<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-KSB
(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, 1996

                                       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 NO. 0-7406

                            PRIMEENERGY CORPORATION
              (Exact name of Small Business Issuer in its charter)


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

           ONE LANDMARK SQUARE
          STAMFORD, CONNECTICUT                                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 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-B 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-KSB or any
amendment to this Form 10-KSB.  [ ]

  The Registrant's revenues for its most recent fiscal year were $23,226,000.

         The aggregate market value of the voting stock of the Registrant held
by non-affiliates, computed on the average bid and asked prices of such stock
in the over-the-counter market, as of March 20, 1997, was $5,151,453.

         The number of shares outstanding of each class of the Registrant's
Common Stock as of March 20, 1997, was: Common Stock, $0.10 par value,
4,687,749.

                      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, 1997, are incorporated by reference in Part III hereof.

   Transitional Small Business Disclosure Format (check one)   YES      NO  X
                                                                   -----  -----

================================================================================
<PAGE>   2
                            PRIMEENERGY CORPORATION

                           FORM 10-KSB ANNUAL REPORT
                           FOR THE FISCAL YEAR ENDED
                               DECEMBER 31, 1996

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL

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

         The Company is engaged generally in the oil and gas business through
the acquisition, development, and production of crude oil and natural gas, and
to a lesser degree, exploratory drilling operations. The Company's properties
are located primarily in Oklahoma, Texas, West Virginia, New Mexico, Montana
and Wyoming. The Company's wholly-owned subsidiary, PrimeEnergy Management
Corporation ("PEMC"), acts as the managing general partner in 51 exploration
and development limited partnerships, joint ventures and asset and income fund
limited partnerships (the "Partnerships") of which six are publicly held, and
acts as the managing trustee of two asset and income business trusts (the
"Trusts"). The Company, through its wholly-owned subsidiaries, Prime Operating
Company and Eastern Oil Well Service Company, acts as operator and provides
well servicing support operations for many of the oil and gas wells in which
the Partnerships, the Trusts and the Company have an interest, primarily in
West  Virginia, Oklahoma and Texas. In addition, through a subsidiary,
Southwest Oilfield Construction Company, the Company provides site preparation
and construction services for oil and gas drilling and re-working operations,
both in connection with the Company's activities and providing contract
services for third parties. The Company is also active in the acquisition of
producing oil and gas properties through joint ventures with industry partners
and private investors.


THE PARTNERSHIPS AND TRUSTS

         A substantial portion of the assets and revenues of PEMC are derived
from the interests of PEMC in the oil and gas properties acquired by the
Partnerships and Trusts. As the managing general partner in each of the
Partnerships and managing trustee of the Trusts, PEMC receives approximately
from 5% to 12% of the net revenues of each Partnership and Trust as a carried
interest in the Partnership's and Trust's properties.

         Since 1975, PEMC has sponsored a total of 59 limited partnerships, 22
of which were offered publicly and 37 of which were offered in private
placements and two Delaware business trusts, both of which were offered
publicly. The aggregate number of limited partners in the Partnerships and
beneficial owners in the Trusts now administered by PEMC is about 10,200. The
Partnership and Trust interests were sold by broker-dealers which are members
of the National Association of Securities Dealers, Inc. through a managing
dealer. The total funds contributed to the Partnerships and Trusts was about
$157,550,000.

         A significant portion of the Company's business is now conducted
through the Partnerships and Trusts, either through its ownership of interests
in various properties derived through the Partnerships and Trusts, or as
operator of oil and gas wells in which the Partnerships and Trusts have
interests.

         PEMC, as managing general partner of the Partnerships, and managing
trustee of the Trusts, is responsible for all Partnership and Trust activities,
including the review and analysis of oil and gas properties for






<PAGE>   3
acquisition, 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.

JOINT VENTURES

         PEMC organizes and the Company participates in various joint ventures
formed for the purpose of acquiring and developing oil and gas assets. The
Company receives varying interests in the net revenues of each joint venture as
a carried interest in the joint venture properties.

         Since 1987, PEMC has organized approximately $15 million of joint
venture capital. The Company's participation in the joint ventures varies from
none to approximately 50%. The Company's carried interest ranges from 5 to 10%
depending on the proportion of funds contributed by outside investors.

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
about 1,762 oil and gas wells, 522 through the Houston office, 231 through the
Midland office, 494 through the Oklahoma City office and 515 through the
Charleston, West Virginia office. Substantially all of the wells operated by
the Company are wells in which the Company, the Partnerships, the Trusts or the
joint ventures have 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 which are competitive in the areas of operations and also is
reimbursed for expenses incurred in connection with well operations.

EXPLORATION AND ACQUISITION ACTIVITIES; OTHER MATTERS

         The Company's focus is on the acquisition and development of producing
oil and gas properties. The Company will continue to engage in exploratory
operations and will continue to engage in development drilling of properties in
which it has an interest. The Company attempts to assume the position of
operator in all acquisitions of producing properties.

RECENT ACTIVITIES

         Activities commenced in the Company's 1995 Development Program
continued and expanded in 1996. In January, the Company participated in the
initial 3D seismic survey, conducted along the Gulf Coast of Texas. During
1996, the Company drilled 6 wells on this survey. Five of these wells were
completed as gas wells. Throughout 1996, the Company and its partners expanded
their leasehold positions and conducted additional 3D seismic surveys. This
acreage is currently being evaluated for drilling potential. The Company's
joint venture partners have continued to participate in the expansion of this
development and exploration program. The Company's interest in these activities
ranges from 37 to 52 percent.

         During 1996, the 1995 Development Program also attempted recompletions
on five wells in the Tansil, Yates and Seven Rivers Formations of the Jalmat
Field of Lea County, New Mexico. Three of these wells successfully established
commercial production with an average initial production of 29 barrels of oil
per day. Two recompletion attempts were unsuccessful. The Company owns 46
percent of these properties.






                                       3
<PAGE>   4
         In January of 1996, the Company participated in the completion of a
well in the Caterina field of Dimmit County, Texas. The well was successfully
completed as a gas well in the Olmos Formation with an initial production rate
of 20 barrels of oil per day and 50 Mcf of gas per day. The Company owns 40
percent of this property.

         In February of 1996, the Company operated and participated in the
drilling of one well in the Indio field of Zapata County, Texas. The well was
successfully completed as a gas well in the Olmos Formation with an initial
flow rate of approximately 775 Mcf per day. The Company owns 22.5 percent of
this property.

         In February of 1996, the Company operated and participated in the
drilling of a well in Acadia Parish, Louisiana. This well was drilled to
11,330' and successfully completed as a gas well in the Upper Bathysiphon sand
with an initial production rate of 1,500 Mcf of natural gas per day and 40
barrels of condensate per day. During the initial 30 days of production the
well changed to an oil well producing approximately 200 barrels of oil per day
and 210 Mcf of natural gas per day. In December of 1996, the Company operated
and participated in the drilling of second well in Acadia Parish, Louisiana.
This well was drilled to 11,750' and successfully completed as a gas well in
the Marg 7 sand with an initial production rate of 1,936 Mcf of natural gas per
day and 6 barrels of condensate per day. The Company owns 13.56 percent of
these properties.

         In May of 1996, the Company completed the acquisition of various
interests in 145 gross (45 net) active wells previously owned by Saratoga
Resources, Inc., from Internationale Nederlanden (U.S.) Capital Corporation for
$7,180,000.  The Company serves as operator for 132 of these wells. These
properties are located primarily in eight counties along the Gulf Coast of
Texas. The Company began development activities in the third quarter of 1996,
with the deepening of three wells in the Segno field of Polk County, Texas. Two
were successfully completed as producers and one was plugged and abandoned. The
two producers had a combined initial production of approximately 23 barrels of
oil per day.  Additionally, in October 1996, the S.F. Wing No. 82 well was
drilled in the Segno field. The well was completed in the Yegua formation at an
initial production rate of approximately 90 Barrels of oil per day and 500 Mcf
of gas per day. The Company owns 20 percent of these wells. Also in October
1996, the Company participated in the drilling of the Fling Point No. 1H, which
was drilled as a horizontal well in the Brookeland field, of Sabine County,
Texas. This well was completed in the Austin Chalk Formation at an initial
production rate of approximately 2,500 Mcf of gas per day. The Company owns 8
percent of this well.

         During 1996, the Company participated in the drilling and completion
or workover operation of 23 gross (1.37 net) wells operated by other companies.
The Company spent approximately $420,000 on these projects. At year-end, 9
gross (0.48 net) wells were successfully completed as producers, six were
unsuccessful and 8 were either drilling or waiting on completion. The
successfully completed wells had an aggregate initial production rate of
approximately 430 gross (17 net) barrels of oil per day and 13,931 gross (1,022
net) Mcf of gas per day.

         In the first quarter of 1997, the Company has continued to expand its
3D seismic development and exploration program. The Company participated in a
survey over 17,680 acres that it has under option to lease. The Company has
leased acreage and plans to drill at least two wells as it continues to
evaluate the results of this survey. The Company has also continued to develop
acreage evaluated in the initial 3D survey and has drilled and completed a
successful gas well during March, 1997.

         Since January 1, 1997, and to the date of this Report, the Company has
not participated in the acquisition or disposition of any material producing
oil and gas properties. The Company is actively engaged in negotiations
regarding acquisition and disposition candidates. In some cases acquisitions
are in various stages of due diligence review.  Management cannot predict with
certainty which, if any, of these transactions will ultimately close.






                                       4
<PAGE>   5
         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 Colorado, Kansas, Oklahoma, Louisiana, Mississippi,
Montana, New Mexico, Texas, West Virginia and Wyoming. The Company does not own
any significant properties other than its leasehold, mineral and royalty
interests and related pipeline and gas gathering systems, and does not own any
drilling equipment or refinery or marketing facilities. All of the Company's
oil and gas properties and interests are located in the continental United
States.

         During the recent 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., "Description of Property," 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., "Description of Property --
Reserves" below.

REGULATION

         The Company's oil and gas operations are subject to a wide variety of
federal, state and local regulations.  Administrative agencies in such
jurisdictions may promulgate and enforce rules and regulations relating to,
among other things, drilling and spacing of oil and gas wells, production
rates, prevention of waste, conservation of natural gas and oil, pollution
control, and various other matters, all of which may affect the Company's
future operations and production of oil and gas. The Company's natural gas
production and prices received for natural gas are regulated by the Federal
Energy Regulatory Commission ("FERC"), the Natural Gas Act of 1938 ("NGA") and
the Natural Gas Policy Act of 1978 ("NGPA") and various state regulations. The
Company is also subject to state drilling and proration regulations affecting
its drilling operations and production rates.

         The FERC continues to regulate interstate natural gas pipeline
transportation rates and service conditions pursuant to the NGA and NGPA.
Federal regulation of interstate transporters affects the marketing of natural
gas produced by the Company as well as the revenues received by the Company for
sales of such natural gas. Since the latter part of 1985, through its Order
Nos. 436, 500 and 636 rulemakings, the FERC has endeavored to make natural gas
transportation accessible to gas buyers and sellers on an open and
non-discriminatory basis. The FERC's efforts have significantly altered the
marketing and pricing of natural gas. No prediction can be made as to what
additional legislation may be proposed, if any, affecting the competitive
status of a gas producer, restricting the prices at which a producer may sell
its gas, or the market demand for gas, nor can it be predicted which proposals,
including those presently under consideration, if enacted, might be effective.

         Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any
such proposals might become effective, or their effect, if any, on the
Company's operations. The natural gas industry historically has been very
heavily regulated; therefore, there is no assurance that the less stringent
regulatory approach recently pursued by the FERC and Congress will continue
indefinitely into the future.






                                       5
<PAGE>   6
         In the event the Company conducts operations on federal, state or
Indian oil and gas leases, such operations must comply with numerous regulatory
restrictions, including various nondiscrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other appropriate permits issued by the Bureau of Land Management ("BLM")
or Minerals Management Service ("MMS") or other appropriate federal or state
agencies.

         The Mineral Leasing Act of 1920 ("Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in a
corporation that holds a federal onshore oil and gas lease. If this restriction
is violated, the corporation's lease can be canceled in a proceeding instituted
by the United States Attorney General. Although the regulations of the BLM
(which administers the Mineral Act) provide for agency designations of
non-reciprocal countries, there are presently no such designations in effect.
The Company owns interests in federal onshore oil and gas leases. It is
possible that Common Stock could be acquired by citizens of foreign countries,
which at some time in the future might be determined to be non-reciprocal under
the Mineral Act.

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.

         The Company is entitled to credits for producing fuel from a
non-conventional source under Section 29 of the Internal Revenue Code,
primarily from certain of the Company's operations in West Virginia.

         The Company has been subject to the alternative minimum tax in each of
its taxable years since 1988. The primary factors which have caused it to be
subject to this tax in prior years were the former preference for percentage
depletion in excess of the cost basis of an oil and gas property, the former
adjusted current earnings adjustment for intangible drilling costs, and the
limitation of the Section 29 credits allowable to the excess of regular tax
over tentative alternative minimum tax. The Company is subject to alternative
minimum tax in the current year primarily due to the Company's Section 29
credits. The Company is allowed a credit carry forward for the amount of
alternative minimum tax paid. This credit, which may be used to offset regular
tax liability in years where it exceeds the tentative alternative minimum tax,
can be carried forward indefinitely.

         See Notes 1 and 10 to the consolidated financial statements included
in this Report for a discussion of accounting for income taxes and availability
of federal tax net operating loss carryforwards.

COMPETITION AND MARKETS

         The business of acquiring producing properties and nonproducing 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.






                                       6
<PAGE>   7
         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 pricing, 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.

         The Company 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. While the
Company is not dependent on any one purchaser of its production, oil and gas
revenue in 1996 generated from sales to Scurlock Permian Corp. ("Scurlock") and
Basis Petroleum, Inc. (formerly named "Philbro Energy Corp") each individually
represented about 12% of the Company's total revenue from oil and gas sales.
The sales to Basis Petroleum were not made under any contractual arrangements;
however, the Company believes that the purchaser will continue to purchase oil
and gas products and, if not, could be replaced by other purchasers. Sales to
Scurlock were made under an oil purchasing agreement at prices that are
adjusted semi-annually, based upon posted crude oil prices.

ENVIRONMENTAL MATTERS

         Over the past 20 years, the petroleum industry has been affected by a
wide variety of environmental issues.  Throughout the 1970's and 1980's federal
and state environmental regulations have been enacted that affect all aspects
of the Company's operations. These regulations have primarily focused on
correcting existing environmental concerns and implementing preventive controls
to reduce future pollution.

         The Company's activities are subject to existing federal, state and
local laws and regulations governing environmental quality and pollution
control. It is anticipated that, absent the occurrence of an extraordinary
event, compliance with existing federal, state and local laws, rules and
regulations regulating the release of materials in the environment or otherwise
relating to the protection of the environment will not have a material effect
upon the operations, capital expenditures, earnings or the competitive position
of the Company. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from the
Company's operations or ownership of its property could have on its activities.

         Activities of the Company with respect to natural gas facilities,
including the operation and construction of pipelines, plants and other
facilities for transporting, processing, treating or storing natural gas and
other products, are subject to stringent environmental regulation by state and
federal authorities including the Environmental Protection Agency ("EPA"). Such
regulation can increase the cost of planning, designing, installing and
operating such facilities. In most instances, the regulatory requirements
relate to water and air pollution control measures. Although the Company
believes that compliance with environmental regulations will not have a
material adverse effect on it, risks of substantial costs and liabilities are
inherent in natural gas facility operations, and there can be no assurance that
significant costs and liabilities will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons resulting from
operation of natural gas facilities, would result in substantial costs and
liabilities to the Company.

         The Company currently owns or leases, and has in the past owned or
leased, numerous properties that have been used for production of oil and gas
for many years.  Although the Company has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned
or leased by the Company.  In addition, many of these properties have been
operated by third parties over whom the Company had no control as to such
entities' treatment of hydrocarbons or other wastes and the manner in which
such substances may have been disposed of or released.  State and federal laws
applicable to oil and gas wastes and properties have gradually become more
strict.  Under these new laws, the Company could be required to remove or
remediate previously disposed wastes






                                       7
<PAGE>   8
(including wastes disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination) or to perform
remedial plugging operations to prevent future contamination.

         The Company may generate wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act and comparable
state statutes.  The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes.  Furthermore, certain wastes generated by the Company's
oil and gas operations that are currently exempt from treatment as "hazardous
wastes" may in the future be designated as "hazardous wastes," and therefore be
subject to more rigorous and costly operating and disposal requirements.

         In addition, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes," which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up requirements.  If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
Initiatives to further regulate the disposal of oil and gas wastes are also
pending in certain states, and these various initiatives could have a similar
impact on the Company.

         The Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, imposes joint and
several liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current
owner and operator of a site and persons that disposed of or arranged for the
disposal of the hazardous substances found at a site. CERCLA also authorizes
the EPA and, in some cases, third parties to take actions in response to
threats to the public health or the environment and to seek to recover from the
responsible classes of persons the costs of such action. In the course of its
operations, the Company may have generated and may generate wastes that fall
within CERCLA's definition of "hazardous substances." The Company may also be
an owner of sites on which "hazardous substances" have been released by
previous owners or operators. The Company may be responsible under CERCLA for
all or part of the costs to clean up sites at which such wastes have been
released. Neither the Company nor, to its knowledge, its predecessors has been
named a potentially responsible person under CERCLA nor does the Company know
of any prior owners or operators of its properties that are named as
potentially responsible parties related to their ownership or operation of such
property.

         The Company has a proactive environmental policy that management feels
benefits the Company through increased operating profits, improved landowner
relations and an overall enhanced Company image. To this end, the Company has
also adopted a stringent environmental evaluation prior to purchasing a
property. This pre-acquisition assessment, usually referred to as an
Environmental Site Assessment, typically consists of a historical review of the
property combined with a site inspection and limited testing, when necessary.
The objective of this pre-acquisition assessment is to document conditions at
the time of acquisition and to assign liability to the seller for past
operations.

EMPLOYEES

         At March 20, 1997, the Company had 155 full-time and 14 part-time
employees, 28 of whom were employed by the Company at its principal offices in
Stamford, Connecticut, 30 in Houston, Texas, at the offices of Prime Operating
Company and Eastern Oil Well Service Company, and 111 employees who were
primarily involved in the district operations of the Company in Houston and
Midland, Texas, Oklahoma City, Oklahoma and Charleston, West Virginia.






                                       8
<PAGE>   9
ITEM 2. DESCRIPTION OF PROPERTY.

         The Company's executive offices and those of PEMC, are located at One
Landmark Square, Stamford, Connecticut, in leased premises of about 11,500
square feet. The executive offices of Prime Operating Company and Eastern Oil
Well Service Company are located in leased premises in Houston, Texas, and the
offices of Southwest Oilfield Construction Company are in Oklahoma City,
Oklahoma.

         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 Yukon, Oklahoma, and
Arnoldsburg, West Virginia, all in leased space. The Company has no other
facilities other than its leased offices, and other than its oil and gas
properties and related equipment, the Company owns no physical properties.

         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 the
Partnerships, Trusts and joint ventures.

OIL AND GAS DRILLING ACTIVITIES

         The following table sets forth the exploratory and development
drilling experience with respect to wells in which the Company participated
during the five years ended December 31, 1996.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                            ----------------------
                                   1996             1995               1994              1993            1992
                                   ----             ----               ----              ----            ----
                               GROSS    NET    GROSS     NET      GROSS      NET    GROSS     NET     GROSS    NET
                               -----    ---    -----     ---      -----      ---    -----     ---     -----    ---
<S>                <C>          <C>   <C>       <C>     <C>         <C>     <C>      <C>     <C>       <C>     <C>
Exploratory:
 . . . . . . . . .  Oil          --       --     --         --       --        --      1       .009     --       --
 . . . . . . . . .  Gas          --       --     --         --       --        --      3       .375     --       --
 . . . . . . . . .  Dry           1        1     --         --       --        --      2       .150      1       .178
Development:
 . . . . . . . . .  Oil           3     .740      8      1.046        4      .346      3       .600      6       .762
 . . . . . . . . .  Gas          17    1.292      3       .235        2      .121     13       .257     --       --
 . . . . . . . . .  Dry           1     .371      2       .350        4      .215      1       .090     --       --
Total:
 . . . . . . . . .  Oil           3     .740      8      1.046        4      .346      4       .609      6       .762
 . . . . . . . . .  Gas          17    1.292      3       .235        2      .121     16       .632     --       --
 . . . . . . . . .  Dry           2    1.371      2       .350        4      .215      3       .240      1       .178
                                --    -----     --      -----      ---   -  ----     --      -----     --       ----
                                22    3.403     13      1.631       10      .682     23      1.481      7        .94
                                ==    =====     ==      =====      ===   =  ====     ==      =====     ==       ====
</TABLE>

OIL AND GAS PRODUCTION

         As of December 31, 1996, 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).

<TABLE>
<CAPTION>
                                                                     GROSS          NET
                                                                     -----          ---
       <S>                                                           <C>          <C>
       Producing wells (2):
          Oil Wells . . . . . . . . . . . . . . . . . . .              1,486      180.20
          Gas Wells . . . . . . . . . . . . . . . . . . .              1,328      162.19
       Producing Acres  . . . . . . . . . . . . . . . . .            234,197      40,262
</TABLE>

----------




                                       9
<PAGE>   10
(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 acre 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.

(2)      Includes the Company's interest in 64 gross multiple completion wells.

         The following table shows the Company's net production of crude oil
and natural gas for each of the five years ended December 31, 1996. "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.

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                            -----------------------
                                        1996           1995            1994             1993           1992
                                        ----           ----            ----             ----           ----
  <S>                                <C>             <C>             <C>             <C>            <C>
  Oil (barrels)   . . . . . .          249,000         155,000         143,000         149,000        180,000
  Gas (Mcf)   . . . . . . . .        2,888,000       1,952,000       1,408,000       1,332,000      1,689,000
</TABLE>

         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 five years ended December 31, 1996.

<TABLE>
<CAPTION>
                                                    1996         1995          1994         1993       1992
                                                    ----         ----          ----         ----       ----
<S>                                            <C>                <C>           <C>          <C>        <C>
Average sales price
  per barrel  . . . . . . . . . . . . . . . .  $     21.11        16.53         15.22        16.30      18.30
Average sales price
  per Mcf   . . . . . . . . . . . . . . . . .  $      2.36         1.85          2.36         2.51       2.64
Average production
  costs per net equivalent
  barrel (1)  . . . . . . . . . . . . . . . .  $      8.09         8.92         10.14        10.70       7.93
</TABLE>

----------

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






                                       10
<PAGE>   11
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, 1996. "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.

<TABLE>
<CAPTION>
                                      LEASEHOLD                   MINERAL                     ROYALTY
                                      INTERESTS                  INTERESTS                   INTERESTS
                                      ---------                  ---------                   ---------
                                GROSS           NET         GROSS          NET         GROSS          NET
      STATE                     ACRES          ACRES        ACRES         ACRES        ACRES         ACRES
      -----                     -----          -----        -----         -----        -----         -----
<S>                              <C>            <C>         <C>              <C>            <C>          <C>
Colorado  . . . . . . . . .      10,345           935          799            23             --          --
Kansas  . . . . . . . . . .         323            16           --            --             --          --
Louisiana . . . . . . . . .         266            16           --            --             --          --
Montana . . . . . . . . . .          --            --       13,984            59            786           5
Nebraska  . . . . . . . . .          --            --        2,553           331             --          --
Oklahoma  . . . . . . . . .          --            --          320             1             --          --
Texas . . . . . . . . . . .      17,888         7,736          640             3             --          --
Wyoming . . . . . . . . . .       1,000           125        5,043            35            140          35
                                 ------         -----       ------           ---            ---          --
TOTAL . . . . . . . . . . .      29,822         8,828       23,339           452            928          40
                                 ======         =====       ======           ===            ===          ==
</TABLE>


RESERVES

         The Company's interests in proved developed and undeveloped oil and
gas properties have been evaluated by Ryder Scott Company for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996. 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):

<TABLE>
<CAPTION>
                                             RESERVE CATEGORY
                                             ----------------
                               PROVED DEVELOPED            PROVED UNDEVELOPED                    TOTAL
                               ----------------            ------------------                    -----
 AS OF                       OIL             GAS         OIL            GAS             OIL             GAS
 12-31                     (BBLS)           (MCF)       (BBLS)         (MCF)           (BBLS)          (MCF)
 -----                     ------           -----       ------         -----           ------          -----
<S>                      <C>             <C>            <C>            <C>           <C>            <C>
1992  . . . . . .          863,000        7,934,000     72,000         821,000         935,000        8,755,000
1993  . . . . . .          512,000        8,351,000     76,000         922,000         588,000        9,273,000
1994  . . . . . .          799,000        9,675,000      2,000         129,000         801,000        9,804,000
1995  . . . . . .          905,000       13,549,000         --          52,000         905,000       13,601,000
1996  . . . . . .        1,453,000       19,036,000     13,000          29,000       1,466,000       19,065,000
</TABLE>

         The estimated future net revenue (using current prices and costs as of
those dates, exclusive of income taxes) and the present value of future net
revenue (at a 10% discount for estimated timing of cash flow) for the






                                       11
<PAGE>   12
Company's proved developed and proved undeveloped oil and gas reserves at the
end of each of the five years ended December 31, 1996, are summarized as
follows (figures rounded):

<TABLE>
<CAPTION>
                          PROVED DEVELOPED                  PROVED UNDEVELOPED                   TOTAL
                          ----------------                  ------------------                   -----
                                       PRESENT                        PRESENT                      PRESENT
                                       VALUE OF                      VALUE OF                     VALUE OF
                      FUTURE           FUTURE          FUTURE         FUTURE         FUTURE        FUTURE
 AS OF                  NET              NET            NET             NET            NET           NET
 12-31                REVENUE          REVENUE        REVENUE         REVENUE        REVENUE       REVENUE
 -----                -------          -------        -------         -------        -------       -------
<S>            <C>                    <C>             <C>             <C>           <C>             <C>
1992  . . .    $    12,219,000         7,727,000      1,503,000       999,000       13,722,000        8,726,000
1993  . . .    $    11,307,000         6,576,000        460,000       221,000       11,767,000        6,797,000
1994  . . .    $    10,396,000         6,839,000        156,000        75,000       10,552,000        6,914,000
1995  . . .    $    15,727,000         9,530,000         39,000        18,000       15,766,000        9,548,000
1996  . . .    $    51,077,000        35,025,000        273,000       167,000       51,350,000       35,192,000
</TABLE>

         "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.

         Since January 1, 1996, 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.

ITEM 3. LEGAL PROCEEDINGS.

         The Company is not a party to, nor is any of its property the subject
of, any legal proceedings, actual or threatened involving any claim for damages
which exceed 10 percent of the Company's current assets.

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, 1996, to a vote of the Company's security-holders through
the solicitation of proxies or otherwise.






                                       12
<PAGE>   13
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         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, 1996, were as follows:

<TABLE>
<CAPTION>
      1995                        HIGH        LOW                1996                         HIGH       LOW
      ----                        ----        ---                ----                         ----       ---
<S>                              <C>        <C>           <C>                                 <C>     <C>
First Quarter . . . . . . .      $  2.19    $  2.19       First Quarter   . . . . . . . .     $ 2.44   $ 2.38
Second Quarter  . . . . . .         2.19       2.19       Second Quarter  . . . . . . . .       4.00     2.44
Third Quarter . . . . . . .         2.50       2.19       Third Quarter   . . . . . . . .       4.00     3.25
Fourth Quarter  . . . . . .         2.38       2.38       Fourth Quarter  . . . . . . . .       4.75     3.88
</TABLE>

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

         The approximate number of record holders of the Company's Common Stock
as of March 20, 1997, was 1,266.

         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.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

         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. PEMC is the managing general
partner or managing trustee in several Limited Partnerships and Trusts
(collectively, the "Partnerships").

LIQUIDITY AND CAPITAL RESOURCES

         The Company feels that it has the ability to generate sufficient
amounts of cash to meet long-term liquidity needs, as well as debt service. The
Company expects to generate increased cash flows by increasing its reserve base
through continued acquisition and development. By increasing its reserve base,
the Company's borrowing ability is increased due to additional properties
available as collateral. Capital expenditures during 1996 were financed by
borrowings and internally generated funds coupled with cash balances available
at the prior year-end.

         On April 26, 1995, the Company entered into a revised credit agreement
with Bank One, Texas, NA providing for a $12.5 million revolving line of credit
on a $50 million master promissory note. This new agreement introduced Den
Norske Bank, AS as a 25% syndication partner in the line. The agreement also
provides for a lower floating rate compared to previous agreements as well as
the ability to borrow based upon the London Inter-Bank Offered (LIBO) Rate. The
borrowing base will be revised every six months by the banks.

         As of December 31, 1996, the borrowing base under the agreement was
$19,250,000 and the Company had $1,850,000 available under this line of credit.
During 1996, the interest rate on this line of credit was 1/2% over the bank's
base rate, as defined, monthly, or 2 3/4 % over the published LIBO rate,
payable at the end of the applicable interest period. Effective February 6,
1997, the agreement was amended lowering the interest rate to the bank's base
rate, as defined, monthly, or 2 1/4% over the published LIBO rate. The line of
credit was increased to $21,000,000, reflecting the increase in the Company's
reserve and operating base due to the purchase






                                       13
<PAGE>   14
and development of the Saratoga properties and the success of the 3D seismic
development and exploration program.

         Most of the Company's oil and gas properties as well as certain
receivables and equipment are pledged as security under the agreement. The
Company is required to maintain, as defined, a minimum tangible net worth, and
certain debt, interest coverage and current ratios, and restrictions are placed
on the Company's ability to pay dividends and purchase treasury stock.

         In May of 1996, the Company purchased from Internationale Nederlanden
(U.S.) Capital Corporation properties formerly owned by Saratoga Resources,
Inc. for $7,180,000. During 1996, a further $720,000 was spent on the
development of these properties.

         Company spending related to its 3D seismic development and exploration
program totaled $3,410,000 during 1996.  The Company has, to date, drilled
eight wells as part of this program, seven of which have been completed as
producing gas wells. The Company intends to continue expanding this program in
1997. Expenditures during the first quarter of 1997 included approximately
$570,000, related to conducting a 3D seismic survey to identify prospects for
exploratory drilling, which will be charged to expense.

         In total, during 1996, the Company spent approximately $12,910,000 on
the acquisition and development of its oil and gas interests. This amount
includes $211,000 of dry hole costs and $538,000 to buy back limited
partnership interests from investors in its oil and gas partnerships.
Additionally, the Company spent approximately $542,000 on trucks and
automobiles used in connection with field service operations, and an additional
$236,000 on computer related equipment and software.

         During 1996, the Company entered into an agreement to purchase 400,000
shares of its common stock for total consideration of $1,144,000. Of this
amount, $523,000 was paid in 1996 and $621,000 is due in 1997. An additional
$398,000 was spent to acquire treasury stock in open market transactions.

         Most of the Company's capital spending is discretionary and the
ultimate level of spending will be dependent on the company's assessment of the
gas and oil business environment, the number of oil and gas prospects, and oil
and gas business opportunities in general. The Company plans to continue with
its recompletion and development program on existing properties, while pursuing
the Company's primary objective of increasing reserves through the acquisition,
development and exploration of new properties.

         The Company's operations and financial condition over the past several
years have been affected by a very volatile domestic and foreign market for
crude oil and gas. Price reductions shorten the economic life of properties,
and, as a result, some properties may not be economical to operate if price
deterioration should occur. Other properties might not support major
expenditures under such conditions. Capital expenditures are constantly
scrutinized to reasonably ensure the economic viability of a project.

         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.

RESULTS OF OPERATIONS

1996 Compared to 1995

Net income increased to $939,000 in 1996 as compared  to $527,000 in 1995. This
large increase was primarily caused by sharply higher oil and gas revenue
caused by production from the properties acquired in the Saratoga acquisition
and wells drilled in the 3D seismic development and exploration project, as
well as higher oil and gas






                                       14
<PAGE>   15
prices received in the fourth quarter of 1996. Oil and gas prices have declined
significantly between December 31, 1996, and the date of this report.

         As a result of the Saratoga acquisition and the success of the
Company's recent drilling, oil and gas revenue accounted for 48% of total
revenue in 1996 as compared to 33% in 1995. This percentage is likely to
increase in 1997 as these properties contribute a full year of production. As
oil and gas prices can be highly volatile, this may lead to greater variability
in the Company's profitability and cash flow in the future. In addition, the
Company has greatly increased its drilling and exploration activities. The risk
inherent in these activities, coupled with the requirement that certain costs
incurred in these activities must be expensed as incurred, can be expensed to
lead to greater volatility in earnings in the future.

         Oil and gas sales increased 87% in 1996, going from $6,024,000 in 1995
to $11,238,000 in 1996. This  large increase is due primarily to the
contributions of the Saratoga properties acquired in May of 1996 and wells
drilled in the third quarter as part of the Company's 3D seismic development
program combined with sharply higher oil and gas prices.  The Saratoga
properties contributed a total of $2,676,000 in oil and gas revenue in 1996.
The wells from the 3D seismic development program have contributed $823,000.

         The average oil price per barrel received for directly owned
production in 1996 was $21.24 as compared to $16.53 per barrel in 1995 and the
average gas price was $2.34 in 1996 as compared to $1.85 per Mcf in 1995.

         Oil and gas sales related to PEMC's carried interest in the
Partnerships and other ventures increased approximately 56% or $1,476,000 in
1996 as compared to 1995. Factors leading to this increase include
substantially higher oil and gas prices received by those entities, the
acquisition of new properties and the development of existing properties by
those entities, and the purchase by PEMC of substantial additional interests in
these Partnerships over the last year.

         Lease operating expenses increased 44%, or $1,809,000 in 1996 as
compared to 1995. This increase is primarily attributable to the $1,142,000 in
lease operating expenses incurred on the Saratoga properties purchased during
1996.  Average lifting costs on directly owned properties declined to $8.87 per
barrel of oil equivalent, primarily because the wells drilled as part of the
Company's 3D seismic program produced 54,000 barrel of oil equivalents, while
adding only $98,000 to lease operating expense.

         Depreciation and depletion of oil and gas properties increased 76% or
$1,853,000 in 1996 as compared to 1995.  Depletion on the newly acquired
Saratoga properties contributed $1,153,000 to depletion expense in 1996.

         District operating revenue and expense totals for 1996 were relatively
flat when compared to 1995.  Revenues increased $171,000 (1.75%) to $9.8
million while expenses increased $40,000 (less than 1%) to $7.4 million.  These
results are the net effect of several changes in the Company's activities.  The
primary increase in both revenue and expense results from the addition of the
Saratoga properties to the Gulf Coast district. Activity related to servicing
these properties and the expansion of activity related to the 3D seismic
program, which is also concentrated in the Gulf Coast district, offset by a
decrease in equipment utilization on existing Gulf Coast properties, resulted
in net additions of $500,000 and $300,000 in revenues and expense,
respectively, generated by that district.  The offsetting declines in district
operating revenue and expense resulted primarily from organizational changes
made in both the Appalachian and Mid-continent districts.  The Company has
reduced the costs incurred in servicing the operated properties by
restructuring the field organization and reducing personnel.  The reduction in
these costs is reflected in reduced billings and related revenues in both
districts.

         Administrative revenue which represents the Company's reimbursement of
general and administrative overhead expended on behalf of the Partnerships (see
Note 12 to the consolidated financial statements), declined 13% in 1996 as
compared to 1995.  Administrative revenues received in both years from certain
Partnerships are






                                       15
<PAGE>   16
substantially less than the amounts allocable to those Partnerships under the
Partnership agreements.  The lower amounts reflect PEMC's continuing efforts to
reduce costs, both incurred and those allocated to the Partnerships.

         Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships.

         The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of its related partnerships
and other joint venture partners.  To the extent that these property
acquisition costs are expended at the district level, the reimbursements are
recorded as a reduction of total district operating expenses.  When expenses
are incurred at the corporate headquarters level, such reimbursements are
recorded as a reduction of the total general and administrative expenses.
During 1996 and 1995, the Company's total reimbursements for property
acquisition costs were approximately $1,783,000 and $1,616,000 respectively.

         General and administrative expense increased by 13%, or $387,000
between 1996 and 1995.  This increase is primarily due to $340,000 in
non-capitalized costs incurred in connection with Saratoga acquisition, as well
as a general increase in costs reflecting an increase in the scope of the
Company's operations.

         Exploration costs of $483,000 consist of $211,000 of dry hole costs
and $272,000 of seismic and other costs related to properties on which
exploratory wells will be drilled in 1997.

         Interest expense increased 48% or $327,000 in 1996 as compared to
1995.  This increase is primarily due to higher debt levels related to the
purchase of the Saratoga properties in May of 1996.

         The Company recorded $175,000 in gains on the sale of assets during
1996.  This amount is primarily attributable to the sale of a large number of
fully depleted wells and equipment sold for salvage during 1996.

  1995 Compared to 1994

         Net income declined slightly between 1994 and 1995 from $577,000 to
$527,000, as the effect of significantly lower gas prices was partially offset
by lower payroll and related costs and profit related to properties acquired
later in 1994. Due to lower weighted average shares outstanding, caused by
significant purchases of treasury stock during the year, net income per share
remained constant at 9 cents per share.

         Oil and gas sales of $6 million increased 16% compared to 1994 due to
increases in both oil and gas production offset by the decline in gas prices.
Average oil prices received increased from $15.22 per barrel in 1994 to $16.53
per barrel in 1995, while average gas prices received declined from $2.36 per
Mcf to $1.85 per Mcf. Oil production was up 8.5% and gas production was up
38.6% reflecting the production from acquisitions the Company made at the end
of 1994.

         Approximately 17% of the Company's 1995 oil and gas sales were made
under a fixed price gas contract which expired in March of 1996. Under this
contract, which covered production from one field, the Company received an
average price which was approximately 75 cents per Mcf greater than the spot
price which the Company is currently receiving. The Company will take steps to
control operating expenses on this property to minimize, to the extent
possible, the effect of the decline in revenue on net income.

         District operating income of $9.7 million increased 3% compared to
1994. Income is derived through the operation of wells owned by the Company as
well as those owned by the Partnerships. The district offices of the Company
are responsible for the operation and maintenance of these properties. The
increase in revenue compared to 1994 is largely due to a full year of revenues
from the 1994 Excelco acquisition partially offset by declines in revenue from
the Appalachian district.






                                       16
<PAGE>   17
         Administrative revenue represents the Company's reimbursement of
general and administrative overhead expended on behalf of the Partnerships (see
Note 12 to the consolidated financial statements). Administrative revenues
received in both 1995 and 1994 from certain Partnerships are substantially less
than the amounts allocable to those Partnerships under the Partnership
agreements. The lower amounts reflect PEMC's efforts to limit costs, both
incurred and those allocated to the Partnerships.

         Reporting and management fees are earned from providing the accounting
and reporting functions for certain of the Partnerships. Overall fees declined
5% compared to 1994 due to PEMC's efforts to control costs incurred by the
Partnerships.

         Interest and other income decreased by approximately $34,000 compared
to 1994. This decrease is primarily due to lower balances available for
investment during 1995 as the Company utilized excess working capital for debt
reduction.

         Lease operating expenses increased 14% compared to 1994. This increase
reflects the full year of operating expenses on the Excelco and Walker
properties acquired in 1994. Average lifting costs, (lease operating expenses
per equivalent unit of production) decreased from $10.14 per equivalent unit in
1994 to $8.92 per equivalent unit in 1995 primarily due to lower lifting costs
on recent acquisitions.

         The Company receives reimbursement for costs incurred related to the
evaluation and acquisition of properties on behalf of its related partnerships
and other joint venture partners. To the extent that these property acquisition
costs are expended at the district level, the reimbursements are recorded as a
reduction of total district operating expenses. When expenses are incurred at
the PEMC level, such reimbursements are recorded as a reduction of total
general and administrative expenses. During 1995 and 1994, the Company's total
reimbursements for property acquisition costs were approximately $1.6 million
and $1.5 million respectively.

         District operating expenses of $7.4 million increased $372,000, or 5%
compared to 1994. This increase is largely the result of the growth of the
Company's operating and well servicing businesses, and is relatively consistent
with the increase in district operating income. Reimbursement of property
acquisition costs at the district level decreased from $425,000 in 1994 to
$300,000 in 1995. Management believes that the Company is now positioned such
that significant additions may be made to operated wells without significant
cost increases within existing district offices.


         General and administrative expenses of $2.9 million decreased $515,000
or 15% compared to 1994. This decrease is primarily related to the increase in
reimbursement of property acquisition costs at the corporate level, from $1.1
million in 1994 to $1.3 million in 1995, as well as overall lower payroll
related expenses. Additionally, the Company discontinued sponsoring public
investment vehicles in 1994 and accordingly, expenses in 1994 included a charge
of $90,000 related to prepaid marketing fees. No such charge was incurred in
1995.

         Depreciation and depletion of oil and gas properties of $2.4 million
increased 31% compared to 1994 due to primarily a full year of production from
properties acquired at the end of 1994, partially offset by the effect of
higher year-end oil and gas prices lowering depletion rates.

         Exploration costs increased from $17,000 in 1994 to $50,000 in 1995 as
a result of dry hole costs incurred during 1995. The 1994 costs relate to dry
hole costs incurred on the 1994-I Development Program. In the first quarter of
1996, the Company incurred approximately $130,000 of costs for the drilling of
a dry hole.

         Interest expense increased 31% compared to 1994 due to additional
amounts borrowed at the end of 1994 to finance acquisition activity.






                                       17
<PAGE>   18
         Income tax expense for the year of $69,000 resulted in an effective
rate of 11.6%. This low rate is primarily due to the utilization of net
operating loss and percentage depletion deduction carryforwards.


ITEM 7.  FINANCIAL STATEMENTS.

         Included on pages F-1 through F-28 of this Report. The Index to
Financial Statements is at page 24 of this Report.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         The Company engaged Pustorino, Puglisi & Co. as the principal
accountants for the Company with respect to the audit of the Company's
financial statements for the year ended December 31, 1996, and the report on
the financial statements included in this Report. The appointment of Pustorino,
Puglisi & Co. was effective October 29, 1996, upon approval of the Executive
Committee of the Board of Directors. Coopers & Lybrand acted as the principal
accountants for the Company with respect to the audit of the Company's
financial statements for the years ended December 31, 1995, and 1994.

         Coopers & Lybrand was dismissed effective October 29, 1996, upon the
recommendation of the Executive Committee of the Board of Directors of the
Company. There were no disagreements with Coopers & Lybrand on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure in connection with the audit of the Company's two most
recent audited fiscal years, being the years ended December 31, 1995 and 1994,
or any subsequent interim period. The audit reports of Coopers & Lybrand
contained no adverse opinion or any disclaimer of opinion, nor were their
reports qualified or modified as to uncertainty, audit scope or accounting
principles.

         Due to a billing dispute, Coopers & Lybrand has refused to perform the
"keeping current procedures" necessary to reissue their opinion on the 1995
financial statements. That opinion is therefore not included in this Report.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         Information relating to the Company's Directors, nominees for
Directors and executive officers is included in the Company's definitive proxy
statement relating to the Company's Annual Meeting of Stockholders to be held
in June, 1997, which will be filed with the Securities and Exchange Commission
within 120 days of December 31, 1996, and which is incorporated herein by
reference.

ITEM 10. 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, 1997, which will be filed with the
Securities and Exchange Commission within 120 days of December 31, 1996, and
which is incorporated herein by reference.






                                       18
<PAGE>   19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         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,
1997, which will be filed with the Securities and Exchange Commission within
120 days of December 31, 1996, and which is incorporated herein by reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         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, 1997, which will be filed with the Securities and Exchange Commission
within 120 days of December 31, 1996, and which is incorporated herein by
reference.






                                       19
<PAGE>   20
                                    PART IV

ITEM 13.         EXHIBITS AND REPORTS ON FORM 8-K.

         (a)     Exhibits:

       NO.
      -----

       3.1         --  Certificate of Incorporation as amended, of PrimeEnergy
                       Corporation. (Incorporated herein by reference to
                       Exhibit 3.1 of PrimeEnergy Corporation Form 10-KSB for
                       the year ended December 31, 1994)

       3.2         --  Bylaws of PrimeEnergy Corporation. (Incorporated herein
                       by reference to Exhibit 3.2 of PrimeEnergy Corporation
                       Form 10-KSB for the year ended December 31, 1994)

      10.1         --  PrimeEnergy Corporation 1983 Incentive Stock Option Plan
                       (Incorporated herein by reference to Exhibit 10.1 of
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)

      10.3         --  Massachusetts Mutual Flexinvest 401 (k) Plan as amended
                       and restated. (Incorporated herein by reference to
                       Exhibit 10.3 of PrimeEnergy Corporation Form 10-KSB for
                       the year ended December 31, 1994) (1)

      10.7         --  Credit Agreement dated April 26, 1995, between
                       PrimeEnergy Corporation, PrimeEnergy Management
                       Corporation and Bank One, Texas, National Association.
                       (Incorporated herein by reference to Exhibit 10.7 to
                       PrimeEnergy Corporation Form 8-K dated April 26, 1995)

      10.7.1       --  First Amendment to Credit Agreement Among PrimeEnergy
                       Corporation and PrimeEnergy Management Corporation, as
                       Borrowers, Bank One, Texas, National Association, as
                       Agent, and the Lenders Signatory Hereto, effective as of
                       October 6, 1995. (Incorporated herein by reference to
                       Exhibit 10.7.1 to PrimeEnergy Corporation Form 10-KSB
                       for the year ended December 31, 1995)

      10.7.2       --  Second Amendment to Credit Agreement Among PrimeEnergy
                       Corporation and PrimeEnergy Management Corporation, as
                       Borrowers, Bank One, Texas, National Association, as
                       Agent, and the Lenders Signatory Hereto, effective as of
                       February 6, 1997. (filed herewith)

      10.8         --  Mortgage, Deed of Trust, Indenture, Security Agreement,
                       Financing Statement and Assignment of Production dated
                       May 27, 1994, as ratified and amended April 26, 1995,
                       between PrimeEnergy Corporation, PrimeEnergy Management
                       Corporation and Bank One, Texas, National Association.
                       (Incorporated herein by reference to Exhibit 10.8 to
                       PrimeEnergy Corporation Form 8-K dated April 26, 1995)

      10.15        --  Employment Agreement between K.R.M. Petroleum
                       Corporation and Charles E. Drimal, Jr.  (Incorporated
                       herein by reference to Exhibit 10.15 of PrimeEnergy
                       Corporation Form 10-KSB for the year ended December 31,
                       1994) (1)

      10.17        --  Amended Marketing Agreement between PrimeEnergy
                       Management Corporation and Charles E. Drimal, Jr.
                       (Incorporated herein by reference to Exhibit 10.17 of
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)






                                       20
<PAGE>   21
      10.18        --  Composite copy of Non-Statutory Option Agreements.(1)
                       (Incorporated herein by reference to Exhibit 10.18 to
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)

      10.19        --  Purchase and Sale Agreement dated as of May 7, 1996, by
                       and between Internationale Nederlanden (U.S.) Capital
                       Corporation and PrimeEnergy Corporation (Incorporated
                       herein by reference to Exhibit 10.19 to PrimeEnergy
                       Corporation Form 8-K dated May 29, 1996)

      10.20        --  Assignment, Conveyance and Bill of Sale dated as of May
                       7, 1996, by Saratoga Resources, Inc., a Texas
                       corporation, et al., to PrimeEnergy Corporation
                       (Incorporated herein by reference to Exhibit 10.20 to
                       PrimeEnergy Corporation Form 8-K dated May 29, 1996)

      22           --  Subsidiaries. (filed herewith)

      24           --  Consent of Ryder Scott Company. (filed herewith)

      27           --  Financial Data Schedule. (filed herewith)

----------

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

         (b)     Reports on Form 8-K:

         Form 8-K dated October 29, 1996, was filed to report the engagement of
Pustorino, Puglisi & Co. as the principal accountants for the Company,
replacing Coopers & Lybrand, as described under Item 4. Changes in Registrant's
Certifying Accountant.






                                       21

<PAGE>   22
                                   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 31st day of
March, 1997.



                                   PrimeEnergy Corporation


                                   By:   /s/ CHARLES E. DRIMAL, JR.
                                         ------------------------------
                                         Charles 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 31st day of March, 1997.




/s/ CHARLES E. DRIMAL, JR.            Director and President;
------------------------------        The Principal Executive Officer
Charles E. Drimal, Jr.



/s/ BEVERLY A. CUMMINGS               Director, Vice President and Treasurer;
------------------------------        The Principal Financial and Accounting
Beverly A. Cummings                     Officer



/s/ BENNIE H. WALLACE, JR.            Director, and Vice President
------------------------------
Bennie H. Wallace, Jr.

/s/ SAMUEL R. CAMPBELL                Director
------------------------------
Samuel R. Campbell

/s/ JAMES E. CLARK                    Director
------------------------------
James E. Clark

/s/ CHARLES E. DRIMAL, SR.            Director
------------------------------
Charles E. Drimal, Sr.

/s/ MATTHIAS ECKENSTEIN               Director
------------------------------
Matthias Eckenstein

/s/ H. GIFFORD FONG                   Director
------------------------------
H. Gifford Fong






                                       22
<PAGE>   23
/s/ THOMAS S.T. GIMBEL                Director
------------------------------
Thomas S.T. Gimbel

/s/ CLINT HURT                        Director
------------------------------
Clint Hurt

/s/ ROBERT DE ROTHSCHILD              Director
------------------------------
Robert de Rothschild

/s/ JARVIS K. SLADE                   Director
------------------------------
Jarvis J. Slade

/s/ JAN K. SMEETS                     Director
------------------------------
Jan K. Smeets

                                      Director
------------------------------
Gaines Wehrle

/s/ MICHAEL WEHRLE                    Director
------------------------------
Michael Wehrle






                                       23
<PAGE>   24
                         INDEX TO FINANCIAL STATEMENTS

Financial Statements (Included herein at pages F-1 through F-28):

Report of Independent Public Accountants, F-1

Financial Statements:

         Consolidated Balance Sheets -- December 31, 1996 and 1995, F-2

         Consolidated Statements of Operations -- for the years ended December
         31, 1996 and 1995, F-4

         Consolidated Statements of Stockholders' Equity -- for the years ended
         December 31, 1996 and 1995, F-5

         Consolidated Statements of Cash Flows -- for the years ended December
         31, 1996 and 1995, F-6

         Notes to Consolidated Financial Statements, F-7
         Supplementary Information: F-21

                 Capitalized Costs Relating to Oil and Gas Producing Operations,
                 December 31, 1996 and 1995, F-22

                 Costs Incurred in Oil and Gas Property Acquisition,
                 Exploration and Development Activities, years ended December
                 31, 1996 and 1995, F-22

                 Standardized Measure of Discounted Future Net Cash Flows
                 Relating to Proved Oil and Gas reserves, years ended December
                 31, 1996 and 1995, F-23

                 Standardized Measure of Discounted Future Net Cash Flows and
                 Changes Therein Relating to Proved Oil and Gas Reserves, years
                 ended December 31, 1996 and 1995, F-24

                 Reserve Quantity Information, years ended December 31, 1996
                 and 1995, F-25

                 Results of Operations from Oil and Gas Producing Activities,
                 years ended December 31, 1996 and 1995, F-26

                 Notes to Supplementary Information, F-27
<PAGE>   25


                       REPORT OF INDEPENDENT ACCOUNTANTS




To the Board of Directors and Stockholders of PrimeEnergy Corporation:

We have audited the accompanying consolidated balance sheet of PrimeEnergy
Corporation and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The financial statements for 1995 were
audited by another auditor, whose opinion dated March 20, 1996 was unqualified.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit 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, 1996, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.




Pustorino, Puglisi & Co., LLP
New York, New York
March 28, 1997



<PAGE>   26


                    PRIMEENERGY CORPORATION and SUBSIDIARIES

            CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                        1996            1995
                                                    ------------    ------------
<S>                                                 <C>             <C>
     Current assets:
     Cash and cash equivalents                      $  3,316,000    $  1,009,000
     Restricted cash and cash
         equivalents (Note 13)                           663,000         713,000
     Accounts receivable, net (Note 3)                 5,052,000       2,311,000
     Due from related parties (less allowance for
         doubtful accounts of $800,000 in 1996
         and $725,000 in 1995) (Note 12)               2,184,000       2,939,000
     Prepaid expenses                                    150,000         151,000
     Other current assets                                266,000         597,000
     Deferred income taxes (Notes 1 and 10)              119,000         198,000
                                                    ------------    ------------

         Total current assets                         11,750,000       7,918,000
                                                    ------------    ------------

Property and equipment, at cost (Notes 1 and 2):
     Oil and gas properties (successful
       efforts method):
         Proved                                       36,645,000      25,024,000
         Unproved                                        179,000              --
     Furniture, fixtures and equipment
       including leasehold improvements                5,269,000       4,696,000
                                                    ------------    ------------
                                                      42,093,000      29,720,000
     Accumulated depreciation and depletion          (21,860,000)    (17,766,000)
                                                    ------------    ------------
       Net property and equipment                     20,233,000      11,954,000
                                                    ------------    ------------

Other assets (Note 12)                                   607,000         487,000
Due from affiliates (Note 12)                            325,000         325,000
                                                    ------------    ------------
       Total assets                                 $ 32,915,000    $ 20,684,000
                                                    ============    ============
</TABLE>






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


                                      F-2

<PAGE>   27

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

            CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                    1996            1995
                                                ------------    ------------
<S>                                             <C>             <C>
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
     Current portion of other long-term
       obligations (Note 5)                     $     73,000    $    202,000
     Accounts payable (Note 15)                    5,297,000       2,691,000
     Accrued liabilities:
       Payroll, Benefits and Related Items           494,000         522,000
       Taxes (Notes 1 and 10)                         11,000          26,000
       Interest and other                            774,000         617,000
     Due to related parties (Note 12)              1,298,000       1,319,000
                                                ------------    ------------
       Total current liabilities                   7,947,000       5,377,000
                                                ------------    ------------

Long-term bank debt (Note 4)                      17,400,000       7,400,000
Other long-term obligations (Note 5)                 243,000         507,000
Deferred income taxes (Notes 1 and 10)               240,000         333,000
Payable for encumbered treasury
     stock (Note 6)                                  621,000              --

Stockholders' equity:
     Preferred stock, $.10 par, authorized
       10,000 shares; none issued                         --              --
     Common stock, $.10 par value, authorized
       15,000,000 shares; issued 7,597,970
       in 1996 and 1995                              760,000         760,000
     Paid in capital                              10,888,000      10,888,000
     Accumulated deficit                             (53,000)       (992,000)
     Encumbered treasury stock (Note 6)             (621,000)             --
                                                ------------    ------------
                                                  10,974,000      10,656,000
     Treasury stock, at cost, 2,650,398
       common shares in 1996 and 2,361,961
       common shares in 1995                      (4,510,000)     (3,589,000)
                                                ------------    ------------
       Total stockholders' equity                  6,464,000       7,067,000
                                                ------------    ------------
         Total liabilities and equity           $ 32,915,000    $ 20,684,000
                                                ============    ============
</TABLE>




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



                                      F-3

<PAGE>   28
                    PRIMEENERGY CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS of OPERATIONS

                 for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                       1996          1995
                                                    -----------   -----------
<S>                                                 <C>           <C>
Revenue:
     Oil and gas sales                              $11,238,000   $ 6,024,000
     District operating income                        9,846,000     9,675,000
     Administrative revenue (Note 12)                 1,621,000     1,866,000
     Reporting and management fees (Note 12)            350,000       356,000
     Interest income                                    129,000       108,000
     Other income                                        42,000        30,000
                                                    -----------   -----------
                                                     23,226,000    18,059,000
                                                    -----------   -----------

Costs and expenses:
     Lease operating expense                          5,909,000     4,100,000
     District operating expense                       7,407,000     7,367,000
     Depreciation and depletion of
       oil and gas properties                         4,283,000     2,430,000
     General and administrative expense               3,328,000     2,940,000
     Exploration costs                                  483,000        50,000
     Interest expense (Notes 4 and 5)                 1,002,000       675,000
                                                    -----------   -----------
                                                     22,412,000    17,562,000
                                                    -----------   -----------
     Income from operations                             814,000       497,000

Other income:
Gain on sale and exchange of assets                     175,000        99,000
                                                    -----------   -----------
     Income before provision for income taxes           989,000       596,000

Provision for income taxes                               50,000        69,000
                                                    -----------   -----------
     Net income                                     $   939,000   $   527,000
                                                    ===========   ===========

Net income per common share (Note 1)                $      0.17   $      0.09
                                                    ===========   ===========
Weighted average number of shares of common stock
     and common stock equivalents outstanding         5,584,542     5,975,903
                                                    ===========   ===========
</TABLE>



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



                                      F-4

<PAGE>   29





                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                 CONSOLIDATED STATEMENT of STOCKHOLDERS' EQUITY

                 for the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                         Additional    Retained Earnings                    Encumbered
                                   Common Stock           Paid In        (Accumulated          Treasury     Treasury
                               Shares         Amount      Capital          Deficit)              Stock        Stock           Total
                               ------         ------      -------          --------              -----        -----           -----
<S>                            <C>            <C>        <C>                <C>            <C>            <C>            <C>
Balance at December 31, 1994   7,597,970      $760,000   $10,888,000        ($1,519,000)   ($2,532,000)   $     --       $7,597,000

Purchased 442,923 shares of
 common stock                                                                               (1,057,000)                  (1,057,000)

Net income                                                                      527,000                                     527,000

                             ------------------------------------------------------------------------------------------------------
Balance at December 31, 1995   7,597,970       760,000    10,888,000           (992,000)    (3,589,000)         --        7,067,000

Purchased 105,388 shares of
 common stock                                                                                 (398,000)                    (398,000)

Purchased 400,000 shares of
 encumbered treasury stock
 (Note 10)                                                                                    (523,000)   (621,000)      (1,144,000)

Net income                                                                      939,000                                     939,000

                             ------------------------------------------------------------------------------------------------------
Balance at December 31, 1996   7,597,970      $760,000   $10,888,000           ($53,000)   ($4,510,000)   $621,000)      $6,464,000
                             ======================================================================================================
</TABLE>




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



                                      F-5

<PAGE>   30
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                     CONSOLIDATED STATEMENTS of CASH FLOWS

                 for the years ended December 31, 1996 and 1995

                                    --------

<TABLE>
<CAPTION>
                                                               1996            1995
                                                           ------------    ------------
<S>                                                        <C>             <C>
Cash flows from operating activities:
     Net income                                            $    939,000    $    527,000
     Adjustments to reconcile net income to net cash
         provided by operating activities:
         Depreciation, depletion and amortization             5,039,000       3,190,000
         Gain on sale of properties                            (175,000)        (99,000)
         Provision of deferred income taxes                     (14,000)         14,000
     Changes in assets and liabilities
         (Increase) in accounts receivable                   (2,741,000)       (218,000)
         (Increase) decrease in due from related parties        755,000        (519,000)
         (Increase) decrease in other assets                    252,000        (421,000)
         (Increase) decrease in prepaid expenses                  1,000         (42,000)
         Decrease (increase) in account payable               2,656,000        (276,000)
         Increase in accrued liabilities                        114,000         348,000
         Increase (decrease) in due to related parties          (21,000)      1,002,000
                                                           ------------    ------------
              Net cash provided by operating activities       6,805,000       3,506,000
                                                           ------------    ------------

Cash flows from investing activities:
     Proceeds from sale of properties and equipment             291,000         248,000
     Additions to property and equipment                    (13,434,000)     (3,068,000)
     (Increase) in notes receivable                             (40,000)             --
                                                           ------------    ------------
     Net cash used in investing activities                  (13,183,000)     (2,820,000)
                                                           ------------    ------------
Cash flows from financing activities:
     Purchase of stock for treasury                            (921,000)     (1,057,000)
     Repayment of long-term bank debt and other
         long-term obligations                              (20,677,000)    (13,970,000)
     Increase in long-term bank debt and other
         long-term obligations                               30,283,000      13,569,000
     Distributions to related parties                                --        (580,000)
                                                           ------------    ------------
     Net cash provided by (used in) financing activities      8,685,000      (2,038,000)
                                                           ------------    ------------
     Net increase (decrease) in cash                          2,307,000      (1,352,000)

Cash and cash equivalents, beginning of year                  1,009,000       2,361,000
                                                           ------------    ------------
Cash and cash equivalents, end of year                     $  3,316,000    $  1,009,000
                                                           ============    ============

Supplemental disclosures:
     Income taxes paid during the year                     $     79,000    $     53,000
     Interest paid during the year                         $    905,000    $    684,000
</TABLE>

Supplemental information of non-cash investing and financial activities:
     During 1996, the Company purchased treasury stock in return for a note in
amount of $1,144,000. (Note 6)


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



                                      F-6

<PAGE>   31
                    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. PrimeEnergy Management Corporation ("PEMC"), a
         wholly-owned subsidiary, acts as the managing general partner,
         providing administration, accounting and tax preparation services for
         53 private and publicly-held limited partnerships and trusts (the
         "Partnerships"). PEC owns Eastern Oil Well Service Company ("EOWSC")
         and Southwest Oilfield Construction Company ("SOCC"), both 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.
         PrimeEnergy Corporation and its wholly-owned subsidiaries are herein
         referred to as the "Company."

         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 continental United States, including Colorado,
         Kansas, Louisiana, Mississippi, Montana, Nebraska, Nevada, New Mexico,
         North Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming. The
         Company operates approximately 1,762 wells and owns non-operating
         interests in approximately 1,052 additional wells. Additionally, the
         Company provides well-servicing support operations, site-preparation
         and construction services for oil and gas drilling and re-working
         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."

         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.

         Principles of Consolidation:

         The consolidated financial statements include the accounts of
         PrimeEnergy Corporation and its wholly-owned subsidiaries. All
         material inter-company accounts and transactions between these
         entities have been eliminated. Oil and gas properties include
         ownership interests in the Partnerships. The statement of operations
         includes the Company's proportionate share of revenue and expenses
         related to oil and gas interests.



                                      F-7

<PAGE>   32
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         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.

         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, FAS
         121 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.

         The Company has significant deferred tax assets which have been fully
         reserved against based upon the assumption that at current and
         expected future levels of taxable income, and considering the Section
         29 credits the Company expects to generate, the availability of these
         carryforwards will not lead to significant reductions in the Company's
         tax liability as compared to what it would pay if such carryforwards
         did not exist. Increases in estimates of future taxable income could
         lead to significant reductions in the amount of this reserve, which
         could have a material effect on the net income of the Company.

         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. Costs incurred by the Company related to the acquisition
         of producing oil and gas properties on behalf of related partnerships,
         trusts or joint ventures are deferred and charged to the related
         entity upon the completion of the acquisition. To the extent that the
         Company acquires an interest in the property, an appropriate
         allocation of internal costs are capitalized as part of the depletable
         base of the property.



                                      F-8

<PAGE>   33

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         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 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.

         Effective January 1, 1996, the Company adopted the provisions of
         Statement of Financial Accounting Standards No. 121, "Accounting for
         the Impairment of Long-Lived Assets and for Long Lived Assets to Be
         Disposed Of" ("SFAS No. 121"). Prior to the adoption of SFAS No. 121,
         the total amount of unamortized capitalized cost was limited to the
         aggregated undiscounted value of future net revenues, based on current
         prices and cost. SFAS No. 121 requires that long-lived assets held and
         used by a company, including oil and gas properties accounted for
         under the successful efforts method of accounting, be reviewed for
         impairment whenever events or changes in circumstances indicate that
         the carrying amount of an asset may not be recoverable. The Company
         determines whether an impairment has occurred by estimating the
         undiscounted expected future net cash flows of its oil and gas
         properties at a field level and compares such cash flows to the
         carrying amount of the oil and gas properties to determine if the
         carrying amount is recoverable. For those oil and gas properties for
         which the carrying amount exceeds the undiscounted estimated future
         cash flows, an impairment is determined to exist. The carrying amount
         of such properties is adjusted to their estimated net fair value based
         on discounted cash flows. The Company recognized a non-cash charge of
         $184,000 related to the impairment oil and gas properties during 1996,
         which is included in depreciation, depletion and amortization expense.

         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.



                                      F-9

<PAGE>   34


                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         General and Administrative Expenses:

         General and administrative expenses represent costs and expenses
         associated with the operation of the Company. Certain partnerships and
         trusts sponsored by the Company reimburse general and administrative
         expenses incurred on their behalf.

         Income Per Common Share:

         Income per share of common stock has been computed based on the
         weighted average number of common shares and common stock equivalents
         outstanding during the respective periods.

         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:

         From time to time the Company may enter into futures contracts in
         order to reduce its exposure related to changes in oil and gas prices.
         In accordance with Statement of Financial Accounting Standards No. 80,
         any gain or loss on such contracts is treated as an adjustment to oil
         and gas revenue.

         Fair Value of Financial Instruments:

         The Company estimates that the fair value of financial instruments
         reported herein approximates their carrying value.

         Recently Issued Accounting Standards:

         In October 1995, FAS Statement No. 123, "Accounting for Stock-Based
         Compensation" was issued, effective January 1, 1996. The Company will
         continue to measure compensation costs for its employee stock
         compensation as prescribed by APB Opinion No. 25, "Accounting for
         Stock Issued to Employees", and comply with the disclosure
         requirements of FAS Statement No. 123 rather than record compensation
         expense in accordance with the new standard. Recording compensation
         expense in accordance with the standard would not have a significant
         effect on the Company's results of operations.



                                     F-10

<PAGE>   35


                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         In October 1996, the American Institute of Certified Public
         Accountants issued Statement of Position (SOP) 96-1, "Environmental
         Remediation Liabilities." SOP 96-1 was adopted by the Company on
         January 1, 1997. It requires, among other things, that environmental
         remediation liabilities be accrued when the criteria of SFAS No. 5,
         "Accounting for Contingencies", have been met. SOP 96-1 also provides
         guidance with respect to the measurement of the remediation
         liabilities. Such accounting is consistent with the Company's current
         method of accounting for environmental remediation costs. Therefore,
         adoption of SOP 96-1 will not have a material impact on the Company's
         financial position or results of operations.

2.       SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

         1996

         Saratoga Property Acquisition:

         In May 1996, the Company completed the acquisition of various
         interests in 145 active wells previously owned by Saratoga Resources,
         Inc. from Internationale Nederlandend (U.S.) Capital Corporation
         (herein referred to as "ING") for $7,180,000. The Company serves as
         operator for 132 of these wells. These properties are located
         primarily in eight counties along the Gulf Coast of Texas. These
         properties also include additional development potential. Pursuant to
         the purchase and sale agreement, ING has retained a net profits
         interest in the development of these properties, subject to
         performance hurdles.

         During 1996, wells were drilled on properties acquired in the Saratoga
         Property Acquisition. In October 1996, the S.F. Wing No. 82 well was
         drilled in the Segno field of Polk County, Texas. The well was
         completed in the Yegua Formation at an initial production rate of
         approximately 90 Barrels of oil per day and 500 MCF of gas per day.
         The Company owns 20% of this property. Also in October 1996, the Fling
         Point No. 1H was drilled as a horizontal well in the Brookeland field,
         of Sabine County, Texas. This well was completed in the Austin Chalk
         Formation at an initial production rate of approximately 2,500 MCF of
         gas per day. The Company owns eight percent of this property.

         The purchase of Saratoga, described above, constitutes a significant
         acquisition. The following unaudited proforma data presents financial
         information as if the Saratoga acquisition was made at the beginning
         of the periods indicated:


<TABLE>
<CAPTION>
                                                   December 31,
                                           ---------------------------
                                               1996           1995
                                           ------------   ------------
<S>                                        <C>            <C>
            Revenue                        $ 24,318,000   $ 21,114,000
                                           ============   ============
            Net income                     $  1,218,000   $    635,000
                                           ============   ============
            Net income per  common share   $        .22   $        .11
                                           ============   ============
</TABLE>



                                     F-11

<PAGE>   36


                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         These proforma results have been prepared for comparative purposes
         only and do not purport to be indicative of what would have occurred
         had the acquisition been made at the beginning of 1996 and 1995 or of
         results which may occur in the future.

         3D Seismic Development and Exploration Program:
         Capital committed under the 1995 Development Program was expended
         during 1996 on the initial phase of this development and exploration
         program. The Company has continued to expand this program with
         additional 3D seismic surveys, leasehold acquisitions and drilling.
         Outside investors have continued to participate in the subsequent
         phases. The Company's interest in these activities ranges from 37% to
         52%.

         Other:
         As more fully described in Note 8, PEMC is committed to offer to
         repurchase the interests of the limited partners and trust unitholders
         in certain managed limited partnerships and trusts. During 1996, PEMC
         purchased such interests in an amount totaling $538,000.


         1995

         1995 Development Program:

         During 1995, PEMC obtained commitments of $3.0 million, primarily from
         outside investors, to be used to finance the development of several
         acquisition, drilling and recompletion prospects. During 1995, the
         Company committed to spending $1.25 million on this program in which
         it owns a 41.7% interest. Each investor owns a proportional interest
         in each prospect equal to the amount invested as a percentage of the
         total raised. PEMC retains a 10% carried interest in the net revenues
         attributable to the prospects, excluding PEC's direct interest.

         Other:

         As more fully described in Note 8, PEMC is committed to offer to
         repurchase the interests of the limited partners and trust unitholders
         in certain managed limited partnerships and trusts. During 1995, PEMC
         purchased such interests in an amount totaling $486,000.



                                     F-12

<PAGE>   37

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------

3.       ACCOUNTS RECEIVABLE

         Accounts receivable at December 31, 1996 and 1995 consisted of the
         following:

<TABLE>
<CAPTION>
                                                                December 31,
                                                          --------------------------
                                                             1996           1995
                                                          -----------    -----------
<S>                                                       <C>            <C>
         Joint interest billing                           $ 1,533,000    $   918,000
         Trade receivables                                    126,000         98,000
         Oil and gas sales                                  3,337,000        994,000
         Other                                                 99,000        399,000
                                                          -----------    -----------
                                                            5,095,000      2,409,000
              Less, allowance for doubtful accounts           (43,000)       (98,000)
                                                          -----------    -----------
                                                          $ 5,052,000    $ 2,311,000
                                                          ===========    ===========
</TABLE>

  4.     LONG-TERM BANK DEBT

         During 1994, the Company entered into a $4.8 million revolving line of
         credit with the bank which refinanced an existing outstanding loan to
         PEC. In May of 1994, the line was increased to $4.99 million and
         increased again in November to $8.0 million to facilitate acquisitions
         of oil and gas properties. The borrowing base, as defined under this
         agreement, was $7.9 million as of December 31, 1994.

         On April 26, 1995, the Company entered into a new credit agreement
         with the same bank, extending the borrowing base to a non-reducing
         $12.5 million and syndicating 25% of the borrowings to a second bank.
         During 1995 and 1996, the new agreement provided for interest at 1/2%
         over the bank's base rate, as defined, and payable monthly, or 2 3/4%
         over the London Inter-Bank Offered Rate (LIBO rate) for the interest
         period requested, payable at the end of the interest period. The
         average interest rates paid on outstanding borrowings subject to
         interest at 1/2% over the bank's base rate during 1996 and 1995 were
         8.79% and 9.52%, respectively. During the same periods, the average
         rates paid on outstanding borrowings bearing interest at 2 3/4% over
         the LIBO rate were 8.33% and 8.67%, respectively. As of December 31,
         1996 and 1995, the total outstanding borrowings were $17.4 million and
         $7.4 million, respectively, of which $12.6 million and $4.7 million
         accrued interest at the LIBO rate option.

         Advances pursuant to the agreement are limited to the borrowing base
         as defined in the agreement. As of December 31, 1996, the borrowing
         base was $19 million. Most of the Company's oil and gas properties, as
         well as certain receivables and equipment, were pledged as security
         under this agreement. Under the Company's credit agreement, the
         Company is required to maintain, as defined, a minimum current ratio,
         tangible net worth, debt coverage ratio and interest coverage ratio,
         and is prohibited from the payment of dividends.


                                     F-13

<PAGE>   38


                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         On February 6, 1997, the bank extended the borrowing base to a
         non-reducing $21 million. The credit agreement was also amended to
         provide for interest on outstanding borrowings at the bank's base
         rate, as defined, or 2 1/4% over the LIBO rate.

5.       OTHER LONG-TERM OBLIGATIONS

         Other long-term obligations at December 31, 1996 and 1995 consist of
         the following:

<TABLE>
<CAPTION>
                                                   1996         1995
                                                 ---------    ---------
<S>                                              <C>          <C>
         Subordinated debentures                 $ 225,000    $ 225,000
         Installment notes payable                      --      321,000
         Capital lease obligations                  91,000      163,000
                                                 ---------    ---------
                                                   316,000      709,000
                  Less, current portion            (73,000)    (202,000)
                                                 ---------    ---------
                                                 $ 243,000    $ 507,000
                                                 =========    =========
</TABLE>

         The secured subordinated debentures are held by affiliated
         Partnerships in which PEMC is a general partner and mature in
         December, 1998. Interest was payable at 9.25% through 1995, 6.5%
         through 1996 and 1% above year-end money market rates thereafter. The
         installment notes, bearing interest at rates ranging from 8.5% to
         11.25% during 1995, were fully paid during 1996.

6.       ENCUMBERED TREASURY STOCK

         In June of 1996, the Company entered into an agreement to purchase
         400,000 shares of the Company's common stock from McJunkin
         Corporation. The Company agreed to make 15 monthly payments of $80,000
         beginning on June 1, 1996, with the shares to be held in escrow until
         such payments have been made. The shares are classified as encumbered
         treasury stock on the balance sheet, and will be unencumbered in
         proportion to the payments made under the agreement. The liability for
         future payments under the note, less imputed interest, is shown as
         "Payable For Encumbered Treasury Stock" on the balance sheet.


                                     F-14

<PAGE>   39

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


7.       COMMITMENTS

         Operating Leases:

         The Company has several noncancelable operating leases, primarily for
         rental of office space and equipment, that have a term of more than
         one year. Future minimum lease payments under operating leases are as
         follows:

<TABLE>
<S>                          <C>              <C>
                             1997             $    418,000
                             1998                  382,000
                             1999                   45,000
                                              ------------
                                              $    845,000
                                              ============
</TABLE>

8.       CONTINGENT LIABILITIES

         PEMC, as managing general partner of the affiliated Partnerships, is
         responsible for all Partnership activities, including the review and
         analysis of oil and gas properties for acquisition, the drilling of
         development wells and the production and sale of oil and gas from
         productive wells. PEMC also provides the administration, accounting
         and tax preparation work for the Partnerships. PEMC 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.

         The Company is subject to environment 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.

         As a general partner, PEMC is committed to offer to purchase the
         limited partners' interest in certain of its managed Partnerships at
         various annual intervals. Under the terms of a partnership agreement,
         PEMC is not obligated to purchase an amount greater than 10% of the
         total partnership interest outstanding. In addition, PEMC will be
         obligated to purchase interests tendered by the limited partners only
         to the extent of one-hundred fifty (150) percent of the revenues
         received by it from such partnership in the previous year. Purchase
         prices are based upon annual reserve reports of independent petroleum
         engineering firms discounted by a risk factor. Based upon historical
         production rates and prices, management estimates that if all such
         offers were to be accepted, the maximum annual future purchase
         commitment would be approximately $500,000.

         The Company and its subsidiaries are involved in a number of lawsuits,
         all of which have arisen in the ordinary course of business. The
         Company believes that any ultimate



                                     F-15

<PAGE>   40
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         liability resulting from the settlement of any of these lawsuits will
         not have a material adverse effect on its financial position or
         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. In each case such options are for a term of ten years ending
         May 15, 1999, and are exercisable, on a cumulative basis, as to twenty
         percent of the shares subject to option in each year, beginning one
         year after the granting of the option. At December 31, 1996, options
         on 802,500 shares were outstanding and exercisable at prices ranging
         from $1.00 to $1.25.

         On January 27, 1983, the Company adopted the 1983 Incentive Stock
         Option Plan. At December 31, 1996 and 1995, options on 124,000 and
         134,000 shares were exercisable at $1.50 per share, respectively, and
         no additional shares were available for granting.

         PEMC has a marketing agreement with its current President to provide
         assistance and advice to PEMC in connection with the organization and
         marketing of oil and gas partnerships and joint ventures and other
         investment vehicles of which PEMC is to serve as general or managing
         partner. The Company had a similar agreement with its former Chairman.
         Although that agreement has expired, the former Chairman is still
         entitled to receive certain payments relating to partnerships and
         joint ventures formed during the time the agreement was in effect.
         Each individual is entitled to a percentage of the Company's carried
         interest depending on total capital raised and annual performance of
         the Partnerships and Joint ventures.

10.      INCOME TAXES

         The components of the provision for income taxes for the year ended
         December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
          Federal:                       1996          1995
                                      ----------    ----------
<S>                                   <C>           <C>
          Current                     $   23,000    $   24,000
          Deferred                            --            --
          State:
              Current                     40,000        32,000
              Deferred                   (13,000)       13,000
                                      ----------    ----------
                                      $   50,000    $   69,000
                                      ==========    ==========
</TABLE>



                                     F-16

<PAGE>   41

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


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

<TABLE>
<CAPTION>
                                                                    December 31,   December 31,
                                                                        1996           1995
                                                                    -----------    -----------
<S>                                                                 <C>            <C>
          Current assets:
               Compensation and benefits                            $   102,000    $    90,000
               Allowance for doubtful accounts                           17,000         29,000
               Other accrued liabilities                                     --         79,000
                                                                    -----------    -----------
                                                                        119,000        198,000
          Noncurrent assets:
               Depreciation                                              74,000             --
               Due from related parties reserve                         316,000        286,000
               Net operating loss carryforwards                         747,000        871,000
               Percentage depletion carryforwards                     1,116,000      1,142,000
               Alternative minimum tax credits                          729,000        705,000
               Less, Valuation allowance                             (1,607,000)    (1,715,000)
                                                                    -----------    -----------
                                                                      1,375,000      1,289,000
                                                                    -----------    -----------
          Noncurrent liabilities:
               Basis differences relating to limited partnerships      (813,000)      (901,000)
               Depletion                                               (802,000)      (558,000)
               Depreciation                                                  --       (163,000)
                                                                    -----------    -----------
                                                                     (1,615,000)    (1,622,000)
                                                                    -----------    -----------
          Net deferred tax liabilities:                             $  (121,000)   $  (135,000)
                                                                    ===========    ===========
</TABLE>


         The total provision for income taxes for the years ended December 31,
         1996 and 1995 varies from the federal statutory tax rate as a result
         of the following:

<TABLE>
<CAPTION>
                                                                               December 31,    December 31,
                                                                                  1996             1995
                                                                               -----------     -----------
<S>                                                                       <C>         <C>
                    Expected statutory tax rate                                       34.0%           34.0%
                    State income tax, net of federal benefit                           2.7%            7.6%
                    Effect of utilizing net operating loss carryforwards             (12.6%)          (6.4%)
                    Percentage depletion                                              (9.9%)         (23.6%)
                    Intangible drilling costs                                         (9.1%)            --
                                                                               -----------     -----------
                                                                                       5.1%           11.6%
                                                                               ===========     ===========
          </TABLE>

         At December 31, 1996, the Company had federal tax net operating loss
         carryforwards for both regular income tax purposes and alternative
         minimum tax ("AMT") purposes of $2,196,000. Due to the change in
         control of the Company on October 7, 1987, the Company is limited in
         utilizing its annual net operating loss carryforwards. Based on the
         current ownership and IRS statutes, the annual amount available to the
         Company is approximately $366,000. Net loss carryforwards expire
         beginning in 1997 through 2002.


                                     F-17

<PAGE>   42
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         This  applies  to the  alternative  minimum  tax net  operating  loss
         carryforwards, which can be used to offset 90% of AMT income in future
         years. The Company has percentage depletion carryforwards of
         approximately $2,790,000 for regular tax purposes and $2,555,000 for
         alternative minimum tax purposes. The Company has approximately
         $706,000 in alternative minimum tax credit carryforwards.

         Both the percentage depletion deductions and the alternative minimum
         tax credits may be carried forward indefinitely for tax purposes.

11.      SEGMENT INFORMATION AND MAJOR CUSTOMERS

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

         The Company sells its oil and gas production to a number of
         purchasers. While the Company is not dependent on any one purchaser of
         its production, oil and gas revenue in 1996 and 1995 included sales to
         one purchaser for $1,378,000 and $1,222,000, respectively, which
         represented approximately 12% and 20% of the Company's total revenue
         from oil and gas sales. In 1996, $1,401,000 of revenue was generated
         from sales to another purchaser, representing an additional 12% of the
         Company's total oil and gas revenue. In 1995, $957,000 of revenue from
         sales to a third purchaser represented 16% of the Company's total oil
         and gas revenue. The above sales were made under various contractual
         arrangements, some of which are month-to-month; however, the Company
         believes that these purchasers will continue to purchase oil and gas
         products and, if not, could be replaced by other purchasers.

12.      RELATED PARTY TRANSACTIONS

         PEMC is a general partner in several oil and gas Partnerships in which
         certain directors have limited and general partnership interests. A
         substantial portion of the assets and revenues of PEMC are derived
         from its sponsorship of the Partnerships and the interests of PEMC in
         the oil and gas properties acquired by the Partnerships. As the
         managing general partner in each of the Partnerships, PEMC receives
         approximately 5% to 12% of the net revenues of each Partnership as a
         carried interest in the Partnerships' properties.

         The Partnership agreements allow PEMC to receive management fees for
         various services to the Partnerships as well as a reimbursement for
         property acquisition and development costs incurred on behalf of the
         Partnerships and general and administrative overhead, which is
         reported in the statements of operations as administrative revenue.

         In 1991, the Company loaned approximately $325,000 at 12% interest to
         a real estate limited partnership of which a Company Officer and
         Director is a general partner. During



                                     F-18

<PAGE>   43
                    PRIMEENERGY CORPORATION and SUBSIDIARIES

             NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                   ---------


         1996, the principal of the loan was increased by $40,000,
         representing additional funds disbursed to the limited partnership in
         May and August. This loan is secured by a second mortgage on the
         underlying real estate in the partnership and the Company received a
         23% equity participation in the partnership. The loan agreement
         provides for interest payments on a quarterly basis provided the cash
         flow from operations of the limited partnership are sufficient to pay
         interest for the quarter. If cash flows are not sufficient, then the
         accrued interest is added to the principal. Amounts due, included in
         other non-current assets on the balance sheet, were $520,000 and
         $425,000 at December 31, 1996 and 1995, respectively.

         Due to related parties at December 31, 1996 and December 31, 1995
         primarily represent receipts collected by the Company, as agent, from
         oil and gas sales net of expenses. The amount of such receipts due the
         affiliated partnerships was $1,298,000 and $1,319,000 at December 31,
         1996 and 1995, respectively. Receivables from affiliates consist of
         reimbursable general and administrative costs, lease operating
         expenses and reimbursements for property acquisitions, development,
         and related costs.

         As discussed in note 6 above, in June of 1996 the Company entered into
         an agreement to purchase 400,000 shares of the Company's common stock
         from McJunkin Corporation. The McJunkin Corporation is a major
         shareholder in the Company.

13.      RESTRICTED CASH AND CASH EQUIVALENTS

         Restricted cash and cash equivalents includes $663,000 and $467,000 at
         December 31, 1996 and December 31, 1995, respectively, of cash
         primarily pertaining to unclaimed royalty payments. There were
         corresponding accounts payable recorded at December 31, 1996 and
         December 31, 1995 for these liabilities.

         Restricted cash at December 31, 1995, also includes $246,000 relating
         to the 1994-I and 1995-I Development Programs.

14.      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 $207,000 and $197,000 in 1996 and 1995, respectively.



                                     F-19

<PAGE>   44


15.      ACCOUNTS PAYABLE

         A summary of accounts payable at December 31, 1996 and 1995 is as
         follows:

<TABLE>
<CAPTION>
                                                       1996         1995
                                                    ----------   ----------
<S>                                                 <C>          <C>
          Deposits - Development Programs           $       --   $  246,000
          Payables to unaffiliated interests         5,221,000    2,365,000
          Overdraft payable to bank                         --       27,000
          Other                                         76,000       53,000
                                                    ----------   ----------
                                                    $5,297,000   $2,691,000
                                                    ==========   ==========
</TABLE>

         The Deposits - Development Programs represented funds raised which
         were committed to the development of certain properties identified in
         the programs (see Note 13).

  16.    SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                        Year Ended
                        December 31,    Fourth        Third         Second        First
                           1996         Quarter       Quarter       Quarter       Quarter
                        -----------   -----------   -----------   -----------   -----------
<S>                     <C>           <C>           <C>           <C>           <C>
Revenue                 $23,226,000   $ 7,341,000   $ 6,044,000   $ 5,395,000   $ 4,446,000

Operating income            814,000       533,000       267,000         4,000        10,000

Net income                  939,000       546,000       284,000        73,000        36,000

Net income per common
share                   $       .17   $       .10   $       .05   $       .01   $       .01
</TABLE>


<TABLE>
<CAPTION>
                              Year Ended
                             December 31,     Fourth        Third         Second        First
                                 1995        Quarter       Quarter       Quarter       Quarter
                             -----------   -----------   -----------   -----------   -----------
<S>                          <C>           <C>           <C>           <C>           <C>
Revenue                      $18,059,000   $ 4,812,000   $ 4,357,000   $ 4,521,000   $ 4,369,000

Operating income                 497,000        14,000        87,000       192,000       204,000

Net income                       527,000        57,000        83,000       151,000       236,000

Net income per common
share                        $       .09   $       .01   $       .01   $       .03   $       .04
</TABLE>



                                     F-20
<PAGE>   45





                    PRIMEENERGY CORPORATION AND SUBSIDIARIES

                           SUPPLEMENTARY INFORMATION

                                     -----

                                  (UNAUDITED)





                                     F-21

<PAGE>   46



                    PRIMEENERGY CORPORATION and SUBSIDIARIES

         CAPITALIZED COSTS RELATING to OIL and GAS PRODUCING ACTIVITIES

                           December 31, 1996 and 1995

                                   ---------

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                  1996          1995
                                              -----------   -----------
<S>                                           <C>           <C>
Developed oil and gas properties              $35,952,000   $25,024,000
Undeveloped oil and gas properties--              872,000            --
                                              -----------   -----------
                                               36,824,000    25,024,000

Accumulated depreciation, depletion and
     valuation allowance                       18,661,000    14,956,000
                                              -----------   -----------

     Net capitalized costs (1)                $18,163,000   $10,068,000
                                              ===========   ===========
</TABLE>

(1)  Includes $160,000 in 1996 and $177,000 in 1995 related to the net cost of
     gas gathering facilities.


               COSTS INCURRED in OIL and GAS PROPERTY ACQUISTION,
                     EXPLORATION and DEVELOPMENT ACTIVITIES

                     Years ended December 31, 1996 and 1995

                                   ---------

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                          1996         1995
                                                       ----------   ----------
<S>                                                    <C>          <C>
Acquisition of properties:
     Developed                                         $7,281,000   $1,128,000
     Undeveloped                                          872,000           --

Exploration costs, excluding valuation allowance          483,000       50,000

Development costs                                       4,274,000      935,000
</TABLE>


             See accompanying notes to supplementary information.



                                     F-22

<PAGE>   47

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                   STANDARDIZED MEASURE of DISCOUNTED FUTURE
             NET CASH FLOWS RELATING to PROVED OIL and GAS RESERVES

                     years ended December 31, 1996 AND 1995

                                   ---------

                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                 1996            1995
                                                            ------------    ------------
<S>                                                         <C>             <C>
Future cash inflows                                         $ 95,679,000    $ 41,946,000

Future production and development costs                      (44,329,000)    (26,181,000)

Future income tax expenses                                    (6,488,000)       (837,000)
                                                            ------------    ------------

     Future net cash flows                                    44,862,000      14,928,000

10% annual discount for estimated timing of cash flow        (14,220,000)     (5,794,000)
                                                            ------------    ------------
     Standardized measure of discounted
         future net cash flow                               $ 30,642,000    $  9,134,000
                                                            ============    ============
</TABLE>




             See accompanying notes to supplementary information.



                                      F-23

<PAGE>   48
                    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, 1996 and 1995

                                   ----------

                                  (Unaudited)


The following are the principal sources of change in the standardized measure
of discounted future net cash flows during 1996 and 1995:

<TABLE>
<CAPTION>
                                                                   1996            1995
                                                               ------------    ------------
<S>                                                            <C>             <C>
Sales of oil and gas produced, net of production costs         $ (5,329,000)   $ (1,925,000)
Net changes in prices and production costs                        7,803,000         409,000
Extensions, discoveries and improved recovery,
     less recovery costs                                          7,897,000         335,000
Revisions of previous quantity estimates                          4,827,000       2,272,000
Reserves purchases, net of development costs                      9,783,000         883,000
Net change in development costs                                     (26,000)        125,000

Reserves sold                                                            --         (15,000)

Accretion of discount                                               913,000         677,000

Net change in income taxes                                       (4,200,000)       (209,000)
Other                                                              (160,000)       (191,000)
                                                               ------------    ------------

     Net change                                                  21,508,000       2,361,000

Standardized measure of discounted future net cash flow:

     Beginning of year                                            9,134,000       6,773,000
                                                               ------------    ------------
     End of year                                               $ 30,642,000    $  9,134,000
                                                               ============    ============
</TABLE>





              See accompanying notes to supplementary information



                                     F-24

<PAGE>   49

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

                          RESERVE QUANTITY INFORMATION

                     years ended December 31, 1996 and 1995

                                   ---------

                                  (Unaudited)


<TABLE>
<CAPTION>
                                                             1996                         1995
                                                ------------------------------  --------------------------
                                                     Gas              Oil           Gas             Oil
                                                    (Mcf)           (bbls.)        (Mcf)           (bbls.)
<S>                                               <C>               <C>          <C>              <C>
Proved developed and undeveloped
   reserves:
       Beginning of year                          13,600,000        905,000      9,804,000        801,000
       Extensions, discoveries
          and improved recovery                    3,746,000         90,000        544,000         18,000
       Revisions of previous
          estimates (1)                            1,012,000        (14,000)     3,646,000        137,000
       Sales                                              --             --             --         (5,000)
       Purchases                                   3,595,000        734,000      1,558,000        109,000
       Production                                 (2,888,000)      (249,000)    (1,952,000)      (155,000)

       End of year                                19,065,000      1,466,000     13,600,000        905,000

Proved developed reserves                         19,036,000      1,453,000     13,549,000        905,000
</TABLE>



(1) Revisions during 1995 and 1996 relate primarily to changes in prices.



              See accompanying notes to supplementary information



                                     F-25

<PAGE>   50

                    PRIMEENERGY CORPORATION and SUBSIDIARIES

          RESULTS of OPERATIONS from OIL and GAS PRODUCTING ACTIVITIES

                     years ended December 31, 1996 and 1995

                                   ---------

                                  (Unaudited)



<TABLE>
<CAPTION>
                                                              1996          1995
                                                          -----------   -----------
<S>                                                       <C>           <C>
Revenue:
     Oil and gas sales                                    $11,238,000   $ 6,024,000
                                                          -----------   -----------

Costs and expenses:
     Lease operating expense                                5,909,000     4,100,000
     Exploration costs                                        483,000        50,000
     Depreciation and depletion                             4,283,000     2,430,000
     Income tax (benefit) expense                                  --       (64,000)
                                                          -----------   -----------
                                                           10,675,000     6,516,000
                                                          -----------   -----------

Results of operations from producing activities
    (excluding corporate overhead and interest costs)     $   563,000   $  (492,000)
                                                          ===========   ===========
</TABLE>




              See accompanying notes to supplementary information



                                     F-26

<PAGE>   51

                    PRIMEENERGY CORPORATION and SUBSIDARIES

                       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 applying current prices
         of oil and gas received by the Company to estimated future production
         of 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.




                                     F-27

<PAGE>   52

         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-28

<PAGE>   53


                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>
 EXHIBIT NO.                      DESCRIPTION
 -----------                      -----------
<S>                    <C>
    3.1            --  Certificate of Incorporation as amended, of PrimeEnergy
                       Corporation. (Incorporated herein by reference to
                       Exhibit 3.1 of PrimeEnergy Corporation Form 10-KSB for
                       the year ended December 31, 1994)

    3.2            --  Bylaws of PrimeEnergy Corporation. (Incorporated herein
                       by reference to Exhibit 3.2 of PrimeEnergy Corporation
                       Form 10-KSB for the year ended December 31, 1994)

   10.1            --  PrimeEnergy Corporation 1983 Incentive Stock Option Plan
                       (Incorporated herein by reference to Exhibit 10.1 of
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)

   10.3            --  Massachusetts Mutual Flexinvest 401 (k) Plan as amended
                       and restated. (Incorporated herein by reference to
                       Exhibit 10.3 of PrimeEnergy Corporation Form 10-KSB for
                       the year ended December 31, 1994) (1)

   10.7            --  Credit Agreement dated April 26, 1995, between
                       PrimeEnergy Corporation, PrimeEnergy Management
                       Corporation and Bank One, Texas, National Association.
                       (Incorporated herein by reference to Exhibit 10.7 to
                       PrimeEnergy Corporation Form 8-K dated April 26, 1995)

   10.7.1          --  First Amendment to Credit Agreement Among PrimeEnergy
                       Corporation and PrimeEnergy Management Corporation, as
                       Borrowers, Bank One, Texas, National Association, as
                       Agent, and the Lenders Signatory Hereto, effective as of
                       October 6, 1995. (Incorporated herein by reference to
                       Exhibit 10.7.1 to PrimeEnergy Corporation Form 10-KSB
                       for the year ended December 31, 1995)

   10.7.2          --  Second Amendment to Credit Agreement Among PrimeEnergy
                       Corporation and PrimeEnergy Management Corporation, as
                       Borrowers, Bank One, Texas, National Association, as
                       Agent, and the Lenders Signatory Hereto, effective as of
                       February 6, 1997. (filed herewith)

   10.8            --  Mortgage, Deed of Trust, Indenture, Security Agreement,
                       Financing Statement and Assignment of Production dated
                       May 27, 1994, as ratified and amended April 26, 1995,
                       between PrimeEnergy Corporation, PrimeEnergy Management
                       Corporation and Bank One, Texas, National Association.
                       (Incorporated herein by reference to Exhibit 10.8 to
                       PrimeEnergy Corporation Form 8-K dated April 26, 1995)

   10.15           --  Employment Agreement between K.R.M. Petroleum
                       Corporation and Charles E. Drimal, Jr.  (Incorporated
                       herein by reference to Exhibit 10.15 of PrimeEnergy
                       Corporation Form 10-KSB for the year ended December 31,
                       1994) (1)

   10.17           --  Amended Marketing Agreement between PrimeEnergy
                       Management Corporation and Charles E. Drimal, Jr.
                       (Incorporated herein by reference to Exhibit 10.17 of
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)

   10.18           --  Composite copy of Non-Statutory Option Agreements.(1)
                       (Incorporated herein by reference to Exhibit 10.18 to
                       PrimeEnergy Corporation Form 10-KSB for the year ended
                       December 31, 1994) (1)

   10.19           --  Purchase and Sale Agreement dated as of May 7, 1996, by
                       and between Internationale Nederlanden (U.S.) Capital
                       Corporation and PrimeEnergy Corporation (Incorporated
                       herein by reference to Exhibit 10.19 to PrimeEnergy
                       Corporation Form 8-K dated May 29, 1996)

   10.20           --  Assignment, Conveyance and Bill of Sale dated as of May
                       7, 1996, by Saratoga Resources, Inc., a Texas
                       corporation, et al., to PrimeEnergy Corporation
                       (Incorporated
</TABLE>
<PAGE>   54
                       herein by reference to Exhibit 10.20 to PrimeEnergy
                       Corporation Form 8-K dated May 29, 1996)

   22              --  Subsidiaries. (filed herewith)

   24              --  Consent of Ryder Scott Company. (filed herewith)

   27              --  Financial Data Schedule. (filed herewith)

----------

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