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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K

(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, 2008

Or



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

For the Transition Period From                      to

Commission
File Number 0-7406





PrimeEnergy Corporation

(Exact name
of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 84-0637348                          
|(state or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     
|One Landmark Square, Stamford, CT                              |  | 06901                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

Securities registered pursuant to Section 12(b) of the Act:  None

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

Common Stock, par value $.10 per share

(Title of Class)





Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No   x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the
Act.Yes   ̈    No  x

Indicate whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

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

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



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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

The aggregate market value of the voting stock of the Registrant held by non-affiliates, computed by reference to the average bid and asked price of such
common equity as of the last business day of the Registrants most recently completed second fiscal quarter, was $34,989,461.

The
number of shares outstanding of each class of the Registrants Common Stock as of April 2, 2009 was 3,041,513 shares, Common Stock, $0.10 par value.





DOCUMENTS INCORPORATED BY
REFERENCE

Portions of the Registrants proxy statement to be furnished to stockholders in connection with its Annual Meeting of
Stockholders to be held in June 2009, are incorporated by reference in Part III hereof.









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TABLE OF CONTENTS



|                      |  |                               |  |                                                                                                              |  |   
|--------------------- |  | ----------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I                |  |                               |  |                                                                                                              |  |   
|                      |  | Item 1.                       |  | BUSINESS                                                                                                     |  | 3 
|                      |  | Item 1A.                      |  | RISK FACTORS                                                                                                 |  | 12
|                      |  | Item 1B.                      |  | UNRESOLVED STAFF COMMENTS                                                                                    |  | 16
|                      |  | Item 2.                       |  | PROPERTIES                                                                                                   |  | 16
|                      |  | Item 3.                       |  | LEGAL PROCEEDINGS                                                                                            |  | 21
|                      |  | Item 4.                       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 21
|                      |  |                               | 
|PART II               |  |                               |  |                                                                                                              |  |   
|                      |  | Item 5.                       |  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |  | 22
|                      |  | Item 6.                       |  | SELECTED FINANCIAL DATA                                                                                      |  | 23
|                      |  | Item 7.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 23
|                      |  | Item 7a.                      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 25
|                      |  | Item 8.                       |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | 25
|                      |  | Item 9.                       |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 25
|                      |  | Item 9A.                      |  | CONTROLS AND PROCEDURES                                                                                      |  | 26
|                      |  | Item 9B.                      |  | OTHER INFORMATION                                                                                            |  | 27
|                      |  |                               | 
|PART III              |  |                               |  |                                                                                                              |  |   
|                      |  | Item 10.                      |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                       |  | 28
|                      |  | Item 11.                      |  | EXECUTIVE COMPENSATION                                                                                       |  | 28
|                      |  | Item 12.                      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS               |  | 28
|                      |  | Item 13.                      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE                                     |  | 28
|                      |  | Item 14.                      |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                       |  | 28
|                      |  |                               | 
|PART IV               |  |                               |  |                                                                                                              |  |   
|                      |  | Item 15.                      |  | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                   |  | 29
|                      | 
|SIGNATURES            |  | 33                           
|                      | 
|FINANCIAL STATEMENTS: |  |                              
|                      |  | INDEX TO FINANCIAL STATEMENTS |  | F-1                                                                                                         



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PrimeEnergy Corporation

FORM 10-K ANNUAL REPORT

For the Fiscal Year Ended

December 31, 2008

PART I



|Item 1. | BUSINESS.
|------- | ---------

General

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

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

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

Exploration, Development and Recent Activities

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

As of December 31, 2008, the Company had net capitalized costs related to oil and gas properties of $212.1 million, including $2.4 million of
undeveloped properties. Total expenditures for the acquisition, exploration and development of the Companys properties during 2008 were $53.7 million of which $649,000 related to



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exploration costs expensed during 2008. Proved reserves as of December 31, 2008, were 87 BCFe of gas which consisted of 98.6% proved developed reserves
and 1.4% proved undeveloped reserves.

Significant 2008 activity

During 2008, we participated in drilling a total of 71 gross (41.68 net) wells, all of which were successful completions.

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

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

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

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

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

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

Well Operations

The Companys operations are conducted through a central office in Houston, Texas, and district offices in Houston and Midland, Texas, Oklahoma City,
Oklahoma, and Charleston, West Virginia. The Company currently operates 1,645 oil and gas wells, 418 through the Houston office, 283 through the Midland office, 446 through the Oklahoma City office and 498 through the Charleston, West Virginia
office. Substantially all of the wells operated by the Company are wells in which the Company has an interest.

The Company operates wells
pursuant to operating agreements which govern the relationship between the Company as operator and the other owners of working interests in the properties, including the Partnerships, Trusts and joint venture participants. For each operated well,
the Company receives monthly fees that are



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competitive in the areas of operations and also is reimbursed for expenses incurred in connection with well operations.

The Partnerships, Trusts and Joint Ventures

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

PEMC, as managing
general partner of the Partnerships and managing trustee of the Trusts, is responsible for all Partnership and Trust activities, the drilling of development wells and the production and sale of oil and gas from productive wells. PEMC also provides
administration, accounting and tax preparation for the Partnerships and Trusts. PEMC is liable for all debts and liabilities of the Partnerships and Trusts, to the extent that the assets of a given limited partnership or trust are not sufficient to
satisfy its obligations. The Company stopped sponsoring partnerships and trusts in 1992. Today there are only 18 partnerships and two trusts remaining. The aggregate number of limited partners in the Partnerships and beneficial owners of the Trusts
now administered by PEMC is approximately 2,587. This number, as well as the number of remaining partnerships noted above, has decreased in recent years as the Company continues to buy back limited partner interest.

Regulation

Regulation of Transportation and Sale of Natural
Gas:

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

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

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

The Outer Continental
Shelf Lands Act (OCSLA), which FERC implements as to transportation and pipeline issues, requires that all pipelines operating on or across the outer continental shelf (OCS) provide open



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access, non-discriminatory transportation service. One of FERCs principal goals in carrying out OCSLAs mandate is to increase transparency in the
market to provide producers and shippers on the OCS with greater assurance of open access service on pipelines located on the OCS and non-discriminatory rates and conditions of service on such pipelines.

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

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

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

Regulation of Transportation of Oil:

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

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



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Regulation of Production:

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

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

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

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

Taxation

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

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

Competition and Markets

The business of acquiring producing properties and non-producing leases suitable for exploration and development is highly competitive. Competitors of the Company, in its efforts to acquire both producing and



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

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

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



|                           |  |    |  
|-------------------------- |  | -- | -
|Oil Purchasers:            |  |    |  
|Texon Distributing L.P.    |  | 25 | %
|Plains All American Inc.   |  | 61 | %
|Gas Purchasers:            |  |    |  
|Unimark LLC                |  | 12 | %
|Cokinos Energy Corporation |  | 48 | %

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

Environmental Matters

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



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



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



| |  |  | Impose substantial liabilities for pollution resulting from our operations.
| | - |  | ---------------------------------------------------------------------------

Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal fines and penalties or the imposition of injunctive relief. Changes in environmental laws and
regulations occur regularly, and any changes that result in more stringent and costly waste handling, storage, transport, disposal or cleanup requirements could materially adversely affect our operations and financial position, as well as those in
the oil and natural gas industry in general. While we believe that we are in substantial compliance



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with current applicable environmental laws and regulations and that continued compliance with existing requirements would not have a material adverse impact
on us, there is no assurance that this trend will continue in the future.

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



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



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



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

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

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



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



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

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

Oil Pollution Act of 1990. The Oil Pollution Act of 1990, as amended (the OPA), and
regulations there under impose liability on responsible parties for damages resulting from oil spills into or upon navigable waters, and adjoining shorelines or in the exclusive economic zone of the United States. Liability under OPA is
strict, and under certain circumstances joint and several, and potentially unlimited. A responsible party includes the owner or operator of an onshore facility and the lessee or permittee of the area in which an offshore facility is
located. The OPA also requires the lessee or permittee of the offshore area in which a covered offshore facility is located to establish and maintain evidence of financial responsibility in the amount of $35.0 million ($10.0 million if the offshore
facility is located landward of the seaward boundary of a state) to cover liabilities



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related to an oil spill for which such person is statutorily responsible. The amount of required financial responsibility may be increased above the minimum
amounts to an amount not exceeding $150.0 million depending on the risk represented by the quantity or quality of oil that is handled by the facility. We carry insurance coverage to meet these obligations, which we believe is customary for
comparable companies in our industry. A failure to comply with OPAs requirements or inadequate cooperation during a spill response action may subject a responsible party to civil or criminal enforcement actions. We are not aware of any action
or event that would subject us to liability under OPA, and we believe that compliance with OPAs financial responsibility and other operating requirements will not have a material adverse effect on us.

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

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

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

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



10



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##### Index to Financial Statements

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

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

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

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

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

Air Pollution Control. The Clean Air Act and state air pollution laws adopted to fulfill its mandates provide a framework for national, state and local
efforts to protect air quality. Our operations utilize equipment that emits air pollutants subject to federal and state air pollution control laws. These laws require utilization of air emissions



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##### Index to Financial Statements

abatement equipment to achieve prescribed emissions limitations and ambient air quality standards, as well as operating permits for existing equipment and
construction permits for new and modified equipment. Air emissions associated with offshore activities are projected using a matrix and formula supplied by MMS, which has primacy from the Environmental Protection Agency for regulating such
emissions.

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

Employees

At March 26, 2009, the Company had 232 full-time and 17 part-time employees,
21 of whom were employed by the Company at its principal offices in Stamford, Connecticut, 35 in Houston, Texas, at the offices of Prime Operating Company, Eastern Oil Well Service Company, EOWS Midland Company and Prime Offshore L.L.C., and 193
employees who were primarily involved in the district operations of the Company in Houston and Midland, Texas, Oklahoma City, Oklahoma and Charleston, West Virginia.



|Item 1A. | RISK FACTORS.
|-------- | -------------

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

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

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



| |  |  | the level of consumer product demand;
| | - |  | -------------------------------------



| |  |  | weather conditions;
| | - |  | -------------------



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



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



| |  |  | the price of foreign imports;
| | - |  | -----------------------------



| |  |  | actions of governmental authorities;
| | - |  | ------------------------------------



| |  |  | pipeline capacity constraints;
| | - |  | ------------------------------



| |  |  | inventory storage levels;
| | - |  | -------------------------



| |  |  | domestic and foreign governmental regulations;
| | - |  | ----------------------------------------------



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##### Index to Financial Statements

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



| |  |  | overall economic conditions
| | - |  | ---------------------------

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

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

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



| |  |  | unexpected drilling conditions, pressure or irregularities in formations;
| | - |  | -------------------------------------------------------------------------



| |  |  | equipment failures or accidents;
| | - |  | --------------------------------



| |  |  | adverse weather conditions;
| | - |  | ---------------------------



| |  |  | compliance with governmental requirements; and
| | - |  | ----------------------------------------------



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

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



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



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



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



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



| |  |  | our financial resources and results; and
| | - |  | ----------------------------------------



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

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

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

Reserve engineering is a
subjective process of estimating underground accumulations of natural gas and crude oil that cannot be measured in an exact manner. The process of estimating quantities of proved reserves is



13



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##### Index to Financial Statements

complex and inherently uncertain, and the reserve data included in this document are only estimates. The process relies on interpretations of available
geologic, geophysic, engineering and production data. As a result, estimates of different engineers may vary. In addition, the extent, quality and reliability of this technical data can vary. The differences in the reserve estimation process are
substantially due to the geological conditions in which the wells are drilled. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as natural gas and oil prices. Additional assumptions include drilling
and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of:



| |  |  | the quality and quantity of available data;
| | - |  | -------------------------------------------



| |  |  | the interpretation of that data;
| | - |  | --------------------------------



| |  |  | the accuracy of various mandated economic assumptions; and
| | - |  | ----------------------------------------------------------



| |  |  | the judgment of the persons preparing the estimate.
| | - |  | ---------------------------------------------------

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

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

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

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

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

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

Our business involves a variety of operating risks, including:



| |  |  | blowouts, cratering and explosions;
| | - |  | -----------------------------------



14



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##### Index to Financial Statements

| |  |  | mechanical problems;
| | - |  | --------------------



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



| |  |  | formations with abnormal pressures;
| | - |  | -----------------------------------



| |  |  | pollution and other environmental risks; and
| | - |  | --------------------------------------------



| |  |  | natural disasters.
| | - |  | ------------------

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

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

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

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

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

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

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

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

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

Competition in the natural gas and oil industry is intense. Major and independent
natural gas and oil companies actively bid for desirable natural gas and oil properties, as well as for the equipment and labor required to operate and develop these properties. Our competitive position is affected by price, contract terms and
quality of service, including pipeline connection times, distribution efficiencies and reliable delivery record. Many of our competitors have financial and technological resources and exploration and development budgets



15



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##### Table of Contents

##### Index to Financial Statements

that are substantially greater than ours. These companies may be able to pay more for exploratory projects and productive natural gas and oil properties and
may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. In addition, these companies may be able to expend greater resources on the existing and changing
technologies that we believe are and will be increasingly important to attaining success in the industry.

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

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

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

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

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

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



|Item 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

The Company is a
smaller reporting company and no response is required pursuant to this Item.



|Item 2. | PROPERTIES.
|------- | -----------

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



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##### Index to Financial Statements

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

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

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

The following table sets forth the exploratory and development drilling experience with
respect to wells in which the Company participated during the three years ended December 31, 2008.



|             |  |       |  |       |  |       |  |        |  |       |  |       
|------------ |  | ----- |  | ----- |  | ----- |  | ------ |  | ----- |  | ------
|             |  | 2008  |  | 2007  |  | 2006 
|             |  | Gross |  | Net   |  | Gross |  | Net    |  | Gross |  | Net   
|Exploratory: |  |       |  |       |  |       |  |        |  |       |  |       
|Oil          |  | 2     |  | 1.5   |  |      |  |       |  |      |  |      
|Gas          |  |      |  |      |  |      |  |       |  | 5     |  | 3.750 
|Dry          |  |      |  |      |  | 1     |  | .375   |  | 1     |  | .400  
|Development: |  |       |  |       |  |       |  |        |  |       |  |       
|Oil          |  | 69    |  | 40.18 |  | 30    |  | 13.88  |  | 41    |  | 22.141
|Gas          |  |      |  |      |  |      |  |       |  | 28    |  | 11.664
|Dry          |  |      |  |      |  |      |  |       |  |      |  |      
|Total:       |  |       |  |       |  |       |  |        |  |       |  |       
|Oil          |  | 71    |  | 41.68 |  | 30    |  | 13.88  |  | 41    |  | 22.141
|Gas          |  |      |  |      |  |      |  |       |  | 33    |  | 15.414
|Dry          |  |      |  |      |  | 1     |  | .375   |  | 1     |  | .400  
|             |  |       |  |       |  |       |  |        |  |       |  |       
|             |  | 71    |  | 41.68 |  | 31    |  | 14.255 |  | 75    |  | 37.955
|             |  |       |  |       |  |       |  |        |  |       |  |       

Oil and Gas Production

As of December 31, 2008, the Company had ownership interests in the following numbers of gross and net producing oil and gas wells and gross and net producing acres (1).



|                    |  |            |  |           
|------------------- |  | ---------- |  | ----------
|                    |  | Gross      |  | Net       
|Producing wells (1) |  |            |  |           
|Oil Wells           |  | 997        |  | 407       
|Gas Wells           |  | 1,186      |  | 517       
|Producing Acres     |  | 315,640.83 |  | 106,589.27



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

The following table shows the
Companys net production of crude oil and natural gas for each of the three years ended December 31, 2008. 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.



|              |  |           |  |            |  |          
|------------- |  | --------- |  | ---------- |  | ---------
|              |  | 2008      |  | 2007       |  | 2006     
|Oil (barrels) |  | 658,000   |  | 561,000    |  | 456,000  
|Gas (Mcf)     |  | 8,899,000 |  | 11,312,000 |  | 6,411,000



17



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##### Index to Financial Statements

The following table sets forth the Companys average sales price per barrel of crude oil and average
sales prices per one thousand cubic feet (Mcf) of gas, together with the Companys average production costs per unit of production for the three years ended December 31, 2008.



|                                                       |  |      |       |      |       |      |      
|------------------------------------------------------ |  | ---- | ----- | ---- | ----- | ---- | -----
|                                                       |  | 2008 |       | 2007 |       | 2006
|Average sales price per barrel                         |  | $    | 84.43 |      | 66.94 |      | 61.10
|Average sales price Per Mcf                            |  | $    | 8.93  |      | 7.50  |      | 6.83 
|Average production costs per net equivalent barrel (1) |  | $    | 19.92 |      | 14.24 |      | 16.62



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

Undeveloped Acreage

The following table sets forth the approximate gross and net undeveloped acreage in which the
Company has leasehold, mineral and royalty interests as of December 31, 2008. 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.



|               |  |                     |  |                   |  |                  |  |          |  |            |  |         
|-------------- |  | ------------------- |  | ----------------- |  | ---------------- |  | -------- |  | ---------- |  | --------
|               |  | Leasehold Interests |  | Mineral Interests |  | RoyaltyInterests
|State          |  | GrossAcres          |  | NetAcres          |  | GrossAcres       |  | NetAcres |  | GrossAcres |  | NetAcres
|Colorado       |  |                    |  |                  |  | 799              |  | 23       |  |           |  |        
|Gulf of Mexico |  | 85,696              |  | 54,288            |  |                 |  |         |  |           |  |        
|Louisiana      |  |                    |  |                  |  |                 |  |         |  | 295        |  | 1       
|Montana        |  |                    |  |                  |  | 14,304           |  | 60       |  |           |  |        
|Nebraska       |  |                    |  |                  |  | 2,554            |  | 331      |  |           |  |        
|North Dakota   |  |                    |  |                  |  | 640              |  | 1        |  |           |  |        
|Oklahoma       |  | 4,176               |  | 1,895             |  | 320              |  | 0        |  | 2,880      |  | 24      
|Texas          |  | 1,826               |  | 1,371             |  | 640              |  | 2        |  |           |  |        
|West Virginia  |  | 220                 |  | 41                |  |                 |  |         |  |           |  |        
|Wyoming        |  |                    |  |                  |  |                 |  |         |  | 140        |  | 35      
|               |  |                     |  |                   |  |                  |  |          |  |            |  |         
|TOTAL          |  | 91,918              |  | 57,595            |  | 19,257           |  | 417      |  | 3,315      |  | 60      
|               |  |                     |  |                   |  |                  |  |          |  |            |  |         

Reserves

The Companys interests, including the interests held by the Partnerships, in proved developed and undeveloped oil and gas properties have been evaluated by Ryder Scott Company, L.P. for each of the three years
ended December 31, 2008. All of the Companys reserves are located within the continental United States. The following table summarizes the Companys oil and gas reserves at each of the respective dates (figures rounded):



|            |  |                  |  |                    |  |            |  |           |  |            |  |           
|----------- |  | ---------------- |  | ------------------ |  | ---------- |  | --------- |  | ---------- |  | ----------
|            |  | Reserve Category |  |                    |  |           
|            |  | Proved Developed |  | Proved Undeveloped |  | Total     
|As of 12-31 |  | Oil (bbls)       |  | Gas (Mcf)          |  | Oil (bbls) |  | Gas (Mcf) |  | Oil (bbls) |  | Gas (Mcf) 
|2006        |  | 4,986,000        |  | 75,434,000         |  | 219,000    |  | 2,479,000 |  | 5,205,000  |  | 77,913,000
|2007        |  | 5,640,000        |  | 58,814,000         |  | 952,000    |  | 2,598,000 |  | 6,592,000  |  | 61,412,000
|2008        |  | 5,317,000        |  | 54,140,000         |  |           |  | 1,198,000 |  | 5,317,000  |  | 55,338,000



18



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##### Index to Financial Statements

The estimated future net revenue (using current prices and costs as of those dates) and the present value
of future net revenue (at a 10% discount for estimated timing of cash flow) for the Companys proved developed and proved undeveloped oil and gas reserves at the end of each of the three years ended December 31, 2008, are summarized as
follows (figures rounded):



|            |  |                   |             |                                  |             |                  |            |                                    |            |                   |             |                                    |             |                                     |            |                                           |            
|----------- |  | ----------------- | ----------- | -------------------------------- | ----------- | ---------------- | ---------- | ---------------------------------- | ---------- | ----------------- | ----------- | ---------------------------------- | ----------- | ----------------------------------- | ---------- | ----------------------------------------- | -----------
|            |  | Proved Developed  |             | Proved Undeveloped               |             | Total           
|As of 12-31 |  | Future NetRevenue |             | PresentValue OfFuture NetRevenue |             | FutureNetRevenue |            | PresentValue 10Of FutureNetRevenue |            | Future NetRevenue |             | PresentValue 10Of FutureNetRevenue |             | PresentValue 10Of FutureIncomeTaxes |            | StandardizedMeasure ofDiscountedCash flow
|2006        |  | $                 | 409,525,000 |                                  | 269,139,000 |                  | 13,836,000 |                                    | 7,077,000  |                   | 423,361,000 |                                    | 276,216,000 |                                     | 58,167,000 |                                           | 218,049,000
|2007        |  | $                 | 449,372,000 |                                  | 266,405,000 |                  | 60,392,000 |                                    | 21,062,000 |                   | 509,764,000 |                                    | 287,467,000 |                                     | 62,007,000 |                                           | 225,460,000
|2008        |  | $                 | 206,400,000 |                                  | 132,654,000 |                  | 1,502,000  |                                    | 1,515,000  |                   | 207,902,000 |                                    | 134,169,000 |                                     | 17,635,000 |                                           | 116,534,000

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

Proved developed oil and gas reserves are reserves that can be expected to be recovered from existing wells with existing equipment and
operating methods. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. The
Companys reserves include amounts attributable to minority interests in the Partnerships. These interests represent less than 10% of the Companys reserves.

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

The spot price for gas at December 31, 2008 and 2007 was $5.62 and $6.79 per MMBTU, respectively. The range of spot prices during the year 2008
was a low of $5.40 and a high of $13.28 and the average was $8.84. The range during the first quarter of 2009 has been from $3.72 to $6.10, with an average of $4.57. The recent futures market prices have traded above $3.72 per MMBTU.

The NYMEX price for oil at December 31, 2008 and 2007 was $44.60 and $96.01 per barrel, respectively. The range of NYMEX prices during the year 2008
was a low of $33.87 and a high of $145.18 and the average was $99.63. The range during the first quarter of 2009 has been from $33.98 to $54.34, with an average of $43.11. The recent futures market prices have fluctuated around $52.00.

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

Since January 1, 2009, the Company has not filed any estimates of its oil and gas reserves with, nor were any such estimates included in any reports
to, any federal authority or agency, other than the Securities and Exchange Commission, except Form EIA-23, Annual Survey of Domestic Oil and Gas Reserves, filed with The Energy Information Administration of the U.S. Department of Energy.



19



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##### Index to Financial Statements

District Information

The following table presents certain reserve, production and well information as of December 31, 2008.



|                                         |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|---------------------------------------- |  | ----------- |  | --------- |  | ------------- |  | --------- |  | -------- |  | ----- |  | ------
|                                         |  | Appalachian |  | GulfCoast |  | Mid-Continent |  | WestTexas |  | Offshore |  | Other |  | Total 
|Proved Reserves at Year End (Mmcfe)      |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|Developed                                |  | 12,516      |  | 7,850     |  | 22,486        |  | 32,750    |  | 9,345    |  | 1,098 |  | 86,045
|Undeveloped                              |  |            |  |          |  |              |  |          |  | 1,198    |  |      |  | 1.198 
|                                         |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|Total                                    |  | 12,516      |  | 7,850     |  | 22,486        |  | 32,750    |  | 10,543   |  | 1,098 |  | 87,243
|                                         |  |             |  |           |  |               | 
|Average Daily Production (Mmcfe per day) |  | 2           |  | 3         |  | 7             |  | 10        |  | 12       |  | 1     |  | 35    
|                                         |  |             |  |           |  |               | 
|Gross Wells                              |  | 732         |  | 506       |  | 734           |  | 394       |  | 19       |  | 81    |  | 2,397 
|Net Wells                                |  | 377         |  | 181       |  | 280           |  | 147       |  | 10       |  | 15    |  | 1,011 
|Gross Operated Wells                     |  | 498         |  | 333       |  | 446           |  | 283       |  | 17       |  | 68    |  | 1,645 

District Information

Appalachian Region

Our Appalachian activities are concentrated primarily in West Virginia. In this
region, our assets include a large acreage position and a high concentration of wells. At December 31, 2008, we had 732 wells (377 net), of which 498 wells are operated by us. There are multiple producing intervals that include the Big Lime,
Injun, Blue Monday, Weir, Berea, Gordon and Devonian Shale formations at depths primarily ranging from 1,600 to 5,600 feet. Average net daily production in 2008 was 2,290 Mcfe. While natural gas production volumes from Appalachian reservoirs are
relatively low on a per-well basis compared to other areas of the United States, the productive life of Appalachian reserves is relatively long. At December 31, 2008, we had 12.5 Bcfe of proved reserves (substantially all natural gas) in the
Appalachian region, constituting 14% of our total proved reserves. This region is managed from our office in Charleston, West Virginia.

Gulf Coast
Region

Our development, exploitation, exploration and production activities in the Gulf Coast region are primarily concentrated in
Louisiana, southeast Texas and south Texas. This region is managed from our office in Houston. Principal producing intervals are in the Marg Tex, Wilcox, Pettit, Glenrose, Woodbine, San Miguel, Olmos, and Yegua formations at depths ranging from
3,000 to 12,500 feet. We had 506 wells (181 net) in the Gulf Coast region as of December 31, 2008, of which 333 wells are operated by us. Average daily production in 2008 was 2,596 Mcfe. At December 31, 2008, we had 7.9 Bcfe of proved
reserves (75% natural gas) in the Gulf Coast region, which represented 9% of our total proved reserves.

Mid-Continent Region

Our Mid-Continent activities are concentrated in central Oklahoma. As of December 31, 2008, we had 734 wells (280 net) in the Mid-Continent
area, of which 446 wells are operated by us. Principal producing intervals in the Mid-Continent are in the Roberson, Avant, Skinner, Sycamore, Bromide, McLish, Hunton, Mississippian, Oswego, Red Fork, and Chester formations at depths ranging from
1,100 to 10,500 feet. Average net daily production in 2008 was 7,420 Mcfe. At December 31, 2008, we had 22.5 Bcfe of proved reserves (67% natural gas) in the Mid-Continent area, or 26% of our total proved reserves. This region is managed
from our office in Oklahoma City.

West Texas Region

Our West Texas activities are concentrated in the Permian Basin in Texas and New Mexico. As of December 31, 2008, we had 394 wells (147 net) in the West Texas area, of which 283 wells are operated by
us.



20



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##### Index to Financial Statements

Principal producing intervals in the West Texas are in the Spraberry, Wolfcamp and San Andres formations at depths ranging from 5,500 to 12,500 feet. Average
net daily production in 2008 was 10,382 Mcfe. At December 31, 2008, we had 32.8 Bcfe of proved reserves (34% natural gas) in the West Texas area, or 38% of our total proved reserves. This region is managed from our office in Midland, Texas.

Offshore Gulf of Mexico

Our
development, exploitation, exploration and production activities in the Offshore Gulf of Mexico are primarily concentrated in the western gulf area in shallow water. This region is managed from our office in Houston. Principal producing
intervals are in the Pleistocene to Miocene formations at depths ranging from 750 to 12,500 feet. We had 19 wells (10 net) in the Offshore Gulf of Mexico region as of December 31, 2008, of which 17 wells are operated by us. Average daily
production in 2008 was 12,182 Mcfe. At December 31, 2008, we had 10.5 Bcfe of proved reserves (substantially all natural gas) in the Offshore Gulf of Mexico region, which represented 12% of our total proved reserves.

Acreage subject to Expiration in the next three years



|               |  |        |  |        |  |       |  |     |  |        |  |       
|-------------- |  | ------ |  | ------ |  | ----- |  | --- |  | ------ |  | ------
|               |  | 2009   |  | 2010   |  | 2011 
|State          |  | Gross  |  | Net    |  | Gross |  | Net |  | Gross  |  | Net   
|GULF OF MEXICO |  | 12,757 |  | 8,894  |  |      |  |    |  | 28,800 |  | 21,600
|OKLAHOMA       |  | 780    |  | 780    |  | 170   |  | 85  |  |       |  |      
|TEXAS          |  | 1,743  |  | 1,212  |  |      |  | 24  |  |       |  |      
|NEW MEXICO     |  | 3,920  |  | 3,287  |  | 320   |  | 87  |  |       |  |      
|WEST VIRGINIA  |  |       |  |       |  |      |  | 11  |  |       |  |      
|COLORADO       |  |       |  |       |  | 211   |  |    |  |       |  |      
|               |  |        |  |        |  |       |  |     |  |        |  |       
|TOTAL          |  | 19,200 |  | 14,173 |  | 701   |  | 207 |  | 28,800 |  | 21,600
|               |  |        |  |        |  |       |  |     |  |        |  |       



|Item 3. | LEGAL PROCEEDINGS.
|------- | ------------------

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



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

No matters were submitted during the fourth quarter of the fiscal year ended December 31, 2008, to a vote of the Companys security-holders through the solicitation of proxies or otherwise.



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##### Index to Financial Statements

PART II



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

The Companys Common Stock is traded in the NASDAQ Stock Market, trading symbol PNRG. The high and low bid quotations for each quarterly
period during the two years ended December 31, 2008, were as follows:



|               |  |      |       |     |   |       |  |                |  |     |       |  |   |      
|-------------- |  | ---- | ----- | --- | - | ----- |  | -------------- |  | --- | ----- |  | - | -----
|2008           |  | High |       | Low |   | 2007  |  | High           |  | Low
|First Quarter  |  | $    | 58.00 |     | $ | 52.08 |  | First Quarter  |  | $   | 64.97 |  | $ | 50.10
|Second Quarter |  | $    | 64.50 |     | $ | 52.00 |  | Second Quarter |  | $   | 64.90 |  | $ | 54.75
|Third Quarter  |  | $    | 82.38 |     | $ | 50.68 |  | Third Quarter  |  | $   | 58.60 |  | $ | 53.00
|Fourth Quarter |  | $    | 77.62 |     | $ | 44.63 |  | Fourth Quarter |  | $   | 56.95 |  | $ | 52.43

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

The number of record holders of the Companys Common Stock as of
March 30, 2009, was 717.

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

Issuer Purchases of Equity Securities

In December 1993, we announced that our Board of Directors authorized a stock repurchase program whereby we may purchase outstanding shares of our Common Stock from time-to-time, in open market transactions or negotiated sales. A total of
2,700,000 shares have been authorized, to date, under this program. Through December 31, 2008, we repurchased a total of 2,503,277 shares under this program for $33,660,798 at an average price of $13.45 per share. Additional purchases of shares
may occur as market conditions warrant. We expect future purchases will be funded with internally generated cash flow or from working capital.



|                        |  |                 |  |                             |       |                                                                   |        
|----------------------- |  | --------------- |  | --------------------------- | ----- | ----------------------------------------------------------------- | -------
|2008 Month              |  | Number ofShares |  | Average Price Paidper share |       | Maximum Number ofShares that May YetBe Purchased UnderThe Program
|January                 |  | 60,684          |  | $                           | 50.06 |                                                                   | 224,871
|February                |  | 558             |  |                             | 54.68 |                                                                   | 224,313
|March                   |  | 10,465          |  |                             | 50.25 |                                                                   | 213,848
|April                   |  | 5,500           |  |                             | 58.05 |                                                                   | 208,348
|May                     |  | 435             |  |                             | 61.22 |                                                                   | 207,913
|June                    |  | 6,726           |  |                             | 55.62 |                                                                   | 201,187
|July                    |  | 1,777           |  |                             | 55.14 |                                                                   | 199,410
|August                  |  | 200             |  |                             | 64.04 |                                                                   | 199,210
|September               |  |                |  |                             |      |                                                                   | 199,210
|October                 |  | 735             |  |                             | 54.97 |                                                                   | 198,475
|November                |  | 1,036           |  |                             | 49.62 |                                                                   | 197,439
|December                |  | 716             |  |                             | 49.20 |                                                                   | 196,723
|                        |  |                 |  |                             |       |                                                                   |        
|Total/Average/Remainder |  | 88,832          |  | $                           | 51.24 |                                                                   |        
|                        |  |                 |  |                             |       |                                                                   |        



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##### Index to Financial Statements

|Item 6. | SELECTED FINANCIAL DATA
|------- | -----------------------

The company is a smaller
reporting company and no response is required pursuant to this Item.



|Item 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

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

Liquidity And Capital Resources:

Cash flow provided by operations for the year ended December 31, 2008, was $84 million, compared to $95 million in the prior year.

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

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

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

The Company has in place both a stock repurchase program and a limited partnership interest repurchase program. Spending under these programs in 2008 was
$5.03 million. The Company expects to expend substantially less in 2009 because of the drop in energy prices.

The Company currently
maintains two credit facilities totaling $360 million, with a combined current borrowing base of $126.37 million. The bank reviews the borrowing base semi-annually and, at their discretion, may decrease or propose an increase to the borrowing
base relative to a redetermined estimate of proved oil and gas reserves. Our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial covenants defined in the agreement. We are currently in
compliance with these financial covenants. If we do not comply with these covenants on a continuing basis, the lenders have the right to refuse to advance additional funds under the facility and/or declare all principal and interest immediately due
and payable.

During the second quarter of 2008, the Companys offshore subsidiary arranged a subordinated credit facility with a
private lender controlled by a director of the Company. The facility provides availability of $50 million and is secured by properties released by the bank and pledged under this agreement. The current advances under this credit facility are $20
million due January 2010.

It is the goal of the Company to increase its oil and gas reserves and production through the acquisition and
development of oil and gas properties. The Company also continues to explore and consider opportunities to



23



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##### Table of Contents

##### Index to Financial Statements

further expand its oilfield servicing revenues through additional investment in field service equipment. However, the majority of the Companys capital
spending is discretionary, and the ultimate level of expenditures will be dependent on the Companys assessment of the oil and gas business environment, the number and quality of oil and gas prospects available, the market for oilfield
services, and oil and gas business opportunities in general.

Critical Accounting Estimates:

Proved Oil and Gas Reserves

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

Depreciation, Depletion and Amortization for Oil and
Gas Properties

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

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

Results of Operations:

2008
as compared to 2007

The Company had net income of $541,000 in 2008 as compared to $7,920,000 in 2007. The significant components
of net income are discussed below.

Oil and gas saleswere $135,036,000 in 2008 as compared to $122,361,000 in 2007. A chart
summarizing oil and gas production and revenue is presented below.



|                                 |  |      |             |      |   |                    |  |   |            |  
|-------------------------------- |  | ---- | ----------- | ---- | - | ------------------ |  | - | ---------- | -
|                                 |  | 2008 |             | 2007 |   | Increase(Decrease) | 
|Barrels of Oil Produced          |  |      | 658,000     |      |   | 561,000            |  |   | 97,000     |  
|Average Price Received (rounded) |  | $    | 84.43       |      | $ | 66.94              |  | $ | 17.49      |  
|                                 |  |      |             |      |   |                    |  |   |            |  
|Oil Revenue                      |  | $    | 55,554,000  |      | $ | 37,553,000         |  | $ | 18,001,000 |  
|                                 |  |      |             |      |   |                    |  |   |            |  
|Mcf of Gas Produced              |  |      | 8,899,000   |      |   | 11,312,000         |  |   | (2,413,000 | )
|Average Price Received (rounded) |  | $    | 8.93        |      | $ | 7.50               |  | $ | 1.43       |  
|                                 |  |      |             |      |   |                    |  |   |            |  
|Gas Revenue                      |  | $    | 79,482,000  |      | $ | 84,808,000         |  | $ | (5,326,000 | )
|                                 |  |      |             |      |   |                    |  |   |            |  
|Total Oil & Gas Revenue          |  | $    | 135,036,000 |      | $ | 122,361,000        |  | $ | 12,675,000 |  
|                                 |  |      |             |      |   |                    |  |   |            |  



24



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##### Index to Financial Statements

Oil & gas prices received excluding the impact of derivatives were:



|          |  |      |       |      |   |                    |  |   |      
|--------- |  | ---- | ----- | ---- | - | ------------------ |  | - | -----
|          |  | 2008 |       | 2007 |   | Increase(Decrease)
|Oil Price |  | $    | 95.74 |      | $ | 68.07              |  | $ | 27.67
|Gas Price |  | $    | 9.09  |      | $ | 6.86               |  | $ | 2.23 

Changes in Productionare due to additional production from properties added throughout
2008. The increase in oil production is from our 2008 West Texas properties.

Lease operating expensesincreased by 22% to
$42,643,000 in 2008 as compared to $34,841,000 in 2007. The difference is attributable to costs associated with properties added during 2008 and repairs made to marginal wells currently economic due to higher product price levels. This increase also
reflects the overall price increase in oil field services.

General and administrative expensesincreased by 18% to $14,512,000 in
2008 as compared to $12,349,000 in 2007. A large portion of this increase is the result of increased compensation expense. In addition there was approximately $438,000 of due diligence expenses incurred in 2008 related to screening offshore
acquisitions.

Depreciation and depletionincreased by 21% to $77,869,000 in 2008 from $64,507,000 in 2007. This increase is
attributed to the Companys offshore properties coupled with the added properties in our West Texas area.

Interest expensedecreased by 28% to $7,967,000 in 2008 from $11,062,000 in 2007 due to decreased average debt coupled with a large decrease in average interest rates. The average interest rates paid on outstanding bank borrowings subject to interest during 2008
and 2007 were 5.64% and 8.77% respectively. As of December 31, 2008 and 2007, the total outstanding borrowings were $124,140,000 and $155,000,000, respectively.

Income tax expenseof $59,000 in 2008 represents a 10% effective rate as compared to the effective rate of 33% in 2007. The primary reason for the lower effective rate is that percentage depletion deductions,
which create a permanent difference, are more significant as a percentage of book income when book income is lower, as it was in 2008. Current tax expense in 2008 of $1,445,000 was partially offset by a benefit of $1,386,000 due to a decline in
deferred tax liability.

The current federal tax expense for 2008 is above the statutory rate primarily due to depletion deductions being
lower for tax than for book income purposes. This lower depletion is due to a lower basis in oil and gas properties due to prior year intangible costs having been expensed for tax purposes but capitalized for book. This difference was partially
offset by the deduction of current year intangible drilling cost.



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

The Company is a smaller reporting company and no response is required pursuant to this item.



|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- | --------------------------------------------

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



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

None.



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##### Index to Financial Statements

|Item 9A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

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

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

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

Managements Report on Internal Control Over Financial Reporting

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

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

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. Management based this
assessment on criteria for effective internal control over financial reporting described in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment
included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the
Audit Committee of our Board of Directors.

Based on this assessment, management believes that PrimeEnergy Corporation maintained effective
internal control over financial reporting as of December 31, 2008.

This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the



26



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##### Index to Financial Statements

Companys registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.

There have been no significant changes in our internal controls over financial reporting
during the fourth fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



|Item 9B. | OTHER INFORMATION.
|-------- | ------------------

None.



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##### Index to Financial Statements

PART III



|Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|-------- | -------------------------------------------------------

Information relating to the Companys Directors, nominees for Directors and executive officers is included in the Companys definitive proxy statement relating the Companys Annual Meeting of Stockholders to be held in June,
2009 which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2008, and which is incorporated herein by reference.



|Item 11. | EXECUTIVE COMPENSATION.
|-------- | -----------------------

Information relating to
executive compensation is included in the Companys definitive proxy statement relating to the Companys Annual Meeting of Stockholders to be held in June, 2009, which will be filed with the U. S. Securities and Exchange Commission within
120 days of December 31, 2008, and which is incorporated herein by reference.



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

Information relating to security ownership of certain beneficial owners and management is included in the Companys definitive proxy statement
relating to the Companys Annual Meeting of Stockholders to be held in June, 2009, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2008, and which is incorporated herein by reference.



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

Information relating to certain transactions by Directors and executive officers of the Company is included in the Companys definitive proxy statement relating to the Companys Annual Meeting of
Stockholders to be held in June, 2009, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2008, and which is incorporated herein by reference.



|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

Information relating to principal accountant fees and services is included in the Companys definitive proxy statement relating to the Companys Annual Meeting of Stockholders to be held in June, 2009, which will be filed with the
U. S. Securities and Exchange Commission within 120 days of December 31, 2008, and which is incorporated herein by reference.



28



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##### Index to Financial Statements

PART IV



|Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- | -------------------------------------------

The
following documents are filed as part of this Report:



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



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



| | 3. | Exhibits:
| | -- | ---------



|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|3.1       |  | Restated Certificate of Incorporation of PrimeEnergy Corporation (Incorporated by reference to Exhibit 3.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
2004)                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | 
|3.2       |  | Bylaws of PrimeEnergy Corporation (Incorporated by reference to Exhibit 3.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | 
|10.3.1    |  | Adoption Agreement #003 dated 4/23/2002, MassMutual Life Insurance Company Flexinvest Prototype Non-Standardized 401(k) Profit-Sharing Plan; EGTRRA Amendment to the PrimeEnergy employees 401(k)
Savings Plan; MassMutual Retirement Services Flexinvest Defined Contribution Prototype Plan; Protected Benefit Addendum; Addendum to the Administrative Services Agreement Loan Agreement; Addendum to Administrative Services Agreement GUST Restatement
Provisions; General Trust Agreement (Incorporated by reference to Exhibit 10.3.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2002) (1)
|          | 
|10.3.2    |  | First Amendment to the PrimeEnergy Corporation Employees 401(k) Savings Plan (Incorporated by reference to Exhibit 10.3.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
2008)                                                                                                                                                                                                                                                                                                                                                                                                                       
|          | 
|10.4      |  | Amended and Restated Agreement of Limited Partnership, FWOE Partners L.P., dated as of August 22, 2005 (Incorporated by reference to Exhibit 10.3 of PrimeEnergy Corporation Form 8-K for events
of August 22, 2005)                                                                                                                                                                                                                                                                                                                                                                                                       
|          | 
|10.4.1    |  | Contribution Agreement between F-W Oil Exploration L.L.C. and FWOE Partners L.P. dated as of August 22, 2005 (Incorporated by reference to exhibit 10.4 of PrimeEnergy Corporation Form 8-K for
events of August 22, 2005)                                                                                                                                                                                                                                                                                                                                                                                                 
|          | 
|10.18     |  | Composite copy of Non-Statutory Option Agreements (Incorporated by reference to Exhibit 10.18 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2004) (1)                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          | 
|10.22.5   |  | Amended and Restated Credit Agreement among PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield
Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A., as Co-Documentation Agent and the Lenders Signatory hereto, December 28,
2006 (Incorporated by reference to Exhibit 10.22.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                             
|          | 
|10.22.5.1 |  | Letter from BNP Paribas regarding Amended and Restated Credit Agreement effective as of December 28, 2006, among PrimeEnergy Corporation, et al, and Guaranty Bank, FSB (Incorporated by reference
to Exhibit 10.22.5.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                                                                                                                                                                         
|          | 
|10.22.5.2 |  | First Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest
Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A. as Co-Documentation Agent and the Lenders Signatory Hereto, dated
July 17, 2007. (filed herewith)                                                                                                                                  



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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.22.5.3 |  | Second Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company,
Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer BNP Paribas, as Co-Documentation Agent and JPMorgan Chase Bank, N.A. as Co-Documentation Agent and the Lenders Signatory
Hereto, dated October 9, 2007. (filed herewith)
|          | 
|10.22.5.4 |  | Third Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest
Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective January 22, 2008. (filed herewith)                                                                                           
|          | 
|10.22.5.5 |  | Fourth Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company,
Southwest Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective February 8, 2008. (filed herewith)                                                                                          
|          | 
|10.22.5.6 |  | Fifth Amendment to Amended and Restated Credit Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest
Oilfield Construction Company, EOWS Midland Company and Guaranty Bank, FSB as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective October 30, 2008. (filed herewith)                                                                                           
|          | 
|10.23.2   |  | Amended and Restated Security Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield
Construction Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
2006)                                                  
|          | 
|10.23.3   |  | Amended and Restated Security Agreement (Membership Pledge) by PrimeEnergy Corporation in favor of Guaranty Bank, FSB as Agent December 28, 2006 (Incorporated by reference to Exhibit
10.23.3 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                                                                   
|          | 
|10.23.4   |  | Amended and Restated Security Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest Oilfield
Construction Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.4 of PrimeEnergy Corporation Form 10-K for the year ended December 31,
2006)                                                  
|          | 
|10.23.5   |  | Amended and Restated Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated
by reference to Exhibit 10.23.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                                 
|          | 
|10.23.6   |  | Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to
Exhibit 10.23.6 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                                                      
|          | 
|10.23.7   |  | Amended and Restated Security Agreement between Southwest Oilfield Construction Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to
Exhibit 10.23.7 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                                                



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|        |  |                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.23.8 |  | Amended and Restated Security Agreement effective between EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit
10.23.8 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                             
|        | 
|10.25   |  | Credit Agreement dated as of June 1, 2006 (but effective for all purposes as of August 22, 2005), between Prime Offshore L.L.C. as Borrower and PrimeEnergy Corporation as Lender (Incorporated by
reference to Exhibit 10.25 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                        
|        | 
|10.26.1 |  | Subordination Agreement effective as of June 29, 2006, between Prime Offshore L.L.C., PrimeEnergy Corporation, and Guaranty Bank, FSB (Incorporated by reference to Exhibit 10.26.1 of PrimeEnergy
Corporation Form 10-K for the year ended December 31, 2006)                                                                                                  
|        | 
|10.26.2 |  | Amended and Restated Credit Agreement among Prime Offshore L.L.C. between Guaranty Bank, FSB, as agent and the Lenders party hereto effective March 31, 2008. (Incorporated by reference to
Exhibit 10.26.2 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)                                                                           
|        | 
|10.27   |  | Security Agreement effective June 29, 2006 between Prime Offshore L.L.C., and Guaranty Bank, FSB (debtor) and Guaranty Bank, FSB as Agent (secured party) (Incorporated by reference to Exhibit
10.27 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                
|        | 
|10.27.1 |  | Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production effective as of June 29, 2006, from Prime Offshore L.L.C. and Guaranty Bank, FSB (Incorporated by
reference to Exhibit 10.27.1 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                         
|        | 
|10.27.2 |  | Pledge Agreement as of June 29, 2006, between Guaranty Bank, FSB and Prime Offshore L.L.C. (Incorporated by reference to Exhibit 10.27.2 of PrimeEnergy Corporation Form 10-K for the year ended
December 31, 2006)                                                                                                                                             
|        | 
|10.27.3 |  | Subordinated Promissory Note dated effective March 31, 2008 in the face principal amount of up to $50,000,000 executed by Prime Offshore L.L.C. and payable to Artic Management Corporation.
(Incorporated by reference to Exhibit 10.27.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)                                            
|        | 
|10.27.4 |  | Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C. to Mathias Eckenstein TTEE for Artic
Management Corporation (first lien). (Incorporated by reference to Exhibit 10.27.4 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008) 
|        | 
|10.27.5 |  | Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C. to Mathias Eckenstein TTEE for Artic
Management Corporation (second lien). (Incorporated by reference to Exhibit 10.27.5 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)
|        | 
|10.27.6 |  | Pledge Agreement dated as effective March 31, 2008 between Prime Offshore L.L.C. and Artic Management Corporation (General Partner Interest in FWOE Partners L.P.) (Incorporated by reference to
Exhibit 10.27.6 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2008)                                                                      
|        | 
|10.28   |  | Completion and Liquidity Maintenance Agreement effective as of June 29, 2006, between PrimeEnergy Corporation, Guaranty Bank, FSB, and Prime Offshore, L.L.C. (Incorporated by reference to
Exhibit 10.28 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                            
|        | 
|10.29   |  | Put Right Agreement effective as of June 29, 2006, by and among PrimeEnergy Corporation and Prime Offshore L.L.C. (Incorporated by reference to Exhibit 10.29 of PrimeEnergy Corporation Form 10-K
for the year ended December 31, 2006)                                                                                                                        



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



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



32



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##### Index to Financial Statements

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 3rd day of April, 2009.





PrimeEnergy CorporationBy:

/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 3rd day of April, 2009.



|                                                   |  |                                                                         |  | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------- |  | 
|                                                   |  |                                                                        
|/s/  CHARLES E. DRIMAL, JR. Charles E. Drimal, Jr. |  | Director and President; The Principal Executive Officer                 |  | 
|                                                   | 
|/s/  BEVERLY A. CUMMINGS Beverly A. Cummings       |  | Director, Vice President and Treasurer; The
Principal Financial Officer
|                                                   | 
|/s/  LYNNE PIZOR Lynne Pizor                       |  | Controller; The Principal Accounting Officer                           



|                         |  |          |  |  |  |                    |  |         
|------------------------ |  | -------- |  |  |  | ------------------ |  | --------
|                         |  |          |  | 
|/s/  MATTHIAS ECKENSTEIN |  | Director |  |  |  | /s/  CLINT HURT    |  | Director
|Matthias Eckenstein      |  |          |  |  |  | Clint Hurt         |  |         
|                         |  |          |  | 
|/s/  H. GIFFORD FONG     |  | Director |  |  |  | /s/  JAN K. SMEETS |  | Director
|H. Gifford Fong          |  |          |  |  |  | Jan K. Smeets      |  |         
|                         |  |          |  | 
|/s/  THOMAS S.T. GIMBEL  |  | Director |  |  |  |                    |  |         
|Thomas S.T. Gimbel       |  |          |  |  |  |                    |  |         



33



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##### Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                              |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                                       |  | F-2 
|                                                                                                                                                              | 
|Financial Statements                                                                                                                                          |  |     
|Consolidated Balance SheetDecember 31, 2008 and 2007                                                                                                         |  | F-3 
|Consolidated Statement of Operationsfor the years ended December 31, 2008 and 2007                                                                           |  | F-4 
|Consolidated Statement of Stockholders Equityfor the years ended December 31, 2008 and 2007                                                                 |  | F-5 
|Consolidated Statement of Comprehensive Incomefor the years ended December 31, 2008
and 2007                                                                 |  | F-6 
|Consolidated Statement of Cash Flowsfor the years ended December 31, 2008 and 2007                                                                           |  | F-7 
|Notes to Consolidated Financial Statements                                                                                                                    |  | F-8 
|                                                                                                                                                              | 
|Supplementary Information:                                                                                                                                    |  |     
|Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31, 2008 and
2007                                                        |  | F-22
|Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities, years ended December 
31, 2008 and 2007                           |  | F-22
|Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas 
Reserves, years ended December 31, 2008 and 2007                     |  | F-22
|Standardized Measure of Discounted Future Net Cash Flows and 
Changes Therein Relating to Proved Oil and Gas Reserves, years ended December 31, 2008 and 2007 |  | F-23
|Reserve Quantity Information, years ended December 31, 2008 and 2007                                                                                          |  | F-24
|Results of Operations from Oil and Gas Producing Activities, years ended December 31, 2008 and
2007                                                           |  | F-24
|Notes to Supplementary Information                                                                                                                            |  | F-25



F-1



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

PrimeEnergy Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheet of PrimeEnergy Corporation
and Subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders equity, comprehensive income, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our
opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PrimeEnergy Corporation and Subsidiaries as of December 31, 2008 and 2007, and the consolidated results of its
operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

PUSTORINO,
PUGLISI & CO., LLP

New York, New York

April 3, 2009



F-2



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##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET, December 31, 2008 and 2007



|                                                                                              |  |      |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                              |  | 2008 |             |   | 2007 |  
|ASSETS:                                                                                       |  |      |             |   |      |   |             |  
|Current assets:                                                                               |  |      |             |   |      |   |             |  
|Cash and cash equivalents                                                                     |  | $    | 11,808,000  |   |      | $ | 25,373,000  |  
|Restricted cash and cash equivalents                                                          |  |      | 8,027,000   |   |      |   | 3,633,000   |  
|Accounts receivable, net                                                                      |  |      | 18,257,000  |   |      |   | 21,311,000  |  
|Due from related parties                                                                      |  |      | 678,000     |   |      |   | 32,000      |  
|Prepaid expenses                                                                              |  |      | 1,302,000   |   |      |   | 1,391,000   |  
|Derivative contracts                                                                          |  |      | 1,755,000   |   |      |   | 1,332,000   |  
|Inventory at cost                                                                             |  |      | 4,532,000   |   |      |   | 3,705,000   |  
|Deferred income tax                                                                           |  |      | 30,000      |   |      |   | 1,582,000   |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total current assets                                                                          |  |      | 46,389,000  |   |      |   | 58,359,000  |  
|                                                                                              |  |      |             |   |      |   |             |  
|Property and equipment, at cost:                                                              |  |      |             |   |      |   |             |  
|Proved oil and gas properties at cost                                                         |  |      | 427,174,000 |   |      |   | 378,908,000 |  
|Unproved oil and gas properties at cost                                                       |  |      | 2,409,000   |   |      |   | 4,458,000   |  
|Less: Accumulated depletion and depreciation                                                  |  |      | 217,434,000 |   |      |   | 145,514,000 |  
|                                                                                              |  |      |             |   |      |   |             |  
|                                                                                              |  |      | 212,149,000 |   |      |   | 237,852,000 |  
|                                                                                              |  |      |             |   |      |   |             |  
|Field and office equipment                                                                    |  |      | 19,513,000  |   |      |   | 18,029,000  |  
|Less: Accumulated depreciation                                                                |  |      | 11,197,000  |   |      |   | 9,820,000   |  
|                                                                                              |  |      |             |   |      |   |             |  
|                                                                                              |  |      | 8,316,000   |   |      |   | 8,209,000   |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total net property and equipment                                                              |  |      | 220,465,000 |   |      |   | 246,061,000 |  
|                                                                                              |  |      |             |   |      |   |             |  
|Other assets                                                                                  |  |      | 976,000     |   |      |   | 1,245,000   |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total assets                                                                                  |  | $    | 267,830,000 |   |      | $ | 305,665,000 |  
|                                                                                              |  |      |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                         |  |      |             |   |      |   |             |  
|Current liabilities:                                                                          |  |      |             |   |      |   |             |  
|Current bank debt                                                                             |  | $    | 16,970,000  |   |      | $ | 34,950,000  |  
|Accounts payable                                                                              |  |      | 26,715,000  |   |      |   | 26,780,000  |  
|Current portion of asset retirement and other long-term obligations                           |  |      | 1,461,000   |   |      |   | 1,065,000   |  
|Derivative liability short term                                                               |  |      | 387,000     |   |      |   | 4,340,000   |  
|Accrued liabilities                                                                           |  |      | 10,477,000  |   |      |   | 10,032,000  |  
|Due to related parties                                                                        |  |      | 233,000     |   |      |   | 520,000     |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total current liabilities                                                                     |  |      | 56,243,000  |   |      |   | 77,687,000  |  
|Long-term bank debt                                                                           |  |      | 87,170,000  |   |      |   | 120,050,000 |  
|Indebtedness to related parties                                                               |  |      | 20,000,000  |   |      |   |            |  
|Asset retirement obligations                                                                  |  |      | 18,650,000  |   |      |   | 16,936,000  |  
|Derivative liability long term                                                                |  |      | 146,000     |   |      |   | 3,369,000   |  
|Deferred income taxes                                                                         |  |      | 25,688,000  |   |      |   | 26,022,000  |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total liabilities                                                                             |  |      | 207,897,000 |   |      |   | 244,064,000 |  
|                                                                                              |  |      |             |   |      |   |             |  
|                                                                                              |  |     
|Minority interest                                                                             |  |      | 10,645,000  |   |      |   | 12,929,000  |  
|                                                                                              |  |      |             |   |      |   |             |  
|Stockholders equity:                                                                         |  |      |             |   |      |   |             |  
|Preferred stock, $.10 par value, authorized 5,000,000 shares; none issued                     |  |      |            |   |      |   |            |  
|Common stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in 2008 and 2007 |  |      | 769,000     |   |      |   | 769,000     |  
|Paid in capital                                                                               |  |      | 11,024,000  |   |      |   | 11,024,000  |  
|Retained earnings                                                                             |  |      | 73,426,000  |   |      |   | 72,885,000  |  
|Accumulated other comprehensive income (loss)                                                 |  |      | 1,009,000   |   |      |   | (3,618,000  | )
|                                                                                              |  |      |             |   |      |   |             |  
|                                                                                              |  |      | 86,228,000  |   |      |   | 81,060,000  |  
|Treasury stock, at cost 4,647,316 common shares in 2008 and 4,558,484 in 2007                 |  |      | (36,940,000 | ) |      |   | (32,388,000 | )
|                                                                                              |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                    |  |      | 49,288,000  |   |      |   | 48,672,000  |  
|                                                                                              |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                    |  | $    | 267,830,000 |   |      | $ | 305,665,000 |  
|                                                                                              |  |      |             |   |      |   |             |  

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



F-3



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

for the years
ended December 31, 2008 and 2007



|                                         |  |      |             |      |   |            
|---------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                         |  | 2008 |             | 2007
|Revenue:                                 |  |      |             |      |   |            
|Oil and gas sales                        |  | $    | 135,036,000 |      | $ | 122,361,000
|Field service income                     |  |      | 24,687,000  |      |   | 24,340,000 
|Administrative overhead fees             |  |      | 9,255,000   |      |   | 9,041,000  
|Other income                             |  |      | 360,000     |      |   | 404,000    
|                                         |  |      |             |      |   |            
|                                         |  |      | 169,338,000 |      |   | 156,146,000
|Costs and expenses:                      |  |      |             |      |   |            
|Lease operating expense                  |  |      | 42,643,000  |      |   | 34,841,000 
|Field service expense                    |  |      | 19,927,000  |      |   | 17,724,000 
|Depreciation, depletion and amortization |  |      | 77,869,000  |      |   | 64,507,000 
|General and administrative expense       |  |      | 14,512,000  |      |   | 12,349,000 
|Exploration costs                        |  |      | 649,000     |      |   | 633,000    
|                                         |  |      |             |      |   |            
|                                         |  |      | 155,600,000 |      |   | 130,054,000
|                                         |  |      |             |      |   |            
|Add gain on sale and exchange of assets  |  |      | 392,000     |      |   | 598,000    
|                                         |  |      |             |      |   |            
|Income from operations                   |  |      | 14,130,000  |      |   | 26,690,000 
|                                         |  |     
|Other income and expense:                |  |      |             |      |   |            
|Less:  Interest expense                  |  |      | 7,967,000   |      |   | 11,062,000 
|Add:  Interest income                    |  |      | 381,000     |      |   | 852,000    
|Less:  Minority interest                 |  |      | 5,944,000   |      |   | 4,728,000  
|                                         |  |      |             |      |   |            
|Income before provision for income taxes |  |      | 600,000     |      |   | 11,752,000 
|Provision for income taxes               |  |      | 59,000      |      |   | 3,832,000  
|                                         |  |      |             |      |   |            
|Net income                               |  | $    | 541,000     |      | $ | 7,920,000  
|                                         |  |      |             |      |   |            
|Basic net income per common share        |  | $    | 0.18        |      | $ | 2.50       
|                                         |  |      |             |      |   |            
|Diluted net income per common share      |  | $    | 0.14        |      | $ | 2.02       
|                                         |  |      |             |      |   |            



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



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

for the years ended December 31, 2008 and 2007



|                                         |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   |             |   |  |   |            |  
|---------------------------------------- |  | ------------ |  | ------------------------ | ------- | ---------------- | - | ------------------------------------------ |  | - | ------------- |  | - | ---------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                         |  | Common Stock |  | AdditionalPaid InCapital |         | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TreasuryStock |  |   | Total      |  
|                                         |  | Shares       |  | Amount                   |         |                  |   |                                            | 
|Balance at January 1, 2007               |  | 7,694,970    |  | $                        | 769,000 |                  | $ | 11,024,000                                 |  | $ | 64,965,000    |  | $ | 3,976,000  |   |  | $ | (27,979,000 | ) |  | $ | 52,755,000 |  
|Purchased 80,399 shares of common stock  |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   | (4,409,000  | ) |  |   | (4,409,000 | )
|Net income                               |  |              |  |                          |         |                  |   |                                            |  |   | 7,920,000     |  |   |            |   |  |   |             |   |  |   | 7,920,000  |  
|Other comprehensive loss, net of taxes   |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   | (7,594,000 | ) |  |   |             |   |  |   | (7,594,000 | )
|                                         |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2007             |  | 7,694,970    |  | $                        | 769,000 |                  | $ | 11,024,000                                 |  | $ | 72,885,000    |  | $ | (3,618,000 | ) |  | $ | (32,388,000 | ) |  | $ | 48,672,000 |  
|                                         |  |              |  |                          |         |                  |  
|Purchased 88,832 shares of common stock  |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   | (4,552,000  | ) |  |   | (4,552,000 | )
|Net income                               |  |              |  |                          |         |                  |   |                                            |  |   | 541,000       |  |   |            |   |  |   |             |   |  |   | 541,000    |  
|Other comprehensive income, net of taxes |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   | 4,627,000  |   |  |   |             |   |  |   | 4,627,000  |  
|                                         |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   |             |   |  |   |            |  
|Balance as of December 31, 2008          |  | 7,694,970    |  | $                        | 769,000 |                  | $ | 11,024,000                                 |  | $ | 73,426,000    |  | $ | 1,009,000  |   |  | $ | (36,940,000 | ) |  | $ | 49,288,000 |  
|                                         |  |              |  |                          |         |                  |   |                                            |  |   |               |  |   |            |   |  |   |             |   |  |   |            |  



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



F-5



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



|                                                                                                           |  |                          |           |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | ---------- | -
|                                                                                                           |  | Years Ended December 31, |          
|                                                                                                           |  | 2008                     |           |   | 2007 |  
|Net Income                                                                                                 |  | $                        | 541,000   |   |      | $ | 7,920,000  |  
|                                                                                                           |  |                          |           |   |      |   |            |  
|Other Comprehensive Income/(Loss), net of taxes:                                                           |  |                          |           |   |      |   |            |  
|Reclassification Adjustment for Settled Contracts, net of taxes of $3,064,000 and $2,374,000, respectively |  |                          | 5,446,000 |   |      |   | (4,219,000 | )
|Changes in Fair Value of Hedge Positions, net of taxes of $461,000 and $1,898,000, respectively            |  |                          | (819,000  | ) |      |   | (3,375,000 | )
|                                                                                                           |  |                          |           |   |      |   |            |  
|Total Other Comprehensive Income/(Loss)                                                                    |  |                          | 4,627,000 |   |      |   | (7,594,000 | )
|                                                                                                           |  |                          |           |   |      |   |            |  
|Comprehensive Income                                                                                       |  | $                        | 5,168,000 |   |      | $ | 326,000    |  
|                                                                                                           |  |                          |           |   |      |   |            |  





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



F-6



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

for the years
ended December 31, 2008 and 2007



|                                                                                  |  |      |              |   |      |   |              |  
|--------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                                                  |  | 2008 |              |   | 2007 |  
|Cash flows from operating activities:                                             |  |      |              |   |      |   |              |  
|Net income                                                                        |  | $    | 541,000      |   |      | $ | 7,920,000    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |              |   |      |   |              |  
|Depreciation, depletion, amortization and accretion on discounted liabilities     |  |      | 77,869,000   |   |      |   | 64,507,000   |  
|Dry hole and abandonment costs                                                    |  |      |             |   |      |   | 343,000      |  
|Gain on sale of properties                                                        |  |      | (392,000     | ) |      |   | (598,000     | )
|Provision for deferred income taxes                                               |  |      | (1,387,000   | ) |      |   | 1,215,000    |  
|Minority interest in earnings of partnerships                                     |  |      | 5,944,000    |   |      |   | 4,728,000    |  
|Changes in assets and liabilities:                                                |  |      |              |   |      |   |              |  
|(Increase) decrease in accounts receivable                                        |  |      | 3,056,000    |   |      |   | 14,276,000   |  
|(Increase) decrease in due from related parties                                   |  |      | (996,000     | ) |      |   | 1,306,000    |  
|(Increase) decrease in inventories                                                |  |      | 115,000      |   |      |   | 325,000      |  
|(Increase) decrease in prepaid expenses and other assets                          |  |      | (831,000     | ) |      |   | (175,000     | )
|Increase (decrease) in accounts payable                                           |  |      | 1,551,000    |   |      |   | 126,000      |  
|Increase (decrease) in accrued liabilities                                        |  |      | (1,033,000   | ) |      |   | 53,000       |  
|Increase (decrease) in due to related parties                                     |  |      | (697,000     | ) |      |   | 1,088,000    |  
|                                                                                  |  |      |              |   |      |   |              |  
|Net cash provided by operating activities                                         |  |      | 83,740,000   |   |      |   | 95,114,000   |  
|                                                                                  |  |      |              |   |      |   |              |  
|Cash flows from investing activities                                              |  |      |              |   |      |   |              |  
|Capital expenditures, including exploration expense                               |  |      | (55,515,000  | ) |      |   | (109,819,000 | )
|Proceeds from sale of properties and equipment                                    |  |      | 392,000      |   |      |   | 598,000      |  
|                                                                                  |  |      |              |   |      |   |              |  
|Net cash used in investing activities                                             |  |      | (55,123,000  | ) |      |   | (109,221,000 | )
|                                                                                  |  |      |              |   |      |   |              |  
|Cash flows from financing activities                                              |  |      |              |   |      |   |              |  
|Purchase of stock for treasury                                                    |  |      | (4,552,000   | ) |      |   | (4,409,000   | )
|Increase in long-term bank debt and other long-term obligations                   |  |      | 116,295,000  |   |      |   | 105,867,000  |  
|Repayment of long-term bank debt and other long-term obligations                  |  |      | (148,459,000 | ) |      |   | (86,960,000  | )
|Distribution to minority interest                                                 |  |      | (5,466,000   | ) |      |   | (4,074,000   | )
|                                                                                  |  |      |              |   |      |   |              |  
|Net cash provided by (used in) financing activities                               |  |      | (42,182,000  | ) |      |   | 10,424,000   |  
|                                                                                  |  |      |              |   |      |   |              |  
|Net (decrease) in cash and cash equivalents                                       |  |      | (13,565,000  | ) |      |   | (3,683,000   | )
|Cash and cash equivalents at the beginning of the year                            |  |      | 25,373,000   |   |      |   | 29,056,000   |  
|                                                                                  |  |      |              |   |      |   |              |  
|Cash and cash equivalents at the end of the year                                  |  | $    | 11,808,000   |   |      | $ | 25,373,000   |  
|                                                                                  |  |      |              |   |      |   |              |  
|Supplemental disclosures:                                                         |  |      |              |   |      |   |              |  
|Income taxes paid during the year                                                 |  | $    | 395,000      |   |      | $ | 1,643,000    |  
|Net income tax refunds received during the year                                   |  | $    |             |   |      | $ | 2,623,000    |  
|Interest paid during the year                                                     |  | $    | 7,967,000    |   |      | $ | 11,062,000   |  

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



F-7



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Description of Operations and Significant Accounting Policies
|-- | -------------------------------------------------------------

Nature of Operations:

PrimeEnergy Corporation (PEC), a Delaware corporation, was
organized in March 1973. The Company is engaged in the development, acquisition and production of oil and natural gas properties. The Company owns leasehold, mineral and royalty interests in producing and non-producing oil and gas properties across
the United States, including Colorado, Kansas, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Texas, Utah, West Virginia and Wyoming and the Gulf of Mexico. The Company operates 1,645 wells and owns non-operating
interests in over 823 additional wells. Additionally, the Company provides well-servicing support operations, site-preparation and construction services for oil and gas drilling and reworking operations, both in connection with the Companys
activities and providing contract services for third parties. The Company is publicly traded on the NASDAQ under the symbol PNRG. PEC owns Eastern Oil Well Service Company (EOWSC), EOWS Midland Company (EMID) and
Southwest Oilfield Construction Company (SOCC), all of which perform oil and gas field servicing. PEC also owns Prime Operating Company (POC), which serves as operator for most of the producing oil and gas properties owned by
the Company and affiliated entities. PEC also owns Prime Offshore L.L.C. (Prime Offshore), formerly F-W Oil Exploration LLC, which owns and operates properties in the Gulf of Mexico. PrimeEnergy Corporation and its subsidiaries are herein referred
to as the Company. PrimeEnergy Management Corporation (PEMC), a wholly-owned subsidiary, acts as the managing general partner, providing administration, accounting and tax preparation services for 18 limited partnerships and
2 trusts (collectively, the Partnerships). The markets for the Companys products are highly competitive, as oil and gas are commodity products and prices depend upon numerous factors beyond the control of the Company, such as
economic, political and regulatory developments and competition from alternative energy sources.

Consolidation and Presentation:

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

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



F-8



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the units of production method, could be significantly impacted by changes in such estimates. Additionally, FAS144 requires that if the expected future cash
flow from an asset is less than its carrying cost, that asset must be written down to its fair market value. As the fair market value of an oil and gas property will usually be significantly less than the total future net revenue expected from that
property, small changes in the estimated future net revenue from an asset could lead to the necessity of recording a significant impairment of that asset.

Property and Equipment:

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

Capitalization of Interest:

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

Impairment of Long-Lived Assets:

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

Asset Retirement Obligation:

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

Income Taxes:

The Company follows the asset and liability method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to the differences between the financial carrying amounts of existing assets and liabilities and their respective tax basis.



F-9



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred tax assets and liabilities are measured using the tax rate in effect for the year in which those temporary differences are expected to turn around.
The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the related tax
benefits will not be realized.

The Company is required to make judgments, including estimating reserves for potential adverse outcomes
regarding tax positions that the Company has taken. The Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return. The effective tax rate and the
tax basis of assets and liabilities reflect managements estimates of the ultimate outcome of various tax uncertainties.

General
and Administrative Expenses:

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

Income Per Common Share:

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

Statements of cash flows:

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

Concentration of Credit Risk:

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

Hedging:

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

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



F-10



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recently Issued Accounting Pronouncements:

In December 2008, the Securities and Exchange Commission (SEC) issued Release No. 33-8995, Modernization of Oil and Gas Reporting, which
amends the oil and gas disclosures for oil and gas producers contained in Regulations S-K and S-X, as well as adding a section to Regulation S-K (Subpart 1200) to codify the revised disclosure requirements in Securities Act Industry Guide 2, which
is being phased out. The goal of Release No. 33-8995 is to provide investors with a more meaningful and comprehensive understanding of oil and gas reserves. Energy companies affected by Release No. 33-8995 will be required to price proved
oil and gas reserves using the un-weighted arithmetic average of the price on the first day of each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding
escalations based on future conditions. SEC Release No. 33-8995 is effective beginning January 1, 2010. The Company is currently evaluating what impact Release No. 33-8995 may have on its financial position, results of operations or
cash flows.

In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. Emerging Issues Task Force
(EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. Under this FSP, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents, whether they are paid or unpaid, are considered participating securities and should be included in the computation of earnings per share pursuant to the two-class method. FSP No. EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those years. In addition, all prior period earnings per share data presented should be adjusted retrospectively and early application is not permitted. The Company
does not believe that FSP No. EITF 03-6-1 will have a material impact on its financial position, results of operations or cash flows.

In
May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles, which identifies a consistent framework for selecting accounting principles to be used
in preparing financial statements for non-governmental entities that are presented in conformity with United States generally accepted accounting principles (GAAP). The current GAAP hierarchy was criticized due to its complexity, ranking position of
FASB Statements of Financial Accounting Concepts and the fact that it is directed at auditors rather than entities. SFAS No. 162 will be effective 60 days following the SECs approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The FASB does not expect that SFAS No. 162 will have a change in current practice, and the Company does
not believe that SFAS No. 162 will have an impact on its financial position, results of operations or cash flows.

In March 2008, the
FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Enhanced disclosures to improve
financial reporting transparency are required and include disclosure about the location and amounts of derivative instruments in the financial statements, how derivative instruments are accounted for and how derivatives affect an entitys
financial position, financial performance and cash flows. A tabular format including the fair value of derivative instruments and their gains and losses, disclosure about credit risk-related derivative features and cross-referencing within the
footnotes are also new requirements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application and comparative disclosures encouraged, but not
required. The Company has not yet adopted SFAS No. 161.



F-11



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|2. | Significant Acquisitions and Dispositions
|-- | -----------------------------------------

Historically the Company has repurchased the interests of the partners and trust unit holders in certain of the Partnerships. The Company purchased such interests in an amount totaling $481,000 in 2008 and $371,000 in 2007.



|3. | Additional Balance Sheet Information
|-- | ------------------------------------

Accounts
receivable at December 31, 2008 and 2007, consisted of the following:



|                                      |  |              |            |   |      |   |            |  
|------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                      |  | December 31, |           
|                                      |  | 2008         |            |   | 2007 |  
|Joint interest billing                |  | $            | 2,244,000  |   |      | $ | 3,192,000  |  
|Trade receivables                     |  |              | 7,270,000  |   |      |   | 2,352,000  |  
|Oil and gas sales                     |  |              | 8,426,000  |   |      |   | 14,785,000 |  
|Income tax receivable                 |  |              |           |   |      |   | 795,000    |  
|Other                                 |  |              | 608,000    |   |      |   | 415,000    |  
|                                      |  |              |            |   |      |   |            |  
|                                      |  |              | 18,548,000 |   |      |   | 21,539,000 |  
|Less: allowance for doubtful accounts |  |              | (291,000   | ) |      |   | (228,000   | )
|                                      |  |              |            |   |      |   |            |  
|Total                                 |  | $            | 18,257,000 |   |      | $ | 21,311,000 |  
|                                      |  |              |            |   |      |   |            |  

Accounts Payable at December 31, 2008 and 2007, consisted of the following:



|                         |  |              |            |      |   |           
|------------------------ |  | ------------ | ---------- | ---- | - | ----------
|                         |  | December 31,
|                         |  | 2008         |            | 2007
|Trade                    |  | $            | 9,753,000  |      | $ | 12,364,000
|Royalty and other owners |  |              | 13,215,000 |      |   | 11,209,000
|Other                    |  |              | 3,747,000  |      |   | 3,207,000 
|                         |  |              |            |      |   |           
|Total                    |  | $            | 26,715,000 |      | $ | 26,780,000
|                         |  |              |            |      |   |           



F-12



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Accrued Liabilities at December 31, 2008 and 2007, consisted of the following:



|                                  |  |              |            |      |   |           
|--------------------------------- |  | ------------ | ---------- | ---- | - | ----------
|                                  |  | December 31,
|                                  |  | 2008         |            | 2007
|Compensation and related expenses |  | $            | 2,185,000  |      | $ | 1,687,000 
|Property costs                    |  |              | 5,582,000  |      |   | 4,551,000 
|Income tax                        |  |              | 504,000    |      |   |          
|Other                             |  |              | 2,206,000  |      |   | 3,794,000 
|                                  |  |              |            |      |   |           
|                                  |  | $            | 10,477,000 |      | $ | 10,032,000
|                                  |  |              |            |      |   |           



|4. | Property and Equipment
|-- | ----------------------

Total interest costs
incurred during 2007 was $12,984,000. Of this amount, the Company capitalized $1,922,000. Capitalized interest is included as part of the cost of oil and gas properties. The capitalized rates are based upon the Companys weighted-average cost
of borrowings used to finance the expenditures. There was no interest capitalized during 2008.



|5. | Long-Term Debt
|-- | --------------

Bank Debt:

The Company currently has credit facilities totaling $360 million, consisting of a $200 million credit facility through
Guaranty Bank (the offshore facility) and a $160 million credit facility through a syndicate of banks led by Guaranty Bank (the onshore facility). The offshore facilitys maturity date is 2009 and onshore credit facility matures in 2011.

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

The credit facilities include terms and covenants that require the Company to maintain, as
defined, a minimum current ratio, tangible net worth, debt coverage ratio and interest coverage ratio, and restrictions are placed on the payment of dividends and the amount of treasury stock the Company may purchase. The credit facilities are
collateralized by substantially all of the Companys assets. The Company is required to mortgage, and grant a security interest in, consolidated proved oil and gas properties. PEC also pledged the stock of several subsidiaries to the lenders to
secure the credit facilities.

During the second quarter 2008, the Company entered into an amended and restated credit agreement related to
the offshore credit facility allowing for a subordinated credit facility with a private lender and the release of certain collateral which was then pledged to the new lender under a separate credit agreement.



F-13



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At December 31, 2008, the borrowing bases and outstanding balances of the Companys bank
debt were $112 million and $87.17 million, respectively, under the onshore credit facility at a weighted average interest rate of 5.49%, and $16.97 million under the offshore credit facility at a weighted average interest rate of 6%. Total
outstanding bank debt was $104.14 million at December 31, 2008. The combined average interest rates paid on outstanding bank borrowings subject to interest at the banks base rate and on outstanding bank borrowings bearing interest based
upon the LIBO rate were 5.64% during 2008 as compared to 8.76% in 2007. The Companys onshore borrowing base was increased from $96 million to $112 million effective October 30, 2008.

The Company entered into interest rate hedge agreements to help manage interest rate exposure. These contracts include interest rate swaps. Interest rate
swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The Company entered into interest swap agreements for a period of two years, beginning
in April 2008, related to $60 million of Company bank debt resulting in a fixed rate of 4.375%. The underlying debt contracts above are, re-priced quarterly based upon the three-month LIBO rates.

Indebtedness to related partiesnon-current:

During the second quarter 2008, the Companys offshore subsidiary entered into a subordinated credit facility with a private lender with an
availability of $50 million. The private lender has specific collateral pledged under a separate credit agreement. The private lender is a member of the Companys Board of Directors. The current advances under this credit facility are $20
million. The facility matures in January 2010. The new loan bears interest at the rate of 10% per annum.



|6. | Commitments
|-- | -----------

Operating Leases:

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



|                       |  |                 |          
|---------------------- |  | --------------- | ---------
|                       |  | OperatingLeases
|2009                   |  | $               | 569,000  
|2010                   |  |                 | 391,000  
|2011                   |  |                 | 331,000  
|2012                   |  |                 | 128,000  
|                       |  |                 |          
|Total minimum payments |  | $               | 1,419,000
|                       |  |                 |          

Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the years ended December 31, 2008 and 2007 is as follows:



|                                                |  |      |            |   |      |   |            |  
|----------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                |  | 2008 |            |   | 2007 |  
|Asset retirement obligationbeginning of period |  | $    | 17,361,000 |   |      | $ | 7,047,000  |  
|Liabilities incurred                            |  |      | 627,000    |   |      |   | 468,000    |  
|Liabilities settled                             |  |      | (1,292,000 | ) |      |   | (367,000   | )
|Accretion expense                               |  |      | 1,395,000  |   |      |   | 461,000    |  
|Revisions in estimated liabilities              |  |      | 1,450,000  |   |      |   | 9,752,000  |  
|                                                |  |      |            |   |      |   |            |  
|Asset retirement obligationend of period       |  | $    | 19,541,000 |   |      | $ | 17,361,000 |  
|                                                |  |      |            |   |      |   |            |  



F-14



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|7. | Contingent Liabilities
|-- | ----------------------

The Company, as managing
general partner of the affiliated Partnerships, is responsible for all Partnership activities, including the drilling of development wells and the production and sale of oil and gas from productive wells. The Company also provides the
administration, accounting and tax preparation work for the Partnerships, and is liable for all debts and liabilities of the affiliated Partnerships, to the extent that the assets of a given limited Partnership are not sufficient to satisfy its
obligations. As of December 31, 2008, the affiliated Partnerships have established cash reserves in excess of their debts and liabilities and the Company believes these reserves will be sufficient to satisfy Partnership obligations.

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



|8. | Stock Options and Other Compensation
|-- | ------------------------------------

In May 1989,
non-statutory stock options were granted by the Company to four key executive officers for the purchase of shares of common stock. At December 31, 2008 and 2007, options on 767,500 shares were outstanding and exercisable at prices ranging from
$1.00 to $1.25.



|9. | Income Taxes
|-- | ------------

The components of the provision for
income taxes for the years ended December 31, 2008 and 2007 are as follows:



|         |  |      |            |   |      |   |           |  
|-------- |  | ---- | ---------- | - | ---- | - | --------- | -
|         |  | 2008 |            |   | 2007 |  
|Federal: |  |      |            |   |      |   |           |  
|Current  |  | $    | 754,000    |   |      | $ | 567,000   |  
|Deferred |  |      | (1,158,000 | ) |      |   | 2,662,000 |  
|State:   |  |      |            |   |      |   |           |  
|Current  |  |      | 691,000    |   |      |   | 660,000   |  
|Deferred |  |      | (228,000   | ) |      |   | (57,000   | )
|         |  |      |            |   |      |   |           |  
|Total    |  | $    | 59,000     |   |      | $ | 3,832,000 |  
|         |  |      |            |   |      |   |           |  



F-15



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                |  |                  |            |                  |   |           
|----------------------------------------------- |  | ---------------- | ---------- | ---------------- | - | ----------
|                                                |  | December 31,2008 |            | December 31,2007
|Current assets:                                 |  |                  |            |                  |   |           
|Compensation allowance                          |  | $                | 415,000    |                  | $ | 443,000   
|Allowance for doubtful accounts                 |  |                  | 108,000    |                  |   | 56,000    
|Unrealized loss on hedging transactions         |  |                  | 139,000    |                  |   | 1,083,000 
|                                                |  |                  |            |                  |   |           
|Total current deferred income tax assets        |  | $                | 662,000    |                  | $ | 1,582,000 
|                                                |  |                  |            |                  |   |           
|Current liabilities:                            |  |                  |            |                  |   |           
|Unrealized loss for swap transactions           |  | $                | 632,000    |                  | $ |          
|                                                |  |                  |            |                  |   |           
|Net current deferred tax asset                  |  | $                | 30,000     |                  | $ | 1,582,000 
|                                                |  |                  |            |                  |   |           
|Non-current assets:                             |  |                  |            |                  |   |           
|Alternative minimum tax credits                 |  | $                | 7,946,000  |                  | $ | 7,478,000 
|Net operating loss carry-forwards               |  |                  | 161,000    |                  |   | 2,526,000 
|Percentage depletion carry-fowards              |  |                  | 1,101,000  |                  |   | 1,099,000 
|Unrealized loss on hedging transactions         |  |                  |           |                  |   | 953,000   
|                                                |  |                  |            |                  |   |           
|Total non-current assets                        |  | $                | 9,208,000  |                  | $ | 12,056,000
|                                                |  |                  |            |                  |   |           
|Non-current liabilities:                        |  |                  |            |                  |   |           
|Basis differences relating to partnerships      |  | $                | 1,774,000  |                  | $ | 1,381,000 
|Depletion and depreciation                      |  |                  | 33,045,000 |                  |   | 36,697,000
|Unrealized gain on hedging transactions         |  |                  | 77,000     |                  |   |          
|                                                |  |                  |            |                  |   |           
|Total non-current liabilities                   |  | $                | 34,896,000 |                  | $ | 38,078,000
|                                                |  |                  |            |                  |   |           
|Net non-current deferred income tax liabilities |  | $                | 25,688,000 |                  | $ | 26,022,000
|                                                |  |                  |            |                  |   |           

The total provision for income taxes for the years ended December 31, 2008 and 2007 varies
from the federal statutory tax rate as a result of the following:



|                                         |  |                  |          |   |                  |   |           |  
|---------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | --------- | -
|                                         |  | December 31,2008 |          |   | December 31,2007 |  
|Expected tax expense                     |  | $                | 203,000  |   |                  | $ | 4,006,000 |  
|State income tax, net of federal benefit |  |                  | 309,000  |   |                  |   | 398,000   |  
|Percentage depletion                     |  |                  | (639,000 | ) |                  |   | (697,000  | )
|Executive compensation                   |  |                  | 186,000  |   |                  |   | 125,000   |  
|Other, net                               |  |                  |         |   |                  |   |          |  
|                                         |  |                  |          |   |                  |   |           |  
|Tax expense                              |  | $                | 59,000   |   |                  | $ | 3,832,000 |  
|                                         |  |                  |          |   |                  |   |           |  

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

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



F-16



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Uncertain Tax Positions

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109. This
Interpretation provides guidance for recognizing and measuring uncertain tax positions as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a two-step process for accounting for income tax uncertainties. First, a
threshold condition of more likely than not should be met to determine whether any of the benefit of the uncertain tax position should be recognized in the financial statements. If the recognition threshold is met, FIN 48 provides
additional guidance on measuring the amount of the uncertain tax position. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. Guidance is also provided regarding derecognition, classification, interest and penalties, interim period accounting, transition and increased disclosure of these uncertain tax position. FIN 48
is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized no change to the liability for unrecognized tax benefits.

The Company
recognizes accrued interest related to uncertain tax positions in Interest Expense and Other and accrued penalties related to such positions in General and Administrative expense in the Consolidated Statement of Operations, which is consistent with
the recognition of these items in prior reporting periods. As of December 31, 2008, the Company determined that no accrual for penalties was required.

The Company files income tax returns in the U.S. federal jurisdiction and various states. During 2008, the Internal Revenue Service completed its review of the Companys Federal income tax returns for the years
ended 2004 through 2006, and of a refund claim based on carrying a 2006 net operating loss to 2005. No changes were made to the amounts reported in any of the periods examined, or to the refund claimed.



|10. | Segment Information and Major Customers
|--- | ---------------------------------------

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

The Company sells its oil and gas production to a number of purchasers. Listed below are the percent of the Companys total oil and gas sales made
to each of the customers whose purchases represented more than 10% of the Companys oil and gas sales in the year 2008.



|                         |  |     |  |                            |  |    
|------------------------ |  | --- |  | -------------------------- |  | ---
|Oil Purchasers:          |  |     |  | Gas Purchasers:            |  |    
|Texon  Distributing L.P. |  | 25% |  | Unimark LLC                |  | 12%
|Plains All American Inc. |  | 61% |  | Cokinos Energy Corporation |  | 48%

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



|11. | Financial Instruments
|--- | ---------------------

Adoption of SFAS
No. 157

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a formal
framework for measuring fair values of assets and liabilities in financial statements that are already



F-17



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



required by United States generally accepted accounting principles to be measured at fair value. SFAS No. 157 clarifies guidance in FASB Concepts
Statement (CON) No. 7 which discusses present value techniques in measuring fair value. Additional disclosures are also required for transactions measured at fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157, which granted a one year deferral (to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal years) for certain non-financial assets and liabilities to comply with SFAS No. 157. The Company will adopt the provisions of SFAS No. 157 covered under
FSP No. 157-2 on January 1, 2009. Additionally, in February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13, which amends SFAS No. 157 to exclude SFAS No. 13 and related pronouncements that address fair value measurements for purposes of lease
classification and measurement. FSP No. FAS 157-1 is effective upon the initial adoption of SFAS No. 157. The Company has adopted SFAS No. 157 and the related FSPs discussed above which did not have an impact on its financial position or
results of operations for the year ended December 31, 2008.

As defined in SFAS No. 157, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market
considered from the perspective of the market participant that holds the asset or owes the liability.

The valuation techniques that can be
used under SFAS No. 157 are the market approach, income approach or cost approach. The market approach uses prices and other information for market transactions involving identical or comparable assets or liabilities, such as matrix pricing.
The income approach uses valuation techniques to convert future amounts to a single discounted present amount based on current market conditions about those future amounts, such as present value techniques, option pricing models (i.e. Black-Scholes
model) and binomial models (i.e. Monte-Carlo model). The cost approach is based on current replacement cost to replace an asset.

The
Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the
highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurements should be used whenever possible.

The three levels of the fair value hierarchy as defined by SFAS No. 157 are as follows:



| |  |  | Level 1: Valuations utilizing quoted, unadjusted prices for identical assets or liabilities in active markets that the Company has the ability to access. This is
the most reliable evidence of fair value and does not require a significant degree of judgment. Examples include exchange-traded derivatives and listed equities that are actively traded.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Valuations utilizing quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are
observable, either directly or indirectly for substantially the full term of the asset or liability. Financial instruments that are valued using models or other valuation methodologies are included. Models used should primarily be industry-standard
models that
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | consider various assumptions and economic measures, such as interest rates, yield curves, time value, volatilities, contract terms, current market prices,
credit risk or other market-corroborated inputs. Examples include most over-the-counter derivatives (non-exchange traded), physical commodities, most structured notes and municipal and corporate bonds.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Valuations utilizing significant, unobservable inputs. This provides the least objective evidence of fair value and requires a significant degree of
judgment. Inputs may be used with internally developed methodologies and should reflect an entitys assumptions using the best information available about the assumptions that market participants would use in pricing an asset or liability.
Examples include certain corporate loans, real-estate and private equity investments and long-dated or complex over-the-counter derivatives.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Depending on the particular asset or liability, input availability can vary depending on factors such as product type, longevity of a product in the market and other particular transaction conditions. In some cases,
certain inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. For disclosure purposes under SFAS No. 157, the lowest level that contains significant inputs used in valuation should be chosen.
Per SFAS No. 157, the Company has classified its assets and liabilities into these levels depending upon the data relied on to determine the fair values. The fair values of the Companys natural gas and crude oil price collars and swaps
are valued based upon quotes obtained from counterparties to the agreements and are designated as Level 3.

The following fair value
hierarchy table presents information about the Companys assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:



|                                   |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|---------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------- | --------- | - | ----------------------------- | - | --------- | -
|                                   |  | Quoted Prices inActive MarketsFor Identical Assets(Level 1) |  | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3) |           |   | Balance as ofDecember 31,2008 |  
|Assets                             |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|Commodity Derivative Contracts     |  |                                                            |  |                                            |  | $                                       | 2,111,000 |   |                               | $ | 2,111,000 |  
|                                   |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|Total Assets                       |  |                                                            |  |                                            |  | $                                       | 2,111,000 |   |                               | $ | 2,111,000 |  
|                                   |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|Liabilities                        |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|Interest Rate Derivative Contracts |  |                                                            |  |                                            |  | $                                       | (533,000  | ) |                               | $ | (533,000  | )
|                                   |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  
|Total Liability                    |  |                                                            |  |                                            |  | $                                       | (533,000  | ) |                               | $ | (533,000  | )
|                                   |  |                                                             |  |                                             |  |                                         |           |   |                               |   |           |  

The derivative contracts were measured based on quotes from the Companys counterparties.
Such quotes have been derived using a model that considers various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates,
such as a LIBOR curve for a similar length of time as the derivative contract term. Although the Company utilizes multiple quotes to assess the reasonableness of its values, the Company has not attempted to obtain sufficient corroborating market
evidence to support classifying these derivative contracts as Level 2.



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table sets forth a reconciliation of changes in the fair value of financial assets and
liabilities classified as level 3 in the fair value hierarchy.



|                                                 |  |   |            |  
|------------------------------------------------ |  | - | ---------- | -
|Net liabilities as of January 1, 2008            |  | $ | (3,618,000 | )
|Total realized and unrealized losses:            |  |   |            |  
|Included in earnings(a)                          |  |   | (5,446,000 | )
|Included in other comprehensive income           |  |   | 10,927,000 |  
|Purchases, sales, issuances and settlements, net |  |   | (285,000   | )
|                                                 |  |   |            |  
|Net assets as of December 31, 2008               |  | $ | 1,578,000  |  
|                                                 |  |   |            |  

| | 
| | 

| | (a) | Amounts reported in net income are classified as oil and gas sales for commodity derivative instruments and as a reduction to interest expense for interest rate swap instruments.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company periodically enters into derivative commodity instruments to hedge its exposure to price fluctuations on natural
gas and crude oil production. At December 31, 2008, the Company had seven cash flow hedges open: seven crude oil collar arrangements. At December 31, 2008, $2.11 million ($1.35 million net of tax) unrealized gain was recorded in
Accumulated Other Comprehensive Income, along with a $1.75 million and $356 thousand short-term and long-term derivative receivable. The change in the fair value of derivatives designated as hedges that is effective is initially recorded to
Accumulated Other Comprehensive Income. The ineffective portion, if any, of the change in the fair value of derivatives designated as hedges, and the change in fair value of all other derivatives, is recorded currently in earnings as a component of
oil and gas sales.

As of December 31, 2008, the oil price collars covers 561 Mbbl of production at a floor price ranging from $60.00
to $65.00, a ceiling price ranging from $77.40 to $86.50.

Assuming no change in commodity prices, after December 31, 2008, the
Company would expect to reclassify to the Statement of Operations, over the next 12 months, $1.12 million in after-tax income associated with commodity hedges. This reclassification represents the net short-term receivable associated with open
positions currently not reflected in earnings at December 31, 2008 related to anticipated 2009 production.



|12. | Related Party Transactions
|--- | --------------------------

The Company, as
managing general partner or managing trustee, makes an annual offer to repurchase the interest of the partners and trust unit holders in certain of the Partnerships or Trusts. The Company purchased such interests in an amount totaling $481,000
during 2008 and $371,000 during 2007.

Treasury stock purchases in 2008 and 2007 included shares acquired from related parties. Purchases
from related parties included 70,000 shares purchased for a total consideration of $3,500,000 during 2008 and a total of 31,700 shares purchased for a total consideration of $1,743,500 in 2007.

Receivables from related parties consist of reimbursable general and administrative costs, lease operating expenses and reimbursement for property
development and related costs. These receivables are due from joint venture partners, which may include members of the Companys Board of Directors. Included at December 31, 2008 in due from related parties is an amount of $574,000 by two
members of the Companys Board of Director for their participation in a project with the Companys offshore subsidiary.

Payables
owed to related parties primarily represent receipts collected by the Company as agent for the joint venture partners, which may include members of the Companys Board of Directors, for oil and gas sales net of expenses. Also included in due to
related parties is the amount of accrued interest owed to the related party, a



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



member of the Companys Board of Directors, with whom the Companys offshore subsidiary entered into a credit agreement. The agreement provides for
a loan of $20 million at a rate of 10% per annum and is secured by certain oil and gas properties and the Companys interest in a limited partnership which owns a shopping center in Alabama. Included at December 31, 2008 was $169,000
of accrued interest on the related party loan.



|13. | Restricted Cash and Cash Equivalents
|--- | ------------------------------------

Restricted
cash and cash equivalents include $8,027,000 and $3,633,000 at December 31, 2008 and 2007, respectively, of cash primarily pertaining to oil and gas revenue payments. There were corresponding accounts payable recorded at December 31, 2008
and 2007 for these liabilities.



|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 $438,000 and $437,000 in 2008 and 2007,
respectively.



|15. | Earnings per Share
|--- | ------------------

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



|                                    |  |                              |           |                 |           |                |   |     
|----------------------------------- |  | ---------------------------- | --------- | --------------- | --------- | -------------- | - | ----
|                                    |  | Year ended December 31, 2008
|                                    |  | Net Income                   |           | Number ofShares |           | PershareAmount
|Net income per common share         |  | $                            | 541,000   |                 | 3,062,159 |                | $ | 0.18
|Effect of dilutive securities:      |  |                              |           |                 |           |                |   |     
|Options                             |  |                              |          |                 | 753,754   |                |   |     
|                                    |  |                              |           |                 |           |                |   |     
|Diluted net income per common share |  | $                            | 541,000   |                 | 3,815,913 |                | $ | 0.14
|                                    |  |                              |           |                 |           |                |   |     
|                                    | 
|                                    |  | Year ended December 31, 2007
|                                    |  | Net Income                   |           | Number ofShares |           | PershareAmount
|Net income per common share         |  | $                            | 7,920,000 |                 | 3,174,032 |                | $ | 2.50
|Effect of dilutive securities:      |  |                              |           |                 |           |                |   |     
|Options                             |  |                              |          |                 | 752,868   |                |   |     
|                                    |  |                              |           |                 |           |                |   |     
|Diluted net income per common share |  | $                            | 7,920,000 |                 | 3,926,900 |                | $ | 2.02
|                                    |  |                              |           |                 |           |                |   |     



F-21



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION





PRIMEENERGY CORPORATION AND SUBSIDIARIES

CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
ACTIVITIES

December 31, 2008 and 2007

(Unaudited)



|                                                            |  |      |             |      |   |            
|----------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                            |  | 2008 |             | 2007
|Developed oil and gas properties                            |  | $    | 426,190,000 |      | $ | 378,908,000
|Undeveloped oil and gas properties                          |  |      | 3,393,000   |      |   | 4,458,000  
|                                                            |  |      |             |      |   |            
|                                                            |  |      | 429,583,000 |      |   | 383,366,000
|Accumulated depreciation, depletion and valuation allowance |  |      | 217,434,000 |      |   | 145,514,000
|                                                            |  |      |             |      |   |            
|Net capitalized costs                                       |  | $    | 212,149,000 |      | $ | 237,852,000
|                                                            |  |      |             |      |   |            

COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,

EXPLORATION AND DEVELOPMENT ACTIVITIES

Years ended December 31, 2008 and 2007

(Unaudited)



|                                    |  |      |            |      |   |           
|----------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                    |  | 2008 |            | 2007
|Acquisition of Properties Developed |  | $    |           |      | $ | 371,000   
|Undeveloped                         |  | $    |           |      | $ | 184,000   
|Exploration Costs                   |  | $    | 649,000    |      | $ | 633,000   
|Development Costs                   |  | $    | 53,718,000 |      | $ | 86,574,000

STANDARDIZED MEASURE OF DISCOUNTED FUTURE

NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES

Years Ended December 31, 2008 and 2007

(Unaudited)



|                                                         |  |      |              |   |      |   |              |  
|-------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                         |  | 2008 |              |   | 2007 |  
|Future cash inflows                                      |  | $    | 505,316,000  |   |      | $ | 996,419,000  |  
|Future production and development costs                  |  |      | (297,414,000 | ) |      |   | (487,001,000 | )
|Future income tax expenses                               |  |      | (31,259,000  | ) |      |   | (127,961,000 | )
|                                                         |  |      |              |   |      |   |              |  
|Future net cash flows                                    |  |      | 176,643,000  |   |      |   | 381,457,000  |  
|10% annual discount for estimated timing of cash flow    |  |      | (60,109,000  | ) |      |   | (155,997,000 | )
|                                                         |  |      |              |   |      |   |              |  
|Standardized measure of discounted future net cash flows |  | $    | 116,534,000  |   |      | $ | 225,460,000  |  
|                                                         |  |      |              |   |      |   |              |  

See accompanying notes to supplementary information.



F-22



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##### Table of Contents

##### Index to Financial Statements

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, 2008 and 2007

(Unaudited)

The following are the principal sources of change in the standardized measure of discounted future net cash flows during 2008 and 2007:



|                                                         |  |      |              |   |      |   |             |  
|-------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ----------- | -
|For Year Ended December 31,                              |  | 2008 |              |   | 2007 |  
|Sales of oil and gas produced, net of production costs   |  | $    | 92,393,000   |   |      | $ | (83,990,000 | )
|Net changes in prices and production costs               |  |      | (129,629,000 | ) |      |   | 93,088,000  |  
|Extensions, discoveries and improved recovery            |  |      | 45,879,000   |   |      |   | 10,554,000  |  
|Revisions of previous quantity estimates                 |  |      | (34,889,000  | ) |      |   | (16,462,000 | )
|Reserves purchased, net of development costs             |  |      |             |   |      |   | (23,000     | )
|Net change in development costs                          |  |      | 27,975,000   |   |      |   | (27,304,000 | )
|Reserves sold                                            |  |      |             |   |      |   |            |  
|Accretion of discount                                    |  |      | 28,746,700   |   |      |   | 32,564,000  |  
|Net change in income taxes                               |  |      | 44,372,000   |   |      |   | (1,979,000  | )
|Changes in production rates (timing) and other           |  |      | 1,012,000    |   |      |   | 973,000     |  
|                                                         |  |      |              |   |      |   |             |  
|Net change                                               |  |      | (108,926,300 | ) |      |   | 7,421,000   |  
|Standardized measure of discounted future net cash flow: |  |      |              |   |      |   |             |  
|Beginning of year                                        |  |      | 225,460,000  |   |      |   | 218,049,000 |  
|                                                         |  |      |              |   |      |   |             |  
|End of year                                              |  | $    | 116,533,700  |   |      | $ | 225,460,000 |  
|                                                         |  |      |              |   |      |   |             |  



See accompanying notes to
supplementary information.



F-23



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##### Table of Contents

##### Index to Financial Statements

RESERVE QUANTITY INFORMATION

Years Ended December 31, 2008 and 2007

(Unaudited)



|                                              |  |             |   |  |            |   |  |             |   |  |             |  
|--------------------------------------------- |  | ----------- | - |  | ---------- | - |  | ----------- | - |  | ----------- | -
|                                              |  | 2008        |   |  | 2007       |  
|                                              |  | Oil (bbls.) |   |  | Gas (Mcf)  |   |  | Oil (bbls.) |   |  | Gas (Mcf)   |  
|Proved developed and undeveloped reserves:    |  |             |   |  |            |   |  |             |   |  |             |  
|Beginning of year                             |  | 6,592,000   |   |  | 61,412,000 |   |  | 5,205,000   |   |  | 77,912,000  |  
|Extensions, discoveries and improved recovery |  | 2,048,000   |   |  | 6,409,000  |   |  | 941,000     |   |  | 2,343,000   |  
|Revisions of previous estimates               |  | (2,665,000  | ) |  | (3,584,000 | ) |  | 1,007,000   |   |  | (7,531,000  | )
|Purchases                                     |  |            |   |  |           |   |  |            |   |  |            |  
|Reserves sold                                 |  |            |   |  |           |   |  |            |   |  |            |  
|Production                                    |  | (658,000    | ) |  | (8,899,000 | ) |  | (561,000    | ) |  | (11,312,000 | )
|                                              |  |             |   |  |            |   |  |             |   |  |             |  
|End of year                                   |  | 5,317,000   |   |  | 55,338,000 |   |  | 6,592,000   |   |  | 61,412,000  |  
|                                              |  |             |   |  |            |   |  |             |   |  |             |  
|Proved developed reserves                     |  | 5,317,000   |   |  | 54,140,000 |   |  | 5,640,000   |   |  | 58,814,000  |  
|                                              |  |             |   |  |            |   |  |             |   |  |             |  

RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES

Years Ended December 31, 2008 and 2007

(Unaudited)



|                                                                                                 |  |      |             |      |   |            
|------------------------------------------------------------------------------------------------ |  | ---- | ----------- | ---- | - | -----------
|                                                                                                 |  | 2008 |             | 2007
|Revenue:                                                                                         |  |      |             |      |   |            
|Oil and gas sales                                                                                |  | $    | 135,036,000 |      | $ | 122,361,000
|                                                                                                 |  |      |             |      |   |            
|Costs and expenses:                                                                              |  |      |             |      |   |            
|Lease operating expense                                                                          |  |      | 42,643,000  |      |   | 34,841,000 
|Exploration costs                                                                                |  |      | 649,000     |      |   | 633,000    
|Depreciation and Depletion                                                                       |  |      | 69,711,000  |      |   | 59,792,000 
|Income tax expense                                                                               |  |      | 4,995,000   |      |   | 7,569,000  
|                                                                                                 |  |      |             |      |   |            
|                                                                                                 |  |      | 117,998,000 |      |   | 102,835,000
|                                                                                                 |  |      |             |      |   |            
|Results of operations from producing activities(excluding corporate overhead and interest costs) |  | $    | 17,038,000  |      | $ | 19,526,000 
|                                                                                                 |  |      |             |      |   |            

See accompanying notes to supplementary information.



F-24



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##### Table of Contents

##### Index to Financial Statements

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO SUPPLEMENTARY INFORMATION

(Unaudited)



|1. | Presentation of Reserve Disclosure Information
|-- | ----------------------------------------------

Reserve disclosure information is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 69 (SFAS 69), Disclosures About Oil and Gas Producing Activities. The
Companys reserves include amounts attributable to minority interests in the Partnerships. These interests represent less than 10% of the Companys reserves.



|2. | Determination of Proved Reserves
|-- | --------------------------------

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



|3. | Results of Operations from Oil and Gas Producing Activities
|-- | -----------------------------------------------------------

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



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

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

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

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

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

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



|5. | Changes in Reserves
|-- | -------------------

The 2008 extensions and
discoveries reflect the successful drilling activity in our West Texas area.

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



F-25