
                71,650,000Field
      service income
                
                
                20,319,000
                
                
                
                38,000
                
                
                
                b
                
                
                
                20,357,000Administrative
      overhead fees
                
                
                9,704,000
                
                
                
                --
                
                
                
                
                
                
                
                9,704,000Loss
      on derivative instruments, net
                
                
                --
                
                
                
                --
                
                
                
                
                
                
                
                --Other
      income
                
                
                112,000
                
                
                
                --
                
                
                
                
                
                
                
                112,00092,059,000
                
                
                
                9,764,000
                
                
                
                
                
                
                
                101,823,000Costs
      and expenses:Lease
      operating expense
                
                
                21,040,000
                
                
                
                4,297,000
                
                
                
                b
                
                
                
                25,337,000Field
      service expense
                
                
                15,796,000
                
                
                
                6,000
                
                
                
                b
                
                
                
                15,802,000Depreciation,
      depletion and amortization
                
                
                14,437,000
                
                
                
                (67,000
                )
                
                
                a,b
                
                
                
                14,370,000General
      and administrative expense
                
                
                12,400,000
                
                
                
                577,000
                
                
                
                b
                
                
                
                12,977,000Exploration
      costs
                
                
                1,162,000
                
                
                
                --
                
                
                
                
                
                
                
                1,162,00064,835,000
                
                
                
                4,813,000
                
                
                
                
                
                
                
                69,648,000Add
      gain on sale and exchange of assets
                
                
                3,017,000
                
                
                
                712,000
                
                
                
                
                
                
                
                3,729,000Income
      from operations
                
                
                30,241,000
                
                
                
                5,663,000
                
                
                
                
                
                
                
                35,904,000Other
      income and expense:Less:
      Interest expense
                
                
                2,091,000
                
                
                
                --
                
                
                
                
                
                
                
                2,091,000Add
      interest income
                
                
                360,000
                
                
                
                148,000
                
                
                
                b
                
                
                
                508,000Less:
      Minority interest
                
                
                --
                
                
                
                5,173,000
                
                
                
                b
                
                
                
                5,173,000Income
      before provision for income taxes
                
                
                28,510,000
                
                
                
                638,000
                
                
                
                
                
                
                
                29,148,000Provision
      for income taxes
                
                
                10,210,000
                
                
                
                230,000
                
                
                
                a
                
                
                
                10,440,000Net
      income
                
                $
                18,300,000
                
                
                $
                408,000
                
                
                
                
                
                
                $
                18,708,000Basic
      net income per common share
                
                $
                5.52
                
                
                $
                0.13
                
                
                
                
                
                
                $
                5.65Diluted
      net income per common share
                
                $
                4.50
                
                
                $
                0.10
                
                
                
                
                
                
                $
                4.60





F-20
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
STATEMENTS of CASH FLOWS





for the
year ended December 31, 2006





As Reported 2006
                  
                  
                  CurrentYear
      Adjustments
                  
                  
                  Notes
                  
                  
                  As Restated 2006Cash
      flows from operating activities:Net
      income
                  
                  $
                  18,300,000
                  
                  
                  $
                  408,000
                  
                  
                  
                  a
                  
                  
                  $
                  18,708,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                  
                  
                  14,437,000
                  
                  
                  
                  (67,000
                  )
                  
                  
                  a,b
                  
                  
                  
                  14,370,000Dry
      hole and abandonment costs
                  
                  
                  510,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  510,000Gain
      on sale of properties
                  
                  
                  (3,017,000
                  )
                  
                  
                  (712,000
                  )
                  
                  
                  b
                  
                  
                  
                  (3,729,000
                  )Non-cash
      incentive compensation expense
                  
                  
                  1,313,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  1,313,000Provision
      for deferred income taxes
                  
                  
                  11,557,000
                  
                  
                  
                  230,000
                  
                  
                  
                  a
                  
                  
                  
                  11,787,000Minority
      interest in earnings of partnerships
                  
                  
                  --
                  
                  
                  
                  5,173,000
                  
                  
                  
                  b
                  
                  
                  
                  5,173,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (16,411,000
                  )
                  
                  
                  931,000
                  
                  
                  
                  b
                  
                  
                  
                  (15,480,000
                  )(Increase)
      decrease in due from related parties
                  
                  
                  330,000
                  
                  
                  
                  154,000
                  
                  
                  
                  b
                  
                  
                  
                  484,000(Increase)
      decrease in inventories
                  
                  
                  (3,133,000
                  )
                  
                  
                  (3,000
                  )
                  
                  
                  b
                  
                  
                  
                  (3,136,000
                  )(Increase)
      decrease in prepaid expenses and other assets
                  
                  
                  6,382,000
                  
                  
                  
                  67,000
                  
                  
                  
                  b
                  
                  
                  
                  6,449,000Increase
      (decrease) in accounts payable
                  
                  
                  3,716,000
                  
                  
                  
                  (206,000
                  )
                  
                  
                  b
                  
                  
                  
                  3,510,000Increase
      (decrease) in accrued liabilities
                  
                  
                  (1,450,000
                  )
                  
                  
                  (68,000
                  )
                  
                  
                  b
                  
                  
                  
                  (1,518,000
                  )Increase
      (decrease) in due to related parties
                  
                  
                  (552,000
                  )
                  
                  
                  (68,000
                  )
                  
                  
                  b
                  
                  
                  
                  (620,000
                  )Net
      cash provided by operating activities
                  
                  
                  31,982,000
                  
                  
                  
                  5,839,000
                  
                  
                  
                  
                  
                  
                  
                  37,821,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                  
                  
                  (121,345,000
                  )
                  
                  
                  (1,359,000
                  )
                  
                  
                  b
                  
                  
                  
                  (122,704,000
                  )Proceeds
      from sale of properties and equipment
                  
                  
                  3,017,000
                  
                  
                  
                  712,000
                  
                  
                  
                  b
                  
                  
                  
                  3,729,000Net
      cash used in investing activities
                  
                  
                  (118,328,000
                  )
                  
                  
                  (647,000
                  )
                  
                  
                  
                  
                  
                  
                  (118,975,000
                  )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                  
                  
                  (7,314,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (7,314,000
                  )Increase
      in long-term bank debt and other long-term obligations
                  
                  
                  198,362,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  198,362,000Repayment
      of long-term bank debt and other long-term obligations
                  
                  
                  (91,168,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (91,168,000
                  )Distribution
      to minority interest
                  
                  
                  
                  
                  
                  
                  (4,443,000
                  )
                  
                  
                  b
                  
                  
                  
                  (4,443,000
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  99,880,000
                  
                  
                  
                  (4,443,000
                  )
                  
                  
                  
                  
                  
                  
                  95,437,000Net
      increase in cash and cash equivalents
                  
                  
                  13,534,000
                  
                  
                  
                  749,000
                  
                  
                  
                  
                  
                  
                  
                  14,283,000Cash
      and cash equivalents at the beginning of the period
                  
                  
                  11,119,000
                  
                  
                  
                  3,654,000
                  
                  
                  
                  b
                  
                  
                  
                  14,773,000Cash
      and cash equivalents at the end of the period
                  
                  $
                  24,653,000
                  
                  
                  $
                  4,403,000
                  
                  
                  
                  
                  
                  
                  $
                  29,056,000Supplemental
      disclosures:Income
      taxes paid during the year
                  
                  $
                  5,713,000
                  
                  
                  $
                  --
                  
                  
                  
                  
                  
                  
                  $
                  5,713,000Interest
      paid during the year
                  
                  $
                  2,091,000
                  
                  
                  $
                  --
                  
                  
                  
                  
                  
                  
                  $
                  2,091,000





F-21
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








CONSOLIDATED
STATEMENTS OF OPERATIONS





As
      Reported
                  2005
                
                
                Current
      year
                  adjustments
                
                
                Notes
                
                
                As
      Restated
                  2005Revenue:Oil
      and gas sales
                
                $
                53,988,000
                
                
                $
                11,332,000
                
                
                
                b
                
                
                $
                65,320,000Field
      service income
                
                
                15,182,000
                
                
                
                44,000
                
                
                
                b
                
                
                
                15,226,000Administrative
      overhead fees
                
                
                7,068,000
                
                
                
                --
                
                
                
                
                
                
                
                7,068,000Loss
      on derivative instruments, net
                
                
                (415,000
                )
                
                
                --
                
                
                
                
                
                
                
                (415,000
                )Other
      income
                
                
                25,000
                
                
                
                --
                
                
                
                
                
                
                
                25,00075,848,000
                
                
                
                11,376,000
                
                
                
                
                
                
                
                87,224,000Costs
      and expenses:Lease
      operating expense
                
                
                18,573,000
                
                
                
                4,668,000
                
                
                
                b
                
                
                
                23,241,000Field
      service expense
                
                
                12,791,000
                
                
                
                13,000
                
                
                
                b
                
                
                
                12,804,000Depreciation,
      depletion and amortization
                
                
                11,274,000
                
                
                
                510,000
                
                
                
                a,b
                
                
                
                11,784,000General
      and administrative expense
                
                
                10,493,000
                
                
                
                555,000
                
                
                
                b
                
                
                
                11,048,000Exploration
      costs
                
                
                664,000
                
                
                
                --
                
                
                
                
                
                
                
                664,00053,795,000
                
                
                
                5,746,000
                
                
                
                
                
                
                
                59,541,000Add
      gain on sale and exchange of assets
                
                
                20,334,000
                
                
                
                (3,746,000
                )
                
                
                a
                
                
                
                16,588,000Income
      from operations
                
                
                42,387,000
                
                
                
                1,884,000
                
                
                
                
                
                
                
                44,271,000Other
      income and expense:Less
      interest expense
                
                
                1,531,000
                
                
                
                --
                
                
                
                
                
                
                
                1,531,000Add
      interest income
                
                
                98,000
                
                
                
                55,000
                
                
                
                b
                
                
                
                153,000Less
      minority interest
                
                
                --
                
                
                
                5,613,000
                
                
                
                b
                
                
                
                5,613,000Income
      before provision for income taxes
                
                
                40,954,000
                
                
                
                (3,674,000
                )
                
                
                
                
                
                
                37,280,000Provision
      for income taxes
                
                
                14,999,000
                
                
                
                (1,323,000
                )
                
                
                a
                
                
                
                13,676,000Net
      income
                
                $
                25,955,000
                
                
                $
                (2,351,000
                )
                
                
                
                
                
                $
                23,604,000Basic
      net income per common share
                
                $
                7.64
                
                
                $
                (0.69
                )
                
                
                
                
                
                $
                6.95Diluted
      net income per  common share
                
                $
                6.27
                
                
                $
                (0.57
                )
                
                
                
                
                
                $
                5.70





F-22
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








RESTATED
CONSOLIDATED STATEMENTS of CASH FLOWS





for the
year ended December 31, 2005





As Reported 2005
                    
                    
                    CurrentYear
      Adjustments
                    
                    
                    Notes
                    
                    
                    As Restated 2005Cash
      flows from operating activities:Net
      income
                    
                    $
                    25,955,000
                    
                    
                    $
                    (2,351,000
                    )
                    
                    
                    a
                    
                    
                    $
                    23,604,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                    
                    
                    11,274,000
                    
                    
                    
                    510,000
                    
                    
                    
                    a,b
                    
                    
                    
                    11,784,000Dry
      hole and abandonment costs
                    
                    
                    262,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    262,000Gain
      on sale of properties
                    
                    
                    (20,334,000
                    )
                    
                    
                    3,746,000
                    
                    
                    
                    b
                    
                    
                    
                    (16,588,000
                    )Provision
      for deferred income taxes
                    
                    
                    6,230,000
                    
                    
                    
                    (1,323,000
                    )
                    
                    
                    a
                    
                    
                    
                    4,907,000Minority
      interest in earnings of partnerships
                    
                    
                    --
                    
                    
                    
                    5,613,000
                    
                    
                    
                    b
                    
                    
                    
                    5,613,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                    
                    
                    (7,803,000
                    )
                    
                    
                    1,397,000
                    
                    
                    
                    b
                    
                    
                    
                    (6,406,000
                    )(Increase)
      decrease in due from related parties
                    
                    
                    (985,000
                    )
                    
                    
                    778,000
                    
                    
                    
                    b
                    
                    
                    
                    (207,000
                    )(Increase)
      decrease in inventories
                    
                    
                    --
                    
                    
                    
                    (6,000
                    )
                    
                    
                    b
                    
                    
                    
                    (6,000
                    )(Increase)
      decrease in prepaid expenses and other assets
                    
                    
                    (7,320,000
                    )
                    
                    
                    69,000
                    
                    
                    
                    b
                    
                    
                    
                    (7,251,000
                    )Increase
      (decrease) in accounts payable
                    
                    
                    5,510,000
                    
                    
                    
                    (278,000
                    )
                    
                    
                    b
                    
                    
                    
                    5,232,000Increase
      (decrease) in accrued liabilities
                    
                    
                    5,385,000
                    
                    
                    
                    (168,000
                    )
                    
                    
                    b
                    
                    
                    
                    5,217,000Increase
      (decrease) in due to related parties
                    
                    
                    431,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    431,000Net
      cash provided by operating activities
                    
                    
                    18,605,000
                    
                    
                    
                    7,987,000
                    
                    
                    
                    
                    
                    
                    
                    26,592,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                    
                    
                    (54,440,000
                    )
                    
                    
                    403,000
                    
                    
                    
                    b
                    
                    
                    
                    (54,037,000
                    )Proceeds
      from sale of properties and equipment
                    
                    
                    46,796,000
                    
                    
                    
                    (3,746,000
                    )
                    
                    
                    b
                    
                    
                    
                    43,050,000Net
      cash used in investing activities
                    
                    
                    (7,644,000
                    )
                    
                    
                    (3,343,000
                    )
                    
                    
                    
                    
                    
                    
                    (10,987,000
                    )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                    
                    
                    (4,456,000
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (4,456,000
                    )Increase
      in long-term bank debt and other long-term obligations
                    
                    
                    65,570,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    65,570,000Repayment
      of long-term bank debt and other long-term obligations
                    
                    
                    (67,432000
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (67,432,000
                    )Distribution
      to minority interest
                    
                    
                    
                    
                    
                    
                    (3,456,000
                    )
                    
                    
                    b
                    
                    
                    
                    (3,456,000
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    (6,318,000
                    )
                    
                    
                    (3,456,000
                    )
                    
                    
                    
                    
                    
                    
                    (9,774,000
                    )Net
      increase in cash and cash equivalents
                    
                    
                    4,643,000
                    
                    
                    
                    1,188,000
                    
                    
                    
                    
                    
                    
                    
                    5,831,000Cash
      and cash equivalents at the beginning of the period
                    
                    
                    6,476,000
                    
                    
                    
                    2,466,000
                    
                    
                    
                    b
                    
                    
                    
                    8,942,000Cash
      and cash equivalents at the end of the period
                    
                    $
                    11,119,000
                    
                    
                    $
                    3,654,000
                    
                    
                    
                    
                    
                    
                    $
                    14,773,000Supplemental
      disclosures:Income
      taxes paid during the year
                    
                    $
                    5,076,000
                    
                    
                    $
                    --
                    
                    
                    
                    
                    
                    
                    $
                    5,076,000Interest
      paid during the year
                    
                    $
                    1,531,000
                    
                    
                    $
                    --
                    
                    
                    
                    
                    
                    
                    $
                    1,531,000





F-23
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








Explanatory
Notes to Restated Consolidated Statements of Operations, Balance Sheets and
Statements of Cash Flows





a)
            The
      correction of the recorded gain on sale of assets to a partnership in
      which the Company acquired a twenty percent non-controlling interest in
      the year ended December 31, 2005 resulted in a decrease of $3.7 million in
      gain on sale and a decrease in depletion and depreciation of $72,000 for
      the year ended December 31, 2005, and a corresponding decrease in proved
      oil and gas properties and accumulated depletion and depreciation as of
      December 31, 2005. This change in the basis of oil and gas properties
      resulted in a reduction of depletion and depreciation expense
      of  $638,000 and $515,000 in 2006 and 2007 respectively and
      corresponding reductions in accumulated depletion and depreciation. The
      change in gain and depletion and depreciation expense resulted in the
      noted change in deferred taxes for each
period.





b)
            The
      restatement of these items, net of amounts described in note a, results
      from the change from the proportionate consolidation method to the full
      consolidation method of accounting for the limited partnerships and trusts
      that we control.





3.
            Significant
      Acquisitions and
Dispositions





As more
fully described in Note 7, the Company is committed to offer to repurchase the
interests of the partners and trust unit holders in certain of the Partnerships.
The Company purchased such interests in an amount totaling $371,000 in 2007,
$526,000 in 2006.





In August
2005, the Company completed a transaction involving its interests in certain
offshore Gulf of Mexico properties effective April 1, 2005 (the “Partners
transaction”). Prime Offshore L.L.C. (Prime Offshore), formerly F-W Oil
Exploration L.L.C., a subsidiary of the Company, entered into a limited
partnership agreement (the “Partners Agreement”), wherein Prime Offshore is the
General Partner of FWOE Partners L.P. (“Partners”) formed for the acquisition,
development and operation of oil and gas properties and pipelines, equipment,
facilities and fixtures appurtenant thereto, in off-shore Gulf of Mexico (the
“Properties”). Prior to entering into the Partners Agreement, Prime Offshore had
distributed interests in the Properties to the minority shareholders of Prime
Offshore and the Company purchased all of the outstanding shares of such
minority shareholders for $250,000, resulting in the Company’s 100% ownership of
Prime Offshore.





Prime
Offshore contributed all of its interest in the Properties to Partners in
exchange for an initial 20% General Partner interest in Partners and a cash
distribution of $43.2 million. Partners purchased the interests previously
distributed to the former minority shareholders for $27.7 million. The entire
$70.9 million expended by Partners was funded by a cash contribution by the
Limited Partner. The cash distribution includes adjustments for estimated net
revenues from the effective date of April 1, 2005, estimated capital
expenditures and other typical closing adjustments.





To record
this transaction, the Company applied the guidance of EITF 86-29, Non monetary
transactions: Magnitude of Boot and the Exceptions to the Use of Fair
Value.  In this transaction, the boot was significant (in excess of
25% of the fair value of the exchange), therefore, the transaction was treated
as a monetary transaction with the assets recorded at fair value. The Company
recorded proceeds of $61.2 million consisting of cash of $43.2 million and the
fair market value of the General Partner interest of $18.0
million.  The fair market value of the General Partner interest was
determined by calculating 20% of the total agreed value of all properties
acquired by the Partners. The related properties had a book value of $42.5
million resulting in a total gain of $18.7 million, however in accordance with
EITF 01-2, since the Company acquired a 20% interest in Partners the Company
recognized a gain of $15 million, representing 80% of the total
gain.   The Company uses the proportionate consolidation method
of accounting for its interest in Partners under the Guidance of EITF 00-1 as
related to the extractive industries since the Company does not control
Partners.





F-24
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








In July
2005, the Company completed the sale of certain leasehold and exploration rights
in prospects generated in the Company’s onshore Texas 2-d Seismic Exploration
Program in exchange for a cash payment of $3.5 million.





4.
            Additional
      Balance Sheet Information(restated)





Accounts
receivable at December 31, 2007 and 2006, consisted of the
following:





December 31,2007
                  
                  
                  2006Joint
      interest billing
                  
                  $
                  3,192,000
                  
                  
                  $
                  13,054,000Trade
      receivables
                  
                  
                  2,352,000
                  
                  
                  
                  2,367,000Oil
      and gas sales
                  
                  
                  14,785,000
                  
                  
                  
                  9,458,000Income
      tax receivable
                  
                  
                  795,000
                  
                  
                  
                  3,023,000Other
                  
                  
                  415,000
                  
                  
                  
                  5,912,00021,539,000
                  
                  
                  
                  33,814,000Less:
      allowance for doubtful accounts
                  
                  
                  (228,000
                  )
                  
                  
                  (150,000
                  )Total
                  
                  $
                  21,311,000
                  
                  
                  $
                  33,664,000





Accounts
Payable at December 31, 2007 and 2006, consisted of the following:





December 31,2007
                  
                  
                  2006Trade
                  
                  $
                  12,364,000
                  
                  
                  $
                  34,324,000Royalty
      and other owners
                  
                  
                  11,209,000
                  
                  
                  
                  6,232,000Other
                  
                  
                  3,207,000
                  
                  
                  
                  2,071,000Total
                  
                  $
                  26,780,000
                  
                  
                  $
                  42,627,000








Accrued
Liabilities at December 31, 2007 and 2006, consisted of the
following:





December 31,2007
                  
                  
                  2006Compensation
      and related expenses
                  
                  $
                  1,687,000
                  
                  
                  $
                  1,584,000Property
      costs
                  
                  
                  4,551,000
                  
                  
                  
                  16,256,000Income
      tax
                  
                  
                  --
                  
                  
                  
                  270,000Other
                  
                  
                  3,794,000
                  
                  
                  
                  3,988,000$
                  10,032,000
                  
                  
                  $
                  22,098,000





5.
            Property
      and Equipment





Total
interest costs incurred during 2007 was $12,984,000. Of this amount, the Company
capitalized $1,922,000. Capitalized interest is included as part of the cost of
oil and gas properties. The capitalized rates are based upon the Company’s
weighted-average cost of borrowings used to finance the
expenditures.





F-25
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








6.
            Long-Term
      Bank Debt - Debt





The
Company currently has credit facilities totaling $360 million, consisting of a
$200 million credit facility through Guaranty Bank (the offshore facility) and a
$160 million credit facility through a syndicate of banks led by Guaranty Bank
(the onshore facility).  The credit facilities mature in 2008 and
2009. Availability under the credit facilities is based on the loan value
assigned to Prime's oil and gas properties.  At December 31, 2007, the
borrowing bases and outstanding balances were $89 million under the onshore
credit facility at a weighted average interest rate of  7.78%,
and  $66  million under the offshore credit facility at a
weighted average interest rate of 9.79%. Currently, the borrowing base and
outstanding balance  under the onshore credit facility is $96 million
and $80.6 million, respectively, and the borrowing base and outstanding balance
under the offshore credit facility is $57.4 million.





The
determination of the Borrowing Base is made by the lenders taking into
consideration the estimated value of Prime’s oil and gas properties in
accordance with the lenders’ customary practices for oil and gas loans. This
process involves reviewing Prime’s estimated proved reserves and their
valuation. The Borrowing Base is redetermined semi-annually, and the available
borrowing amount could be increased or decreased as a result of such
redeterminations. In addition, Prime and the lenders each have discretion at any
time to have the Borrowing Base redetermined. A revision to Prime’s reserves may
prompt such a request on the part of the lenders, which could possibly result in
a reduction in the Borrowing Base and availability under the credit facilities.
If outstanding borrowings under either of the credit facilities exceed the
applicable portion of the  Borrowing Base, Prime would be required to
repay the excess amount within a prescribed period. If we are unable to pay the
excess amount, it would cause an event of default.





The
credit facilities include terms and covenants that require the Company to
maintain, as defined, a minimum current ratio, tangible net worth, debt coverage
ratio and interest coverage ratio, and restrictions are placed on the payment of
dividends and the amount of treasury stock the Company may
purchase.





The
credit facilities are collateralized by substantially all of the Company’s
assets. The Company is required to mortgage, and grant a security interest in,
consolidated proved oil and gas properties. Prime also pledged the stock of
several subsidiaries to the lenders to secure the credit
facilities.





7.
            Commitments





Operating
Leases:





The
Company has several noncancelable operating leases, primarily for rental of
office space, that have a term of more than one year. The future minimum lease
payment for the operating leases are as follows.





Operating
      Leases2008
                  
                  $
                  605,0002009
                  
                  
                  350,0002010
                  
                  
                  71,0002011
                  
                  
                  5,000Thereafter
                  
                  
                  --Total
      minimum payments
                  
                  $
                  1,031,000





F-26
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








Asset Retirement
Obligation:





A
reconciliation of our liability for plugging and abandonment costs for the years
ended December 31, 2007 and 2006 is as follows:





2007 Restated
                  
                  
                  2006 RestatedAsset
      retirement obligation - beginning of period
                  
                  $
                  7,047,000
                  
                  
                  $
                  3,160,000Liabilities
      incurred
                  
                  
                  468,000
                  
                  
                  
                  3,033,000Liabilities
      settled
                  
                  
                  (367,000
                  )
                  
                  
                  (348,000
                  )Accretion
      expense
                  
                  
                  461,000
                  
                  
                  
                  149,000Revisions
      in estimated liabilities
                  
                  
                  9,752,000
                  
                  
                  
                  1,053,000Asset
      retirement obligation - end of period
                  
                  $
                  17,361,000
                  
                  
                  $
                  7,047,000





The
Company’s liability is determined using significant assumptions, including
current estimates of plugging and abandonment costs, annual inflation of these
costs, the productive life of wells and our risk-adjusted interest rate. Changes
in any of these assumptions can result in significant revisions to the estimated
asset retirement obligation. Revisions to the asset retirement obligation are
recorded with an offsetting change to producing properties, resulting in
prospective changes to depreciation, depletion and amortization expense and
accretion of discount. Because of the subjectivity of assumptions and the
relatively long life of most of our wells, the costs to ultimately retire our
wells may vary significantly from previous estimates.





8.
            Contingent
      Liabilities





The
Company, as managing general partner of the affiliated Partnerships, is
responsible for all Partnership activities, including the drilling of
development wells and the production and sale of oil and gas from productive
wells. The Company also provides the administration, accounting and tax
preparation work for the Partnerships, and is liable for all debts and
liabilities of the affiliated Partnerships, to the extent that the assets of a
given limited Partnership are not sufficient to satisfy its obligations. As of
December 31, 2007, the affiliated Partnerships have established cash reserves in
excess of their debts and liabilities and the Company believes these reserves
will be sufficient to satisfy Partnership obligations.





The
Company is subject to environmental laws and regulations. Management believes
that future expenses, before recoveries from third parties, if any, will not
have a material effect on the Company’s financial condition. This opinion is
based on expenses incurred to date for remediation and compliance with laws and
regulations, which have not been material to the Company’s results of
operations.





9.
            Stock
      Options and Other
Compensation





In May
1989, non-statutory stock options were granted by the Company to four key
executive officers for the purchase of shares of common stock. At December 31,
2007 and 2006, options on 767,500 shares were outstanding and exercisable at
prices ranging from $1.00 to $1.25.





In
January 2006, Prime Offshore L.L.C. (the LLC), a subsidiary of the Registrant,
entered into a Grant of Shares Agreement with two key employees of the LLC. The
grant of these shares constituted a reevaluation event under the Limited
Liability Company Agreement.  The Grant Agreement set forth the
carrying value of the assets of the LLC, representing the agreed to estimate of
the fair market value of the properties and other assets and liabilities of the
LLC, as of the date of the agreement.  Each employee was granted
430,280 shares of the LLC having a fair market value of $1.53 per share. There
are no requisite service periods or vesting periods relating to the grants,
therefore, the aggregate compensation cost of $1,313,000 was charged to expense
in the Consolidated Statement of Operations and reported as an adjustment to net
cash provided by operating activities on the Consolidated Statement of Cash
Flows.





F-27
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








10.
            Income
      Taxes (restated)





The
components of the provision for income taxes for the years ended December 31,
2007, 2006 and 2005 are as follows:




2007
                  
                  
                  2006
                  
                  
                  2005Federal:Current
                  
                  $
                  567,000
                  
                  
                  $
                  (1,814,000
                  )
                  
                  $
                  8,011,000Deferred
                  
                  
                  2,662,000
                  
                  
                  
                  11,638,000
                  
                  
                  
                  4,106,000State:Current
                  
                  
                  660,000
                  
                  
                  
                  467,000
                  
                  
                  
                  803,000Deferred
                  
                  
                  (57,000
                  )
                  
                  
                  149,000
                  
                  
                  
                  756,000Total
                  
                  $
                  3,832,000
                  
                  
                  $
                  10,440,000
                  
                  
                  $
                  13,676,000





The
components of net deferred tax assets and liabilities are as
follows:





December
      31,
                    2007
                  
                  
                  December
      31,
                    2006Current
      assets:Compensation
      allowance
                  
                  $
                  443,000
                  
                  
                  $
                  252,000Allowance
      for doubtful accounts
                  
                  
                  56,000
                  
                  
                  
                  56,000Unrealized
      loss on hedging transactions
                  
                  
                  1,083,000
                  
                  
                  
                  -Total
      current deferred income tax assets
                  
                  $
                  1,582,000
                  
                  
                  $
                  308,000Current
      liabilities:Unrealized
      gain on hedging transactions
                  
                  $
                  --
                  
                  
                  $
                  2,270,000Net
      current deferred tax liability (asset)
                  
                  $
                  (1,582,000
                  )
                  
                  $
                  1,962,000Noncurrent
      assets:Alternative
      minimum tax credits
                  
                  $
                  7,478,000
                  
                  
                  $
                  7,328,000Net
      operating loss carryfowards
                  
                  
                  2,526,000
                  
                  
                  
                  903,000Percentage
      depletion carryfowards
                  
                  
                  1,099,000
                  
                  
                  
                  351,000Unrealized
      gain on hedging transactions
                  
                  
                  953,000
                  
                  
                  
                  --Total
      noncurrent assets
                  
                  $
                  12,056,000
                  
                  
                  $
                  8,582,000Noncurrent
      liabilities:Basis
      differences relating to partnerships
                  
                  $
                  1,381,000
                  
                  
                  $
                  1,213,000Depletion
      and depreciation
                  
                  
                  36,697,000
                  
                  
                  
                  31,547,000Unrealized
      gain on hedging transactions
                  
                  
                  --
                  
                  
                  
                  96,000Total
      noncurrent liabilities
                  
                  $
                  38,078,000
                  
                  
                  $
                  32,856,000Net
      noncurrent deferred income tax liabilities
                  
                  $
                  26,022,000
                  
                  
                  $
                  24,274,000





F-28
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








The total
provision for income taxes for the years ended December 31, 2007, 2006 and 2005
varies from the federal statutory tax rate as a result of the
following:





December
      31,
                    2007
                  
                  
                  December
      31,
                    2006
                  
                  
                  December
      31,
                    2005Expected
      tax expense
                  
                  $
                  4,006,000
                  
                  
                  $
                  9,923,000
                  
                  
                  $
                  12,690,000State
      income tax, net of federal benefit
                  
                  
                  398,000
                  
                  
                  
                  411,000
                  
                  
                  
                  1,029,000Percentage
      depletion
                  
                  
                  (697,000
                  )
                  
                  
                  (352,000
                  )
                  
                  
                  (429,000
                  )Executive
      Compensation
                  
                  
                  125,000
                  
                  
                  
                  542,000
                  
                  
                  
                  467,000Other,
      Net
                  
                  
                  --
                  
                  
                  
                  (84,000
                  )
                  
                  
                  (81,000
                  )Tax
      expense
                  
                  $
                  3,832,000
                  
                  
                  $
                  10,440,000
                  
                  
                  $
                  13,676,000





Deferred
income taxes reflect the impact of temporary differences between the amount of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. Differences relating to oil and gas
properties owned through Prime Offshore are reflected under "Depletion and
Depreciation", while basis differences relating to the managed partnerships are
reflected under "Basis differences relating to managed
partnerships".





Due
primarily to the current deduction of intangible drilling costs, the Company
will have a federal net operating loss (NOL) in 2007 for regular tax purposes,
which will be carried forward. As intangible drilling costs are a preference
item for the alternative minimum tax (AMT), the Company will have a Federal Tax
Liability based on the AMT. The current deductibility of intangible drilling
costs is the primary reason for both the low current federal tax expense and the
increase in deferred tax liability.





The
Company is entitled to percentage depletion on certain of its wells, which is
calculated without reference to the basis of the property. To the extent that
such depletion exceeds a property’s basis, it creates a permanent difference,
which lowers the Company’s effective rate.





11.
            Segment
      Information and Major Customers
  (restated)





The
Company operates in one industry - oil and gas exploration, development,
operation and servicing. The Company’s oil and gas activities are entirely in
the United States.





The
Company sells its oil and gas production to a number of purchasers. Listed below
are the percent of the Company’s total oil and gas sales made to each of the
customers whose purchases represented more than 10% of the Company’s oil and gas
sales in the year 2007.





Oil
      Purchasers:
                      
                      
                      
                      
                      Gas
      Purchasers:Texon
      Distributing L.P.
                      
                      
                      30
                      %
                      
                      Unimark
      LLC
                      
                      
                      12
                      %Plains
      All American Inc.
                      
                      
                      54
                      %
                      
                      Cokinos
      Energy Corporation
                      
                      
                      57
                      %





Although
there are no long-term oil and gas purchasing agreements with these purchasers,
the Company believes that they will continue to purchase its oil and gas
products and, if not, could be replaced by other purchasers.





F-29
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








12.
            Derivative Instruments
      and Hedging Activity:





The
Company periodically enters into derivative commodity instruments to hedge its
exposure to price fluctuations on natural gas and crude oil
production.  At December 31, 2007, the Company had twelve cash flow
hedges open: two natural gas price swap arrangements and ten crude oil collar
arrangements. At December 31, 2007, $5.65 million ($3.62 million net of tax)
unrealized loss was recorded in Accumulated Other Comprehensive Income, along
with a $1.32 million and $723 thousand short-term and long-term derivative
receivable and a $4.34 million and $3.69 million short-term and long-term
derivative payable. The change in the fair value of derivatives designated as
hedges that is effective is initially recorded to Accumulated Other
Comprehensive Income.  The ineffective portion, if any, of the change
in the fair value of derivatives designated as hedges, and the change in fair
value of all other derivatives, is recorded currently in earnings as a component
of oil and gas sales.





As of
December 31, 2007, natural gas price swaps cover 4,635 Mmcf of production at a
weighted average price of $8.23 for 2008 and $9.75 for 2009. The oil price
collar covers 907 Mbbl of production at a floor price ranging from $60.00 to
$65.00, a ceiling price ranging from $77.40 to $86.50 and a third-tier call of
$100 on one collar arrangement.





Assuming
no change in commodity prices, after December 31, 2007, the Company would expect
to reclassify to the Statement of Operations, over the next 12 months, $1.92
million in after-tax loss associated with commodity hedges. This
reclassification represents the net short-term receivable and payables
associated with open positions currently not reflected in earnings atDecember 31, 2007related to anticipated
2008 production.





13.
            Related Party
      Transactions (restated)





The
Company, as managing general partner or managing trustee, makes an annual offer
to repurchase the interests of the partners and trust unit holders in certain of
the Partnerships or Trusts. The Company purchased such interests in an amount
totaling $371,000 during 2007 and $526,000 during 2006.




Treasury
stock purchases in 2007 and 2006 included shares acquired from related parties.
Purchases from related parties included a total of 31,700 shares purchased for a
total consideration of $1,743,500 in 2007 and 40,759 shares purchased for a
total consideration of $2,623,564 in 2006.




Receivables
from related parties consist of reimbursable general and administrative costs,
lease operating expenses and reimbursement for property development and related
costs.  These receivables are due from joint venture partners, which
may include members of the Company’s Board of Directors.




Payables
owed to related parties primarily represents receipts collected by the Company
as agent, for the joint venture partners, which may included members of the
Company’s Board of Directors,  for oil and gas sales net of
expenses.





14.
            Restricted
      Cash and Cash Equivalents





Restricted
cash and cash equivalents includes $3,633,000 and $2,528,000 at December 31,
2007 and 2006, respectively, of cash primarily pertaining to oil and gas revenue
payments. There were corresponding accounts payable recorded at December 31,
2007 and 2006 for these liabilities.





15.
            Salary
      Deferral Plan





The
Company maintains a salary deferral plan (the “Plan”) in accordance with
Internal Revenue Code Section 401(k), as amended. The Plan provides for
discretionary and matching contributions, which approximated $437,000 and
$366,000 in 2007 and 2006, respectively.





F-30
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued





_________________








16.
            Earnings
      per Share (restated)





Basic
earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial
statements:





Year ended December 31,
2007Net Income
                  
                  
                  Number
      of
                    Shares
                  
                  
                  Per
      share
                    AmountNet
      income per common share
                  
                  $
                  7,920,000
                  
                  
                  
                  3,174,032
                  
                  
                  $
                  2.50Effect
      of dilutive securities:Options
                  
                  
                  --
                  
                  
                  
                  752,868Diluted
      net income per common share
                  
                  $
                  7,920,000
                  
                  
                  
                  3,926,900
                  
                  
                  $
                  2.02





Year ended December 31,
2006Net Income
                  
                  
                  Number
      of
                    Shares
                  
                  
                  Per
      share
                    AmountNet
      income per common share
                  
                  $
                  18,708,000
                  
                  
                  
                  3,314,003
                  
                  
                  $
                  5.65Effect
      of dilutive securities:Options
                  
                  
                  --
                  
                  
                  
                  755,682Diluted
      net income per common share
                  
                  $
                  18,708,000
                  
                  
                  
                  4,069,685
                  
                  
                  $
                  4.60





Year ended December 31,
2005Net Income
                  
                  
                  Number
      of
                    Shares
                  
                  
                  Per
      share
                    AmountNet
      income per common share
                  
                  $
                  23,604,000
                  
                  
                  
                  3,397,820
                  
                  
                  $
                  6.95Effect
      of dilutive securities:Options
                  
                  
                  
                  
                  
                  
                  742,589Diluted
      net income per common share
                  
                  $
                  23,604,000
                  
                  
                  
                  4,140,409
                  
                  
                  $
                  5.70





17.
            Selected Quarterly
      Financial Information (Restated and
  Unaudited)





2007
                    
                    Fourth
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    First
                      QuarterRevenue
                    
                    $
                    42,856,000
                    
                    
                    $
                    44,278,000
                    
                    
                    $
                    38,519,000
                    
                    
                    $
                    30,493,000Operating
      income
                    
                    
                    5,556,000
                    
                    
                    
                    5,654,000
                    
                    
                    
                    8,067,000
                    
                    
                    
                    7,413,000Net
      income
                    
                    
                    955,000
                    
                    
                    
                    854,000
                    
                    
                    
                    2,794,000
                    
                    
                    
                    3,317,000Net
      income per  common share
                    
                    $
                    0.32
                    
                    
                    $
                    0.27
                    
                    
                    $
                    0.88
                    
                    
                    $
                    1.03Diluted
      net income per common share
                    
                    $
                    0.25
                    
                    
                    $
                    0.22
                    
                    
                    $
                    0.71
                    
                    
                    $
                    0.84








2006
                      
                      Fourth
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      First
                        QuarterRevenue
                      
                      $
                      22,768,000
                      
                      
                      $
                      27,543,000
                      
                      
                      $
                      26,023,000
                      
                      
                      $
                      25,489,000Operating
      income
                      
                      
                      5,665,000
                      
                      
                      
                      13,119,000
                      
                      
                      
                      8,717,000
                      
                      
                      
                      8,403,000Net
      income
                      
                      
                      2,494,000
                      
                      
                      
                      6,712,000
                      
                      
                      
                      5,421,000
                      
                      
                      
                      4,081,000Net
      income per common share
                      
                      $
                      0.71
                      
                      
                      $
                      2.06
                      
                      
                      $
                      1.65
                      
                      
                      $
                      1.23Diluted
      net income per common share
                      
                      $
                      0.59
                      
                      
                      $
                      1.67
                      
                      
                      $
                      1.34
                      
                      
                      $
                      1.00





F-31
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





SUPPLEMENTARY
INFORMATION


_________________





PRIMEENERGY
CORPORATION and SUBSIDIARIES





CAPITALIZED
COSTS RELATING to OIL and GAS PRODUCING ACTIVITIES





December
31, 2007, 2006 and 2005


_________________





(Unaudited)





2007
                  
                  
                  2006
                  
                  
                  2005Developed
      oil and gas properties
                  
                  $
                  378,908,000
                  
                  
                  $
                  293,837,000
                  
                  
                  $
                  134,812,000Undeveloped
      oil and gas properties
                  
                  
                  4,458,000
                  
                  
                  
                  5,047,000
                  
                  
                  
                  6,166,000383,366,000
                  
                  
                  
                  298,884,000
                  
                  
                  
                  140,978,000Accumulated
      depreciation, depletion and valuation allowance
                  
                  
                  145,514,000
                  
                  
                  
                  83,563,000
                  
                  
                  
                  71,424,000Net
      capitalized costs
                  
                  $
                  237,852,000
                  
                  
                  $
                  215,321,000
                  
                  
                  $
                  69,554,000








COSTS
INCURRED in OIL and GAS PROPERTY ACQUISITION,





EXPLORATION
and DEVELOPMENT ACTIVITIES





Years
ended December 31, 2007, 2006 and 2005


_________________





(Unaudited)





2007
                  
                  
                  2006
                  
                  
                  2005Acquisition
      of Properties Developed
                  
                  $
                  371,000
                  
                  
                  $
                  1,408,000
                  
                  
                  $
                  1,569,000Undeveloped
                  
                  $
                  184,000
                  
                  
                  $
                  5,047,000
                  
                  
                  $
                  6,166,000Exploration
      Costs
                  
                  $
                  633,000
                  
                  
                  $
                  17,429,000
                  
                  
                  $
                  664,000Development
      Costs
                  
                  $
                  86,574,000
                  
                  
                  $
                  136,968,000
                  
                  
                  $
                  45,622,000





See
accompanying notes to supplementary information.





F-32
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





STANDARDIZED
MEASURE of DISCOUNTED FUTURE


NET CASH
FLOWS RELATING to PROVED OIL and GAS RESERVES





Years
Ended December 31, 2007, 2006 and 2005


_________________







(Unaudited)







2007
                
                
                2006
                
                
                2005Future
      cash inflows
                
                $
                996,419,000
                
                
                $
                747,812,000
                
                
                $
                776,004,000Future
      production and development costs
                
                
                (487,001,000
                )
                
                
                (324,750,000
                )
                
                
                (328,619,000
                )Future
      income tax expenses
                
                
                (127,961,000
                )
                
                
                (103,889,000
                )
                
                
                (139,363,000
                )Future
      net cash flows
                
                
                381,457,000
                
                
                
                319,163,000
                
                
                
                308,022,00010%
      annual discount for estimated timing of cash flow
                
                
                (155,997,000
                )
                
                
                (102,975,000
                )
                
                
                (134,533,000
                )Standardized
      measure of discounted future net cash flows
                
                $
                225,460,000
                
                
                $
                216,188,000
                
                
                $
                173,489,000





See
accompanying notes to supplementary information.





F-33
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





STANDARDIZED
MEASURE of DISCOUNTED FUTURE


NET CASH
FLOWS and CHANGES THEREIN


RELATING
to PROVED OIL and GAS RESERVES





Years
Ended December 31, 2007, 2006 and 2005


_________________





(Unaudited)





The
following are the principal sources of change in the standardized measure of
discounted future net cash flows during 2007, 2006 and 2005:





For Year Ended December 31,
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Sales
      of oil and gas produced, net of production costs
                  
                  $
                  (83,990,000
                  )
                  
                  $
                  (43,941,000
                  )
                  
                  $
                  (37,527,000
                  )Net
      changes in prices and production costs
                  
                  
                  93,088,000
                  
                  
                  
                  (58,710,000
                  )
                  
                  
                  70,033,000Extensions,
      discoveries and improved recovery
                  
                  
                  10,554,000
                  
                  
                  
                  147,292,000
                  
                  
                  
                  64,175,000Revisions
      of previous quantity estimates
                  
                  
                  (16,462,000
                  )
                  
                  
                  (2,717,000
                  )
                  
                  
                  33,492,000Reserves
      purchased, net of development costs
                  
                  
                  (23,000
                  )
                  
                  
                  (386,000
                  )
                  
                  
                  (95,000
                  )Net
      change in development costs
                  
                  
                  (27,304,000
                  )
                  
                  
                  1,870,000
                  
                  
                  
                  7,914,000Reserves
      sold
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (64,246,000
                  )Accretion
      of discount
                  
                  
                  32,564,000
                  
                  
                  
                  12,284,000
                  
                  
                  
                  8,020,000Net
      change in income taxes
                  
                  
                  (1,979,000
                  )
                  
                  
                  (7,862,000
                  )
                  
                  
                  (28,441,000
                  )Changes
      in production rates (timing) and other
                  
                  
                  973,000
                  
                  
                  
                  (5,131,000
                  )
                  
                  
                  8,101,000Net
      change
                  
                  
                  7,421,000
                  
                  
                  
                  42,699,000
                  
                  
                  
                  61,426,000Standardized
      measure of discounted future net cash flow:Beginning
      of year
                  
                  
                  216,188,000
                  
                  
                  
                  173,489,000
                  
                  
                  
                  112,063,000End
      of year
                  
                  $
                  223,609,000
                  
                  
                  $
                  216,188,000
                  
                  
                  $
                  173,489,000





See
accompanying notes to supplementary information.





F-34
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





RESERVE
QUANTITY INFORMATION





Years
Ended December 31, 2007, 2006 and 2005


_________________





(Unaudited)





2007
                
                
                2006
                
                
                2005Oil
                  (bbls.)
                
                
                Gas
                  (Mcf)
                
                
                Oil
                  (bbls.)
                
                
                Gas
                  (Mcf)
                
                
                Oil
                  (bbls.)
                
                
                Gas
                  (Mcf)Proved
      developed and undeveloped reserves:Beginning
      of year
                
                
                5,205,000
                
                
                
                77,912,000
                
                
                
                4,711,000
                
                
                
                55,340,000
                
                
                
                2,981,000
                
                
                
                56,607,000Extensions,
      discoveries and improved recovery
                
                
                941,000
                
                
                
                2,343,000
                
                
                
                812,000
                
                
                
                31,394,000
                
                
                
                807,000
                
                
                
                11,087,000Revisions
      of previous estimates
                
                
                1,007,000
                
                
                
                (7,531,000
                )
                
                
                138,000
                
                
                
                (2,410,000
                )
                
                
                456,000
                
                
                
                5,989,000Purchases
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Reserves
      sold
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (89,000
                )
                
                
                (12,701,000
                )Production
                
                
                (561,000
                )
                
                
                (11,132,000
                )
                
                
                (456,000
                )
                
                
                (6,411,000
                )
                
                
                (443,000
                )
                
                
                (5,641,000
                )End
      of year
                
                
                6,592,000
                
                
                
                61,412,000
                
                
                
                5,205,000
                
                
                
                77,913,000
                
                
                
                4,712,000
                
                
                
                55,341,000Proved
      developed reserves
                
                
                5,640,000
                
                
                
                58,814,000
                
                
                
                4,986,000
                
                
                
                75,434,000
                
                
                
                4,529,000
                
                
                
                54,373,000





See
accompanying notes to supplementary information.





F-35
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





RESULTS
of OPERATIONS from OIL and GAS PRODUCING ACTIVITIES





Years
Ended December 31, 2007, 2006 and 2005


_________________





(Unaudited)





2007
                
                
                2006
                
                
                2005Revenue:Oil
      and gas sales
                
                $
                122,361,000
                
                
                $
                71,650,000
                
                
                $
                65,320,000Costs
      and expenses:Lease
      operating expense
                
                
                34,841,000
                
                
                
                25,337,000
                
                
                
                23,241,000Exploration
      costs
                
                
                633,000
                
                
                
                1,162,000
                
                
                
                664,000Depreciation
      andDepletion
                
                
                59,792,000
                
                
                
                12,704,000
                
                
                
                10,635,000Income
      tax expense
                
                
                7,569,000
                
                
                
                9,422,000
                
                
                
                8,281,000102,835,000
                
                
                
                48,625,000
                
                
                
                42,821,000Results
      of operations from producing activities (excluding corporate overhead and
      interest costs)
                
                $
                19,526,000
                
                
                $
                23,025,000
                
                
                $
                22,499,000





See
accompanying notes to supplementary information.





F-36
 Table of Contents





PRIMEENERGY
CORPORATION and SUBSIDIARIES





NOTES to
SUPPLEMENTARY INFORMATION


_________________





(Unaudited)





1.
            Presentation
      of Reserve Disclosure
Information





Reserve
disclosure information is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 69 (“SFAS 69”), “Disclosures
About Oil and Gas Producing Activities”.





2.
            Determination
      of Proved Reserves





The
estimates of the Company’s proved reserves were determined by an independent
petroleum engineer in accordance with the provisions of SFAS 69. The estimates
of proved reserves are inherently imprecise and are continually subject to
revision based on production history, results of additional exploration and
development and other factors. Estimated future net revenues were computed by
reserves, less estimated future development and production costs based on
current costs.





3.
            Results
      of Operations from Oil and Gas Producing
  Activities





The
results of operations from oil and gas producing activities were prepared in
accordance with the provisions of SFAS 69. General and administrative expenses,
interest costs and other unrelated costs are not deducted in computing results
of operations from oil and gas activities.





4.
            Standardized Measure
      of Discounted Future Net Cash Flows and Changes Therein Relating to Proved
      Oil and Gas Reserves





The
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves and the changes of standardized measure of discounted future
net cash flows relating to proved oil and gas reserves were prepared in
accordance with the provisions of SFAS 69.





Future
cash inflows are computed as described in Note 2 by applying current prices to
year-end quantities of proved reserves.





Future
production and development costs are computed estimating the expenditures to be
incurred in developing and producing the oil and gas reserves at year-end, based
on year-end costs and assuming continuation of existing economic
conditions.





Future
income tax expenses are calculated by applying the year-end U.S. tax rate to
future pre-tax cash inflows relating to proved oil and gas reserves, less the
tax basis of properties involved. Future income tax expenses give effect to
permanent differences and tax credits and allowances relating to the proved oil
and gas reserves.





Future
net cash flows are discounted at a rate of 10% annually (pursuant to SFAS 69) to
derive the standardized measure of discounted future net cash flows. This
calculation does not necessarily represent an estimate of fair market value or
the present value of such cash flows since future prices and costs can vary
substantially from year-end and the use of a 10% discount figure is
arbitrary.





F-37
 Table of Contents





5.
            Changes in
      Reserves





The 2007
extensions and discoveries reflect the successful drilling activity related to
our West Texas properties. The downward revisions during 2007 are related to our
offshore properties.





The 2006
extensions and discoveries included 31.4 BCF of natural gas primarily related to
additions from the Company’s offshore drilling activities and 812,000 barrels of
oil primarily related to the Company’s drilling activity
in West Texas.  The Company spent $17 million and $137 million on
exploration and development activities, respectively, during 2006.





The 2005
extensions and discoveries included 11 BCF of natural gas primarily related to
additions from the Company’s offshore drilling activities and 807,000 barrels of
oil primarily related to the Company’s drilling activity in West
Texas.  The Company spent $664,000 and $44 million on exploration and
development activities, respectively, during 2005.





The 2005
upward revision of previous estimates was caused by the increase in oil and gas
prices at the end of 2005.  The 2005 sales of reserves is primarily
related to the sale of reserves in the Partners transaction, discussed more
fully in footnote 2 – Significant Acquisitions and Dispositions.






F-38