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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, 2009

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈     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, a non-accelerated filer or a small reporting company.



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|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 $23,336,482.

The number of shares outstanding of each class of the Registrants Common Stock as of March 31, 2010 was 3,026,397 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 May 2010, 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.                                    |  | RESERVED                                                                                                     |  | 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                                                                                      |  | 25
|                      |  | 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            |  | 34                                        
|                      | 
|FINANCIAL STATEMENTS: |  |                                           
|                      |  | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |  | F-1                                                                                                         



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PrimeEnergy Corporation

FORM 10-K ANNUAL REPORT

For the Fiscal Year Ended

December 31, 2009

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, 2009, the Company had net capitalized costs related to oil and gas properties of $173.8 million, including $1.3
million of undeveloped properties. Total expenditures for the acquisition, exploration and development of the Companys properties during 2009 were $17.5 million of which $136,000 related to exploration costs expensed during 2009. Proved
reserves as of December 31, 2009, were 82 BCFe of gas which consisted of 79.63% proved developed reserves and 20.37% proved undeveloped reserves.



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Significant 2009 activity

During 2009, the Company participated in drilling a total of 13 gross (11.74 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 1,600 oil and gas wells, 376 through the Houston office, 314 through the Midland office, 412 through the Oklahoma City office and 498 through the
Charleston, West Virginia office. Substantially all of the wells operated by the Company are wells in which the Company has an interest.

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



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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 2,467. 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 and trust unit holder interests.

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 thereunder by the Federal Energy Regulatory Commission
(FERC) and its predecessors. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could
reenact price controls in the future. Deregulation of wellhead natural gas sales began with the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, as amended (the Decontrol Act). The Decontrol Act
removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993.

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

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

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



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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 the Company 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.

The
Company cannot accurately predict whether FERCs actions will achieve the goal of increasing competition in markets in which its 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, the Company does not
believe that any action taken will affect them 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, the Company believes that the regulation of similarly situated intrastate natural gas transportation in any states in which it operates and ship natural gas on an intrastate
basis will not affect operations in any way that is materially different from the effect of such regulation on 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,
the Company believes that the regulation of oil transportation rates will not affect operations in any way that is materially different from the effect of such regulation on 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, the Company believes that access to oil pipeline transportation services generally will be available to them to the same extent as to competitors.

Regulation of Production:

The
production of oil and natural gas is subject to regulation under a wide range of local, state and federal statutes, rules, orders and regulations. Federal, state and local statutes and regulations require permits for drilling



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operations and plugging and abandonment, drilling bonds and reports concerning operations. The states in which the Company owns and operates 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
the Company can produce from its wells and to limit the number of wells or the locations at which it 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 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, the Company is required to obtain prior MMS approval for any exploration plans it pursues
and the development and production plans for these leases. MMS regulations also establish construction requirements for production facilities located on the Companys 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 the Company to suspend or terminate 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, the Company believes that the impact of royalty regulation on operations should generally be the same as the impact on 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 the cost of doing business and, consequently, affects profitability. The Companys competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions affecting operations.

Taxation

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

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

Competition and
Markets

The business of acquiring producing properties and non-producing leases suitable for exploration and
development is highly competitive. Competitors of the Company, in its efforts to acquire both producing and non-producing properties, include oil and gas companies, independent concerns, income programs and individual producers and operators, many
of which have financial resources, staffs and facilities substantially greater than



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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.                  |  | 20 | %
|Plains All American Inc.                 |  | 59 | %
|Gas Purchasers:                          |  |    |  
|Unimark LLC                              |  | 13 | %
|Cokinos Energy Corporation               |  | 30 | %
|Atlas Pipeline Mid-Continent WestOK, LLC |  | 17 | %

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 operations and costs. In particular, exploration, development and production operations, activities in connection with storage and transportation of oil and other hydrocarbons and 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 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 the Companys operations and financial position, as well as those in the oil and natural gas industry in general. While the Company believes that it is in substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements would not have a material adverse impact, there is no assurance that this trend will continue in the future.



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As with the industry generally, compliance with existing regulations increases the 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 ordinary
operations, the Company may generate waste that may fall within CERCLAs definition of a hazardous substance. The Company 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.

The Company currently owns or leases properties that for
many years have been used for the exploration and production of oil and natural gas. Although the Company and its 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 the Company 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 the Companys control. These properties and wastes disposed on these properties may be subject to CERCLA and
analogous state laws. Under these laws, the Company 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, the Company does not believe that it is associated with any Superfund site and has 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 thereunder impose liability on responsible parties for damages resulting from oil spills into or upon navigable waters, and adjoining shorelines or in the exclusive economic zone of the
United States. Liability under OPA is strict, and under certain circumstances joint and several, and potentially unlimited. A responsible party includes the owner or operator of an onshore facility and the lessee or permittee of the area
in which an offshore facility is located. The OPA also requires the lessee or permittee of the offshore area in which a covered offshore facility is located to establish and maintain evidence of financial responsibility in the amount of $35.0
million ($10.0 million if the offshore facility is located landward of the seaward boundary of a state) to cover liabilities related to an oil spill for which such person is statutorily responsible. The amount of required financial responsibility
may be increased above the minimum amounts to an amount not exceeding $150.0 million depending on the risk represented by the quantity or quality of oil that is handled by the facility. The Company carries insurance coverage to meet these
obligations, which the Company believes is customary for comparable



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companies in the oil and gas 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. The Company is not aware of any action or event that would subject them to liability under OPA and believes that compliance with OPAs financial responsibility and other operating requirements will not have a
material adverse effect.

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. The Company has coverage under the Region VI National Production Discharge Elimination System Permit for discharges associated with exploration and development activities. The Company takes 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, the Company is not required to comply with a substantial portion of RCRAs requirements because the 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 the Company is required to manage and dispose of and would cause them 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. The Company believes that its operations comply in all material respects with the requirements of the Clean Water Act and state statutes
enacted to control water pollution.

Safe Drinking Water Act. Underground injection is the subsurface placement of fluid
through a well, such as the reinjection of brine produced and separated from oil and natural gas production. The Safe Drinking Water



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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. The Company currently owns and
operates various underground injection wells. Failure to abide by the permits could subject the Company to civil and/or criminal enforcement. The Company believes that it is in compliance in all material respects with the requirements of applicable
state underground injection control programs and 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 operations by
restricting areas in which the Company may carry out future development and exploration projects and/or causing the Company 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 sturgeon 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. The Companys 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, the Company must certify that it will conduct its activities in a manner consistent with an applicable
program.

Lead-Based Paints. Various pieces of equipment and structures owned by the Company 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 the
Company needs 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 the Company 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. Operations utilize equipment that emits air pollutants subject to federal and state air pollution control laws. These laws require utilization of air emissions abatement equipment to achieve prescribed
emissions limitations and ambient air quality standards, as well as



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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. The Company believes that its operations are in material compliance with all applicable NORM
standards established by the states, as applicable.

Employees

At March 8, 2010, the Company had 213 full-time and 11 part-time employees, 18 of whom were employed by the Company at its principal
offices in Stamford, Connecticut, 37 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 169 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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| |  |  | 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 complex and inherently uncertain, and the reserve data included in this document are only estimates. The process



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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 the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, 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 generally accepted accounting
principles 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;
| | - |  | -----------------------------------



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| |  |  | 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.



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

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

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

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

Our operations are dependent upon a relatively small group of key management and technical personnel, and one or more of these
individuals could leave our employment. The unexpected loss of the services of one or more of these individuals could have a detrimental effect on us. In addition, our drilling success and the success of other activities integral to our operations
will depend, in part, on our ability to attract and retain experienced geologists, engineers and other professionals. Competition for experienced geologists, engineers and some other professionals is 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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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, 2009.



|             |  |       |  |       |  |       |  |       |  |       |  |       
|------------ |  | ----- |  | ----- |  | ----- |  | ----- |  | ----- |  | ------
|             |  | 2009  |  | 2008  |  | 2007 
|             |  | Gross |  | Net   |  | Gross |  | Net   |  | Gross |  | Net   
|Exploratory: |  |       |  |       |  |       |  |       |  |       |  |       
|Oil          |  |      |  |      |  | 2     |  | 1.5   |  |      |  |      
|Gas          |  |      |  |      |  |      |  |      |  |      |  |      
|Dry          |  |      |  |      |  |      |  |      |  | 1     |  | .375  
|Development: |  |       |  |       |  |       |  |       |  |       |  |       
|Oil          |  | 13    |  | 11.74 |  | 69    |  | 40.18 |  | 30    |  | 13.88 
|Gas          |  |      |  |      |  |      |  |      |  |      |  |      
|Dry          |  |      |  |      |  |      |  |      |  |      |  |      
|Total:       |  |       |  |       |  |       |  |       |  |       |  |       
|Oil          |  | 13    |  | 11.74 |  | 71    |  | 41.68 |  | 30    |  | 13.88 
|Gas          |  |      |  | .    |  |      |  |      |  |      |  |      
|Dry          |  |      |  |      |  |      |  |      |  | 1     |  | .375  
|             |  |       |  |       |  |       |  |       |  |       |  |       
|             |  | 13    |  | 11.74 |  | 71    |  | 41.68 |  | 31    |  | 14.255
|             |  |       |  |       |  |       |  |       |  |       |  |       

Oil and Gas Production

As of December 31, 2009, 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           |  | 935        |  | 365       
|Gas Wells           |  | 1,171      |  | 513       
|Producing Acres     |  | 316,280.83 |  | 107,229.27



|(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 acre is the sum of the fractional revenue interests owned in
gross wells or gross acres. Wells are classified by their primary product. Some wells produce both oil and gas.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table shows the Companys net production of crude oil and natural gas for each of the three years ended
December 31, 2009. 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.



|              |  |           |  |           |  |           
|------------- |  | --------- |  | --------- |  | ----------
|              |  | 2009      |  | 2008      |  | 2007      
|Oil (barrels) |  | 640,000   |  | 658,000   |  | 561,000   
|Gas (Mcf)     |  | 7,129,000 |  | 8,899,000 |  | 11,312,000



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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, 2009.



|                                                       |  |      |       |      |       |      |      
|------------------------------------------------------ |  | ---- | ----- | ---- | ----- | ---- | -----
|                                                       |  | 2009 |       | 2008 |       | 2007
|Average sales price per barrel                         |  | $    | 59.16 |      | 84.43 |      | 66.94
|Average sales price Per Mcf                            |  | $    | 4.42  |      | 8.93  |      | 7.50 
|Average production costs per net equivalent barrel (1) |  | $    | 18.32 |      | 19.92 |      | 14.24



|(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, 2009. 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              |  |         |  | 2,880      |  | 24      
|Texas          |  | 1,716               |  | 1,309             |  | 640              |  | 2        |  |           |  |        
|West Virginia  |  | 220                 |  | 41                |  |                 |  |         |  |           |  |        
|Wyoming        |  |                    |  |                  |  |                 |  |         |  | 140        |  | 35      
|               |  |                     |  |                   |  |                  |  |          |  |            |  |         
|TOTAL          |  | 91,808              |  | 57,533            |  | 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, 2009. 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) 
|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
|2009        |  | 4,476,000        |  | 38,389,000         |  | 1,611,000  |  | 7,024,000 |  | 6,087,000  |  | 45,413,000



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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, 2009, are
summarized as follows (figures rounded):



|            |  |                   |             |                                    |             |                  |            |                                    |            |                   |             |                                    |             |                                     |            |                                           |            
|----------- |  | ----------------- | ----------- | ---------------------------------- | ----------- | ---------------- | ---------- | ---------------------------------- | ---------- | ----------------- | ----------- | ---------------------------------- | ----------- | ----------------------------------- | ---------- | ----------------------------------------- | -----------
|            |  | Proved Developed  |             | Proved Undeveloped                 |             | Total           
|As of 12-31 |  | Future NetRevenue |             | PresentValue 10Of FutureNetRevenue |             | FutureNetRevenue |            | PresentValue 10Of FutureNetRevenue |            | Future NetRevenue |             | PresentValue 10Of FutureNetRevenue |             | PresentValue 10Of FutureIncomeTaxes |            | StandardizedMeasure ofDiscountedCash flow
|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
|2009        |  | $                 | 178,272,000 |                                    | 110,613,000 |                  | 44,792,000 |                                    | 10,388,000 |                   | 223,064,000 |                                    | 121,001,000 |                                     | 18,260,000 |                                           | 102,742,000

The PV 10 Value
represents the discounted future net cash flows attributable to the Companys proved oil and gas reserves before income tax, discounted at 10%. Although this measure is not in accordance with generally accepted accounting principles, the
Company believes that the presentation of the PV 10 Value is relevant and useful to investors because it presents the discounted future net cash flow attributable to proved reserves prior to taking into account corporate future income taxes and the
current tax structure. The Company uses this measure when assessing the potential return on investment related to oil and gas properties. The standardized measure of discounted future net cash flows represents the present value of future cash flows
attributable to 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 non-controlling interests in the Partnerships. These interests represent less
than 10% of the Companys reserves.

In accordance with generally accepted accounting principles, product prices are
determined using the twelve-month average oil and gas index prices, calculated as the unweighted arithmetic average for the first day of the month price for each month, 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 specifications and generally accepted accounting principles, changes in market prices subsequent to December 31 are not considered.

The range of Henry Hub daily gas prices per MMBTU during the year 2009 was a low of $1.92 and a high of $6.10 and the average
was $3.95. The range during the first quarter of 2010 has been from $4.48 to $7.38, with an average of $5.45. The recent futures market prices have traded above $4.53 per MMBTU.

The range of NYMEX oil prices per barrel during the year 2009 was a low of $33.98 and a high of $81.37 and the average was $62.12. The
range during the first quarter of 2010 has been from $71.19 to $83.18, with an average of $77.89. The recent futures market prices have fluctuated around $81.00.

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, 2010, 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



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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.

District Information

The following table presents certain reserve, production and well information as of December 31, 2009.



|                                         |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|---------------------------------------- |  | ----------- |  | --------- |  | ------------- |  | --------- |  | -------- |  | ----- |  | ------
|                                         |  | Appalachian |  | GulfCoast |  | Mid-Continent |  | WestTexas |  | Offshore |  | Other |  | Total 
|Proved Reserves at Year End (Mmcfe)      |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|Developed                                |  | 7,413       |  | 5,526     |  | 13,673        |  | 32,122    |  | 5,036    |  | 1,462 |  | 65,231
|Undeveloped                              |  |            |  |          |  |              |  | 16,336    |  | 351      |  |      |  | 16,687
|                                         |  |             |  |           |  |               |  |           |  |          |  |       |  |       
|Total                                    |  | 7,413       |  | 5,526     |  | 13,673        |  | 48,459    |  | 5,387    |  | 1,462 |  | 81,919
|                                         |  |             |  |           |  |               | 
|Average Daily Production (Mmcfe per day) |  | 2           |  | 3         |  | 6             |  | 12        |  | 7        |  | 1     |  | 31    
|                                         |  |             |  |           |  |               | 
|Gross Wells                              |  | 732         |  | 468       |  | 700           |  | 425       |  | 19       |  | 77    |  | 2,421 
|Net Wells                                |  | 377         |  | 167       |  | 267           |  | 156       |  | 10       |  | 14    |  | 991   
|Gross Operated Wells                     |  | 498         |  | 295       |  | 412           |  | 314       |  | 17       |  | 64    |  | 1,600 

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, 2009, 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 2009 was 2,216 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, 2009, we had 7.4 Bcfe of proved reserves (substantially all natural gas) in the Appalachian region, constituting 9.0% 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 468 wells (167 net) in the Gulf Coast region as of December 31, 2009, of which 295 wells are operated by us. Average daily production in 2009 was 3,229 Mcfe. At December 31, 2009, we had 5.5 Bcfe of proved reserves
(69.3% natural gas) in the Gulf Coast region, which represented 6.7% of our total proved reserves.

Mid-Continent Region

Our Mid-Continent activities are concentrated in central Oklahoma. As of December 31, 2009, we had 700 wells (267 net) in the
Mid-Continent area, of which 412 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 2009 was 6,288 Mcfe. At December 31, 2009, we had 13.7 Bcfe of proved reserves (67.2% natural gas) in the Mid-Continent area, or 16.7% of our total proved reserves. This
region is managed from our office in Oklahoma City.



20



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##### Table of Contents

West Texas Region

Our West Texas activities are concentrated in the Permian Basin in Texas and New Mexico. As of December 31, 2009, we had 425
wells (156 net) in the West Texas area, of which 314 wells are operated by us. Principal producing intervals in the West Texas are in the Spraberry, Wolfcamp and San Andres formations at depths ranging from 5,500 to 12,500 feet. Average net
daily production in 2009 was 11,749 Mcfe. At December 31, 2009, we had 48.4 Bcfe of proved reserves (38.1% natural gas) in the West Texas area, or 59.2% 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, 2009, of which 17 wells are operated by us. Average daily production in 2009 was 6,746 Mcfe. At December 31, 2009, we had 5.4 Bcfe of proved reserves (substantially all natural gas) in
the Offshore Gulf of Mexico region, which represented 6.6% of our total proved reserves.

Acreage subject to expiration in the next three
years



|               |  |       |  |      |  |        |  |        |  |       |  |    
|-------------- |  | ----- |  | ---- |  | ------ |  | ------ |  | ----- |  | ---
|               |  | 2010  |  | 2011 |  | 2012  
|State          |  | Gross |  | Net  |  | Gross  |  | Net    |  | Gross |  | Net
|GULF OF MEXICO |  |      |  |     |  | 28,800 |  | 21,600 |  |      |  |   
|OKLAHOMA       |  | 170   |  | 85   |  |       |  |       |  |      |  |   
|TEXAS          |  |      |  | 24   |  |       |  |       |  |      |  |   
|NEW MEXICO     |  | 320   |  | 87   |  |       |  |       |  |      |  |   
|WEST VIRGINIA  |  |      |  | 11   |  |       |  |       |  |      |  |   
|COLORADO       |  | 211   |  |     |  |       |  |       |  |      |  |   
|               |  |       |  |      |  |        |  |        |  |       |  |    
|TOTAL          |  | 701   |  | 207  |  | 28,800 |  | 21,600 |  |      |  |   
|               |  |       |  |      |  |        |  |        |  |       |  |    



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

Not
applicable



|Item 4. | RESERVED.
|------- | ---------



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##### Table of Contents

PART II



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

The Companys Common Stock is traded in the NASDAQ Stock Market, trading symbol PNRG. The high and low bid quotations for
each quarterly period during the two years ended December 31, 2009, were as follows:



|               |  |      |       |     |   |       |  |                |  |     |       |  |   |      
|-------------- |  | ---- | ----- | --- | - | ----- |  | -------------- |  | --- | ----- |  | - | -----
|2009           |  | High |       | Low |   | 2008  |  | High           |  | Low
|First Quarter  |  | $    | 55.97 |     | $ | 24.46 |  | First Quarter  |  | $   | 58.00 |  | $ | 52.08
|Second Quarter |  | $    | 53.22 |     | $ | 32.69 |  | Second Quarter |  | $   | 64.50 |  | $ | 52.00
|Third Quarter  |  | $    | 36.74 |     | $ | 23.58 |  | Third Quarter  |  | $   | 82.38 |  | $ | 50.68
|Fourth Quarter |  | $    | 38.74 |     | $ | 27.02 |  | Fourth Quarter |  | $   | 77.62 |  | $ | 44.63

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 31, 2010, was 663.

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, the Company announced that the Board of Directors authorized a stock repurchase program whereby the Company may purchase
outstanding shares of the 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, 2009, a total of 2,514,359 shares has
been repurchased under this program for $34,074,279 at an average price of $13.55 per share. Additional purchases of shares may occur as market conditions warrant. The Company expects future purchases will be funded with internally generated cash
flow or from working capital.



|                        |  |                 |  |                             |       |                                                                               |        
|----------------------- |  | --------------- |  | --------------------------- | ----- | ----------------------------------------------------------------------------- | -------
|2009 Month              |  | Number ofShares |  | Average Price Paidper share |       | Maximum Number ofShares that May YetBe Purchased UnderThe Program atMonth-End
|January                 |  | 1,803           |  | $                           | 42.82 |                                                                               | 194,920
|February                |  | 2,209           |  |                             | 34.18 |                                                                               | 192,711
|March                   |  | 1,824           |  |                             | 39.38 |                                                                               | 190,887
|April                   |  | 946             |  |                             | 45.77 |                                                                               | 189,941
|May                     |  |                |  |                             |      |                                                                               | 189,941
|June                    |  |                |  |                             |      |                                                                               | 189,941
|July                    |  |                |  |                             |      |                                                                               | 189,941
|August                  |  |                |  |                             |      |                                                                               | 189,941
|September               |  |                |  |                             |      |                                                                               | 189,941
|October                 |  | 1,400           |  |                             | 31.06 |                                                                               | 188,541
|November                |  | 1,300           |  |                             | 33.67 |                                                                               | 187,241
|December                |  | 1,600           |  |                             | 36.50 |                                                                               | 185,641
|                        |  |                 |  |                             |       |                                                                               |        
|Total/Average/Remainder |  | 11,082          |  | $                           | 37.31 |                                                                               |        
|                        |  |                 |  |                             |       |                                                                               |        



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##### Table of Contents

|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 consolidated financial statements of the Company and notes thereto. The
Companys subsidiaries are listed in Note 1 to the consolidated financial statements.

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.

Liquidity And Capital Resources:

Cash flow provided by operations for the year ended December 31, 2009, was $34 million, compared to $84 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.



23



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##### Table of Contents

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 2009 was $565 thousand. The Company expects continue spending under these programs in 2010.

The Company currently maintains two credit facilities totaling $360 million, with a combined current borrowing base of $105.5
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 2012.

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

Results of Operations:

2009 as compared to 2008

The Company had a net loss of $23,679,000 in 2009 as compared to net income of $541,000 in 2008. The significant components of net
income are discussed below.

Oil and gas saleswere $69,343,000 in 2009 as compared to $135,036,000 in 2008. A chart
summarizing oil and gas production and revenue is presented below.



|                                                                      |  |      |            |      |   |                    |  |   |             |  
|--------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ------------------ |  | - | ----------- | -
|                                                                      |  | 2009 |            | 2008 |   | Increase(Decrease) | 
|Barrels of Oil Produced                                               |  |      | 640,000    |      |   | 658,000            |  |   | (18,000     | )
|Average Price Received (rounded, including the impact of derivatives) |  | $    | 59.16      |      | $ | 84.43              |  | $ | (25.27      | )
|                                                                      |  |      |            |      |   |                    |  |   |             |  
|Oil Revenue                                                           |  | $    | 37,860,000 |      | $ | 55,554,000         |  | $ | (17,694,000 | )
|                                                                      |  |      |            |      |   |                    |  |   |             |  
|Mcf of Gas Produced                                                   |  |      | 7,129,000  |      |   | 8,899,000          |  |   | (1,770,000  | )
|Average Price Received (rounded, including the impact of derivatives) |  | $    | 4.42       |      | $ | 8.93               |  | $ | (4.51       | )
|                                                                      |  |      |            |      |   |                    |  |   |             |  
|Gas Revenue                                                           |  | $    | 31,483,000 |      | $ | 79,482,000         |  | $ | (47,999,000 | )
|                                                                      |  |      |            |      |   |                    |  |   |             |  
|Total Oil & Gas Revenue                                               |  | $    | 69,343,000 |      | $ | 135,036,000        |  | $ | (65,693,000 | )
|                                                                      |  |      |            |      |   |                    |  |   |             |  



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##### Table of Contents

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



|          |  |      |       |      |   |                    |  |   |        |  
|--------- |  | ---- | ----- | ---- | - | ------------------ |  | - | ------ | -
|          |  | 2009 |       | 2008 |   | Increase(Decrease) | 
|Oil Price |  | $    | 56.80 |      | $ | 95.74              |  | $ | (38.94 | )
|Gas Price |  | $    | 4.42  |      | $ | 9.09               |  | $ | (4.67  | )

Changes in Productionrelated to gas are primarily due to the natural decline in our offshore properties. The oil production remained relatively stable as a result of the additional properties added throughout 2008.

Field service income decreased by 32.65% to $16,627,000 in 2009 from $24,687,000 in 2008 as a result of reduced utilization of
equipment combined with rate decreases.

Field service expense decreased by 26.66% to $14,614,000 in 2009 from
$19,927,000 in 2008. This decrease is the result of reduced labor and operating costs associated with the drop in equipment utilization in 2009.

Lease operating expensesdecreased by 21.46% to $33,490,000 in 2009 from $42,643,000 in 2008 due to overall price decreases in oil
field services combined with reduced production taxes related to commodity prices.

General and administrative expensesdecreased by 18.29% to $11,858,000 in 2009 from $14,512,000 in 2008. This decrease is primarily due to reductions in personnel costs.

Depreciation and depletiondecreased by 28.42% to $55,741,000 in 2009 from $77,869,000 in 2008. This decrease is primarily related
to the decrease in offshore production in 2009.

Interest expensedecreased by 7.46% to $7,373,000 in 2009 from
$7,967,000 in 2008. This decrease is due to lower outstanding debt balances during the year and slightly lower average interest rates. The average interest rates paid on outstanding bank borrowings subject to interest during 2009 and 2008 were 5.59%
and 5.64% respectively. As of December 31, 2009 and 2008, the total outstanding borrowings were $113,995,000 and $124,140,000, respectively.

Income tax benefitof $12,305,000 was recorded for 2009, including a reduction of $9,173,000 in the Companys deferred tax
liability. The Company expects to have a net operating loss on the 2009 federal income tax return, and to carry this loss back to offset previous year tax liabilities and receive a refund of approximately $2,466,000.



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



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

None.



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

As of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer
have evaluated the effectiveness of our disclosure controls and procedures (Disclosure Controls). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of



25



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##### Table of Contents

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 Exchange Act. 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, 2009. 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 the Company maintained effective internal control over financial reporting as of December 31, 2009.

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



26



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##### Table of Contents

There have been no significant changes in our internal controls over financial reporting
during the fourth fiscal quarter ended December 31, 2009 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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##### Table of Contents

PART III



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

Information relating to the Companys Directors, nominees for Directors and executive officers is included in the Companys
definitive proxy statement relating the Companys Annual Meeting of Stockholders to be held in May, 2010 which will be filed with the U.S. Securities and Exchange Commission within 120 days of December 31, 2009, 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 May, 2010, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2009, 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 May, 2010, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2009, 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 May, 2010, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2009, 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 May, 2010, which will be filed with the U. S. Securities and Exchange Commission within 120 days of December 31, 2009, and which is incorporated herein by reference.



28



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##### Table of Contents

PART IV



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

The following documents are filed as part of this Report:



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



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



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



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|3.1         |  | Restated Certificate of Incorporation of PrimeEnergy Corporation (effective July 1, 2009) (Incorporated by reference to Exhibit 3.1 to PrimeEnergy Corporation Form 10-Q for the
quarter ended June 30, 2009)                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 
|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, 2006) (1)                                                                                                                                                                                                                                                                                                                                                                                                                    
|            | 
|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)                                                                                                                                                                                                                                                                                                                          



29



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##### Table of Contents

|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|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. (Incorporated by reference to Exhibit 10.22.5.2 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)   
|          | 
|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. (Incorporated by reference to Exhibit 10.22.5.3 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)
|          | 
|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. (Incorporated by reference to Exhibit 10.22.5.4 of
PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)                                                                                           
|          | 
|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. (Incorporated by reference to Exhibit 10.22.5.5 of
PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)                                                                                          
|          | 
|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. (Incorporated by reference to Exhibit 10.22.5.6 of
PrimeEnergy Corporation Form 10-K for the year ended December 31, 2008)                                                                                           
|          | 
|10.22.5.7 |  | Sixth Amendment to 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 the Lenders Signatory Hereto, effective June 19, 2009. (Incorporated by reference to Exhibit 10.22.5.7 to
PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)                                                                                                
|          | 
|10.22.5.8 |  | Seventh Amendment to 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 Compass Bank (successor in interest to Guaranty Bank, FSB), as Agent and Letter of Credit Issuer and the Lenders Signatory Hereto, effective as of March 1, 2010 (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)                                                                                                                                                            



30



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        | 
|10.23.3 |  | Amended and Restated Security Agreement (Membership Pledge) by PrimeEnergy Corporation in favor of Guaranty Bank, FSB as Agent December 28, 2006 (Incorporated by reference to
Exhibit 10.23.3 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                                 
|        | 
|10.23.4 |  | Amended and Restated Security Agreement between PrimeEnergy Corporation, PrimeEnergy Management Corporation, Prime Operating Company, Eastern Oil Well Service Company, Southwest
Oilfield Construction Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference to Exhibit 10.23.4 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)
|        | 
|10.23.5 |  | Amended and Restated Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006
(Incorporated by reference to Exhibit 10.23.5 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                               
|        | 
|10.23.6 |  | Security Agreement between Eastern Oil Well Service Company, EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by
reference to Exhibit 10.23.6 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                    
|        | 
|10.23.7 |  | Amended and Restated Security Agreement between Southwest Oilfield Construction Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by
reference to Exhibit 10.23.7 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                              
|        | 
|10.23.8 |  | Amended and Restated Security Agreement effective between EOWS Midland Company, (debtor) and Guaranty Bank, FSB as Agent (secured party) December 28, 2006 (Incorporated by reference
to Exhibit 10.23.8 of PrimeEnergy Corporation Form 10-K for the year ended December 31, 2006)                                                                                                                                                       
|        | 
|10.23.9 |  | Ratification of and Amendment to Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production, dated effective February 24, 2010, by and between
PrimeEnergy Corporation and PrimeEnergy Management Corporation and Compass Bank (successor in interest to Guaranty Bank, FSB) (filed herewith)                                                                                                          
|        | 
|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)                                                                                                                                                     
|        | 
|10.26.3 |  | Consent, Waiver and First Amendment to Amended and Restated Credit Agreement Among Prime Offshore L.L.C., Guaranty Bank, FSB, as Agent and the Lenders Party Hereto, effective
June 30, 2009. (Incorporated by reference to Exhibit 10.26.3 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)                                                                                                                     
|        | 
|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)                                                                                                                                                          



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|          |  |                                                                                                                                                                                                                                                                                                                                                                 
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | 
|10.27.1   |  | Mortgage, Deed of Trust, Security Agreement, Financing Statement and Assignment of Production from Prime Offshore L.L.C. for the benefit of Guaranty Bank, FSB, Agent, effective
June 30, 2009. (Incorporated by reference to Exhibit 10.27.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)                                         
|          | 
|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)                                            
|          | 
|10.27.3.1 |  | Loan Modification effective
30thday of June, 2009 by and between Artic Management
Corporation, Prime Offshore L.L.C. and PrimeEnergy Corporation. (Incorporated by reference to Exhibit 10.27.3.1 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009)                                                                                     
|          | 
|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)                                                                      
|          | 
|10.27.7   |  | Pledge Agreement made effective June 30, 2009, by and between Prime Offshore L.L.C. and Guaranty Bank, FSB, as Agent. (Incorporated by reference to Exhibit 10.27.7 to PrimeEnergy
Corporation Form 10-Q for the quarter ended June 30, 2009)                                                                                                                   
|          | 
|10.27.8   |  | Subordination of Liens and Security Interests effective June 30, 2009, by Artic Management Corporation for the benefit of Guaranty Bank, FSB, as Agent. (Incorporated by reference
to Exhibit 10.27.8 to PrimeEnergy Corporation Form 10-Q for the quarter ended June 30, 2009                                                                                  
|          | 
|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)                                                                                                                        
|          | 
|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)                                                                                                                                                                                                                                                                                                          



32



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##### Table of Contents

|     |  |                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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
|--- | ------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the
15thday of April, 2010.





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
15thday of April, 2010.



|                                                   |  |                                                                         |  | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------- |  | 
|                                                   |  |                                                                        
|/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       |  |          |  |  |  |                    |  |         



34



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##### Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                                              |  |     
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                                       |  | F-2 
|                                                                                                                                                              | 
|Financial Statements                                                                                                                                          |  |     
|Consolidated Balance SheetDecember 31, 2009 and 2008                                                                                                         |  | F-3 
|Consolidated Statement of Operationsfor the years ended December 31, 2009 and
2008                                                                           |  | F-4 
|Consolidated Statement of Stockholders Equityfor the years ended December 
31, 2009 and 2008                                                                |  | F-5 
|Consolidated Statement of Comprehensive Incomefor the years ended December 31, 2009 and 
2008                                                                |  | F-6 
|Consolidated Statement of Cash Flowsfor the years ended December 31, 2009 and
2008                                                                           |  | F-7 
|Notes to Consolidated Financial Statements                                                                                                                    |  | F-8 
|                                                                                                                                                              | 
|Supplementary Information:                                                                                                                                    |  |     
|Capitalized Costs Relating to Oil and Gas Producing Activities, years ended December 31, 2009 and
2008                                                        |  | F-25
|Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities, years ended December 31,
 2009 and 2008                           |  | F-25
|Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas 
Reserves, years ended December 31, 2009 and 2008                     |  | F-25
|Standardized Measure of Discounted Future Net Cash Flows and 
Changes Therein Relating to Proved Oil and Gas Reserves, years ended December 31, 2009 and 2008 |  | F-26
|Reserve Quantity Information, years ended December 31, 2009 and 2008                                                                                          |  | F-27
|Results of Operations from Oil and Gas Producing Activities, years ended December 31, 2009 and
2008                                                           |  | F-27
|Notes to Supplementary Information                                                                                                                            |  | F-28



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

PrimeEnergy Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheet of PrimeEnergy Corporation and Subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity, comprehensive income, and cash flows for each of the years then ended. These consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of PrimeEnergy Corporation and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting principles generally accepted
in the United States of America.

/s/ Pustorino, Puglisi & Co

PUSTORINO, PUGLISI & CO., LLP

New
York, New York

April 15, 2010



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET, December 31, 2009 and 2008



|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                                                                        |  | 2009 |             |   | 2008 |  
|ASSETS:                                                                                                                                                                                                                 |  |      |             |   |      |   |             |  
|Current assets:                                                                                                                                                                                                         |  |      |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                                                                               |  | $    | 11,779,000  |   |      | $ | 11,808,000  |  
|Restricted cash and cash equivalents                                                                                                                                                                                    |  |      | 5,497,000   |   |      |   | 8,027,000   |  
|Accounts receivable, net                                                                                                                                                                                                |  |      | 13,876,000  |   |      |   | 18,257,000  |  
|Due from related parties                                                                                                                                                                                                |  |      | 30,000      |   |      |   | 678,000     |  
|Prepaid expenses                                                                                                                                                                                                        |  |      | 1,100,000   |   |      |   | 1,302,000   |  
|Derivative contracts                                                                                                                                                                                                    |  |      | 657,000     |   |      |   | 1,755,000   |  
|Inventory at cost                                                                                                                                                                                                       |  |      | 1,871,000   |   |      |   | 4,532,000   |  
|Deferred income taxes                                                                                                                                                                                                   |  |      | 838,000     |   |      |   | 30,000      |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total current assets                                                                                                                                                                                                    |  |      | 35,648,000  |   |      |   | 46,389,000  |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Property and equipment, at cost:                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Proved oil and gas properties at cost                                                                                                                                                                                   |  |      | 441,035,000 |   |      |   | 427,174,000 |  
|Unproved oil and gas properties at cost                                                                                                                                                                                 |  |      | 1,322,000   |   |      |   | 2,409,000   |  
|Less: Accumulated depletion and depreciation                                                                                                                                                                            |  |      | 268,514,000 |   |      |   | 217,434,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|                                                                                                                                                                                                                        |  |      | 173,843,000 |   |      |   | 212,149,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Field and office equipment                                                                                                                                                                                              |  |      | 19,462,000  |   |      |   | 19,513,000  |  
|Less: Accumulated depreciation                                                                                                                                                                                          |  |      | 12,199,000  |   |      |   | 11,197,000  |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|                                                                                                                                                                                                                        |  |      | 7,263,000   |   |      |   | 8,316,000   |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total net property and equipment                                                                                                                                                                                        |  |      | 181,106,000 |   |      |   | 220,465,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Other assets                                                                                                                                                                                                            |  |      | 764,000     |   |      |   | 976,000     |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                                                                            |  | $    | 217,518,000 |   |      | $ | 267,830,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Current liabilities:                                                                                                                                                                                                    |  |      |             |   |      |   |             |  
|Current bank debt                                                                                                                                                                                                       |  | $    | 7,000,000   |   |      | $ | 16,970,000  |  
|Accounts payable                                                                                                                                                                                                        |  |      | 21,291,000  |   |      |   | 26,715,000  |  
|Current portion of asset retirement and other long-term obligations                                                                                                                                                     |  |      | 3,374,000   |   |      |   | 1,461,000   |  
|Derivative liability short term                                                                                                                                                                                         |  |      | 2,288,000   |   |      |   | 387,000     |  
|Accrued liabilities                                                                                                                                                                                                     |  |      | 5,985,000   |   |      |   | 10,477,000  |  
|Due to related parties                                                                                                                                                                                                  |  |      | 450,000     |   |      |   | 233,000     |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total current liabilities                                                                                                                                                                                               |  |      | 40,388,000  |   |      |   | 56,243,000  |  
|Long-term bank debt                                                                                                                                                                                                     |  |      | 86,955,000  |   |      |   | 87,170,000  |  
|Indebtedness to related parties                                                                                                                                                                                         |  |      | 20,000,000  |   |      |   | 20,000,000  |  
|Asset retirement obligations                                                                                                                                                                                            |  |      | 16,862,000  |   |      |   | 18,650,000  |  
|Derivative liability long term                                                                                                                                                                                          |  |      | 2,892,000   |   |      |   | 146,000     |  
|Deferred income taxes                                                                                                                                                                                                   |  |      | 16,635,000  |   |      |   | 25,688,000  |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities                                                                                                                                                                                                       |  |      | 183,732,000 |   |      |   | 207,897,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Stockholders equityPrimeEnergy:                                                                                                                                                                                       |  |      |             |   |      |   |             |  
|Common stock, $.10 par value; 2009: Authorized: 4,000,000 shares, issued: 3,836,397 shares, outstanding: 3,032,097 shares; 2008:
Authorized: 10,000,000 shares, issued: 7,694,970 shares, outstanding: 3,047,564 shares |  |      | 383,000     |   |      |   | 769,000     |  
|Paid in capital                                                                                                                                                                                                         |  |      | 5,465,000   |   |      |   | 11,024,000  |  
|Retained earnings                                                                                                                                                                                                       |  |      | 43,725,000  |   |      |   | 73,426,000  |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                           |  |      | (214,000    | ) |      |   | 1,009,000   |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|                                                                                                                                                                                                                        |  |      | 49,359,000  |   |      |   | 86,228,000  |  
|Treasury stock, at cost; 2009: 804,300 shares; 2008: 4,647,316 shares                                                                                                                                                   |  |      | (25,417,000 | ) |      |   | (36,940,000 | )
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total stockholders equityPrimeEnergy                                                                                                                                                                                  |  |      | 23,942,000  |   |      |   | 49,288,000  |  
|Non-controlling interest                                                                                                                                                                                                |  |      | 9,844,000   |   |      |   | 10,645,000  |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                                                                              |  |      | 33,786,000  |   |      |   | 59,933,000  |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                              |  | $    | 217,518,000 |   |      | $ | 267,830,000 |  
|                                                                                                                                                                                                                        |  |      |             |   |      |   |             |  

See accompanying notes to the consolidated financial statements.



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

for the years ended December 31, 2009 and 2008



|                                                          |  |      |             |   |      |   |            
|--------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|                                                          |  | 2009 |             |   | 2008
|Revenue:                                                  |  |      |             |   |      |   |            
|Oil and gas sales                                         |  | $    | 69,343,000  |   |      | $ | 135,036,000
|Field service income                                      |  |      | 16,627,000  |   |      |   | 24,687,000 
|Administrative overhead fees                              |  |      | 7,972,000   |   |      |   | 9,255,000  
|Loss on derivative instruments                            |  |      | (3,966,000  | ) |      |   |           
|Other income                                              |  |      | 16,000      |   |      |   | 360,000    
|                                                          |  |      |             |   |      |   |            
|Total revenue                                             |  |      | 89,992,000  |   |      |   | 169,338,000
|                                                          |  |     
|Costs and expenses:                                       |  |      |             |   |      |   |            
|Lease operating expense                                   |  |      | 33,490,000  |   |      |   | 42,643,000 
|Field service expense                                     |  |      | 14,614,000  |   |      |   | 19,927,000 
|Depreciation, depletion and amortization                  |  |      | 55,741,000  |   |      |   | 77,869,000 
|Loss on settlement of asset retirement obligation         |  |      | 2,038,000   |   |      |   |           
|General and administrative expense                        |  |      | 11,858,000  |   |      |   | 14,512,000 
|Exploration costs                                         |  |      | 136,000     |   |      |   | 649,000    
|                                                          |  |      |             |   |      |   |            
|Total costs and expenses                                  |  |      | 117,877,000 |   |      |   | 155,600,000
|                                                          |  |      |             |   |      |   |            
|Gain on sale and exchange of assets                       |  |      | 236,000     |   |      |   | 392,000    
|                                                          |  |      |             |   |      |   |            
|Income (loss) from operations                             |  |      | (27,649,000 | ) |      |   | 14,130,000 
|                                                          |  |     
|Other income and expenses:                                |  |      |             |   |      |   |            
|Less: Interest expense                                    |  |      | 7,373,000   |   |      |   | 7,967,000  
|Add: Interest income                                      |  |      | 52,000      |   |      |   | 381,000    
|                                                          |  |      |             |   |      |   |            
|Income (loss) before provision (benefit) for income taxes |  |      | (34,970,000 | ) |      |   | 6,544,000  
|Provision (benefit) for income taxes                      |  |      | (12,305,000 | ) |      |   | 59,000     
|                                                          |  |      |             |   |      |   |            
|Net income (loss)                                         |  |      | (22,665,000 | ) |      |   | 6,485,000  
|                                                          |  |      |             |   |      |   |            
|Less: Net income attributable to non-controlling interest |  |      | 1,014,000   |   |      |   | 5,944,000  
|                                                          |  |      |             |   |      |   |            
|Net income (loss) attributable to PrimeEnergy             |  | $    | (23,679,000 | ) |      | $ | 541,000    
|                                                          |  |      |             |   |      |   |            
|Basic income (loss) per common share                      |  | $    | (7.79       | ) |      | $ | 0.18       
|                                                          |  |      |             |   |      |   |            
|Diluted income (loss) per common share                    |  | $    | (7.79       | ) |      | $ | 0.14       
|                                                          |  |      |             |   |      |   |            



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



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

for the years ended December 31, 2009 and 2008



|                                          |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |             |   |  |   |            |   |  |   |             |  
|----------------------------------------- | ------ | ------------ | - | ------ | ------------------------ | -------- | - | ---------------- | - | ---------- | ------------------------------------------ |  | - | ------------- | - |  | ------------------------------------ | ---------- | - | ----------------------- | - | ----------- | ------------------------ |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                          |        | Common Stock |   |        | AdditionalPaid InCapital |          |   | RetainedEarnings |   |            | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TreasuryStock |   |  | TotalStockholdersEquityPrimeEnergy |            |   | Non-ControllingInterest |   |             | TotalStockholdersEquity | 
|                                          | Shares |              |   | Amount |                          |          |   |                  |   |            |                                            | 
|Balance at January 1, 2008                |        | 7,694,970    |   |        | $                        | 769,000  |   |                  | $ | 11,024,000 |                                            |  | $ | 72,885,000    |   |  | $                                    | (3,618,000 | ) |                         | $ | (32,388,000 | )                        |  | $ | 48,672,000  |   |  | $ | 12,929,000 |   |  | $ | 61,601,000  |  
|Purchase 88,832 shares of common stock    |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   | (4,552,000  | )                        |  |   | (4,552,000  | ) |  |   |            |   |  |   | (4,552,000  | )
|Net income                                |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   | 541,000       |   |  |                                      |            |   |                         |   |             |                          |  |   | 541,000     |   |  |   | 5,944,000  |   |  |   | 6,485,000   |  
|Other comprehensive income, net of taxes  |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      | 4,627,000  |   |                         |   |             |                          |  |   | 4,627,000   |   |  |   |            |   |  |   | 4,627,000   |  
|Purchase of non-controlling interest      |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |            |   |  |   | (481,000   | ) |  |   | (481,000    | )
|Distributions to non-controlling interest |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |            |   |  |   | (7,747,000 | ) |  |   | (7,747,000  | )
|                                          |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |             |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2008              |        | 7,694,970    |   |        | $                        | 769,000  |   |                  | $ | 11,024,000 |                                            |  | $ | 73,426,000    |   |  | $                                    | 1,009,000  |   |                         | $ | (36,940,000 | )                        |  | $ | 49,288,000  |   |  | $ | 10,645,000 |   |  | $ | 59,933,000  |  
|Purchase 11,082 shares of common stock    |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   | (413,000    | )                        |  |   | (413,000    | ) |  |   |            |   |  |   | (413,000    | )
|Retire 3,858,573 shares of treasury stock |        | (3,858,573   | ) |        |                          | (386,000 | ) |                  |   | (5,528,000 | )                                          |  |   | (6,022,000    | ) |  |                                      |            |   |                         |   | 11,936,000  |                          |  |   |            |   |  |   |            |   |  |   |            |  
|Net loss                                  |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   | (23,679,000   | ) |  |                                      |            |   |                         |   |             |                          |  |   | (23,679,000 | ) |  |   | 1,014,000  |   |  |   | (22,665,000 | )
|Other comprehensive loss, net of taxes    |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      | (1,223,000 | ) |                         |   |             |                          |  |   | (1,223,000  | ) |  |   |            |   |  |   | (1,223,000  | )
|Purchase of non-controlling interest      |        |              |   |        |                          |          |   |                  |   | (31,000    | )                                          |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   | (31,000     | ) |  |   | (120,000   | ) |  |   | (151,000    | )
|Distributions to non-controlling interest |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |            |   |  |   | (1,695,000 | ) |  |   | (1,695,000  | )
|                                          |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |             |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2009              |        | 3,836,397    |   |        | $                        | 383,000  |   |                  | $ | 5,465,000  |                                            |  | $ | 43,725,000    |   |  | $                                    | (214,000   | ) |                         | $ | (25,417,000 | )                        |  | $ | 23,942,000  |   |  | $ | 9,844,000  |   |  | $ | 33,786,000  |  
|                                          |        |              |   |        |                          |          |   |                  |   |            |                                            |  |   |               |   |  |                                      |            |   |                         |   |             |                          |  |   |             |   |  |   |            |   |  |   |             |  

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



F-5



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME



|                                                                                                         |  |                          |             |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ---------- | -
|                                                                                                         |  | Years Ended December 31, |            
|                                                                                                         |  | 2009                     |             |   | 2008 |  
|Net income (loss)                                                                                        |  | $                        | (23,679,000 | ) |      | $ | 541,000    |  
|                                                                                                         |  |                          |             |   |      |   |            |  
|Other comprehensive income (loss), net of taxes:                                                         |  |                          |             |   |      |   |            |  
|Reclassification adjustment for settled contracts, net of taxes of $230,000 and $3,064,000, respectively |  |                          | 408,000     |   |      |   | 5,446,000  |  
|Changes in fair value of hedge positions, net of taxes of $917,000 and $461,000, respectively            |  |                          | (1,631,000  | ) |      |   | (819,000   | )
|                                                                                                         |  |                          |             |   |      |   |            |  
|Total other comprehensive income (loss)                                                                  |  |                          | (1,223,000  | ) |      |   | 4,627,000  |  
|                                                                                                         |  |                          |             |   |      |   |            |  
|Comprehensive income (loss)                                                                              |  |                          | (24,902,000 | ) |      |   | 5,168,000  |  
|                                                                                                         |  |                          |             |   |      |   |            |  
|Less: Comprehensive income attributable to non-controlling interest                                      |  |                          | (1,014,000  | ) |      |   | (5,944,000 | )
|                                                                                                         |  |                          |             |   |      |   |            |  
|Comprehensive income (loss) attributable to PrimeEnergy                                                  |  | $                        | (23,888,000 | ) |      | $ | 11,112,000 |  
|                                                                                                         |  |                          |             |   |      |   |            |  







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



F-6



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

for the years ended December 31, 2009 and 2008



|                                                                                         |  |      |             |   |      |   |              |  
|---------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ------------ | -
|                                                                                         |  | 2009 |             |   | 2008 |  
|Cash flows from operating activities:                                                    |  |      |             |   |      |   |              |  
|Net income (loss)                                                                        |  | $    | (23,679,000 | ) |      | $ | 541,000      |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |   |      |   |              |  
|Non-controlling interest in earnings of partnerships                                     |  |      | 1,014,000   |   |      |   | 5,944,000    |  
|Depreciation, depletion, amortization and accretion on discounted liabilities            |  |      | 55,741,000  |   |      |   | 77,869,000   |  
|Gain on sale of properties                                                               |  |      | (236,000    | ) |      |   | (392,000     | )
|Unrealized loss on derivative instruments                                                |  |      | 3,966,000   |   |      |   |             |  
|Provision for deferred income taxes                                                      |  |      | (11,972,000 | ) |      |   | (1,387,000   | )
|Loss on settlement of asset retirement obligations                                       |  |      | 2,038,000   |   |      |   |             |  
|Changes in assets and liabilities:                                                       |  |      |             |   |      |   |              |  
|(Increase) decrease in accounts receivable                                               |  |      | 6,847,000   |   |      |   | 3,056,000    |  
|(Increase) decrease in due from related parties                                          |  |      | 649,000     |   |      |   | (996,000     | )
|(Increase) decrease in inventories                                                       |  |      | 2,660,000   |   |      |   | 115,000      |  
|(Increase) decrease in prepaid expenses and other assets                                 |  |      | 454,000     |   |      |   | (831,000     | )
|Increase (decrease) in accounts payable                                                  |  |      | (2,697,000  | ) |      |   | 1,551,000    |  
|Increase (decrease) in accrued liabilities                                               |  |      | (943,000    | ) |      |   | (1,033,000   | )
|Increase (decrease) in due to related parties                                            |  |      | 218,000     |   |      |   | (697,000     | )
|                                                                                         |  |      |             |   |      |   |              |  
|Net cash provided by operating activities                                                |  |      | 34,060,000  |   |      |   | 83,740,000   |  
|                                                                                         |  |      |             |   |      |   |              |  
|Cash flows from investing activities                                                     |  |      |             |   |      |   |              |  
|Capital expenditures, including exploration expense                                      |  |      | (18,020,000 | ) |      |   | (55,034,000  | )
|Proceeds from sale of properties and equipment                                           |  |      | 236,000     |   |      |   | 392,000      |  
|                                                                                         |  |      |             |   |      |   |              |  
|Net cash used in investing activities                                                    |  |      | (17,784,000 | ) |      |   | (54,642,000  | )
|                                                                                         |  |      |             |   |      |   |              |  
|Cash flows from financing activities                                                     |  |      |             |   |      |   |              |  
|Purchase of stock for treasury                                                           |  |      | (413,000    | ) |      |   | (4,552,000   | )
|Purchase of non-controlling interests                                                    |  |      | (152,000    | ) |      |   | (481,000     | )
|Increase in long-term bank debt and other long-term obligations                          |  |      | 43,100,000  |   |      |   | 116,295,000  |  
|Repayment of long-term bank debt and other long-term obligations                         |  |      | (57,147,000 | ) |      |   | (148,459,000 | )
|Distribution to non-controlling interest                                                 |  |      | (1,693,000  | ) |      |   | (5,466,000   | )
|                                                                                         |  |      |             |   |      |   |              |  
|Net cash used in financing activities                                                    |  |      | (16,305,000 | ) |      |   | (42,663,000  | )
|                                                                                         |  |      |             |   |      |   |              |  
|Net (decrease) in cash and cash equivalents                                              |  |      | (29,000     | ) |      |   | (13,565,000  | )
|Cash and cash equivalents at the beginning of the year                                   |  |      | 11,808,000  |   |      |   | 25,373,000   |  
|                                                                                         |  |      |             |   |      |   |              |  
|Cash and cash equivalents at the end of the year                                         |  | $    | 11,779,000  |   |      | $ | 11,808,000   |  
|                                                                                         |  |      |             |   |      |   |              |  
|Supplemental disclosures:                                                                |  |      |             |   |      |   |              |  
|Income taxes paid during the year                                                        |  | $    | 463,000     |   |      | $ | 395,000      |  
|Net income tax refunds received during the year                                          |  | $    | 797,000     |   |      | $ |             |  
|Interest paid during the year                                                            |  | $    | 7,373,000   |   |      | $ | 7,967,000    |  

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



F-7



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

Nature of Operations:

PrimeEnergy Corporation (PEC), a Delaware corporation, was organized in March 1973 and is engaged in the development,
acquisition and production of oil and natural gas properties. PrimeEnergy Corporation and its subsidiaries are herein referred to as the Company. 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 1,600
wells and owns non-operating interests in over 821 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
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 are controlled by the Company. 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 are not controlled by the Company. For those entities which are proportionately consolidated the 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 the ownership percentage of Partnership reserve reports. DD&A expense and
evaluation of impairment may differ from the Partnership as the Companys 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. Subsequent events have been evaluated through April 15, 2010, the date that the consolidated financial statements were
issued.

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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Estimates of oil and gas reserves, as determined by independent petroleum engineers, are
continually subject to revision based on price, production history and other factors. Depletion expense, which is computed based on the units of production method, could be significantly impacted by changes in such estimates. Additionally, generally
accepted accounting principles require 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.

Fair Value:

The Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and
liabilities in financial statements that are already required by generally accepted accounting principles to be measured at fair value. The guidance defines fair value as 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 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,



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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. The guidance 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 measurement should be used whenever possible.

Asset Retirement Obligation:

Effective January 1, 2003, the Company adopted the accounting standard for asset retirement obligations. The asset retirement
obligation primarily represents the estimated present value of the amount the Company will incur to plug, abandon and remediate producing properties (including removal of 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 at
its 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 statement carrying amounts of existing assets and liabilities and their respective tax basis. 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.

Earnings (Loss) Per Common Share:

Basic earnings (loss) per share are computed by dividing earnings (loss) 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 in gain periods.

Statements of Cash Flows:

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



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 applicable accounting standards for derivative instruments and hedging
activities. Such standards require that applicable derivative instruments 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 applicable effectiveness guidelines, 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.

Recently Adopted Accounting Standards:

In July 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (the Codification), Generally
Accepted Accounting Principles, establishing the accounting standards codification and the hierarchy of generally accepted accounting principles (GAAP) as the sole source of authoritative non-governmental U.S. GAAP. The Codification was not
intended to change U.S. GAAP; however, references to various accounting pronouncements and literature will now differ from what was previously being used in practice. Authoritative literature is now referenced by topic rather than by type of
standard. As of July 1, 2009, the FASB no longer issues Statements, Interpretations, Staff Positions or Emerging Issues Task Force (EITF) Abstracts. The FASB now communicates new accounting standards by issuing an Accounting Standards Update
(ASU). All guidance in the codification has an equal level of authority. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009, and supersedes all accounting standards in
U.S. GAAP, aside from those issued by the SEC. There was no impact on the Companys financial position, results of operations or cash flows as a result of the Codification.

In January 2010, the FASB issued an ASU, Oil and Gas Reserve Estimation and Disclosures, which aligns the FASBs oil and gas reserve
estimation and disclosure requirements with the requirements in SEC Release No. 33-8955, Modernization of Oil and Gas Reporting Requirements (the Release) issued in December 2008. The ASU is effective for reporting
periods ending on or after December 31, 2009. The provisions include changes to pricing used to estimate reserves (with the use of an average of the first-day-of-the-month price for the 12-month period, rather than a year-end price for
determining whether reserves can be produced economically), an expanded definition of oil and gas producing activities to include nontraditional resources, and amended definitions of key terms such as reliable technology and
reasonable certainty which are used in estimating proved oil and gas reserve quantities. The primary objectives of the revisions are to increase the transparency and information value of reserve disclosures and improve comparability
among oil and gas companies. The adoption of these requirements did not significantly impact the reported value of the Companys reserves or its financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



On January 1, 2009, the Company adopted the guidance Non-controlling
Interests in Consolidated Financial Statements to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance defines a non-controlling interest,
previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The guidance requires, among other items, that a non-controlling interest be included in the consolidated
statement of financial position within equity separate from the parents equity; consolidated net income to be reported at amounts inclusive of both the parents and non-controlling interests shares and, separately, the amounts of
consolidated net income attributable to the parent and non-controlling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be measured at
fair value and a gain or loss be recognized in net income based on such fair value. The adoption of the guidance resulted in changes to the Companys presentation for non-controlling interests but did not have a material impact on the
Companys results of operations and financial condition. Certain prior period balances have been restated to reflect the changes required by the guidance.

In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The guidance provides clarification that in
circumstances in which a quoted market price in an active market for an identical liability is not available, an entity is required to measure fair value using a valuation technique that uses the quoted price of an identical liability when traded as
an asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as assets. If none of this information is available, an entity should use a valuation technique in accordance with existing fair valuation principles.
There was no impact on the Companys financial position, results of operations or cash flows as a result of the adoption of this guidance.

In April 2009, the FASB amended guidance regarding determining fair value when the volume and level of activity for an asset or liability
has significantly decreased and identifying transactions that are not orderly. If an entity determines that either the volume or level of activity for an asset or liability has significantly decreased from normal conditions, or that price quotations
or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. The objective in fair value measurement remains unchanged from what is prescribed in the guidance
and should be reflective of the current exit price. Disclosures in interim and annual periods must include inputs and valuation techniques used to measure fair value, along with any changes in valuation techniques and related inputs during the
period. In addition, disclosures for debt and equity securities must be provided on a more disaggregated basis. These amendments became effective for interim and annual reporting periods ending after June 15, 2009 and did not have a material
impact on the Companys financial position, results of operations or cash flows.

In April 2009, the FASB amended
Financial Instruments to require disclosures about fair value of financial instruments for publicly traded companies for both interim and annual periods. Historically, these disclosures were only required annually. The interim
disclosures are intended to provide financial statement users with more timely and transparent information about the effects of current market conditions on an entitys financial instruments that are not otherwise reported at fair value. These
amendments became effective for interim reporting periods ending after June 15, 2009. Comparative disclosures are only required for periods ending after the initial adoption. There was no material impact on the Companys financial
position, results of operations or cash flows as a result of the adoption.

In April 2009, the FASB amended the
other-than-temporary impairment guidance for debt securities in Investments-Debt and Equity Securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. There were no amendments made to the recognition and measurement guidance for equity securities, but a new method of recognizing and reporting for debt securities was established. Disclosure
requirements for



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



impaired debt and equity securities have been expanded significantly and are now required quarterly, as well as annually. These amendments became effective for interim and annual reporting
periods ending after June 15, 2009 and did not have a material impact on the Companys financial position, results of operations or cash flows. Comparative disclosures are only required for periods ending after the initial adoption.

In June 2009, the FASB amended Subsequent Events to require entities to disclose the date through which they have
evaluated subsequent events and whether the date corresponds with the release of their financial statements. These amendments became effective for interim and annual periods ending after June 15, 2009 and did not have any impact on the
Companys financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements:

In January 2010, the FASB issued changes clarifying existing disclosure requirements for fair value measurements and requiring
gross presentation of activities within the reconciliation for the period, whereby entities must present separately information about purchases, sales, issuances and settlements. The update also added a new requirement to disclose fair value
transfers in and out of Levels 1 and 2 and describe the reasons for the transfers. These changes will be effective for financial statements issued for the first interim or annual reporting period beginning after December 15, 2009, except for
gross presentation of the Level 3 reconciliation for the period, which will become effective for annual reporting periods beginning after December 15, 2010. These changes are not expected to have a material impact on the Companys
financial position, results of operations or cash flows.

In June 2009, the FASB issued changes to Transfers and
Servicing which will require entities to provide more information about sales of securitized financial assets and similar transactions, particularly if the seller retains some risk to the assets. These changes will be effective at the
beginning of the first fiscal year beginning after November 15, 2009. As the Company does not anticipate having any of these types of transactions in the near future, these changes are not expected to have any impact on its financial position,
results of operations or cash flows.

In December 2008, the 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.



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

Historically the Company has repurchased the interests of the partners and trust unit holders in certain of the Partnerships, which
consist primarily of oil and gas interests. The Company purchased such interests in an amount totaling $152,000 in 2009 and $481,000 in 2008.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

Accounts receivable at December 31, 2009 and 2008 consisted of the following:



|                                             |  |              |            |      |   |           
|-------------------------------------------- |  | ------------ | ---------- | ---- | - | ----------
|                                             |  | December 31,
|                                             |  | 2009         |            | 2008
|Joint interest billing                       |  | $            | 2,411,000  |      | $ | 2,244,000 
|Trade receivables                            |  |              | 1,565,000  |      |   | 7,270,000 
|Oil and gas sales                            |  |              | 7,774,000  |      |   | 8,426,000 
|Refundable prior years income taxes (note 9) |  |              | 2,466,000  |      |   |          
|Other                                        |  |              | 83,000     |      |   | 608,000   
|                                             |  |              |            |      |   |           
|                                             |  |              | 14,299,000 |      |   | 18,548,000
|Less: Allowance for doubtful accounts        |  |              | 423,000    |      |   | 291,000   
|                                             |  |              |            |      |   |           
|Total                                        |  | $            | 13,876,000 |      | $ | 18,257,000
|                                             |  |              |            |      |   |           

Accounts payable at December 31, 2009 and 2008
consisted of the following:



|                         |  |              |            |      |   |           
|------------------------ |  | ------------ | ---------- | ---- | - | ----------
|                         |  | December 31,
|                         |  | 2009         |            | 2008
|Trade                    |  | $            | 5,862,000  |      | $ | 9,753,000 
|Royalty and other owners |  |              | 9,920,000  |      |   | 13,215,000
|Other                    |  |              | 5,509,000  |      |   | 3,747,000 
|                         |  |              |            |      |   |           
|Total                    |  | $            | 21,291,000 |      | $ | 26,715,000
|                         |  |              |            |      |   |           

Accrued liabilities at December 31, 2009 and 2008
consisted of the following:



|                                  |  |              |           |      |   |           
|--------------------------------- |  | ------------ | --------- | ---- | - | ----------
|                                  |  | December 31,
|                                  |  | 2008         |           | 2008
|Compensation and related expenses |  | $            | 2,009,000 |      | $ | 2,185,000 
|Property costs                    |  |              | 2,137,000 |      |   | 5,582,000 
|Income tax                        |  |              | 170,000   |      |   | 504,000   
|Other                             |  |              | 1,669,000 |      |   | 2,206,000 
|                                  |  |              |           |      |   |           
|                                  |  | $            | 5,985,000 |      | $ | 10,477,000
|                                  |  |              |           |      |   |           



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

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 2009 or 2008.



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

Bank
Debt:

Prior to August 21, 2009 the Companys long-term debt consisted of an onshore facility owed to a syndicate
of banks and an offshore facility owed to one principal lender. The agent for the syndicate of banks and principal lender was Guaranty Bank. On August 21, 2009, Guaranty Bank was closed by the Office of Thrift Suspension.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Subsequently, the Federal Deposit Insurance Corporation (FDIC) was named Receiver. Loan administration and all deposit accounts were transferred to BBVA Compass from the FDIC at that time. BBVA
Compass became the agent for the syndicate of banks holding the onshore credit facility and the lender for the offshore facility.

The Company has revolving lines of credit up to a total of $360 million, consisting of a $200 million credit facility (the offshore
facility) and a $160 million credit facility through a syndicate of banks (the onshore facility). The offshore facilitys maturity date is October 1, 2010 and the onshore credit facility matures April 1, 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 redetermination. 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 the Company is 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 a minimum current ratio, tangible net worth, debt
coverage ratio and interest coverage ratio, as defined, 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.

As of December 31, 2009, the onshore facilities borrowing base was $98 million, including a monthly reduction of $2 million which
began December 1, 2009. As of December 31, 2009 the offshore facilities borrowing base was $7 million with a monthly reduction of $500 thousand which began in August 2009. The Companys borrowing rates in both facilities have a floor
of 2% plus applicable margin rates that vary from 3% to 5% depending on which facility, the value of current borrowings and the actual available borrowing base. Subsequent to year end on March 1, 2010, the Company amended its onshore credit
facility to formally include BBVA Compass as agent of the syndicate of banks holding the facility. At this time the borrowing base was increased to $100 million with terms including a reduction to the availability of the borrowing beginning
June 1, 2010 in the amount of $2 million.

At December 31, 2009, the borrowing base available was $98 million and
the outstanding balance of the Companys bank debt was $86.955 million under the onshore credit facility at a weighted average interest rate of 5.61%. Under the offshore credit facility the outstanding balance was $7 million, with no further
availability, at a weighted average interest rate of 5.36%. Total outstanding bank debt was $93.955 million at December 31, 2009. The combined weighted 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 5.59% during 2009 as compared to 5.64% during 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, which will expire in April 2010,



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



related to $60 million of Company bank debt resulting in a fixed rate of 2.375% plus the Companys current applicable margin. The underlying debt contracts above are re-priced quarterly
based upon the three-month LIBO rates, the Companys floor of 2% and the applicable margin per the onshore credit facility.

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 controlled by a director of the Company. Effective June 30, 2009, the private lender agreed to
release the pledged collateral under this credit facility in favor of the offshore credit facility in exchange for a second lien position on all of the assets of the offshore subsidiary and a pledge from PEC to pay the outstanding balance under the
facility in full after PECs current bank debt is paid off and not take on any additional debt on its existing asset base. This amended facility will mature in January 2012, which will be accelerated if there is a change in control or
management of PrimeEnergy Corporation, and bears interest at a rate of 10% per annum. As of December 31, 2009 advances from this facility amounted to $20 million.



|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
|2010                   |  | $               | 743,000  
|2011                   |  |                 | 384,000  
|2012                   |  |                 | 121,000  
|                       |  |                 |          
|Total minimum payments |  | $               | 1,248,000
|                       |  |                 |          

Rent expense for office space for the years ended
December 31, 2009 and 2008 was $684,000 and $707,000, respectively.

Asset Retirement Obligation:

A reconciliation of the liability for plugging and abandonment costs for the years ended December 31, 2009 and 2008 is as follows:



|                                                |  |      |            |   |      |   |            |  
|----------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                |  | 2009 |            |   | 2008 |  
|Asset retirement obligationbeginning of period |  | $    | 19,541,000 |   |      | $ | 17,361,000 |  
|Liabilities incurred                            |  |      |           |   |      |   | 627,000    |  
|Liabilities settled                             |  |      | (1,824,000 | ) |      |   | (1,292,000 | )
|Accretion expense                               |  |      | 1,720,000  |   |      |   | 1,395,000  |  
|Revisions in estimated liabilities              |  |      | (71,000    | ) |      |   | 1,450,000  |  
|                                                |  |      |            |   |      |   |            |  
|Asset retirement obligationend of period       |  | $    | 19,366,000 |   |      | $ | 19,541,000 |  
|                                                |  |      |            |   |      |   |            |  

The Companys liability is determined using significant assumptions, including current estimates of
plugging and abandonment costs, annual inflation of these costs, the productive life of wells and a risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 the Companys wells, the costs to ultimately retire the wells may vary significantly from previous estimates.

During the year 2009 the Company incurred a loss on settlement of asset retirement obligation in the amount of $2,038,000.
This loss was the result of actual plugging costs on Prime Offshore properties exceeding the liability that had been originally estimated.



|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, 2009, 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.

From time to time, the Company is party to certain legal actions 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.



|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, 2009 and 2008, options on 767,500 shares were outstanding and exercisable at prices ranging from $1.00 to $1.25. According to their terms, the options have no expiration date.



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

The
components of the provision (benefit) for income taxes for the years ended December 31, 2009 and 2008 are as follows:



|                                     |  |      |             |   |      |   |            |  
|------------------------------------ |  | ---- | ----------- | - | ---- | - | ---------- | -
|                                     |  | 2009 |             |   | 2008 |  
|Current:                             |  |      |             |   |      |   |            |  
|Federal                              |  | $    | (3,484,000  | ) |      | $ | 754,000    |  
|State                                |  |      | 351,000     |   |      |   | 691,000    |  
|                                     |  |      |             |   |      |   |            |  
|Total current                        |  | $    | (3,133,000  | ) |      | $ | 1,445,000  |  
|                                     |  |      |             |   |      |   |            |  
|Deferred:                            |  |      |             |   |      |   |            |  
|Federal                              |  |      | (9,016,000  | ) |      |   | (1,158,000 | )
|State                                |  |      | (156,000    | ) |      |   | (228,000   | )
|                                     |  |      |             |   |      |   |            |  
|Total deferred                       |  | $    | (9,172,000  | ) |      | $ | (1,386,000 | )
|                                     |  |      |             |   |      |   |            |  
|Total income tax provision (benefit) |  | $    | (12,305,000 | ) |      | $ | 59,000     |  
|                                     |  |      |             |   |      |   |            |  



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                |  |                  |            |                  |   |           
|----------------------------------------------- |  | ---------------- | ---------- | ---------------- | - | ----------
|                                                |  | December 31,2009 |            | December 31,2008
|Current assets:                                 |  |                  |            |                  |   |           
|Accrued liabilities                             |  | $                | 414,000    |                  | $ | 415,000   
|Allowance for doubtful accounts                 |  |                  | 303,000    |                  |   | 108,000   
|Derivative contracts                            |  |                  | 121,000    |                  |   | 139,000   
|                                                |  |                  |            |                  |   |           
|Total current deferred income tax assets        |  | $                | 838,000    |                  | $ | 662,000   
|                                                |  |                  |            |                  |   |           
|Current liabilities:                            |  |                  |            |                  |   |           
|Derivative contracts                            |  | $                |           |                  | $ | 632,000   
|                                                |  |                  |            |                  |   |           
|Net current deferred tax asset                  |  | $                | 838,000    |                  | $ | 30,000    
|                                                |  |                  |            |                  |   |           
|Non-current assets:                             |  |                  |            |                  |   |           
|Alternative minimum tax credits                 |  | $                | 5,294,000  |                  | $ | 7,946,000 
|Net operating loss carry-forwards               |  |                  | 3,698,000  |                  |   | 161,000   
|Percentage depletion carry-forwards             |  |                  | 1,101,000  |                  |   | 1,101,000 
|                                                |  |                  |            |                  |   |           
|Total non-current assets                        |  | $                | 10,093,000 |                  | $ | 9,208,000 
|                                                |  |                  |            |                  |   |           
|Non-current liabilities:                        |  |                  |            |                  |   |           
|Basis differences relating to partnerships      |  | $                | 491,000    |                  | $ | 1,774,000 
|Proved oil and gas properties                   |  |                  | 26,237,000 |                  |   | 33,045,000
|Derivative contracts                            |  |                  |           |                  |   | 77,000    
|                                                |  |                  |            |                  |   |           
|Total non-current liabilities                   |  | $                | 26,728,000 |                  | $ | 34,896,000
|                                                |  |                  |            |                  |   |           
|Net non-current deferred income tax liabilities |  | $                | 16,635,000 |                  | $ | 25,688,000
|                                                |  |                  |            |                  |   |           

The total provision for income taxes for the years
ended December 31, 2009 and 2008 varies from the federal statutory tax rate as a result of the following:



|                                         |  |                  |             |   |                  |   |          |  
|---------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | -------- | -
|                                         |  | December 31,2009 |             |   | December 31,2008 |  
|Expected tax expense (benefit)           |  | $                | (12,235,000 | ) |                  | $ | 203,000  |  
|State income tax, net of federal benefit |  |                  | 195,000     |   |                  |   | 309,000  |  
|Percentage depletion                     |  |                  |            |   |                  |   | (639,000 | )
|Executive compensation                   |  |                  |            |   |                  |   | 186,000  |  
|Other, net                               |  |                  | (265,000    | ) |                  |   |         |  
|                                         |  |                  |             |   |                  |   |          |  
|Tax expense                              |  | $                | (12,305,000 | ) |                  | $ | 59,000   |  
|                                         |  |                  |             |   |                  |   |          |  

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 Proved oil and gas properties, 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.

The Company has not recorded any provision for uncertain tax positions.



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 2009.



|                         |  |    |   |  |                                          |  |    |  
|------------------------ |  | -- | - |  | ---------------------------------------- |  | -- | -
|Oil Purchasers:          |  |    |   |  | Gas Purchasers:                          |  |    |  
|Texon Distributing L.P.  |  | 20 | % |  | Unimark LLC                              |  | 13 | %
|Plains All American Inc. |  | 59 | % |  | Cokinos Energy Corporation               |  | 30 | %
|                         |  |    |   |  | Atlas Pipeline Mid-Continent WestOK, LLC |  | 17 | %

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.



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

Fair Value measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the
related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Companys interest rate swaps, natural gas and crude oil price
collars and swaps 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, 2009 and 2008:



|                                   |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|---------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------- | ---------- | - | ----------------------------- | - | ---------- | -
|                                   |  | Quoted Prices inActive MarketsFor Identical Assets(Level 1) |  | Significant OtherObservable Inputs(Level 2) |  | SignificantUnobservable Inputs(Level 3) |            |   | Balance as ofDecember 31,2009 |  
|Assets                             |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|Commodity derivative contracts     |  |                                                            |  |                                            |  | $                                       | 879,000    |   |                               | $ | 879,000    |  
|                                   |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|Total assets                       |  |                                                            |  |                                            |  | $                                       | 879,000    |   |                               | $ | 879,000    |  
|                                   |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|Liabilities                        |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|Commodity derivative contracts     |  |                                                            |  |                                            |  | $                                       | (4,845,000 | ) |                               | $ | (4,845,000 | )
|Interest rate derivative contracts |  |                                                            |  |                                            |  | $                                       | (335,000   | ) |                               | $ | (335,000   | )
|                                   |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|Total liability                    |  |                                                            |  |                                            |  | $                                       | (5,180,000 | ) |                               | $ | (5,180,000 | )
|                                   |  |                                                             |  |                                             |  |                                         |            |   |                               |   |            |  
|                                   |  |                                                             |  |                                            
|                                   |  | 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 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 for the years ended December 31, 2009 and 2008.



|                                                 |  |                         |            |   |      |   |            |  
|------------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                                 |  | Year Ended December 31, |           
|                                                 |  | 2009                    |            |   | 2008 |  
|Net assets (liabilities) at beginning of period  |  | $                       | 1,578,000  |   |      | $ | (3,618,000 | )
|Total realized and unrealized losses:            |  |                         |            |   |      |   |            |  
|Included in earnings (a)                         |  |                         | 399,000    |   |      |   | (5,446,000 | )
|Included in other comprehensive income           |  |                         | (2,312,000 | ) |      |   | 10,927,000 |  
|Purchases, sales, issuances and settlements, net |  |                         | (3,966,000 | ) |      |   | (285,000   | )
|                                                 |  |                         |            |   |      |   |            |  
|Net assets (liabilities) at end of period        |  | $                       | (4,301,000 | ) |      | $ | 1,578,000  |  
|                                                 |  |                         |            |   |      |   |            |  



| | (a) | Amounts reported in net income are classified as oil and gas sales for commodity derivative instruments reported as cash flow hedges prior to
July 1, 2009 and as a reduction to interest expense for interest rate swap instruments. Derivative instruments for periods after July 1, 2009
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | are reported in oil and gas sales as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

Assuming no change in interest prices, after December 31, 2009, the Company would expect to reclassify to the statement of
operations, over the next twelve months, $214,000 in after-tax loss associated with interest rate swaps. This reclassification represents the net short-term payable associated with open swaps currently not reflected in earnings at December 31,
2009 related to anticipated interest expense.

Derivative Instruments:

In March 2008, the FASB issued guidance and amended the disclosure requirements for derivative and hedging activities. Entities are now
required to provide greater transparency about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for and how the instruments and related hedged items affect the financial position, results
of operations and cash flows of the entity.

The Company is exposed to commodity price and interest rate risk, and management
considers periodically the Companys exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Companys exposure to commodity price risk
inherent in the Companys oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. The application of hedge accounting for commodities was discontinued for periods after
July 1, 2009. As a result, both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings. If the derivatives previously reported as cash flow hedges had losses or gains not yet settled, these
items would be reported in accumulated other comprehensive income until settlement occurs and reclassified appropriately from accumulated other comprehensive income into the statement of operations.

Interest rate swaps derivatives continue to be treated as cash-flow hedges and are used to fix or float interest rates on existing debt.
The value of these interest rate swaps at December 31, 2009 is located in accumulated other comprehensive income and settlement of the swaps is recorded within interest expense.



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Effect of derivative instruments on the consolidated balance sheet:



|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|-------------------------------------------------- |  | ------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | --------- | -
|                                                   |  |                                 |  | Fair Value        |           
|                                                   |  | Balance Sheet Location          |  | December 31, 2009 |            |   | December 31, 2008 |  
|Asset Derivatives:                                 |  |                                 |  |                   |            |   |                   |   |           |  
|Derivatives designated as hedging instruments:     |  |                                 |  |                   |            |   |                   |   |           |  
|Crude oil commodity contracts                      |  | Current derivative contracts    |  |                   |           |   |                   | $ | 1,755,000 |  
|Crude oil commodity contracts                      |  | Other assets                    |  |                   |           |   |                   |   | 356,000   |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Total                                              |  |                                 |  | $                 |           |   |                   | $ | 2,111,000 |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Derivatives not designated as hedging instruments: |  |                                 |  |                   |            |   |                   |   |           |  
|Natural gas commodity contracts                    |  | Current derivative contracts    |  |                   | 657,000    |   |                   |   |          |  
|Natural gas commodity contracts                    |  | Other assets                    |  |                   | 222,000    |   |                   |   |          |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Total                                              |  |                                 |  | $                 | 879,000    |   |                   | $ |          |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Liability Derivatives:                             |  |                                 |  |                   |            |   |                   |   |           |  
|Derivatives designated as hedging instruments:     |  |                                 |  |                   |            |   |                   |   |           |  
|Interest rate swap derivatives                     |  | Derivative liability short term |  | $                 | (335,000   | ) |                   | $ | (387,000  | )
|Interest rate swap derivatives                     |  | Derivative liability long term  |  |                   |           |   |                   |   | (146,000  | )
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Total                                              |  |                                 |  | $                 | (335,000   | ) |                   | $ | (533,000  | )
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Derivatives not designated as hedging instruments: |  |                                 |  |                   |            |   |                   |   |           |  
|Crude oil commodity contracts                      |  | Derivative liability short term |  |                   | (1,953,000 | ) |                   |   |          |  
|Crude oil commodity contracts                      |  | Derivative liability long term  |  |                   | (2,892,000 | ) |                   |   |          |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Total                                              |  |                                 |  | $                 | (4,845,000 | ) |                   | $ |          |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  
|Total derivative instruments                       |  |                                 |  | $                 | (4,301,000 | ) |                   | $ | 1,578,000 |  
|                                                   |  |                                 |  |                   |            |   |                   |   |           |  



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Effect of derivative instruments on the consolidated statement of operations:



|                                                          |  |                                                        |  |                                                                 |            |   |      |   |            |  
|--------------------------------------------------------- |  | ------------------------------------------------------ |  | --------------------------------------------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                          |  | Location of gain/loss reclassifiedfrom OCI into income |  | Amount of gain/lossreclassified from accumulatedOCI into income |           
|                                                          |  |                                                        |  | 2009                                                            |            |   | 2008 |  
|Derivatives designated as cash-flow hedges                |  |                                                        |  |                                                                 |            |   |      |   |            |  
|Interest rate swap derivatives                            |  | Interest expense                                       |  | $                                                               | (881,000   | ) |      | $ | 387,000    |  
|Crude oil commodity contracts                             |  | Oil and gas sales                                      |  |                                                                 | 1,519,000  |   |      |   | (7,445,000 | )
|                                                          |  |                                                        |  |                                                                 |            |   |      |   |            |  
|                                                          |  |                                                        |  | $                                                               | 638,000    |   |      | $ | (7,058,000 | )
|                                                          |  |                                                        |  |                                                                 |            |   |      |   |            |  
|                                                          |  |                                                       
|                                                          |  | Location of gain/loss recognizedin income              |  | Amount of gain/lossrecognized in income                         |           
|                                                          |  |                                                        |  | 2009                                                            |            |   | 2008 |  
|Derivatives not designated as cash-flow hedge instruments |  |                                                        |  |                                                                 |            |   |      |   |            |  
|Natural gas commodity contracts                           |  | Loss on derivative instruments                         |  | $                                                               | 879,000    |   |      | $ |           |  
|Crude oil commodity contracts                             |  | Loss on derivative instruments                         |  | $                                                               | (4,845,000 | ) |      |   |           |  
|Crude oil commodity contracts                             |  | Oil and gas sales                                      |  |                                                                 | (14,000    | ) |      |   |            |  
|                                                          |  |                                                        |  |                                                                 |            |   |      |   |            |  
|                                                          |  |                                                        |  | $                                                               | (3,980,000 | ) |      | $ |           |  
|                                                          |  |                                                        |  |                                                                 |            |   |      |   |            |  



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

The Company, as managing general partner or managing trustee, makes an annual offer to repurchase the interests of the partners and trust
unit holders in certain of the Partnerships or Trusts. The Company purchased such interests in an amount totaling $152,000 during 2009 and $481,000 during 2008.

Treasury stock purchases in any reported period may include shares from a related party. There were no related party treasury stock
purchases during the year ending December 31, 2009. Purchases from related parties in 2008 included 70,000 shares purchased for a total consideration of $3,500,000.

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 company controlled by a director of the Company,
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 a second lien position of all the assets of the offshore subsidiary.
Included at each of December 31, 2009 and 2008 was $170,000 of accrued interest on the related party loan.



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PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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

Restricted cash and cash equivalents include $5,497,000 and $8,027,000 at December 31, 2009 and 2008, respectively, of cash primarily
pertaining to oil and gas revenue payments. There were corresponding accounts payable recorded at December 31, 2009 and 2008 for these liabilities. Both the restricted cash and the accounts payable are classified as current on the accompanying
balance sheet.



|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, the latter of which approximated $416,000 and
$438,000 in 2009 and 2008, respectively.



|15. | Earnings (Loss) per Share
|--- | -------------------------

Basic earnings (loss) per share are computed by dividing earnings (loss) 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 in gain periods. The following reconciles amounts
reported in the financial statements:



|                                    |  |                              |             |   |                 |           |                |   |       |  
|----------------------------------- |  | ---------------------------- | ----------- | - | --------------- | --------- | -------------- | - | ----- | -
|                                    |  | Year ended December 31, 2009 |            
|                                    |  | Net Income                   |             |   | Number ofShares |           | PershareAmount |  
|Net loss per common share           |  | $                            | (23,679,000 | ) |                 | 3,038,313 |                | $ | (7.79 | )
|Effect of dilutive securities:      |  |                              |             |   |                 |           |                |   |       |  
|Options (a)                         |  |                              |            |   |                 |          |                |   |       |  
|                                    |  |                              |             |   |                 |           |                |   |       |  
|Diluted net loss per common share   |  | $                            | (23,679,000 | ) |                 | 3,038,313 |                | $ | (7.79 | )
|                                    |  |                              |             |   |                 |           |                |   |       |  
|                                    | 
|                                    |  | 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  |  
|                                    |  |                              |             |   |                 |           |                |   |       |  



| | (a) | The dilutive effect of 767,500 outstanding stock purchase options is not considered for the year ended December 31, 2009, due to the loss incurred for such period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16. | Shareholders Equity
|--- | --------------------

The Company has in place a stock repurchase program whereby it may purchase outstanding shares of its common stock from time-to-time, in
open market transactions or negotiated sales. The Company uses the cost method to account for its treasury share purchases. Effective July 1, 2009, pursuant to a vote of the shareholders amending the Articles of Incorporation, the authorized
shares of common stock were reduced from 10,000,000 to 4,000,000, and the class of Preferred Stock of the Company, no shares of which had been issued, was eliminated. The amendment was filed with the Secretary of State in Delaware. The cost of the
cancelled shares was determined by use of the first-in, first-out valuation method. The cost of the reacquired shares was $11,936,000. The cost was allocated between the par value ($0.10) of the shares cancelled; the excess of cost over the par
value to paid in capital based upon the average per share amount of paid in capital ($1.43) for all shares from the original issuance; and the excess was charged to retained earnings.



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

SUPPLEMENTARY INFORMATION





PRIMEENERGY
CORPORATION AND SUBSIDIARIES

CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES

Years Ended December 31, 2009 and 2008

(Unaudited)



|                                                            |  |      |             |      |   |            
|----------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                            |  | 2009 |             | 2008
|Developed oil and gas properties                            |  | $    | 441,035,000 |      | $ | 426,190,000
|Undeveloped oil and gas properties                          |  |      | 1,322,000   |      |   | 3,393,000  
|                                                            |  |      |             |      |   |            
|                                                            |  |      | 442,357,000 |      |   | 429,583,000
|Accumulated depreciation, depletion and valuation allowance |  |      | 268,514,000 |      |   | 217,434,000
|                                                            |  |      |             |      |   |            
|Net capitalized costs                                       |  | $    | 173,843,000 |      | $ | 212,149,000
|                                                            |  |      |             |      |   |            

COSTS INCURRED IN OIL AND
GAS PROPERTY ACQUISITION,

EXPLORATION AND DEVELOPMENT ACTIVITIES

Years Ended December 31, 2009 and 2008

(Unaudited)



|                                    |  |      |            |      |   |           
|----------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                    |  | 2009 |            | 2008
|Acquisition of Properties Developed |  | $    |           |      | $ |          
|Undeveloped                         |  | $    |           |      | $ |          
|Exploration Costs                   |  | $    | 136,000    |      | $ | 649,000   
|Development Costs                   |  | $    | 17,474,000 |      | $ | 53,718,000

STANDARDIZED MEASURE OF DISCOUNTED FUTURE

NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES

Years Ended December 31, 2009 and 2008

(Unaudited)



|                                                         |  |      |              |   |      |   |              |  
|-------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|                                                         |  | 2009 |              |   | 2008 |  
|Future cash inflows                                      |  | $    | 549,104,000  |   |      | $ | 505,316,000  |  
|Future production and development costs                  |  |      | (326,040,000 | ) |      |   | (297,414,000 | )
|Future income tax expenses                               |  |      | (38,199,000  | ) |      |   | (31,259,000  | )
|                                                         |  |      |              |   |      |   |              |  
|Future net cash flows                                    |  |      | 184,835,000  |   |      |   | 176,643,000  |  
|10% annual discount for estimated timing of cash flow    |  |      | (82,093,000  | ) |      |   | (60,109,000  | )
|                                                         |  |      |              |   |      |   |              |  
|Standardized measure of discounted future net cash flows |  | $    | 102,742,000  |   |      | $ | 116,534,000  |  
|                                                         |  |      |              |   |      |   |              |  

See accompanying notes to supplementary information.



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

STANDARDIZED MEASURE OF DISCOUNTED FUTURE

NET CASH FLOWS AND CHANGES THEREIN

RELATING TO PROVED OIL AND GAS RESERVES

Years Ended December 31, 2009 and 2008

(Unaudited)

The following are the principal sources of change in the standardized measure of discounted future net cash flows during 2009 and 2008:



|                                                         |  |      |              |   |      |   |              |  
|-------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | -
|For Year Ended December 31,                              |  | 2009 |              |   | 2008 |  
|Sales of oil and gas produced, net of production costs   |  | $    | 35,853,000   |   |      | $ | (92,393,000  | )
|Net changes in prices and production costs               |  |      | (143,108,000 | ) |      |   | (129,629,000 | )
|Extensions, discoveries and improved recovery            |  |      | 75,028,000   |   |      |   | 45,879,000   |  
|Revisions of previous quantity estimates                 |  |      | (32,725,000  | ) |      |   | (34,889,000  | )
|Reserves purchased, net of development costs             |  |      |             |   |      |   |             |  
|Net change in development costs                          |  |      | 45,122,000   |   |      |   | 27,975,000   |  
|Reserves sold                                            |  |      |             |   |      |   |             |  
|Accretion of discount                                    |  |      | 11,653,000   |   |      |   | 28,747,000   |  
|Net change in income taxes                               |  |      | (6,940,000   | ) |      |   | 44,372,000   |  
|Changes in production rates (timing) and other           |  |      | 1,325,000    |   |      |   | 1,012,000    |  
|                                                         |  |      |              |   |      |   |              |  
|Net change                                               |  |      | (13,792,000  | ) |      |   | (108,926,000 | )
|Standardized measure of discounted future net cash flow: |  |      |              |   |      |   |              |  
|Beginning of year                                        |  |      | 116,534,000  |   |      |   | 225,460,000  |  
|                                                         |  |      |              |   |      |   |              |  
|End of year                                              |  | $    | 102,742,000  |   |      | $ | 116,534,000  |  
|                                                         |  |      |              |   |      |   |              |  





See accompanying notes to supplementary information.



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##### Table of Contents

RESERVE QUANTITY INFORMATION

Years Ended December 31, 2009 and 2008

(Unaudited)



|                                              |  |             |   |  |             |   |  |             |   |  |            |  
|--------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ----------- | - |  | ---------- | -
|                                              |  | 2009        |   |  | 2008        |  
|                                              |  | Oil (bbls.) |   |  | Gas (Mcf)   |   |  | Oil (bbls.) |   |  | Gas (Mcf)  |  
|Proved developed and undeveloped reserves:    |  |             |   |  |             |   |  |             |   |  |            |  
|Beginning of year                             |  | 5,317,000   |   |  | 55,338,000  |   |  | 6,592,000   |   |  | 61,412,000 |  
|Extensions, discoveries and improved recovery |  | 2,136,000   |   |  | 10,198,000  |   |  | 2,048,000   |   |  | 6,409,000  |  
|Revisions of previous estimates               |  | (726,000    | ) |  | (12,994,000 | ) |  | (2,665,000  | ) |  | (3,584,000 | )
|Purchases                                     |  |            |   |  |            |   |  |            |   |  |           |  
|Reserves sold                                 |  |            |   |  |            |   |  |            |   |  |           |  
|Production                                    |  | (640,000    | ) |  | (7,129,000  | ) |  | (658,000    | ) |  | (8,899,000 | )
|                                              |  |             |   |  |             |   |  |             |   |  |            |  
|End of year                                   |  | 6,087,000   |   |  | 45,413,000  |   |  | 5,317,000   |   |  | 55,338,000 |  
|                                              |  |             |   |  |             |   |  |             |   |  |            |  
|Proved developed reserves                     |  | 4,476,000   |   |  | 38,389,000  |   |  | 5,317,000   |   |  | 54,140,000 |  
|                                              |  |             |   |  |             |   |  |             |   |  |            |  

RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES

Years Ended December 31, 2009 and 2008

(Unaudited)



|                                                                                                  |  |      |            |   |      |   |            
|------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -----------
|                                                                                                  |  | 2009 |            |   | 2008
|Revenue:                                                                                          |  |      |            |   |      |   |            
|Oil and gas sales                                                                                 |  | $    | 69,343,000 |   |      | $ | 135,036,000
|                                                                                                  |  |      |            |   |      |   |            
|Costs and expenses:                                                                               |  |      |            |   |      |   |            
|Lease operating expense                                                                           |  |      | 33,490,000 |   |      |   | 42,643,000 
|Exploration costs                                                                                 |  |      | 136,000    |   |      |   | 649,000    
|Depreciation and Depletion                                                                        |  |      | 48,782,000 |   |      |   | 69,711,000 
|Income tax expense (benefit)                                                                      |  |      | (4,597,000 | ) |      |   | 4,995,000  
|                                                                                                  |  |      |            |   |      |   |            
|                                                                                                  |  |      | 77,811,000 |   |      |   | 117,998,000
|                                                                                                  |  |      |            |   |      |   |            
|Results of operations from producing activities (excluding corporate overhead and interest costs) |  | $    | (8,468,000 | ) |      | $ | 17,038,000 
|                                                                                                  |  |      |            |   |      |   |            



See accompanying notes to supplementary information.



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##### Table of Contents

PRIMEENERGY CORPORATION AND SUBSIDIARIES

NOTES TO SUPPLEMENTARY INFORMATION

(Unaudited)



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

Reserve disclosure information is presented in accordance with generally accepted accounting principles. The Companys reserves
include amounts attributable to non-controlling 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 generally
accepted accounting principles. 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 generally accepted accounting principles.
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 generally accepted accounting principles.

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 applicable guidance) 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
2009 and 2008 extensions and discoveries reflect the successful drilling activity in our West Texas area.



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