##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2007
 o
    
    Transition Report Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 000  13305
 PARALLEL PETROLEUM CORPORATION
  Delaware
    
    75-1971716(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 1004 N. Big Spring, Suite 400
Midland, Texas
    
    79701(Address of Principal Executive Offices
    
    (Zip Code)
   
   o þ
  o þ
  þ o
 þ
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  o þ




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##### 



Item No.
    
    
    
    PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    13Item 1B.
    
    Unresolved Staff Comments
    
    
    25Item 2.
    
    Properties
    
    
    26Item 3.
    
    Legal Proceedings
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5.
    
    Market for Registants Common Equity, Related Stockholders Matters and
Issuer Purchases of Equity Securities
    
    
    30Item 6.
    
    Selected Financial Data
    
    
    32Item 7.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    33Item 7A.
    
    Quantitive and Qualitative Disclosure About Market Risk
    
    
    54Item 8.
    
    Financial Statements and Supplementary Data
    
    
    56Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    56Item 9A.
    
    Controls and Procedures
    
    
    56Item 9B.
    
    Other Information
    
    
    58PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    59Item 11.
    
    Executive Compensation
    
    
    63Item 12.
    
    Security Ownership of Certain Benefical Owners and Management and
Related Stockholder Matters
    
    
    87Item 13.
    
    Certain Relationships and Related Transactions, and Director
Independence
    
    
    90Item 14.
    
    Principal Accountant Fees and Services
    
    
    92PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    93Hagerman Gas Gathering System Joint Venture AgreementConsent of BDO Seidman, LLPConsent of Cawley Gillespie & Associates Inc. Independent Petroleum EngineersCertification of Principal Executive Officer Pursuant to Section 302Certification of Principal Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
  (i)




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Cautionary Statement Regarding Forward -Looking Statements
  
    
    our future financial and operating performance and results;
    
    our drilling plans and ability to secure drilling rigs to effectuate our plans;
    
    production volumes;
    
    availability of natural gas gathering and transmission facilities;
    
    our business strategy;
    
    market prices;
    
    sources and availability of funds necessary to conduct operations and complete acquisitions;
    
    development costs;
    
    number and location of planned wells;
    
    our future commodity price risk management activities;
    
    our plans and forecasts; and
    
    any other statements that are not historical facts.
   
    
    fluctuations in prices of oil and natural gas;
    
    dependence on key personnel;
    
    reliance on technological development and technology development programs;
    
    demand for oil and natural gas;
    
    losses due to future litigation;
    
    future capital requirements and availability of financing;
    
    geological concentration of our reserves;
    
    risks associated with drilling and operating wells;
    
    competition;
 (ii)




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
    
    general economic conditions;
    
    governmental regulations and liability for environmental matters;
    
    receipt of amounts owed to us by customers and counterparties to our derivative contracts;
    
    hedging decisions, including whether or not to hedge;
    
    terrorist attacks or war;
    
    actions of third party co-owners of interests in properties in which we also own an interest; and
    
    fluctuations in interest rates and availability of capital.
  1 4
  (iii)




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PART I
 
 ITEM 1. BUSINESS
 About Our Company
   
    
    Bbl or Bbls  barrel or barrels of oil or other liquid hydrocarbons;
    
    Bcf  billion cubic feet of natural gas;
    
    BOE  equivalent barrel of oil or 6 Mcf of natural gas for one barrel of oil;
    
    MBbls  thousand barrels of oil or other liquid hydrocarbons;
    
    MBoe  thousand barrels of oil equivalent;
    
    MMBbls  million barrels of oil or other liquid hydrocarbons;
    
    MMBoe  million barrels of oil equivalent;
    
    MMBtu  million British thermal units;
    
    Mcf  thousand cubic feet of natural gas; and
    
    MMcf  million cubic feet of natural gas.
   Available Information
 (www.sec.gov)
 www.plll.com.
  cindyt@plll.com
 (1)




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Developments in 2007; 2008 Capital Budget
 1 4
    Proved Reserves as of December 31, 2007
   About Our Business and Strategy
   (2)




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Proved Reserves as of December 31, 2007(1)Oil
    
    Natural Gas
    
    Total
    
    % of Total(MBbl)
    
    (MMcf)
    
    (MBoe)
    
    MBoeResource projects:Barnett Shale
    
    
    
    
    
    
    17,714
    
    
    
    2,952
    
    
    
    8
    %New Mexico Wolfcamp
    
    
    1
    
    
    
    24,284
    
    
    
    4,048
    
    
    
    10
    %Total resource projects
    
    
    1
    
    
    
    41,998
    
    
    
    7,000
    
    
    
    18
    %Permian Basin of West Texas
    
    
    28,332
    
    
    
    12,365
    
    
    
    30,393
    
    
    
    80
    %Onshore Gulf Coast of South Texas
    
    
    101
    
    
    
    2,871
    
    
    
    580
    
    
    
    2
    %Total
    
    
    28,434
    
    
    
    57,234
    
    
    
    37,973
    
    
    
    100
    %
 
 (1)
    
    Period end market pricing, as of December 31, 2007, was $96.01
per Bbl and $7.46 per MMBtu.  
    
    $60.0 million for the drilling and completion of new wells and the acquisition of
additional leasehold acreage in our North Texas Barnett Shale project;
    
    $40.0 million for the drilling and completion of new wells, pipeline construction,
seismic and leasehold acquisitions in our New Mexico Wolfcamp Carbonate project;
    
    $24.5 million for the drilling and completion of new wells, refracs, restimulations,
well deepenings and waterflood implementation in our Permian Basin of West Texas
project; and
    
    $2.7 million for the drilling and completion of new wells in our Yegua/Frio,
Utah/Colorado and Cotton Valley Reef projects.
 Our Strategy
 Conduct Exploitation Activities on Our Existing Assets.
 Accelerate Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays.
 (3)




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Use Advanced Technologies and Production Techniques.
 Acquire Long-Lived Properties with Enhancement Opportunities.
 Conduct Exploratory Activities.
 Drilling Activities in 2007
  Number of WellsNumber of
    
    Drilling or
    
    GrossDepth
    
    Gross
    
    Waiting on Completion
    
    Productive
    
    GrossArea
    
    Range (feet)
    
    Wells Drilled
    
    at December 31, 2007
    
    Wells
    
    Dry WellsNorth TexasBarnett Shale
    
    
    7,000  8,000
    
    
    
    52
    
    
    
    17
    
    
    
    34
    
    
    
    1Permian Basin of West Texas
and New MexicoCarm-Ann/Means
    
    
    4,000  4,500
    
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Harris
    
    
    4,000  4,500
    
    
    
    9
    
    
    
    
    
    
    
    9
    
    
    
    Fullerton
    
    
    4,000  5,000
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Wolfcamp Gas
    
    
    4,300  4,500
    
    
    
    34
    
    
    
    1
    
    
    
    32
    
    
    
    1Onshore Gulf Coast of TexasFrio/Yegua/Wilcox
    
    
    5,000  10,000
    
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    105
    
    
    
    18
    
    
    
    85
    
    
    
    2
 (4)




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Drilling and Acquisition Costs
  Year Ended December 31,2007
    
    2006
    
    2005($ in thousands)Proved property acquisition costs
    
    $
    
    
    
    
    $  27,370
    
    
    $
    23,763Unproved property acquisition costs
    
    
    36,750
    
    
    
    30,058
    
    
    
    11,743Exploration costs
    
    
    55,827
    
    
    
    71,003
    
    
    
    15,455Development costs
    
    
    61,766
    
    
    
    69,285
    
    
    
    26,640$
    154,343
    
    
    
    $197,716
    
    
    $
    77,601
 Current Drilling Projects
  Resource Natural Gas Projects
   Fort Worth Basin of North Texas and Permian Basin of New Mexico
 
    
    Barnett Shale Gas Project, Tarrant County, Texas
 .
 
    
    Wolfcamp Gas Project, Eddy and Chavez Counties, New Mexico
  Permian Basin of West Texas
  
    
    Fullerton San Andres Field, Andrews County, Texas
  (5)




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
    
    Carm-Ann San Andres Field / N. Means Queen Unit,
Andrews & Gaines Counties, Texas
  
    
    Harris San Andres Field, Andrews and Gaines Counties, Texas
  
    
    Diamond M Canyon Reef Unit, Scurry County, Texas
  
    
    Diamond M Shallow leases, Scurry County, Texas
  Onshore Gulf Coast of South Texas
 
    
    Yegua/Frio/Wilcox and Cook Mountain Gas Projects, Jackson, Wharton and Liberty
Counties, Texas
  Other Projects
 
    
    Utah/Colorado Conventional Oil & Gas and Heavy Oil Sands Projects, Uinta Basin
  Oil and Natural Gas Prices
  Average Price Received for theYear Ended December 31,2007
    
    2006
    
    2005Oil (Bbl)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    51.78Natural gas (Mcf)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    8.54
  (6)




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Employees and Consultants
    Wells Drilled
  Exploratory Wells (1)
    
    Development Wells (2)Year Ended
    
    Productive
    
    Dry
    
    Productive
    
    DryDecember 31,
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net2007
    
    
    36.0
    
    
    
    13.93
    
    
    
    1.0
    
    
    
    1.00
    
    
    
    67.0
    
    
    
    32.3
    
    
    
    1.00
    
    
    
    0.372006
    
    
    5.0
    
    
    
    2.87
    
    
    
    3.0
    
    
    
    1.42
    
    
    
    122.0
    
    
    
    68.4
    
    
    
    1.00
    
    
    
    0.082005
    
    
    21.0
    
    
    
    5.32
    
    
    
    6.0
    
    
    
    0.64
    
    
    
    48.0
    
    
    
    27.5
    
    
    
    
    
    
    
    
 
 (1)
    
    An exploratory well is a well drilled to find and produce oil or natural gas in an unproved
area, to find a new reservoir in a field previously found to be productive of oil or natural
gas in another reservoir, or to extend a known reservoir.(2)
    
    A development well is a well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.   (7)




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Volumes, Prices and Lifting Costs
  Year Ended December 31,2007
    
    2006
    
    2005(in thousands, except per unit data)Production, Prices and Lifting Costs:Oil (Bbls)
    
    
    1,051
    
    
    
    1,137
    
    
    
    923Natural gas (Mcf)
    
    
    7,422
    
    
    
    6,539
    
    
    
    3,592BOE
    
    
    2,288
    
    
    
    2,227
    
    
    
    1,522Oil price (per Bbl) (1)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    51.78Natural gas price (per Mcf) (1)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    8.54BOE price (1)
    
    $
    50.72
    
    
    $
    48.73
    
    
    $
    51.57Average Lifting Cost (including production taxes) per BOE
    
    $
    11.60
    
    
    $
    10.06
    
    
    $
    9.24
 
 (1)
    
    Average price received at the wellhead for our oil and natural gas.   2007
    
    
    2006
    
    
    2005($ in thousands)Oil revenue
    
    $
    69,315
    
    
    
    $68,076
    
    
    $
    47,800Effect of oil hedges
    
    
    
    
    
    
    (11,512
    )
    
    
    (12,139
    )Natural gas revenue
    
    
    46,716
    
    
    
    40,461
    
    
    
    30,690Effect of natural gas hedges
    
    
    
    
    
    
    
    
    
    
    (201
    )$
    116,031
    
    
    
    $97,025
    
    
    $
    66,150
  Markets and Customers
  (8)




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2007
    
    2006
    
    2005Allegro Investments, Inc.
    
    
    (1
    )
    
    
    (1
    )
    
    
    14
    %Conoco, Inc.
    
    
    21
    %
    
    
    20
    %
    
    
    12
    %Texland Petroleum, Inc.
    
    
    30
    %
    
    
    30
    %
    
    
    40
    %Tri-C Resources, Inc.
    
    
    (1
    )
    
    
    12
    %
    
    
    (1
    )Dale Operating Company
    
    
    (1
    )
    
    
    10
    %
    
    
    (1
    )Chesapeake Operating, Inc.
    
    
    12
    %
    
    
    (1
    )
    
    
    (1
    )
 
 (1)
    
    Less than 10%.    Office Facilities
   Competition
    
    
    adequate capital resources for projects in our core areas of operations;
    
    the technological capabilities to conduct a thorough evaluation of a particular
project; and
    
    a small staff that can respond quickly to exploration and acquisition opportunities.
  (9)




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
    
    leasehold prospects under which oil and natural gas reserves may be discovered or
developed;
    
    drilling rigs and related equipment to explore for such reserves; and
    
    knowledgeable and experienced personnel to conduct all phases of oil and natural gas
operations.
 Oil and Natural Gas Regulations
  
    
    price controls;
    
    taxes; and
    
    environmental and other laws relating to the oil and natural gas industry.
    
    
    the unitization of pooling of oil and natural gas properties;
    
    the establishment of maximum rates of production from oil and natural gas wells; and
    
    the regulation of spacing, plugging and abandonment of wells.
    (10)




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Environmental Regulations
  
    
    require prior governmental authorization for certain activities;
    
    limit or prohibit activities because of protected areas or species;
    
    impose substantial liabilities for pollution related to our operations or
properties; and
    
    provide significant penalties for noncompliance.
  
    
    containment or cleanup;
    
    personal injury;
    
    property damage; and
    
    penalties assessed or other claims sought for natural resource damages.
  
    
    Water. The Oil Pollution Act, or OPA, was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 (FWPCA) and other
statutes as they pertain to prevention of and response to major oil spills. The OPA
subjects owners of facilities to strict, joint and potentially unlimited liability for
removal costs and certain other consequences of an oil spill, where such spill is into
navigable waters, or along shorelines. In the event of an oil spill into such waters,
substantial liabilities could be imposed upon us. States in which we operate have also
enacted similar laws. Regulations are currently being developed under the OPA and
similar state laws that may also impose additional regulatory burdens on us.The FWPCA imposes restrictions and strict controls regarding the discharge of produced
waters, other oil and gas wastes, any form of pollutant, and, in some instances, storm
water runoff, into waters of the United States. The FWPCA provides for civil, criminal
and administrative penalties for any unauthorized discharges and, along with the OPA,
imposes substantial potential liability for the costs of removal, remediation or damages
resulting from an unauthorized discharge. State laws for the control of water pollution
also provide civil, criminal and administrative penalties and liabilities in the case of
an unauthorized discharge into state waters. The cost of compliance with the OPA and the
FWPCA have
 (11)




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not historically been material to our operations, but there can be no assurance that
changes in federal, state or local water pollution control programs will not materially
adversely affect us in the future. Although no assurances can be given, we believe that
compliance with existing permits and compliance with foreseeable new permit requirements
will not have a material adverse effect on our financial condition or results of
operations.
    
    Solid Waste.We generate non-hazardous solid waste that fall under the
requirements of the Federal Resource Conservation and Recovery Act and comparable state
statues. The EPA and the states in which we operate are considering the adoption of
stricter disposal standards for the type of non-hazardous waste we generate. The
Resource Conservation and Recovery Act also governs the generation, management, and
disposal of hazardous wastes. At present, we are not required to comply with a
substantial portion of the Resource Conservation and Recovery Act requirements because
our operations generate minimal quantities of hazardous wastes. However, it is
anticipated that additional wastes, which could include wastes currently generated
during operations, could in the future be designated as hazardous wastes. Hazardous
wastes are subject to more rigorous and costly disposal and management requirements
than are non-hazardous wastes. Such changes in the regulations may result in us
incurring additional capital expenditures or operating expenses.
    
    Superfund.The Comprehensive Environmental Response, Compensation, and
Liability Act, sometimes called CERCLA or Superfund, imposes liability, without regard
to fault or the legality of the original act, on certain classes of persons in
connection with the release of a hazardous substance into the environment. These
persons include the current owner or operator of any site where a release historically
occurred and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the 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. In the
course of our ordinary operations, we may have managed substances that may fall within
CERCLAs definition of a hazardous substance. We may be jointly and severally liable
under CERCLA for all or part of the costs required to clean up sites where we disposed
of or arranged for the disposal of these substances. This potential liability extends
to properties that we owned or operated as well as to properties owned and operated by
others at which disposal of our hazardous substances occurred.We currently own or lease numerous properties that for many years have been used for
exploring and producing oil and natural gas. Although we believe we use operating and
disposal practices standard in the industry, hydrocarbons or other wastes may have been
disposed of or released by us on or under properties that we have owned or leased. In
addition, many of these properties have been previously owned or operated by third
parties who may have disposed of or released hydrocarbons or other wastes at these
properties. Under CERCLA, and analogous state laws, we could be required to remove or
remediate previously disposed wastes, including wastes disposed of or released by prior
owners or operators, to clean up contaminated property, including contaminated
groundwater, or to perform remedial plugging operations to prevent future contamination.
 Massachusetts, et al. v. EPA Massachusetts
 (12)




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ITEM 1A. RISK FACTORS
  Risks Related to Our Business
 The volatility of the oil and natural gas industry may have an adverse impact on our operations.
  
    
    the level of oil and natural gas prices, expectations about future oil and natural
gas prices and the ability of international cartels to set and maintain production
levels and prices;
    
    the cost of exploring for, producing and transporting oil and natural gas;
    
    the level and price of foreign oil and natural gas transportation;
    
    available pipeline and other oil and natural gas transportation capacity;
    
    weather conditions;
    
    international political, military, regulatory and economic conditions;
    
    the level of consumer demand;
    
    the price and the availability of alternative fuels;
    
    the effect of worldwide energy conservation measures; and
    
    the ability of oil and natural gas companies to raise capital.Significant declines in oil and natural gas prices for an extended period may:
    
    impair our financial condition, liquidity, ability to finance planned capital
expenditures and results of operations;
    
    reduce the amount of oil and natural gas that we can produce economically;
    
    cause us to delay or postpone some of our capital projects;
    
    reduce our revenues, operating income and cash flow; and
    
    reduce the recorded value of our oil and natural gas properties.
  We must replace oil and natural gas reserves that we produce. Failure to replace reserves may
negatively affect our business.
  (13)




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1 4
 We are subject to uncertainties in reserve estimates and future net cash flows.
   
    
    actual prices we receive for oil and natural gas;
    
    the amount and timing of actual production;
    
    supply and demand of oil and natural gas;
    
    limits of increases in consumption by natural gas purchasers; and
    
    changes in governmental regulations or taxation.
  Competition in the oil and natural gas industry is intense, and many of our competitors have
greater financial, technological and other resources than we do.
  
    
    seeking to acquire desirable producing properties or new leases for future
exploration;
    
    marketing our oil and natural gas production;
    
    integrating new technologies; and
    
    seeking to acquire the equipment and expertise necessary to develop and operate our
properties.
  (14)




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We do not control all of our operations and development projects, which may adversely affect our
production, revenues and results of operations.
  
    
    timing and amount of capital expenditures;
    
    expertise and financial resources;
    
    inclusion of other participants in drilling wells; and
    
    use of technology.
  Our business is subject to many inherent risks, including operating risks, which may result in
substantial losses, and insurance may be unavailable or inadequate to protect us against these
risks.
   
    
    explosions, blowouts and fires;
    
    natural disasters;
    
    pressure forcing oil or natural gas out of the wellbore at a dangerous velocity
coupled with the potential for fire or explosion;
    
    weather;
    
    failure of oilfield drilling and service equipment and tools;
    
    changes in underground pressure in a formation that causes the surface to collapse
or crater;
    
    pipeline ruptures or cement failures;
 (15)




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
    
    environmental hazards such as natural gas leaks, oil spills and discharges of toxic
gases; and
    
    availability of needed equipment at acceptable prices, including steel tubular
products.
  
    
    injury or loss of life;
    
    damage to and destruction of property, natural resources and equipment;
    
    pollution and other environmental damage;
    
    regulatory investigations and penalties;
    
    suspension of our operations; and
    
    repair and remediation costs.
   The oil and natural gas industry is capital intensive.
    
    
    our proved reserves;
    
    the level of oil and natural gas we are able to produce from existing wells;
    
    the prices at which oil and natural gas are sold; and
    
    our ability to acquire, locate and produce new reserves.
   There are risks in acquiring producing properties, including difficulties in integrating acquired
properties into our business, additional liabilities and expenses associated with acquired
properties, diversion of management attention, increasing the scope, geographic diversity and
complexity of our operations and incurrence of additional debt.
 (16)




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We could experience delays in securing drilling equipment and crews, which would cause us to fail
to meet our drilling plans and negatively impact our operations.
  The marketability of our natural gas production depends on facilities that we typically do not own
or control.
  Our producing properties are geographically concentrated.
  Our derivative activities create a risk of financial loss.
  
    
    the counterparties to our future contracts fail to perform under the contract; or
    
    a sudden, unexpected event materially impacts oil or natural gas prices.
 (17)




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We are subject to complex federal, state and local laws and regulations that could adversely affect
our business.
  
    
    permits for drilling operations;
    
    drilling bonds;
    
    spacing of wells;
    
    unitization and pooling of properties;
    
    environmental protection;
    
    reports concerning operations; and
    
    taxation.
  
    
    personal injuries;
    
    property damage;
    
    oil spills;
    
    discharge of hazardous materials;
    
    reclamation costs;
    
    remediation and clean-up costs; and
    
    other environmental damages.
  (18)




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Declining oil and natural gas prices may cause us to record ceiling test write-downs.
    Terrorist activities may adversely affect our business.
  We are highly dependent upon key personnel.
    Part of our business is seasonal in nature.
  Failure to maintain effective internal controls could have a material adverse effect on our
operations.
  (19)




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Our business can be adversely impacted by downward changes in oil and natural gas prices, and most
significantly by declines in oil prices.
  A shortage of available drilling rigs, equipment and personnel may delay or restrict our
operations.
  Risks Relating to Our Common Stock
 We do not pay dividends on our common stock.
 1 4
 Our stockholders rights plan, provisions in our corporate governance documents and Delaware law
may delay or prevent an acquisition of Parallel, which could decrease the value of our common
stock.
   
    
    restrictions on dividends on common stock and other series of preferred stock if
dividends on any new series of preferred stock have not been paid;
 (20)




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##### Table of Contents




    
    dilution of the voting power of common stock and other series of preferred stock to
the extent that a new series of preferred stock has voting rights, or to the extent
that any new series of preferred stock is convertible into common stock;
    
    dilution of the equity interest of common stock and other series of preferred stock;
and
    
    limitation on the right of holders of common stock and other series of preferred
stock to share in Parallels assets upon liquidation until satisfaction of any
liquidation preference attributable to any new series of preferred stock.
  Future sales of our common stock could adversely affect our stock prices.
  The price of our common stock may fluctuate which may cause our common stock to trade at a
substantially lower price than the price which you paid for our common stock.
  If securities analysts downgrade our stock or cease coverage of us, the price of our stock could
decline.
  Risks Relating to Our 10 1/4% Senior Notes and Our Other Indebtedness
 We have a substantial amount of indebtedness, which may adversely affect our cash flow and our
ability to operate our business, remain in compliance with debt covenants and make payments on our
debt, including our 10 1/4% senior notes
 1 4
 
    
    we may have difficulty borrowing money in the future for acquisitions, capital
expenditures or to meet our operating expenses or other general corporate obligations;
    
    we will need to use a substantial portion of our cash flows to pay principal and
interest on our debt, which will reduce the amount of money we have for operations,
working capital, capital expenditures, expansion, acquisitions or general corporate or
other business activities;
    
    we may have a higher level of debt than some of our competitors, which may put us at
a competitive disadvantage;
 (21)




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##### Table of Contents




    
    we may be more vulnerable to economic downturns and adverse developments in our
industry or the economy in general, especially declines in oil and natural gas prices;
and
    
    our debt level could limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate.
 We may incur substantially more debt, which may intensify the risks described above, including our
ability to service our indebtedness
 1 4 1 4
 To service our indebtedness, we will require a significant amount of cash. Our ability to generate
cash depends on many factors beyond our control, and any failure to meet our debt obligations could
harm our business, financial condition and results of operations .
 1 4
 1 4 1 4 1 4
  
    
    our debt holders declaring all outstanding principal and interest due and payable;
    
    the lenders under our revolving credit facility terminating their commitments to
loan us money and foreclose against the assets securing their loans to us; and
    
    our bankruptcy or liquidation, which is likely to result in delays in the payment of
our
101/4%
senior notes and in the exercise of enforcement remedies under our 101/4% senior
notes.
 1 4
 (22)




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##### Table of Contents



Restrictive debt covenants in the Indenture and the amended and restated credit agreement governing
our revolving credit facility restrict our business in many ways.
 1 4
 
    
    transfer or sell assets;
    
    make investments;
    
    pay dividends, redeem subordinated indebtedness or make other restricted payments;
    
    incur or guarantee additional indebtedness or issue disqualified capital stock;
    
    create or incur liens;
    
    incur dividend or other payment restrictions affecting certain subsidiaries;
    
    consummate a merger, consolidation or sale of all or substantially all of our
assets;
    
    enter into transactions with affiliates; and
    
    engage in businesses other than the oil and gas business.
 1 4 1 4
 1 4
 Our borrowings under our revolving credit facility expose us to interest rate risk.
  We are subject to many restrictions under our revolving credit facility. If we default under our
revolving credit facility, the lenders could foreclose on, and acquire control of, substantially
all of our assets.
  (23)




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##### Table of Contents



1 4
 Our 101/4% senior notes are structurally subordinated to any of our secured indebtedness to the
extent of the assets securing such indebtedness.
 1 4 1 4 1 4 1 4 1 4 1 4 1 4
 A subsidiary guarantee could be voided if it constitutes a fraudulent transfer under U.S.
bankruptcy or similar state laws, which would prevent the holders of our 101/4% senior notes from
relying on the subsidiary to satisfy our payment obligations under the 101/4% senior notes
 1 4
 
    
    was insolvent or rendered insolvent by making the subsidiary guarantee;
    
    was engaged in a business or transaction for which the subsidiary guarantors
remaining assets constituted unreasonably small capital; or
    
    intended to incur, or believed that it would incur, debts beyond its ability to pay
them as they mature.
  (24)




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##### Table of Contents




    
    the sum of its debts, including contingent liabilities, was greater than the fair
saleable value of all of its assets;
    
    the present fair saleable value of its assets was less than the amount that would be
required to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature; or
    
    it could not pay its debts as they become due.
 1 4 1 4 1 4
 We may not have sufficient liquidity to repurchase the 101/4% senior notes upon a change of control
 1 4 1 4 1 4 1 4 1 4 1 4 1 4
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  (25)




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##### Table of Contents



ITEM 2. PROPERTIES
 General
   
 (26)




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##### Table of Contents



Producing Wells and Acreage
  Producing Wells(1)
    
    AcreageOil(2)
    
    Gas
    
    Developed
    
    UndevelopedGross
    
    Net(3)
    
    Gross
    
    Net(3)
    
    Gross
    
    Net(4)
    
    Gross
    
    Net(4)Resource ProjectsBarnett Shale
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    14.68
    
    
    
    2,400
    
    
    
    785
    
    
    
    26,363
    
    
    
    7,774New Mexico
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    32.30
    
    
    
    13,877
    
    
    
    8,920
    
    
    
    92,480
    
    
    
    68,347Total Resource Projects
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    46.98
    
    
    
    16,277
    
    
    
    9,705
    
    
    
    118,843
    
    
    
    76,121Permian Basin of West TexasFullerton
    
    
    151
    
    
    
    127.50
    
    
    
    
    
    
    
    
    
    
    
    3,683
    
    
    
    3,155
    
    
    
    
    
    
    
    Carm-Ann/N. Means Queen
    
    
    89
    
    
    
    75.84
    
    
    
    
    
    
    
    
    
    
    
    5,560
    
    
    
    4,843
    
    
    
    235
    
    
    
    235Harris
    
    
    69
    
    
    
    61.75
    
    
    
    
    
    
    
    
    
    
    
    1,303
    
    
    
    1,176
    
    
    
    1,816
    
    
    
    1,783Diamond M
    
    
    50
    
    
    
    32.94
    
    
    
    
    
    
    
    
    
    
    
    5,805
    
    
    
    3,809
    
    
    
    
    
    
    
    Other Permian
    
    
    73
    
    
    
    31.66
    
    
    
    28
    
    
    
    12.67
    
    
    
    23,079
    
    
    
    15,469
    
    
    
    
    
    
    
    Total Permian Basin
    
    
    432
    
    
    
    329.69
    
    
    
    28
    
    
    
    12.67
    
    
    
    39,430
    
    
    
    28,452
    
    
    
    2,051
    
    
    
    2,018Onshore Gulf Coast of South TexasYegua/Frio/Wilcox
    
    
    3
    
    
    
    0.62
    
    
    
    34
    
    
    
    8.45
    
    
    
    4,732
    
    
    
    1,993
    
    
    
    2,734
    
    
    
    1,022Cook Mountain
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    1.31
    
    
    
    1,059
    
    
    
    150
    
    
    
    74
    
    
    
    14Total Onshore Gulf Coast
of South Texas
    
    
    3
    
    
    
    0.62
    
    
    
    46
    
    
    
    9.76
    
    
    
    5,791
    
    
    
    2,143
    
    
    
    2,808
    
    
    
    1,036Other ProjectsCotton Valley
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.30
    
    
    
    561
    
    
    
    74
    
    
    
    10,463
    
    
    
    1,077Utah/Colorado
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,196
    
    
    
    155,454Total Other Projects
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.30
    
    
    
    561
    
    
    
    74
    
    
    
    173,659
    
    
    
    156,531Grand Total
    
    
    435
    
    
    
    330.31
    
    
    
    200
    
    
    
    69.71
    
    
    
    62,059
    
    
    
    40,374
    
    
    
    297,361
    
    
    
    235,706
 
 (1)
    
    Does not include 175 gross (79.07 net) wells that were shut in or temporarily abandoned as of
December 31, 2007.(2)
    
    Does not include 128 gross (98.30 net) injection wells as of December 31, 2007.(3)
    
    Net wells are computed by multiplying the number of gross wells by our working interest in the
gross wells.(4)
    
    Net acres are computed by multiplying the number of gross acres by our working interest in the
gross acres.     (27)




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##### Table of Contents



Title to Properties
  Oil and Natural Gas Reserves
    Proved Developed
    
    Proved Developed
    
    Proved
    
    TotalProducing
    
    Non-Producing
    
    Undeveloped
    
    ProvedOil (MBbls)
    
    
    13,570
    
    
    
    808
    
    
    
    14,056
    
    
    
    28,434Gas (MMcf)
    
    
    41,375
    
    
    
    181
    
    
    
    15,678
    
    
    
    57,234MBOE
    
    
    20,466
    
    
    
    838
    
    
    
    16,669
    
    
    
    37,973
  (28)




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##### Table of Contents



ReservesProduction
    
    Total Proved
    
    Proved DevelopedNatural
    
    
    
    
    
    
    
    
    
    Natural
    
    
    
    
    
    NaturalOil
    
    Gas
    
    
    
    
    
    Oil
    
    Gas
    
    Oil
    
    Gas(MBbls)
    
    (MMcf)
    
    BOE
    
    (MBbls)
    
    (MMcf)
    
    (MBbls)
    
    (MMcf)Resource ProjectsBarnett Shale
    
    
    
    
    
    
    3,030
    
    
    
    505
    
    
    
    
    
    
    
    17,714
    
    
    
    
    
    
    
    14,530New Mexico Wolfcamp
    
    
    4
    
    
    
    2,731
    
    
    
    459
    
    
    
    1
    
    
    
    24,284
    
    
    
    1
    
    
    
    17,150Total Resource Projects
    
    
    4
    
    
    
    5,761
    
    
    
    964
    
    
    
    1
    
    
    
    41,998
    
    
    
    1
    
    
    
    31,680Permian Basin of West TexasFullerton
    
    
    536
    
    
    
    110
    
    
    
    554
    
    
    
    9,358
    
    
    
    1,744
    
    
    
    8,945
    
    
    
    1,661Carm-Ann San
Andres/N. Means Queen
    
    
    161
    
    
    
    146
    
    
    
    186
    
    
    
    6,554
    
    
    
    4,159
    
    
    
    1,694
    
    
    
    1,161Harris
    
    
    194
    
    
    
    42
    
    
    
    201
    
    
    
    8,086
    
    
    
    1,113
    
    
    
    2,362
    
    
    
    467Diamond M
    
    
    80
    
    
    
    107
    
    
    
    98
    
    
    
    3,855
    
    
    
    2,195
    
    
    
    796
    
    
    
    562Other Permian Basin
    
    
    45
    
    
    
    306
    
    
    
    96
    
    
    
    479
    
    
    
    3,154
    
    
    
    479
    
    
    
    3,154Total Permian Basin
    
    
    1,016
    
    
    
    711
    
    
    
    1,135
    
    
    
    28,332
    
    
    
    12,365
    
    
    
    14,276
    
    
    
    7,005Onshore Gulf Coast of South Texas
    
    
    31
    
    
    
    950
    
    
    
    189
    
    
    
    101
    
    
    
    2,871
    
    
    
    101
    
    
    
    2,871Total
    
    
    1,051
    
    
    
    7,422
    
    
    
    2,288
    
    
    
    28,434
    
    
    
    57,234
    
    
    
    14,378
    
    
    
    41,556
       (29)




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##### Table of Contents



ITEM 3.
    
    LEGAL PROCEEDINGS
   
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
  Price Per ShareHigh
    
    Low2005First Quarter
    
    $
    7.60
    
    
    $
    5.01Second Quarter
    
    $
    9.00
    
    
    $
    6.26Third Quarter
    
    $
    14.15
    
    
    $
    8.29Fourth Quarter
    
    $
    18.52
    
    
    $
    11.412006First Quarter
    
    $
    21.13
    
    
    $
    15.67Second Quarter
    
    $
    25.56
    
    
    $
    18.47Third Quarter
    
    $
    26.39
    
    
    $
    18.90Fourth Quarter
    
    $
    20.96
    
    
    $
    16.342007First Quarter
    
    $
    23.31
    
    
    $
    16.00Second Quarter
    
    $
    24.69
    
    
    $
    21.79Third Quarter
    
    $
    22.88
    
    
    $
    16.76Fourth Quarter
    
    $
    20.96
    
    
    $
    16.65
 (30)




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##### Table of Contents



Dividends
 1 4
 Sale of Unregistered Securities
  1 4
 Repurchase of Equity Securities
  (31)




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##### Table of Contents



ITEM 6.
    
    SELECTED FINANCIAL DATA
  Year Ended December 31,2007
    
    2006(1)
    
    2005
    
    2004
    
    2003($ in thousands, except per share and per unit data)Consolidated Income Statements Data:Operating revenues
    
    $
    116,031
    
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    35,837
    
    
    $
    33,855Operating expenses
    
    $
    67,066
    
    
    $
    56,606
    
    
    $
    32,805
    
    
    $
    23,571
    
    
    $
    21,138Income (loss) before cumulative effect
of change in accounting principle
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,664Net income (loss)
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,602Cumulative preferred stock dividend
    
    $
    
    
    
    $
    
    
    
    $
    (271
    )
    
    $
    (572
    )
    
    $
    (580
    )Net income (loss) available to common stockholders
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    $
    7,022Income (loss) per common share before cumulative effect of change in accounting principleBasic
    
    $
    (0.12
    )
    
    $
    0.73
    
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.33Diluted
    
    $
    (0.12
    )
    
    $
    0.71
    
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.31Weighted average common stock and common stock
equivalents outstandingBasic
    
    
    38,120
    
    
    
    35,888
    
    
    
    32,253
    
    
    
    25,323
    
    
    
    21,264Diluted
    
    
    38,120
    
    
    
    36,756
    
    
    
    32,253
    
    
    
    25,688
    
    
    
    24,175Cash dividends  common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheet Data:Total assets
    
    $
    563,093
    
    
    $
    442,818
    
    
    $
    253,008
    
    
    $
    170,671
    
    
    $
    118,343Total liabilities
    
    $
    327,831
    
    
    $
    259,036
    
    
    $
    163,506
    
    
    $
    110,677
    
    
    $
    57,111Long-term debt, less current maturities
    
    $
    205,383
    
    
    $
    165,000
    
    
    $
    100,000
    
    
    $
    79,000
    
    
    $
    39,750Total stockholders equity
    
    $
    235,262
    
    
    $
    183,782
    
    
    $
    89,502
    
    
    $
    59,994
    
    
    $
    61,232Consolidated Statement of Cash Flow Data:Cash provided by (used in)Operating activities
    
    $
    76,619
    
    
    $
    74,186
    
    
    $
    37,118
    
    
    $
    18,156
    
    
    $
    19,493Investing activities
    
    $
    (167,397
    )
    
    $
    (200,548
    )
    
    $
    (84,949
    )
    
    $
    (69,518
    )
    
    $
    (15,494
    )Financing activities
    
    $
    92,684
    
    
    $
    125,854
    
    
    $
    49,468
    
    
    $
    38,765
    
    
    $
    1,567Operating Data:Product SalesOil (Bbls)
    
    
    1,051
    
    
    
    1,137
    
    
    
    923
    
    
    
    729
    
    
    
    629Gas (Mcf)
    
    
    7,422
    
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,690
    
    
    
    3,356BOE
    
    
    2,288
    
    
    
    2,227
    
    
    
    1,522
    
    
    
    1,177
    
    
    
    1,188Average sales price(2)Oil (per Bbl)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    29.11Gas (per M cf)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    5.40Proved reservesOil (Bbls)
    
    
    28,434
    
    
    
    28,721
    
    
    
    21,192
    
    
    
    18,916
    
    
    
    12,084Gas (M cf)
    
    
    57,234
    
    
    
    58,896
    
    
    
    25,237
    
    
    
    16,825
    
    
    
    16,271
 
 (1)
    
    Results include $9.0 million of equity in income of pipeline and gathering systems
representing Parallels share of net gain on sale of certain pipeline assets.(2)
    
    Excludes the effects of hedging. (32)




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview and Strategy
    
    
    focuses on projects having less geologic risk;
    
    emphasizes acquisition, exploitation, development and enhancement activities;
    
    includes the utilization of horizontal and fracture stimulation technologies on
certain types of reservoirs;
    
    focuses on acquiring producing properties; and
    
    expands the scope of operations by diversifying our exploratory and development
efforts, both in and outside of our current areas of operation.
   
    
    the prices we receive for the oil and natural gas we produce;
    
    the results of reprocessing and reinterpreting our 3-D seismic data;
    
    the results of our drilling activities;
    
    the costs of obtaining high quality field services;
 (33)




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##### Table of Contents




    
    our ability to find and consummate acquisition opportunities; and
    
    our ability to negotiate and enter into work to earn arrangements, joint venture or
other similar agreements on terms acceptable to us.
  Operating Performance
  
    
    seasonal demand;
    
    weather;
    
    hurricane conditions in the Gulf of Mexico;
    
    availability of pipeline transportation to end users;
    
    proximity of our wells to major transportation pipeline infrastructures; and
    
    world oil prices.
 Results of Operations
  (34)




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##### Table of Contents



Years Ended December 31,2007
    
    
    2006
    
    
    2005($ in thousands, except per unit data)Production
VolumesOil (Bbls)
    
    
    1,051
    
    
    
    1,137
    
    
    
    923Natural gas (Mcf)
    
    
    7,422
    
    
    
    6,539
    
    
    
    3,592BOE
    
    
    2,288
    
    
    
    2,227
    
    
    
    1,522Sales
PriceOil (per Bbl)(1)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    51.78Natural gas (per Mcf)(1)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    8.54BOE Price(1)
    
    $
    50.72
    
    
    $
    48.73
    
    
    $
    51.57BOE Price(2)
    
    $
    50.72
    
    
    $
    43.56
    
    
    $
    43.46Operating
RevenuesOil
    
    $
    69,315
    
    
    $
    68,076
    
    
    $
    47,800Effect of oil hedges
    
    
    
    
    
    
    (11,512
    )
    
    
    (12,139
    )Natural gas
    
    
    46,716
    
    
    
    40,461
    
    
    
    30,690Effect of natural gas hedges
    
    
    
    
    
    
    
    
    
    
    (201
    )116,031
    
    
    
    97,025
    
    
    
    66,150Operating
ExpensesLease operating expense
    
    
    22,200
    
    
    
    16,819
    
    
    
    9,947Production taxes
    
    
    5,545
    
    
    
    5,577
    
    
    
    4,102Production tax refund
    
    
    (1,209
    )
    
    
    
    
    
    
    General and administrative
    
    
    10,415
    
    
    
    9,523
    
    
    
    6,712Depreciation, depletion and amortization
    
    
    30,115
    
    
    
    24,687
    
    
    
    12,04467,066
    
    
    
    56,606
    
    
    
    32,805Operating income
    
    $
    48,965
    
    
    $
    40,419
    
    
    $
    33,345
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. Critical Accounting Policies and Practices
  Full Cost and Impairment of Assets.
 (35)




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##### Table of Contents



Depletion.
  Proved Reserve Estimates.
   Use of Estimates.
 Derivatives.
 (36)




---



##### Table of Contents



Years Ended December 31, 2007 and December 31, 2006
  Oil and Gas Revenues
 Revenues(1)
    
    Production2007
    
    2006
    
    2007
    
    2006Oil (Bbls)
    
    
    60
    %
    
    
    58
    %
    
    
    46
    %
    
    
    51
    %Natural gas
(Mcf)
    
    
    40
    %
    
    
    42
    %
    
    
    54
    %
    
    
    49
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes the effects of derivative transactions accounted for as hedges.  PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands, except per unit data)Production
VolumesOil (Bbls)
    
    
    1,051
    
    
    
    1,137
    
    
    
    (86
    )
    
    
    (8
    )%Natural gas
(Mcf)
    
    
    7,422
    
    
    
    6,539
    
    
    
    883
    
    
    
    14
    %BOE
    
    
    2,288
    
    
    
    2,227
    
    
    
    61
    
    
    
    3
    %Sales
PriceOil (per Bbl)(1)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    6.11
    
    
    
    10
    %Natural gas (per Mcf)(1)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    0.10
    
    
    
    2
    %BOE price(1)
    
    $
    50.72
    
    
    $
    48.73
    
    
    $
    1.99
    
    
    
    4
    %BOE price(2)
    
    $
    50.72
    
    
    $
    43.56
    
    
    $
    7.16
    
    
    
    16
    %Operating
RevenuesOil
    
    $
    69,315
    
    
    $
    68,076
    
    
    $
    1,239
    
    
    
    2
    %Effect of oil hedges
    
    
    
    
    
    
    (11,512
    )
    
    
    11,512
    
    
    
    (100
    )%Natural gas
    
    
    46,716
    
    
    
    40,461
    
    
    
    6,255
    
    
    
    15
    %Total
    
    $
    116,031
    
    
    $
    97,025
    
    
    $
    19,006
    
    
    
    20
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. (37)




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##### Table of Contents



Oil revenues
  Natural gas revenues
  Oil hedges
  Costs and Expenses
 PercentYear Ended December
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    22,200
    
    
    $
    16,819
    
    
    $
    5,381
    
    
    
    32
    %Production taxes
    
    
    5,545
    
    
    
    5,577
    
    
    
    (32
    )
    
    
    (1
    )%Production tax refund
    
    
    (1,209
    )
    
    
    
    
    
    
    (1,209
    )
    
    
    N/AGeneral and administrative
    
    
    10,415
    
    
    
    9,523
    
    
    
    892
    
    
    
    9
    %Depreciation, depletion and amortization
    
    
    30,115
    
    
    
    24,687
    
    
    
    5,428
    
    
    
    22
    %Total
    
    $
    67,066
    
    
    $
    56,606
    
    
    $
    10,460
    
    
    
    18
    %
 Lease operating expense
  (38)




---



##### Table of Contents



Production taxes
   General and administrative
   Depreciation, depletion and amortization
  (39)




---



##### Table of Contents



Other income (expense)
 PercentYear Ended December
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)($ dollars in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    (36,776
    )
    
    $
    2,802
    
    
    $
    (39,578
    )
    
    
    (1,412
    )%Gain (loss) on ineffective portion of hedges
    
    
    
    
    
    
    626
    
    
    
    (626
    )
    
    
    (100
    )%Interest and other income
    
    
    197
    
    
    
    158
    
    
    
    39
    
    
    
    25
    %Interest expense
    
    
    (19,177
    )
    
    
    (12,360
    )
    
    
    (6,817
    )
    
    
    55
    %Cost of debt retirement
    
    
    (760
    )
    
    
    
    
    
    
    (760
    )
    
    
    N/AOther expense
    
    
    (118
    )
    
    
    (189
    )
    
    
    71
    
    
    
    (38
    )%Equity in income (loss) of pipelines
and gathering system ventures
    
    
    (311
    )
    
    
    8,593
    
    
    
    (8,904
    )
    
    
    (104
    )%Total
    
    $
    (56,945
    )
    
    $
    (370
    )
    
    $
    (56,575
    )
    
    
    15,291
    %
 Gain (loss) on derivatives not classified as hedges
   Interest expense
 1 4
  Cost of debt retirement
  Equity in income (loss) of pipelines and gathering system ventures
    (40)




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##### Table of Contents



Income tax
   Basic and diluted net income
  Years Ended December 31, 2006 and December 31, 2005
  Oil and Gas Revenues
 Revenues(1)
    
    Production2006
    
    2005
    
    2006
    
    2005Oil (Bbls)
    
    
    58
    %
    
    
    54
    %
    
    
    51
    %
    
    
    61
    %Natural gas
(M cf)
    
    
    42
    %
    
    
    46
    %
    
    
    49
    %
    
    
    39
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions.  PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands, except per unit data)Production
VolumesOil (Bbls)
    
    
    1,137
    
    
    
    923
    
    
    
    214
    
    
    
    23
    %Natural gas
(M cf)
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,947
    
    
    
    82
    %BOE
    
    
    2,227
    
    
    
    1,522
    
    
    
    705
    
    
    
    46
    %Sales
PriceOil (per Bbl)(1)
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    8.08
    
    
    
    16
    %Natural gas
(per M cf)(1)
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    (2.35
    )
    
    
    (28
    )%BOE price(1)
    
    $
    48.73
    
    
    $
    51.57
    
    
    $
    (2.84
    )
    
    
    (6
    )%BOE price(2)
    
    $
    43.56
    
    
    $
    43.46
    
    
    $
    0.10
    
    
    
    0
    %Operating
RevenuesOil
    
    $
    68,076
    
    
    $
    47,800
    
    
    $
    20,276
    
    
    
    42
    %Oil hedges
    
    
    (11,512
    )
    
    
    (12,139
    )
    
    
    627
    
    
    
    5
    %Natural gas
    
    
    40,461
    
    
    
    30,690
    
    
    
    9,771
    
    
    
    32
    %Natural gas hedges
    
    
    
    
    
    
    (201
    )
    
    
    201
    
    
    
    100
    %Total
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    30,875
    
    
    
    47
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. (41)




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##### Table of Contents



Oil revenues
  Natural gas revenues
  Oil hedges
  Costs and Expenses
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    16,819
    
    
    $
    9,947
    
    
    $
    6,872
    
    
    
    69
    %Production taxes
    
    
    5,577
    
    
    
    4,102
    
    
    
    1,475
    
    
    
    36
    %General and administrative:
    
    
    9,523
    
    
    
    6,712
    
    
    
    2,811
    
    
    
    42
    %Depreciation, depletion and amortization
    
    
    24,687
    
    
    
    12,044
    
    
    
    12,643
    
    
    
    105
    %Total
    
    $
    56,606
    
    
    $
    32,805
    
    
    $
    23,801
    
    
    
    73
    %
 Lease operating expense
  Production taxes
  General and administrative
  (42)




---



##### Table of Contents



Depreciation, depletion and amortization
  Other
income (expense)
 PercentYear Ended December 31,
    
    
    Increase
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    2,802
    
    
    $
    (31,669
    )
    
    $
    34,471
    
    
    
    109
    %Gain (loss) on ineffective portion of hedges
    
    
    626
    
    
    
    (137
    )
    
    
    763
    
    
    
    557
    %Interest and other income
    
    
    158
    
    
    
    167
    
    
    
    (9
    )
    
    
    5
    %Interest expense
    
    
    (12,360
    )
    
    
    (4,780
    )
    
    
    (7,580
    )
    
    
    (159
    )%Other expense
    
    
    (189
    )
    
    
    (102
    )
    
    
    (87
    )
    
    
    (85
    )%Equity in income (loss) of pipelines and
gathering system ventures
    
    
    8,593
    
    
    
    (89
    )
    
    
    8,682
    
    
    
    9,755
    %Total
    
    $
    (370
    )
    
    $
    (36,610
    )
    
    $
    36,240
    
    
    
    99
    %
 Gain (loss) on derivatives not classified as hedges
   Interest expense
  Equity in income (loss) of pipelines and gathering system ventures
  (43)




---



##### Table of Contents



Income tax
  Basic and diluted net income
  Capital Resources and Liquidity
    Year ended December 31,2007
    
    2006
    
    2005($ in thousands)Operating activities
    
    $
    76,619
    
    
    $
    74,186
    
    
    $
    37,118Investing activities
    
    $
    (167,397
    )
    
    $
    (200,548
    )
    
    $
    (84,949
    )Financing activities
    
    $
    92,684
    
    
    $
    125,854
    
    
    $
    49,468
     (44)




---



##### Table of Contents



Senior Notes Offering
  Shelf Registration Statement; Common Stock Offering
     Revolving Credit Facility
     (45)




---



##### Table of Contents




    
    creating, incurring, assuming or permitting to exist any lien, security interest or
other encumbrance on any of our assets or properties, except specified permitted liens;
    
    selling, leasing, transferring or otherwise disposing of any of our assets, except
(a) extracted petroleum hydrocarbons sold in the ordinary course of our business; (b)
worthless or obsolete equipment, and interests in oil and natural gas leases, or
portions thereof, not capable of being held by production of oil, natural gas or other
hydrocarbons or minerals in commercial quantities; and (c) transfers to us or any
subsidiary;
    
    allowing our current ratio (as adjusted for available borrowing and unrealized
derivative losses) to be less than 1.0 to 1.0 as of the end of any fiscal quarter;
    
    allowing our ratio of consolidated funded debt to consolidated EBITDA for any fiscal
quarter (calculated at the end of each fiscal quarter using the results of the
immediately preceding twelve-month period) to exceed (a) 4.25 to 1.00 during 2007, (b)
4.00 to 1.00 during 2008, or (c) 3.50 to 1.00 during 2009 and thereafter;
    
    allowing our adjusted consolidated net worth to be less than the sum of (a) $85.0
million, plus (b) 75% of the net proceeds from the sale of any equity securities, plus
(c) 50% of our consolidated net income for each fiscal quarter determined on a
cumulative basis from September 30, 2005;
    
    forming any new subsidiary or consolidating or merging with or into any other
entity, except for certain intra-company consolidations or mergers where we are the
surviving entity;
    
    becoming liable in respect of any indebtedness, or guaranteeing or otherwise in any
manner becoming liable for indebtedness or obligations of any other person, except for
(a) indebtedness incurred in connection with our revolving credit facility; (b) taxes,
assessments and government charges; (c) obligations arising out of interest rate
management transactions permitted under our revolving credit facility; (d) indebtedness
evidenced by our 101/4% senior notes due 2014 not to exceed the aggregate principal
amount of $150.0 million; (e) indebtedness incurred in the ordinary course of business
that is not more than 60 days past due; or (f) other indebtedness not exceeding
$1,000,000 in the aggregate;
    
    declaring, paying or making any loans, advances, distributions or dividends to our
equity owners, or acquiring, redeeming or retiring any stock or other security issued
by us, except for certain purchases of the notes and certain intra-company dividends or
distributions from our subsidiaries to us;
 (46)




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##### Table of Contents




    
    making or permitting to remain outstanding any loans or advances to any person or
entity, except (a) advances made in the ordinary course of our business; (b) other
loans or advances to a third party not to exceed $1.0 million in the aggregate; or (c)
intra-company loans;
    
    discounting, or selling with recourse, or selling for less than market value, any of
our notes receivable or accounts receivable;
    
    permitting any material change in the character of our business;
    
    entering into transactions with our affiliates, except transactions upon terms that
are no less favorable than could be obtained in a transaction negotiated at arms
length with an unrelated third party;
    
    entering into commodity hedging or interest rate management transactions, except
transactions required by our revolving credit facility, consented to by our lenders, or
transactions designed to hedge, provide a floor price for, or swap crude oil or natural
gas, provided certain conditions are satisfied;
    
    making any investments in any entity, except (a) investments with maturities of not
more than 180 days in direct obligations of the United States of America or any agency
thereof; (b) investments in certain certificates of deposits; (c) our existing
investments at December 23, 2005; (d) other investments not to exceed $10.0 million in
the aggregate when aggregated with loans and advances permitted to be made or remain
outstanding under our revolving credit facility during 2007 and $1.0 million in the
aggregate when aggregated with other permitted loans and advances for calendar years
after 2007; (e) investments in certain certificates of deposit not to exceed $50,000;
or (f) investments in any subsidiary;
    
    permitting any material amendment to our organizational or governing documents;
    
    permitting any plan subject to ERISA to (a) engage in any prohibited transaction
as such term is defined in Section 4975 of the Internal Revenue Code of 1986, as
amended; (b) incur any accumulated funding deficiency as such term is defined in
Section 302 of ERISA; or (c) terminate in a manner which could result in the imposition
of a lien on its property pursuant to Section 4068 of ERISA;
    
    permitting any change in accounting method or fiscal year;
    
    allowing our subsidiaries to issue or sell to any third party any equity interest in
them, or any option, warrant or other right to acquire any such equity interest;
    
    making any amendment or entering into any agreement to amend or otherwise change the
Indenture governing our 101/4% senior notes due 2014, failing to comply with the terms of
the Indenture, or, except as specifically required by the Indenture, making any
prepayment of amounts owing under such notes; or
    
    permitting or incurring any lease obligations which would cause the aggregate amount
of all payments pursuant to all such leases to exceed $1,000,000 in any twelve month
period during the life of such leases, except for oil and gas related leases.
  Second Lien Term Loan Facility
  (47)




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##### Table of Contents



Senior Notes
 Purchase Agreement 1 4
  Indenture
  1 4
  Year
    
    Redemption Price2011
    
    
    105.125
    %2012
    
    
    102.563
    %2013
    
    
    100.000
    %
 (48)




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##### Table of Contents




    
    the sale or other disposition of all or substantially all of our assets;
    
    the adoption by the Board of Directors of a plan of liquidation or dissolution;
    
    any person becomes the owner of more than 50% of our voting stock;
    
    the first day on which a majority of the members of the Board of Directors of
Parallel are not continuing directors; or
    
    certain mergers and consolidations with or into any other person.
  
    
    default for 30 days in the payment when due of interest on the senior notes;
    
    default in the payment when due of the principal of the senior notes;
    
    our failure to comply with the covenants or agreements in the Indenture;
    
    defaults on indebtedness under other mortgages, indentures or instruments which
results from our failure to pay the principal or interest on such indebtedness or which
results in the acceleration of such indebtedness prior to its maturity and the
principal amount of any such indebtedness aggregates $10.0 million or more;
    
    our failure to pay final judgments in excess of $10.0 million;
    
    any subsidiary guarantee is held in any judicial proceeding to be unenforceable or
invalid; and
    
    certain events of bankruptcy or insolvency with respect to us or certain of our
subsidiaries.
 (49)




---



##### Table of Contents




    
    transfer or sell assets;
    
    make investments;
    
    pay dividends, redeem subordinated indebtedness or make other restricted payments;
    
    incur or guarantee additional indebtedness or issue disqualified capital stock;
    
    create or incur liens;
    
    incur dividend or other payment restrictions affecting certain subsidiaries;
    
    consummate a merger, consolidation or sale of all or substantially all of our
assets;
    
    enter into transactions with affiliates; and
    
    engage in businesses other than the oil and gas business.
 Registration Rights Agreement
  Preferred Stock
  
    
    required us to pay dividends of $.60 per annum, semi-annually on June 15 and
December 15 of each year;
    
    was convertible into common stock at any time, at the option of the holder, into
2.8751 shares of common stock at an initial conversion price of $3.50 per share,
subject to adjustment in certain events;
    
    was redeemable at our option, in whole or in part, for $10 per share, plus accrued
dividends;
    
    had no voting rights, except as required by applicable law;
    
    was senior to the common stock with respect to dividends and on liquidation,
dissolution or winding up of Parallel; and
    
    had a liquidation value of $10 per share, plus accrued and unpaid dividends.
 (50)




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##### Table of Contents



Commodity Price Risk Management Transactions and Effects of Derivative Instruments
      Future Capital Requirements
  
    
    our internally generated cash flows;
    
    the availability of additional borrowings under our revolving credit facility or
from other sources;
    
    the availability of supplies and services;
    
    additional sources of funding; and
    
    our future drilling successes.
 (51)




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##### Table of Contents



Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  Obligation Due in PeriodContractual Cash Obligations
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    After 5 years
    
    
    Total($ in thousands)Revolving Credit Facility (secured)
    
    $
    4,117
    
    
    $
    4,106
    
    
    $
    63,419
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    71,642Senior Notes (unsecured)
    
    
    15,418
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    180,750
    
    
    
    257,668Office Lease (Dinero Plaza)
    
    
    200
    
    
    
    200
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Snyder Field Offices (1)
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    521
    
    
    
    591Asset Retirement Obligations(2)
    
    
    598
    
    
    
    92
    
    
    
    127
    
    
    
    85
    
    
    
    17
    
    
    
    4,018
    
    
    
    4,937Derivative Obligations
    
    
    30,424
    
    
    
    7,600
    
    
    
    5,594
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,618Total
    
    $
    50,771
    
    
    $
    27,387
    
    
    $
    84,562
    
    
    $
    15,474
    
    
    $
    15,406
    
    
    $
    185,289
    
    
    $
    378,889
 
 (1)
    
    The Snyder office lease expires upon the cessation of production from the Diamond M
area wells. The lease cost for the office facility is billed to nonaffiliated third
party working interest owners under our joint operating agreements with these third
parties.(2)
    
    Asset retirement obligations of oil and natural gas assets, excluding salvage value and
accretion.    Outlook
  
    
    internally generated cash from operations;
    
    proceeds from bank borrowings; and
    
    proceeds from sales of equity securities.
  
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and natural gas; and
    
    our ability to acquire, locate and produce new reserves.
 (52)




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##### Table of Contents




    
    increased bank borrowings;
    
    sales of our debt and equity securities;
    
    sales of non-core properties; and
    
    other forms of financing.
  Inflation
  Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115,
 Amendment of FASB Interpretation
No. 39
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
 (53)




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##### Table of Contents



Critical Accounting Policies
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Sensitivity as of December 31, 2007
  2011 and2007
    
    2008
    
    2009
    
    2010
    
    after
    
    Total($ in thousands)Revolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    60,000
    
    
    $
    
    
    
    $
    60,000Interest rate
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    6.84
    %
    
    
    Senior notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000Interest rate
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    (54)




---



##### Table of Contents



EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    at December 31, 2007($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    $
    (800
    )January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (754
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (441
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (1,995
    )
 Commodity Price Sensitivity as of December 31, 2007
    Collars.
  EstimatedBarrles of
    
    NYMEX Oil Prices
    
    Fair MarketPeriod of Time
    
    Oil
    
    Floor
    
    Cap
    
    Value($ in thousands)January 1, 2008 thru December 31, 2008
    
    
    347,700
    
    
    $
    63.42
    
    
    $
    83.86
    
    
    $
    (4,003
    )January 1, 2009 thru December 31, 2009
    
    
    620,500
    
    
    $
    63.53
    
    
    $
    80.21
    
    
    
    (6,846
    )January 1, 2010 thru October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    (5,153
    )
 MMBtu of
    
    
    WAHA Gas PricesNatural Gas
    
    
    Floor
    
    
    CapJanuary 1, 2008 thru March 31, 2008
    
    
    546,000
    
    
    $
    6.50
    
    
    $
    9.50
    
    
    
    87April 1, 2008 thru December 31, 2008
    
    
    1,375,000
    
    
    $
    6.75
    
    
    $
    8.40
    
    
    
    63Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (15,852
    )
 (55)




---



##### Table of Contents



Commodity Swaps.
  EstimatedBarrels of
    
    
    NYMEX Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    $
    (25,621
    )
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     
 ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  (56)




---



##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles generally
accepted in the United States of America, and that our receipts and expenditures are
being made only in accordance with authorizations of management and our Board of
Directors; and,
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on the financial statements.
  Internal Control Integrated Framework,
  Changes in Internal Controls
  Attestation Report
 
 
 Internal Control  Integrated Framework
 (57)




---



##### Table of Contents



.
  
 
 ITEM 9B. OTHER INFORMATION
  (58)




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  DirectorName
    
    Age
    
    Since
    
    Position with CompanyJeffrey G. Shrader(1)(2)(3)(4)
    
    
    57
    
    
    
    2001
    
    
    Director and Chairman of the Board of DirectorsLarry C. Oldham(1)
    
    
    54
    
    
    
    1979
    
    
    Director, President and Chief Executive OfficerDonald E. Tiffin
    
    
    50
    
    
    
    
    
    
    Chief Operating OfficerEric A. Bayley
    
    
    59
    
    
    
    
    
    
    Vice President of Corporate EngineeringJohn S. Rutherford
    
    
    47
    
    
    
    
    
    
    Vice President of Land and AdministrationSteven D. Foster
    
    
    52
    
    
    
    
    
    
    Chief Financial OfficerEdward A. Nash(1)(2)(3)(4)
    
    
    59
    
    
    
    2007
    
    
    DirectorMartin B. Oring(1)(2)(3)(4)
    
    
    62
    
    
    
    2001
    
    
    DirectorRay M. Poage(1)(2)(3)(4)
    
    
    60
    
    
    
    2003
    
    
    Director
 
 (1)
    
    Member of Hedging and Acquisitions
Committee(2)
    
    Member of Compensation Committee(3)
    
    Member of Audit Committee(4)
    
    Member of Corporate Governance and Nominating Committee      (59)




---



##### Table of Contents



Consulting Arrangements
  Corporate Governance
  (60)




---



##### Table of Contents




    
    the Audit Committee;
    
    the Corporate Governance and Nominating Committee;
    
    the Compensation Committee; and
    
    the Hedging and Acquisitions Committee.
 Audit Committee
  www.plll.com
  Corporate Governance and Nominating Committee
 www.plll.com.
  
    
    a statement that the writer is a stockholder and is proposing a candidate for
consideration by the committee;
    
    the name of and contact information for the candidate;
    
    a statement of the candidates age, business and educational experience;
    
    information sufficient to enable the committee to evaluate the candidate;
    
    a statement detailing any relationship between the candidate and any joint interest
owners, customer, supplier or competitor of Parallel;
    
    detailed information about any relationship or understanding between the proposing
stockholder and the candidate; and
    
    a statement that the candidate is willing to be considered and willing to serve as a
Director if nominated and elected.
 (61)




---



##### Table of Contents



Compensation Committee
    Hedging and Acquisitions Committee
  Code of Ethics
 www.plll.com
 
 Stockholder Communications with Directors
   
    
    if you request, forward the communication to the other Directors;
    
    request that management handle the inquiry directly, for example where it is a
request for information about the company or it is a stock-related matter; or
    
    not forward the communication to the other Directors or management if it is
primarily commercial in nature or if it relates to an improper or irrelevant topic.
 (62)




---



##### Table of Contents



Director Attendance at Annual Meetings
  Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 11. EXECUTIVE COMPENSATION
 Compensation Discussion and Analysis
 Introduction and Overview
 www.plll.com
    Compensation Philosophy and Objectives
  
    
    is competitive with compensation programs offered by comparable companies engaged in
businesses similar to ours;
    
    rewards performance, skills and talents necessary to advance our company objectives
and further the interests of stockholders;
    
    is balanced between a fair and reasonable cash compensation and incentives linked to
Parallels overall operating performance; and
    
    is fair to our executives, but within reasonable limits.
  
    
    provide a reasonable and competitive level of current annual income;
    
    provide incentives that encourage our executives to continue their employment with
us;
    
    motivate executives to accomplish our company goals and reward performance;
 (63)




---



##### Table of Contents




    
    create an environment conducive to company-oriented success rather than individual
success;
    
    align compensation and benefits with business strategy and competitive market data;
    
    encourage the application of prudent decision making processes in an industry marked
by volatility and high risk; and
    
    provide for overall compensation arrangements that are fair and reasonable pay for
achievements beneficial to Parallel and its stockholders.
   Compensation Components
  
    
    base salaries;
    
    stock option grants;
    
    annual cash bonuses;
    
    health and life insurance plans which are generally available to all of our
employees;
    
    contributions by Parallel to our 401(k) retirement plan;
    
    an equity based cash incentive plan;
    
    change of control arrangements; and
    
    limited perquisites and personal benefits provided by Parallel to our executive
officers.
 (64)




---



##### Table of Contents



Used byParallel
    
    Used by
    
    Not Used byElements of Compensation
    
    Prior to 2007
    
    Parallel in 2007
    
    ParallelBase salaries
    
    
    ü
    
    
    
    üEmployment agreements
    
    
    
    
    
    
    
    
    
    
    üCash bonuses
    
    
    ü
    
    
    
    üStock awards
    
    
    
    
    
    
    
    
    
    
    üChange of control/severence arrangements
    
    
    ü
    
    
    
    üDefined benefit pension plan
    
    
    
    
    
    
    
    
    
    
    üDefined contribution plan
    
    
    ü
    
    
    
    üStock options
    
    
    üTax gross-ups
    
    
    üEmployee stock purchase/
ownership plan
    
    
    
    
    
    
    
    
    
    
    üSupplemental executive retirement
plans/benefits
    
    
    
    
    
    
    
    
    
    
    üDeferred compensation plan
    
    
    
    
    
    
    
    
    
    
    üIncentive and retention plan
    
    
    ü
    
    
    
    üLimited perquisites and personal benefits
    
    
    ü
    
    
    
    ü
 Evaluation Factors
   
    
    growth in the quantity and value of our proved oil and natural gas reserves;
    
    volumes of oil and natural gas produced by Parallel and our executives ability to
replace oil and natural gas produced with new oil and natural gas reserves;
    
    cash flows from operations;
 (65)




---



##### Table of Contents




    
    revenues;
    
    earnings per share;
    
    the market value of our common stock;
    
    the extent to which the officers have been successful in finding and creating
opportunities for Parallel to participate in acquisition, exploitation and drilling
ventures having quality prospects;
    
    the ability of our officers to formulate and maintain sound budgets for our business
activities;
    
    the overall financial condition of Parallel;
    
    the achievement by management of specific tasks and goals set by the Board of
Directors from time to time;
    
    the effectiveness of our compensation packages in motivating officers to remain in
Parallels employment;
    
    oil and gas finding costs and operating costs; and
    
    the ability of our executives to effectively implement risk management practices,
including oil and natural gas and interest rate hedging activities.
  
    
    longevity of service; and
    
    the individual performance, leadership, business knowledge and level of
responsibility of our officers.
   Base Salaries
  (66)




---



##### Table of Contents








Mr. Oldham
    
    
    
    
    
    from
    
    $
    330,000
    
    
    to
    
    $
    350,000Mr. Tiffin
    
    
    
    
    
    from
    
    $
    275,000
    
    
    to
    
    $
    300,000Mr. Rutherford
    
    
    
    
    
    from
    
    $
    175,000
    
    
    to
    
    $
    190,000Mr. Foster
    
    
    
    
    
    from
    
    $
    190,000
    
    
    to
    
    $
    210,000Mr. Bayley
    
    
    
    
    
    from
    
    $
    175,000
    
    
    to
    
    $
    190,000


Cash Bonuses




(67)



---



##### Table of Contents



Amount ofBonusMr. Oldham
    
    $
    200,000Mr. Tiffin
    
    $
    175,000Mr. Rutherford
    
    $
    70,000Mr. Foster
    
    $
    70,000Mr. Bayley
    
    $
    70,000
  Stock Options
     Other Compensation
  (68)




---



##### Table of Contents



Allocation of Amounts and Types of Compensation
   Internal and External Assistance
   (69)




---



##### Table of Contents



Change of Control Arrangements
  Stock Option Plans
  Incentive and Retention Plan
   (70)




---



##### Table of Contents



(71)




---



##### Table of Contents



Stock Ownership/Retention Guidelines
  Perquisites and Personal Benefits
    Analysis and Outlook
  Limit on Deductibility of Certain Compensation
  (72)




---



##### Table of Contents



Compensation Committee Report
    
 Summary of Annual Compensation
  Summary Compensation Table
 Change inPension ValueandNon-Equity
    
    Nonqualified
    
    AllIncentive
    
    Deferred
    
    OtherName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    Option
    
    Plan Com-
    
    Compensation
    
    Com-Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Awards
    
    Awards
    
    pensation
    
    Earnings
    

pensation(1)
    
    TotalL. C. Oldham
    
    
    2007
    
    
    $
    330,000
    
    
    $
    200,000
    
    
    
    0
    
    
    
    12,303

(2)
    
    
    0
    
    
    
    0
    
    
    $
    59,415

(3)
    
    $
    601,718President, Chief Executive
Officer and Director
    
    
    2006
    
    
    $
    300,000
    
    
    $
    185,000
    
    
    
    0
    
    
    
    16,683

(2)
    
    
    0
    
    
    
    0
    
    
    $
    51,090

(3)
    
    $
    552,773D. E. Tiffin
    
    
    2007
    
    
    $
    275,000
    
    
    $
    175,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    47,730

(4)
    
    $
    497,730Chief Operating Officer
    
    
    2006
    
    
    $
    250,000
    
    
    $
    147,500
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    43,247

(4)
    
    $
    440,747E. A. Bayley
    
    
    2007
    
    
    $
    175,000
    
    
    $
    70,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    41,640

(5)
    
    $
    286,640Vice President
of Corporate Engineering
    
    
    2006
    
    
    $
    160,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    39,321

(5)
    
    $
    259,321J. S. Rutherford
    
    
    2007
    
    
    $
    175,000
    
    
    $
    70,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    39,560

(6)
    
    $
    284,560Vice President
of Land and Administration
    
    
    2006
    
    
    $
    160,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    38,174

(6)
    
    $
    258,174S. D. Foster
    
    
    2007
    
    
    $
    190,000
    
    
    $
    70,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    44,493

(7)
    
    $
    304,493Chief Financial Officer
    
    
    2006
    
    
    $
    175,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    45,547

(7)
    
    $
    280,547T. R.
Cambridge(8)
    
    
    2007
    
    
    $
    70,889
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    70,889Former
Chairman of the Board of Directors
    
    
    2006
    
    
    $
    135,000
    
    
    $
    60,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    5,152
    
    
    $
    200,152
 
 (1)
    
    Included in this column is (a) all other compensation received by the named executive officer
but not reported under any other column of this table, and (b) the incremental cost of all
perquisites and personal benefits for each named executive officer, in each case as identified
in the following table: (73)




---



##### Table of Contents



Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.
    
    Mr.Oldham
    
    Tiffin
    
    Rutherford
    
    Foster
    
    Bayley
    
    CambridgePersonal use of club
memberships(a)
    
    
    2007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    1,547
    
    
    $
    1,670
    
    
    $
    2,085
    
    
    $
    02006
    
    
    $
    0
    
    
    $
    0
    
    
    $
    3,376
    
    
    $
    3,652
    
    
    $
    0
    
    
    $
    0Personal use
of comp any car(b)
    
    
    2007
    
    
    $
    4,625
    
    
    $
    0
    
    
    $
    5,644
    
    
    $
    0
    
    
    $
    10,291
    
    
    $
    02006
    
    
    $
    1,723
    
    
    $
    0
    
    
    $
    1,179
    
    
    $
    0
    
    
    $
    8,401
    
    
    $
    0Car allowance
    
    
    2007
    
    
    $
    0
    
    
    $
    8,050
    
    
    $
    0
    
    
    $
    8,050
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    0
    
    
    $
    6,000
    
    
    $
    0
    
    
    $
    6,000
    
    
    $
    0
    
    
    $
    0Personal use
of office
space(c)
    
    
    2007
    
    
    $
    1,809
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    2,366
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0CEO life
insurance(d)
    
    
    2007
    
    
    $
    4,063
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    3,793
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Personal use of charter aircraft
    
    
    2007
    
    
    

(e)
    
    
    $
    0
    
    
    

(e)
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    

(e)
    
    
    

(e)
    
    
    

(e)
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Tax
gross
up(f)
    
    
    2007
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    02006
    
    
    $
    3,629
    
    
    $
    1,687
    
    
    $
    3,697
    
    
    $
    3,559
    
    
    $
    3,836
    
    
    $
    5,152Other(g)
    
    
    2007
    
    
    $
    5,935
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 
 (a)
    The value of personal use of club memberships represents that portion of annual
club dues determined by multiplying the total annual club dues by a fraction equal
to expenses for personal use divided by total business and personal expenses. All
employees pay or reimburse us for their personal expenses.(b)
    Personal use of a company car is based on the sum of the fair lease value of the
car, maintenance expense and gas expense, multiplied by a fraction, the numerator of
which is the number of miles driven for personal use and the denominator of which is
the total number of miles driven.(c)
    Includes personal use of office space by Mr. Oldhams wife for charitable, civic
and personal activities. The value has been determined by multiplying the number of
square feet in the office by the cost per square foot paid by Parallel under its
lease agreement covering its executive offices, and as adjusted for a proportionate
share of common area maintenance expenses.(d)
    We provide a $100,000 whole life insurance policy for Mr. Oldham and pay the
premiums for maintaining the policy in force.(e)
    From time to time, the executives spouse will accompany the executive on
business trips when there is an unoccupied seat on the aircraft. However, there is
no aggregate incremental cost to us.(f)
    The tax gross up payments for each named executive officer were made in
connection with cash bonuses in the amount of $10,000 that were awarded to each
named executive officer on December 6, 2006.(g)
    Includes the cost of commercial airfare for Mr. Oldhams wife when she
accompanied him on seven separate business trips. (2)
    
    The amounts shown in this column represent the dollar amount we recognized for
financial statement reporting purposes, computed in accordance with FAS 123(R), of an
option award made to Mr. Oldham prior to 2006. For a discussion of valuation
assumptions, see Note 11 to our Consolidated Financial Statements included in this
Annual Report on Form 10-K.(3)
    
    For 2007, such amount includes Parallels contribution in the amount of $19,800 to
Mr. Oldhams individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $23,183 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $16,432 representing the total
value of all other compensation and perquisites and personal benefits provided to Mr.
Oldham as described in


(74)



---



##### Table of Contents



(4)
    
    For 2007, such amount includes Parallels contribution in the amount of $16,500 to
Mr. Tiffins individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $23,180 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $8,050 representing the total
value of all other compensation and perquisites and personal benefits provided to Mr.
Tiffin as described in footnote 1. For 2006, such amount includes Parallels 2006
contribution in the amount of $15,000 to Mr. Tiffins individual retirement account
maintained under Parallels 401(k) plan; insurance premiums in the amount of $20,560
for nondiscriminatory group life, medical, disability, long-term care and dental
insurance; and $7,687 representing the total value of all other compensation and
perquisites and personal benefits provided to Mr. Tiffin as described in footnote 1.
 (5)
    
    For 2007, such amount includes Parallels contribution in the amount of $10,500 to
Mr. Bayleys individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $18,764 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $12,376 representing the total
value of all other compensation and perquisites and personal benefits provided to Mr.
Bayley as described in footnote 1. For 2006, such amount includes Parallels 2006
contribution in the amount of $9,600 to Mr. Bayleys individual retirement account
maintained under Parallels 401(k) plan; insurance premiums in the amount of $17,484
for nondiscriminatory group life, medical, disability, long-term care and dental
insurance; and $12,237 representing the total value of all other compensation and
perquisites and personal benefits provided to Mr. Bayley as described in footnote 1.
 (6)
    
    For 2007, such amount includes Parallels contribution in the amount of $10,500 to
Mr. Rutherfords individual retirement account maintained under the 401(k) plan;
insurance premiums in the amount of $21,869 for nondiscriminatory group life, medical,
disability and dental insurance; and $7,191 representing the total value of all other
compensation and perquisites and personal benefits provided to Mr. Rutherford as
described in footnote 1. For 2006, such amount includes Parallels 2006 contribution
in the amount of $9,600 to Mr. Rutherfords individual retirement account maintained
under the 401(k) plan; insurance premiums in the amount of $20,322 for
nondiscriminatory group life, medical, disability and dental insurance; and $8,252
representing the total value of all other compensation and perquisites and personal
benefits provided to Mr. Rutherford as described in footnote 1.
 (7)
    
    For 2007, such amount includes Parallels contribution in the amount of $11,400 to
Mr. Fosters individual retirement account maintained under Parallels 401(k) plan;
insurance premiums in the amount of $23,373 for nondiscriminatory group life, medical,
disability, long-term care and dental insurance; and $9,720 representing the total
value of all other compensation and perquisites and personal benefits provided to Mr.
Foster as described in footnote 1. For 2006, such amount includes Parallels 2006
contribution in the amount of $10,500 to Mr. Fosters individual retirement account
maintained under Parallels 401(k) plan; insurance premiums in the amount of $21,836
for nondiscriminatory group life, medical, disability, long-term care and dental
insurance; and $13,211 representing the total value of all other compensation and
perquisites and personal benefits provided to Mr. Foster as described in footnote 1.
 (8)
    
    The 2007 information shown in this table for Mr. Cambridge is for the period from
January 1, 2007 to June 26, 2007, the date of his retirement. Except as described
under Item 13. Certain Relationships and Related Transactions, and Director
Independence on page 90, no other payments were made to Mr. Cambridge or his
affiliated entities for the fiscal year ended December 31, 2007.
 Outstanding Equity Awards at Fiscal Year-End
  (75)




---



##### Table of Contents



Option Awards
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    of
    
    Value ofNumber
    
    Number
    
    Awards:
    
    
    
    
    
    
    
    
    
    Number
    
    Value
    
    Unearned
    
    Unearnedof
    
    of
    
    Number
    
    
    
    
    
    
    
    
    
    of Shares
    
    of Shares
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    of
    
    
    
    
    
    
    
    
    
    or
    
    or Units
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Securities
    
    
    
    
    
    
    
    
    
    Units of
    
    of
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Underlying
    
    
    
    
    
    
    
    
    
    Stock
    
    Stock
    
    Rights
    
    RightsOptions
    
    Options
    
    Unexercised
    
    Option
    
    Option
    
    That Have
    
    That Have
    
    That Have
    
    That Have(#)
    
    (#)
    
    Unearned
    
    Exercise
    
    Expiration
    
    Not
    
    Not
    
    Not
    
    NotName
    
    Exercisable
    
    Unexercisable
    
    Options
    
    Price
    
    Date
    
    Vested
    
    Vested
    
    Vested
    
    VestedL. C. Oldham
    
    
    7,500

(1)
    
    
    30,000

(1)
    
    
    0
    
    
    $
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0E. A. Bayley
    
    
    25,000
    
    
    
    0
    
    
    
    0
    
    
    $
    3.60
    
    
    
    08-04-08
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    050,000
    
    
    
    0
    
    
    
    0
    
    
    $
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0J. S. Rutherford
    
    
    44,000
    
    
    
    0
    
    
    
    0
    
    
    $
    4.97
    
    
    
    06-20-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0D. E. Tiffin
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0S. D. Foster
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0T. R. Cambridge
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    This stock option is exercisable with respect to 7,500 shares on the first day of January
in each of the years 2007, 2008, 2009, 2010 and 2011. (76)




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##### Table of Contents



Option Exercises and Stock Vested in 2007
  Option Awards
    
    Stock AwardsNumber of
    
    
    
    
    
    Number ofShares
    
    Value
    
    Shares
    
    ValueAcquired
    
    Realized
    
    Acquired
    
    Realizedon
    
    on
    
    on
    
    onName
    
    Exercise
    
    Exercise(1)
    
    Vesting
    
    VestingLarry C. Oldham
    
    
    46,000
    
    
    $
    661,020
    
    
    
    0
    
    
    
    0Donald E. Tiffin
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    0Eric A. Bayley
    
    
    25,000
    
    
    $
    464,000
    
    
    
    0
    
    
    
    0John S. Rutherford
    
    
    2,000
    
    
    $
    31,980
    
    
    
    0
    
    
    
    02,000
    
    
    $
    31,980
    
    
    
    0
    
    
    
    02,000
    
    
    $
    29,780
    
    
    
    0
    
    
    
    0Steven D. Foster
    
    
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    0Thomas R. Cambridge
    
    
    100,000
    
    
    $
    1,890,000
    
    
    
    0
    
    
    
    01,707
    (2)
    
    $
    26,015
    
    
    
    0
    
    
    
    025,000
    (2)
    
    $
    384,500
    
    
    
    0
    
    
    
    026,707
    (2)
    
    $
    361,079
    
    
    
    0
    
    
    
    023,293
    (2)
    
    $
    356,383
    
    
    
    0
    
    
    
    023,293
    (2)
    
    $
    312,592
    
    
    
    0
    
    
    
    01,707
    (2)
    
    $
    20,569
    
    
    
    0
    
    
    
    050,000
    (2)
    
    $
    636,000
    
    
    
    0
    
    
    
    025,000
    (2)
    
    $
    325,000
    
    
    
    0
    
    
    
    023,293
    (2)
    
    $
    283,010
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The value realized on exercise is equal to the closing price of our common stock on the date
of exercise, less the exercise price of the stock option exercised, multiplied by the number
of shares acquired on exercise.(2)
    
    These shares were acquired by Mr. Cambridge during the period from August 23, 2007 to
September 11, 2007 upon exercise of stock options following his retirement on June 26, 2007.
All of the stock options exercised by Mr. Cambridge after his retirement would have expired by
their own terms on September 26, 2007 had they not been exercised. Potential Payments Upon Change of Control
 Stock Option Plans
  
    
    we are not the surviving entity in a merger or consolidation (or survive only as a
subsidiary of another entity);
    
    we sell, lease or exchange all or substantially all of our assets;
    
    we dissolve and liquidate;
 (77)




---



##### Table of Contents




    
    any person or group acquires beneficial ownership of more than 50% of our common
stock; or
    
    in connection with a contested election of Directors, the persons who were Directors
of Parallel before the election cease to constitute a majority of the Board of
Directors.
  
    
    accelerate the time at which options may be exercised;
    
    require optionees to surrender some or all of their options and pay to each optionee
the change of control value;
    
    make adjustments to the options to reflect the change of control; or
    
    permit the holder of the option to purchase, instead of the shares of common stock
as to which the option is then exercisable, the number and class of shares of stock or
other securities or property which the optionee would acquire under the terms of the
merger, consolidation or sale of assets and dissolution if, immediately before the
merger, consolidation or sale of assets or dissolution, the optionee had been the
holder of record of the shares of common stock as to which the option is then
exercisable.
  
    
    the per share price offered to our stockholders in a merger, consolidation, sale of
assets or dissolution transaction;
 
    
    the price per share offered to our stockholders in a tender offer or exchange offer
where a change of control takes place; or
 
    
    if a change of control occurs other than from a tender or exchange offer, the fair
market value per share of the shares into which the options being surrendered are
exercisable, as determined by the Committee.
  Incentive and Retention Plan
   
    
    an acquisition of us by way of purchase, merger, consolidation, reorganization or
other business combination, whether by way of tender offer or negotiated transaction,
as a result of which our outstanding securities are exchanged or converted into cash,
property and/or securities not issued by us;
 
    
    a sale, lease, exchange or other disposition by us of all or substantially all of
our assets;
 
    
    our stockholders approve a plan or proposal for our liquidation or dissolution; or
 
    
    any combination of any of the foregoing.
 (78)




---



##### Table of Contents




    
    the payment of a one-time performance bonus to eligible officers and employees upon
the occurrence of a corporate transaction; or
 
    
    a one time retention payment upon a change of control of Parallel. A change of
control is generally defined as the acquisition of beneficial ownership of 60% or more
of the voting power of Parallels outstanding voting securities by any person or group
of persons, or a change in the composition of the Board of Directors of Parallel such
that the individuals who, at the effective date of the plan, constitute the Board of
Directors cease for any reason to constitute at least a majority of the Board of
Directors.
      (79)




---



##### Table of Contents




    
    designate the officers and employees of, and consultants to, Parallel and its
subsidiaries who participate in the plan, in addition to the executive group;
    
    maintain records and data necessary for proper administration of the plan;
    
    adopt rules of procedure and regulations necessary for the proper and efficient
administration of the plan;
    
    enforce the terms of the plan and the rules and regulations it adopts;
    
    employ agents, attorneys, accountants or other persons; and
    
    perform any other acts necessary or appropriate for the proper management and
administration of the plan.
  Non-Officer Severance Plan
  Compensation of Directors
   (80)




---



##### Table of Contents



Change inFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    PensionEarned
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value andor
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    NonqualifiedPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherName
    
    Cash
    
    Awards(1)
    
    Awards(2)
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalD. E. Chitwood(3)
    
    $
    1,500
    
    
    $
    0
    
    
    $
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    1,500E. A. Nash
    
    $
    11,375
    
    
    $
    23,964
    
    
    $
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    35,339M .B. Oring
    
    $
    33,000
    
    
    $
    23,964
    
    
    $
    77,872
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    134,836R.M . Poage
    
    $
    32,250
    
    
    $
    23,964
    
    
    $
    203,238
    (4)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    259,452J.G. Shrader
    
    $
    41,750
    (5)
    
    $
    23,964
    
    
    $
    77,872
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    143,586
 
 (1)
    
    On the first day of July of each year, beginning July 1, 2004, our non-employee directors are
automatically granted shares of common stock having a value of $25,000. The actual number of
shares granted is determined by dividing $25,000 by the average daily closing price of the
common stock for ten consecutive trading days commencing fifteen trading days before the first
day of July of each year. Under this plan, a total of 1,100 shares of common stock have been
granted to Mr. Nash and each of Messrs. Oring, Poage and Shrader have been granted a total of
10,395 shares of common stock since inception of the plan, which includes 1,100 shares granted
to each of them on the July 1, 2007 grant date. For the July 1, 2007 grant, the 1,100 shares
were calculated by dividing $25,000 by $22.723, the ten trading day average closing price of
the stock, beginning on June 18, 2007. Since July 1, 2007 was not a business day, the amount
set forth in this column is based on the closing price of our common stock on July 2, 2007,
the first business day following the grant date. The amounts shown in this column represent
the dollar amount we recognized for financial statement reporting purposes with respect to the
fiscal year ended December 31, 2007, computed in accordance with FAS 123R and also represents
the aggregate grant date fair value computed in accordance with FAS 123R. Due to an
inadvertent error in calculating the number of shares granted to each of our non-employee
directors in 2007, each non-employee director received 39 more shares than the total of 1,061
shares that each non-employee director should have received. Our non-employee directors have
agreed to offset against future cash fees the economic equivalent (approximately $919) of the
additional 39 shares.(2)
    
    The amounts shown in this column represent the dollar amount we recognized for financial
statement reporting purposes with respect to the fiscal year ended December 31, 2007, computed
in accordance with FAS 123(R) of option awards made to the non-employee Directors prior to
2007 and the option award made to Mr. Poage in 2007 as further described in footnote (4)
below. The amounts shown exclude the impact of estimated forfeitures. For a discussion of
valuation assumptions, see Note 11 to our Consolidated Financial Statements included in this
Annual Report on Form 10-K. For information about the aggregate number of stock options held
by each of our nonemployee Directors, you should read the table below under the heading
Outstanding Equity Awards at 2007 Fiscal Year-End.(3)
    
    Mr. Chitwood resigned from the Board of Directors on January 23, 2007.(4)
    
    On March 27, 2007, a stock option to purchase 17,500 shares of common stock was granted to
Mr. Poage under the Parallel Petroleum Corporation 1997 Nonemployee Directors Stock Option
Plan. The option becomes exercisable with respect to 8,750 shares on March 27, 2008 and the
remaining 8,750 shares become exercisable on March 27, 2009. The grant date fair value of the
option award, computed in accordance with FAS 123(R), was $217,898.(5)
    
    This amount includes $7,500 for Mr. Shraders service as Chairman of the Corporate Governance
and Nominating Committee for 2004, 2005 and 2006 but paid in 2007.  (81)




---



##### Table of Contents



Option Awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    of
    
    Value ofNumber
    
    Number
    
    Awards:
    
    
    
    
    
    
    
    
    
    Number
    
    Value
    
    Unearned
    
    Unearnedof
    
    of
    
    Number
    
    
    
    
    
    
    
    
    
    of Shares
    
    of Shares
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    of
    
    
    
    
    
    
    
    
    
    or
    
    or Units
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Securities
    
    
    
    
    
    
    
    
    
    Units of
    
    of
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Underlying
    
    
    
    
    
    
    
    
    
    Stock
    
    Stock
    
    Rights
    
    RightsOptions
    
    Options
    
    Unexercised
    
    Option
    
    Option
    
    That Have
    
    That Have
    
    That Have
    
    That Have(#)
    
    (#)
    
    Unearned
    
    Exercise
    
    Expiration
    
    Not
    
    Not
    
    Not
    
    NotName
    
    Exercisable
    
    Unexercisable
    
    Options
    
    Price
    
    Date
    
    Vested
    
    Vested
    
    Vested
    
    VestedE. A. Nash
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0M.B. Oring
    
    
    5,000
    
    
    
    0
    
    
    
    0
    
    
    $
    4.58
    
    
    
    05-02-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    025,000
    
    
    
    0
    
    
    
    0
    
    
    $
    4.97
    
    
    
    06-21-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    034,500
    
    
    
    0
    
    
    
    0
    
    
    $
    2.80
    
    
    
    12-18-12
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    020,000
    
    
    
    0
    
    
    
    0
    
    
    $
    4.61
    
    
    
    05-07-11
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,000
    
    
    
    15,000
    (1)
    
    
    0
    
    
    $
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    010,000
    
    
    
    15,000
    (1)
    
    
    0
    
    
    $
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0R.M. Poage
    
    
    50,000
    
    
    
    0
    
    
    
    0
    
    
    $
    2.61
    
    
    
    04-28-13
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    020,000
    
    
    
    30,000
    (2)
    
    
    0
    
    
    $
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    00
    
    
    
    17,500
    (3)
    
    
    0
    
    
    $
    22.89
    
    
    
    03-27-17
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0J.G. Shrader
    
    
    20,000
    
    
    
    30,000
    (2)
    
    
    0
    
    
    $
    12.27
    
    
    
    08-23-15
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    These stock options become exercisable with respect to 5,000 shares on the twenty-third day
of August in each of the years 2008 through 2010.(2)
    
    These stock options become exercisable with respect to 10,000 shares on August 23, 2008 and
on the twenty-third day of August in each of the years 2009 and 2010.(3)
    
    This stock option becomes exercisable with respect to 8,750 shares on March 27, 2008, and an
additional 8,750 shares become exercisable on March 27, 2009. Cash
  
    
    $375 per meeting for service on the Compensation Committee, with the Chairman of the
Compensation Committee being entitled to receive an additional fee of $2,500 per year;
 (82)




---



##### Table of Contents




    
    $375 per meeting for service on the Audit Committee, with the Chairman of the Audit
Committee being entitled to receive an additional fee of $5,000 per year and each other
Audit Committee member receiving $2,500 per year;
 
    
    $375 per meeting for service on the Corporate Governance and Nominating Committee,
with the Chairman of the Corporate Governance and Nominating Committee being entitled
to receive an additional fee of $2,500 per year; and
 
    
    $375 per meeting for service on the Hedging and Acquisitions Committee, with the
Chairman of the Hedging and Acquisitions Committee being entitled to receive an
additional fee of $2,500 per year.
 Stock Options
  Other
    2004 Non-Employee Director Stock Grant Plan
      (83)




---



##### Table of Contents



Stock Option Plans
 1992 Stock Option Plan.
     1997 Nonemployee Directors Stock Option Plan.
    (84)




---



##### Table of Contents



1998 Stock Option Plan.
     2001 Nonemployee Directors Stock Option Plan.
     2001 Employee Stock Option Plan.
  (85)




---



##### Table of Contents



Section 401(k) Retirement Plan
       (86)




---



##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Name and Address
    
    Amount and Nature
    
    Percentof
    
    of
    
    ofBeneficial Owner
    
    Beneficial Ownership (1)
    
    Class(2)Larry C. Oldham 
1004 N. Big Sp ring, Suite 400
Midland, Texas 79701
    
    
    733,590
    (3)
    
    
    1.78
    %Donald E. Tiffin 
1004 N. Big Sp ring, Suite 400
Midland, Texas 79701
    
    
    24,350
    (4)
    
    
    *Eric A. Bay ley 
1004 N. Big Sp ring, Suite 400
Midland, Texas 79701
    
    
    153,490
    (5)
    
    
    *Steven D. Foster 
1004 N. Big Sp ring, Suite 400
Midland, Texas 79701
    
    
    16,000
    (6)
    
    
    *John S. Rutherford 
1004 N. Big Sp ring, Suite 400
Midland, Texas 79701
    
    
    89,800
    (7)
    
    
    *Edward A. Nash 
16214 Lafone 
Spring, Texas 77379
    
    
    1,100
    
    
    
    *Martin B. Oring 
10817 Grande Blvd.
West Palm Beach, Florida 33417
    
    
    208,414
    (8)
    
    
    *Ray M. Poage 
4711 Meandering Way
Colleyville, Texas 76034
    
    
    109,213
    (9)
    
    
    *Jeffrey G. Shrader 
801 S. Filmore, Suite 600
Amarillo, Texas 79105
    
    
    55,395
    (10)
    
    
    *Dreman
Value Management, L.L.C.
520 East Cooper Ave., Suite 230-4
Aspen, Colorado 81611
    
    
    2,203,250
    (11)
    
    
    5.34
    %Neuberger Berman, Inc. 
605 Third Avenue 
New York, New York 10158
    
    
    4,115,645
    (12)
    
    
    9.98
    %Next Century Growth Investors, LLC
5500 Wayzata Blvd., Suite 1275
Minneapolis, Minnesota 55416
    
    
    2,947,394
    (13)
    
    
    7.14
    %All Executive
Officers and
Directors 
as a Group(9 persons)
    
    
    1,391,352
    (14)
    
    
    3.35
    %
 (87)




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##### Table of Contents



*
    
    Less than one percent.(1)
    
    Unless otherwise indicated, all shares of common stock
are held directly with sole voting and investment powers. (2)
    
    Securities not outstanding, but included in the
beneficial ownership of each such person, are deemed to be outstanding for
the purpose of computing the percentage of outstanding securities of the
class owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the class owned by any other person.
Shares of common stock that may be acquired within sixty days of February 8,
2008 upon exercise of outstanding stock options are deemed to be
outstanding.(3)
    
    Includes 400,000 shares of common stock held indirectly
through Oldham Properties, Ltd., a limited partnership, and as to which Mr.
Oldham disclaims beneficial ownership. Also included are 15,000 shares of
common stock underlying a presently exercisable stock option held by Mr.
Oldham. At February 8, 2008, a total of 50,000 shares of common stock were
pledged as collateral to secure repayment of loans.(4)
    
    Of the total number of shares shown, 9,350 shares are
held indirectly through Mr. Tiffins individual retirement account.(5)
    
    Includes 75,000 shares of common stock underlying
presently exercisable stock options. A total of 6,790 shares of common
stock are held indirectly by Mr. Bayley through an Individual Retirement
Account and 408(k) Plan. At February 8, 2008, a total of 40,000 shares of
common stock were pledged as collateral to secure repayment of loans. The
total number of shares shown excludes a warrant to purchase 200 shares of
common stock.(6)
    
    Includes 400 shares of common stock held by Mr. Fosters
wife and 9,000 shares held in his 408(k) Plan.(7)
    
    Includes 44,000 shares of common stock underlying a
presently exercisable stock option. At February 8, 2008, a total of 45,800
shares of common stock were pledged as collateral to secure repayment of
loans.(8)
    
    Of the total number of shares shown, 15,500 shares are
held directly by Mr. Orings wife; 82,019 shares are held by Wealth
Preservation, LLC, a limited liability company owned and controlled by Mr.
Oring and his wife; and 104,500 shares may be acquired by Mr. Oring upon
exercise of stock options that are presently exercisable or that become
exercisable within the next sixty days.(9)
    
    Includes 20,068 shares of common stock held indirectly by
Mr. Poage through his individual retirement account. Also included are
78,750 shares that may be acquired upon exercise of stock options that are
presently exercisable or that become exercisable within the next sixty days.(10)
    
    Includes 20,000 shares of common stock that may be
acquired upon exercise of a presently exercisable stock option or that
become exercisable within the next sixty days. At February 8, 2008, a total
of 25,000 shares of common stock were pledged as collateral to secure
repayment of loans.(11)
    
    As reported in Schedule 13G filed by Dreman Value Management,
L.L.C., an investment advisor, with the Securities and Exchange
Commission on February 14, 2008, Dreman Value Management, L.L.C.,
or “Dreman”, reported beneficial ownership of 2,203,250 shares of
common stock. Of these shares, Dreman reported sole voting power with
respect to 624,950 shares; shared voting power with respect to 22,900
shares and shared dispositive power with respect to 2,203,250
shares.(12)
    
    Based on Amendment No. 1 to Schedule 13G filed by
Neuberger Berman, Inc., Neuberger Berman, LLC, Neuberger Berman
Management, Inc. and Neuberger Berman Equity Funds with the
Securities and Exchange Commission on February 12, 2008,
Neuberger Berman, Inc. or “NBI”, reported beneficial ownership of
4,115,645 shares of common stock. Of these shares, NBI and Neuberger
Berman, LLC each reported sole voting power with respect to 118,204
shares; shared voting power with respect to 3,067,141 shares; and
shared dispositive power with respect to 4,115,645 shares. Neuberger
Berman Management, Inc. reported shared voting and dispositive
powers with respect to 3,067,145 shares and Neuberger Berman Equity
Funds reported shared voting and dispositive powers with respect to
3,032,641 shares. NBI is the parent company of (88)




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##### Table of Contents



Neuberger Berman, LLC,
an investment advisor and broker-dealer, and Neuberger Berman
Management Inc., an investment advisor to a series of public mutual
funds. Neuberger Berman, LLC is deemed to be a beneficial owner of
such shares since it has shared dispositive power, and in some cases
the sole power to vote such shares. Neuberger Berman Management Inc.
is deemed to be a beneficial owner of such shares since it has shared
dispositive and voting power. The
holdings of Lehman Brothers Asset Management LLC, an affiliate of
Neuberger Berman LLC, are also included in the total number of shares
shown.(13)
    
    Based on Schedule 13G filed by Next Century Growth Investors,
LLC, Thomas L. Press and Donald M. Longlet with the Securities and
Exchange Commission on February 14, 2008, Next Century Growth
Investors, LLC, or “NCGI”, reported beneficial ownership of 2,947,394
shares of common stock. NCGI reported that it may be deemed to be
the beneficial owner of such shares by virtue of its investment
discretion and/or voting power over client securities, which may be
revoked, and that Thomas L. Press and Donald M. Longlet may also be
deemed to have beneficial ownership of such shares as a result of
their positions with and ownership positions in NCGI, which could be
deemed to confer upon each of them voting and/or investment power
over the shares. Each of NCGI, Thomas L. Press and Donald M. Longlet
disclaim beneficial ownership of such shares except to the extent of
each of their respective pecuniary interests therein, if any.(14)
    
    Includes 337,250 shares of common stock underlying stock
options that are presently exercisable or that become exercisable within the
next sixty days. Equity Compensation Plans
   (c)Number of securities(b)
    
    remaining available for(a)
    
    Weighted-average
    
    future issuance underNumber of securities to be
    
    exercise
    
    equity compensationissued upon exercise of
    
    price of outstanding
    
    plans (excludingoutstanding options,
    
    options, warrants and
    
    securities reflected inPlan category
    
    warrants and rights
    
    rights
    
    column (a))Equity compensation plans approved by security holders
    
    
    374,500
    (1)
    
    $
    8.03
    
    
    
    74,420
    (2)Equity compensation plans not approved by security holders
    
    
    183,000
    (3)
    
    $
    4.97
    
    
    
    Total
    
    
    557,500
    
    
    $
    7.03
    
    
    
    74,420
 
 (1)
    
    Includes shares of common stock issuable upon exercise of stock options granted under our
1992 Stock Option Plan, 1997 Nonemployee Directors Stock Option Plan, 1998 Stock Option Plan,
and 2001 Nonemployee Directors Stock Option Plan.(2)
    
    These shares of common stock are available for future issuance under our 2004 Non-Employee
Director Stock Grant Plan.(3)
    
    These shares represent shares of common stock underlying stock options granted on June 20,
2001 to non-officer employees under our 2001 Employee Stock Option Plan. The 2001 Employee
Stock Option Plan is the only equity compensation plan in effect that we have adopted without
approval of our stockholders. Our directors and officers are not eligible to participate in
this plan. A description of the material features of this plan can be found under the caption
2001 Employee Stock Option Plan on page 85. (89)




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Transactions
      (90)




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##### Table of Contents



Director Independence
   Procedures for Reviewing Certain Transactions
  
    
    a director or officer of Parallel or a nominee to become a director;
    
    an owner of more than 5% of our outstanding common stock;
    
    certain family members of any of the above persons; and
    
    any entity in which any of the above persons is employed or is a partner or
principal or in which such person has a 5% or greater ownership interest.
 Approval Procedures
  
    
    the related partys relationship to Parallel and interest in the transaction;
    
    the material terms of the proposed transaction;
    
    the benefits to Parallel of the proposed transaction;
    
    the availability of other sources of comparable properties or services; and
    
    whether the proposed transaction is on terms comparable to terms available to an
unrelated third party or to employees generally.
  (91)




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Ratification Procedures
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   Types of Fees
    
    2007
    
    
    2006($ in thousands)Audit fees(1)
    
    $
    736
    
    
    $
    469Audit-related fees
    
    
    13
    
    
    
    52Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    $
    749
    
    
    $
    521
 
 (1)
    
    Includes fees for professional services rendered in connection with
the audit of our internal control over financial reporting under Section 404
of the Sarbanes-Oxley Act of 2002 in the amounts of $175,000 and $160,000 for
2007 and 2006, respectively.   (92)




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
        No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designations, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000)4.4
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.5
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.6
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)
 (93)




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No.
    
    Description of Exhibit4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006)4.8
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. (Incorporated
by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006)4.9
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.10
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.11
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)4.12
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.13
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.14
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007)4.15
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.7):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the Registrants Form 10-K for the fiscal year
ended December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.5
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.6
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.7
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.8
    
    First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)
 (94)




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##### Table of Contents



No.
    
    Description of Exhibit10.9
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as
Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December
20, 2002)10.10
    
    First Amendment to First Amended and Restated Credit Agreement, dated as of September 12,
2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to
Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)10.11
    
    Second Amended and Restated Credit Agreement, dated September 27, 2004, by and among
Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB,
BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 27, 2004 and filed with the
Securities and Exchange Commission on October 1, 2004)10.12
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)10.13
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated December 30, 2004 and
filed with the Securities and Exchange Commission on December 30, 2004)10.14
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American
Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated April 4, 2005 and filed with the Securities
and Exchange Commission on April 8, 2005)10.15
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.16
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.17
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.18
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.19
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.20
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)
 (95)




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##### Table of Contents



No.
    
    Description of Exhibit10.21
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.22
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)10.23
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.24
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)10.25
    
    Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006)10.26
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on August 1, 2007)10.27
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465)*10.28
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P.14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley Gillespie & Associates Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.
 
 *
    
    Filed herewith. (96)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Index to the Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Financial Statements:Consolidated Balance Sheets at December 31, 2007 and 2006
    
    F-3Consolidated Statements of Operations for the years ended December 2007, 2006,
and 2005
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31,
2007, 2006 and 2005
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2007,
2006 and 2005
    
    F-6Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2007, 2006, and 2005
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
  F-1




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Report of Independent Registered Public Accounting Firm
 
     
  F-2




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
December 31, 2007 and 2006  (dollars in thousands)
 2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,816
    
    
    $
    5,910Accounts receivable:Oil and natural gas sales
    
    
    20,499
    
    
    
    18,605Joint interest owners and other, net of allowance for doubtful account of $50 and $80
    
    
    2,460
    
    
    
    7,212Affiliates
    
    
    3,970
    
    
    
    3,33526,929
    
    
    
    29,152Other current assets
    
    
    600
    
    
    
    2,863Deferred tax asset
    
    
    10,293
    
    
    
    4,340Total current assets
    
    
    45,638
    
    
    
    42,265Property and equipment, at cost:Oil and natural gas
properties, full cost method
(including $86,402 and $50,375
not subject to depletion)
    
    
    648,576
    
    
    
    501,405Other
    
    
    2,877
    
    
    
    2,614651,453
    
    
    
    504,019Less accumulated depreciation, depletion and amortization
    
    
    (145,482
    )
    
    
    (115,513
    )Net property and equipment
    
    
    505,971
    
    
    
    388,506Restricted cash
    
    
    78
    
    
    
    325Investment in pipelines and gathering system ventures
    
    
    8,638
    
    
    
    6,454Other assets, net of accumulated amortization of $1,425 and $760
    
    
    2,768
    
    
    
    5,268$
    563,093
    
    
    $
    442,818Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued
liabilities
    
    $
    47,848
    
    
    $
    36,171Asset retirement obligations
    
    
    598
    
    
    
    701Derivative obligations
    
    
    30,424
    
    
    
    14,109Total current liabilities
    
    
    78,870
    
    
    
    50,981Revolving credit facility
    
    
    60,000
    
    
    
    115,000Term loan
    
    
    
    
    
    
    50,000Senior notes (principal amount $150,000 in 2007)
    
    
    145,383
    
    
    
    Asset retirement obligations
    
    
    4,339
    
    
    
    4,362Derivative obligations
    
    
    13,194
    
    
    
    14,386Deferred tax liability
    
    
    26,045
    
    
    
    24,307Total long-term liabilities
    
    
    248,961
    
    
    
    208,055Commitments and contingencies (Note 15)Stockholders equity:Series A preferred stock 
par value $0.10 per share,
authorized 50,000 shares
    
    
    
    
    
    
    Common stock  par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 41,252,644 and 37,547,010
    
    
    412
    
    
    
    375Additional paid-in capital
    
    
    196,457
    
    
    
    140,353Retained earnings
    
    
    38,393
    
    
    
    43,054Total stockholders equity
    
    
    235,262
    
    
    
    183,782$
    563,093
    
    
    $
    442,818
  F-3




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Operations
Years ended December 31, 2007, 2006 and 2005  (dollars in thousands, except per share data)
 2007
    
    
    2006
    
    
    2005Oil and natural gas revenues:Oil and natural gas sales
    
    $
    116,031
    
    
    $
    97,025
    
    
    $
    66,150Cost and expenses:Lease operating expense
    
    
    22,200
    
    
    
    16,819
    
    
    
    9,947Production taxes
    
    
    5,545
    
    
    
    5,577
    
    
    
    4,102Production tax refund
    
    
    (1,209
    )
    
    
    
    
    
    
    General and administrative
    
    
    10,415
    
    
    
    9,523
    
    
    
    6,712Depreciation, depletion and amortization
    
    
    30,115
    
    
    
    24,687
    
    
    
    12,044Total costs and expenses
    
    
    67,066
    
    
    
    56,606
    
    
    
    32,805Operating income
    
    
    48,965
    
    
    
    40,419
    
    
    
    33,345Other income (expense), net:Gain (loss) on derivatives not classified as hedges
    
    
    (36,776
    )
    
    
    2,802
    
    
    
    (31,669
    )Gain (loss) on ineffective portion of hedges
    
    
    
    
    
    
    626
    
    
    
    (137
    )Interest and other income
    
    
    197
    
    
    
    158
    
    
    
    167Interest expense
    
    
    (19,177
    )
    
    
    (12,360
    )
    
    
    (4,780
    )Cost of debt retirement
    
    
    (760
    )
    
    
    
    
    
    
    Other expense
    
    
    (118
    )
    
    
    (189
    )
    
    
    (102
    )Equity in income (loss) of pipelines and gathering system ventures
    
    
    (311
    )
    
    
    8,593
    
    
    
    (89
    )Total other income (expense), net
    
    
    (56,945
    )
    
    
    (370
    )
    
    
    (36,610
    )Income (loss) before income taxes
    
    
    (7,980
    )
    
    
    40,049
    
    
    
    (3,265
    )Income tax benefit (expense)
    
    
    3,319
    
    
    
    (13,894
    )
    
    
    1,676Net income (loss)
    
    
    (4,661
    )
    
    
    26,155
    
    
    
    (1,589
    )Cumulative preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    (271
    )Net income (loss) available to common stockholders
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,860
    )Net income (loss) per common share:Basic
    
    $
    (0.12
    )
    
    $
    0.73
    
    
    $
    (0.06
    )Diluted
    
    $
    (0.12
    )
    
    $
    0.71
    
    
    $
    (0.06
    )
  F-4




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##### Table of Contents



Consolidated Statements of Stockholders Equity
Years ended December 31, 2007, 2006 and 2005  (amounts in thousands)
 AccumulatedPreferred stock
    
    
    Common stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    Loss
    
    
    equityBalance, January 1, 2005
    
    
    950
    
    
    $
    95
    
    
    
    25,439
    
    
    $
    254
    
    
    $
    48,328
    
    
    $
    18,759
    
    
    $
    (7,442
    )
    
    
    59,994Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    5,750
    
    
    
    58
    
    
    
    27,686
    
    
    
    
    
    
    
    
    
    
    
    27,744Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Preferred stock converted
    
    
    (950
    )
    
    
    (95
    )
    
    
    2,714
    
    
    
    27
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    7
    
    
    
    2,241
    
    
    
    
    
    
    
    
    
    
    
    2,248Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    278Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    999
    
    
    
    999Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,589
    )
    
    
    
    
    
    
    (1,589
    )Dividends on preferred stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Balance, January 1, 2006
    
    
    
    
    
    $
    
    
    
    
    34,749
    
    
    $
    347
    
    
    $
    78,699
    
    
    $
    16,899
    
    
    $
    (6,443
    )
    
    $
    89,502Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    25
    
    
    
    60,242
    
    
    
    
    
    
    
    
    
    
    
    60,267Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    2
    
    
    
    764
    
    
    
    
    
    
    
    
    
    
    
    766Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,443
    
    
    
    6,443Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,155
    
    
    
    
    
    
    
    26,155Balance, January 1, 2007
    
    
    
    
    
    $
    
    
    
    
    37,547
    
    
    $
    375
    
    
    $
    140,353
    
    
    $
    43,054
    
    
    $
    
    
    
    $
    183,782Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    30
    
    
    
    52,492
    
    
    
    
    
    
    
    
    
    
    
    52,522Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    83
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    619
    
    
    
    6
    
    
    
    2,454
    
    
    
    
    
    
    
    
    
    
    
    2,460Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    247Tax benefit of stock option exercise
in excess of compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    
    
    
    
    816Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,661
    )
    
    
    
    
    
    
    (4,661
    )Balance,
December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    41,253
    
    
    $
    412
    
    
    $
    196,457
    
    
    $
    38,393
    
    
    $
    
    
    
    $
    235,262
  F-5




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 2007, 2006 and 2005  ( dollars in thousands)
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    30,115
    
    
    
    24,687
    
    
    
    12,044Gain on sale of automobiles
    
    
    (30
    )
    
    
    
    
    
    
    Accretion of asset retirement obligation
    
    
    324
    
    
    
    248
    
    
    
    112Accretion of senior notes discount
    
    
    197
    
    
    
    
    
    
    
    Deferred income tax (benefit) expense
    
    
    (3,319
    )
    
    
    13,894
    
    
    
    (1,676
    )(Gain) loss on derivatives not classified as hedges
    
    
    36,776
    
    
    
    (2,802
    )
    
    
    31,669(Gain) loss on ineffective portion of hedges
    
    
    
    
    
    
    (626
    )
    
    
    137Cost of debt retirement
    
    
    760
    
    
    
    
    
    
    
    Common stock issued in lieu of cash for directors fees
    
    
    96
    
    
    
    118
    
    
    
    99Stock option expense
    
    
    247
    
    
    
    531
    
    
    
    278Equity (income) loss in pipelines and gathering system ventures
    
    
    311
    
    
    
    (8,593
    )
    
    
    89Return on investment in pipelines and gathering system ventures
    
    
    287
    
    
    
    9,000
    
    
    
    Bad debt expense
    
    
    (30
    )
    
    
    71
    
    
    
    Changes in assets and liabilities:Other assets, net
    
    
    379
    
    
    
    1,567
    
    
    
    (823
    )Restricted cash
    
    
    247
    
    
    
    (50
    )
    
    
    (274
    )Decrease (increase) in accounts receivable
    
    
    2,253
    
    
    
    (15,151
    )
    
    
    (7,034
    )Decrease (increase) in other current assets
    
    
    1,070
    
    
    
    (153
    )
    
    
    (1,187
    )Increase in accounts payable and accrued liabilities
    
    
    11,597
    
    
    
    25,330
    
    
    
    5,273Federal tax deposit
    
    
    
    
    
    
    (40
    )
    
    
    Net cash provided by operating activities
    
    
    76,619
    
    
    
    74,186
    
    
    
    37,118Cash flows from investing activities:Additions to oil and natural gas properties
    
    
    (149,298
    )
    
    
    (195,396
    )
    
    
    (77,351
    )Use of restricted cash for acquisition of oil and natural gas properties
    
    
    
    
    
    
    2,366
    
    
    
    (79
    )Proceeds from disposition of oil and natural gas properties and other property and equipment
    
    
    1,677
    
    
    
    130
    
    
    
    3,028Additions to other property and equipment
    
    
    (379
    )
    
    
    (210
    )
    
    
    (342
    )Settlements of derivative instruments
    
    
    (16,615
    )
    
    
    (3,902
    )
    
    
    (5,022
    )Purchase of derivative instruments
    
    
    
    
    
    
    
    
    
    
    (2,363
    )Investment in pipelines and gathering system ventures
    
    
    (2,782
    )
    
    
    (11,260
    )
    
    
    (2,820
    )Return of investment in pipelines and gathering system ventures
    
    
    
    
    
    
    7,724
    
    
    
    Net cash used in investing activities
    
    
    (167,397
    )
    
    
    (200,548
    )
    
    
    (84,949
    )Cash flows from financing activities:Borrowings from bank line of credit
    
    
    92,000
    
    
    
    117,000
    
    
    
    45,714Payments on bank line of credit
    
    
    (147,000
    )
    
    
    (52,000
    )
    
    
    (74,714
    )Borrowings from term loan
    
    
    
    
    
    
    
    
    
    
    50,000Payment on term loan
    
    
    (50,000
    )
    
    
    
    
    
    
    Senior notes (principal amount $150,000 in 2007)
    
    
    145,186
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    (813
    )
    
    
    (179
    )
    
    
    (1,253
    )Deferred debt offering
    
    
    (1,671
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    2,460
    
    
    
    766
    
    
    
    2,248Proceeds (net) from common stock issued
    
    
    52,522
    
    
    
    60,267
    
    
    
    27,744Payment of preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    (271
    )Net cash provided by financing activities
    
    
    92,684
    
    
    
    125,854
    
    
    
    49,468Net increase (decrease) in cash and cash equivalents
    
    
    1,906
    
    
    
    (508
    )
    
    
    1,637Cash and cash equivalents at beginning of year
    
    
    5,910
    
    
    
    6,418
    
    
    
    4,781Cash and cash equivalents at end of year
    
    $
    7,816
    
    
    $
    5,910
    
    
    $
    6,418Non-cash financing and investing activities:Oil and natural gas properties asset retirement obligation
    
    $
    (450
    )
    
    $
    2,320
    
    
    $
    251Non-cash exchange of oil and natural gas properties:Properties received in exchange
    
    $
    6,463
    
    
    $
    
    
    
    $
    Properties delivered in exchange
    
    $
    (5,495
    )
    
    $
    
    
    
    $
    Other transactions:Interest paid
    
    $
    13,096
    
    
    $
    12,255
    
    
    $
    5,192
  F-6




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2007, 2006 and 2005  (dollars in thousands)
 2007
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )Other comprehensive income (loss):Unrealized losses on derivatives
    
    
    
    
    
    
    (1,648
    )
    
    
    (10,980
    )Reclassification adjustment for losses
on derivatives included in net income (loss)
    
    
    
    
    
    
    11,409
    
    
    
    12,494Change in fair value of derivatives
    
    
    
    
    
    
    9,761
    
    
    
    1,514Income tax expense, deferred
    
    
    
    
    
    
    (3,318
    )
    
    
    (515
    )Total other comprehensive income
    
    
    
    
    
    
    6,443
    
    
    
    999Total comprehensive income (loss)
    
    $
    (4,661
    )
    
    $
    32,598
    
    
    $
    (590
    )
  F-7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1)
    
    Organization, Business and Summary of Significant Accounting Policies
 (a)
    
    Basis of ConsolidationThe accompanying financial statements present the consolidated accounts of Parallel
Petroleum Corporation, a Delaware Corporation, and its wholly owned subsidiaries, Parallel
L.P. and Parallel, L.L.C. (collectively the Company or Parallel) prior to their
dissolution and merger into Parallel on July 2, 2007. All significant inter-company
account balances and transactions have been eliminated.The Company accounts for its interests in oil and natural gas joint ventures and working
interests using the proportionate consolidation method. Under this method, the Company
records its proportionate share of assets, liabilities, revenues and expenses.
 (b)
    
    Nature of OperationsThe Companys focus is on the acquisition, development and exploitation of long-lived oil
and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas
reserves. The Companys business activities are currently carried out primarily in Texas
and New Mexico. The Companys activities are focused in the Permian Basin of west Texas
and New Mexico, the Fort Worth Basin of north Texas and the onshore Gulf Coast area of
south Texas. The Company is actively evaluating, drilling and preparing to drill new
projects located in the Cotton Valley Reef trend of east Texas and the Uinta Basin of
Utah.
 (c)
    
    Concentration of Credit RiskFinancial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of unsecured accounts receivable from working interest owners and crude
oil and natural gas purchasers. A substantial portion of Parallels oil and natural gas
reserves are located in the Permian Basin and the Company may be disproportionally exposed
to the impact of delays or interruptions of production from these wells due to mechanical
problems, damages to the current producing reservoirs and significant governmental
regulation, including any curtailment of production or interruption of transportation of
oil or natural gas produced from the wells.
 (d)
    
    Property and EquipmentOil and natural gas properties:The Company uses the full cost method of accounting for its oil and natural gas producing
activities. Accordingly, all costs associated with acquisition, exploration, and
development of oil and natural gas reserves, including directly related overhead costs,
are capitalized.Management and service fees received under contractual arrangements, if any, are treated
as reimbursement of costs, offsetting the costs incurred to provide those services.
Specifically, the Company serves as operator of certain oil and natural gas properties in
which it owns an interest. Under operating agreements naming the Company as operator, the
Company is reimbursed for certain specified direct charges and overhead charges. Amounts
received in reimbursement for drilling activities are applied as a reduction to Parallels
capital costs, and amounts received in reimbursement for producing activities are applied
to reduce the Companys general and administrative expenses.Depletion is provided using the unit-of-production method based upon estimates of proved
oil and natural gas reserves with oil and natural gas production being converted to a
common unit of measure based upon their relative energy content. Investments in unproved
properties and major development projects
are not amortized until proved reserves associated with the projects can be determined or
until impairment occurs. If the results of an assessment indicate that the properties are
impaired, the amount of the impairment is added to the capitalized costs to be amortized.
Once the assessment of unproved properties is complete and when major development projects
are evaluated, the costs previously excluded from amortization are transferred to the full
cost pool and amortization begins. The amortizable base includes es-
 F-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 timated future
development costs and where significant, dismantlement, restoration and abandonment costs,
net of estimated salvage value.In arriving at rates under the unit-of-production method, the quantities of recoverable
oil and natural gas reserves are established based on estimates made
by the Company's geologists and
engineers which require significant judgment as does the projection of future production
volumes and levels of future costs, including future development costs. In addition,
considerable judgment is necessary in determining when unproved properties become impaired
and in determining the existence of proved reserves once a well has been drilled. All of
these judgments may have significant impact on the calculation of depletion expense. There
have been no material changes in the methodology used by the Company in calculating
depletion of oil and gas properties under the full cost method during the three years
ended December 31, 2007.If the net investment in oil and natural gas properties in a cost center, net of related
deferred taxes, exceeds an amount equal to the sum of (1) the standardized measure of
discounted future net cash flows from proved reserves, as adjusted for estimated future
asset retirement costs (see Note 16) and (2) the lower of cost or fair market value of
properties in process of development and unexplored acreage, the excess is charged to
expense as additional depletion and is separately disclosed during the period to which
this excess occurs. The standardized measure is calculated using a 10% discount rate and
is based on unescalated prices in effect at period-end with effect given to the Companys
cash flow hedge positions.Sales of proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would significantly alter
the relationship between capitalized costs and proved oil and natural gas reserves, in
which case the gain or loss would be recognized in the statement of operations.
 Other Property and Equipment:
 Maintenance and repairs are charged to operations. Renewals and betterments are
capitalized to the appropriate property and equipment accounts.Upon retirement or disposition of assets other than oil and natural gas properties, the
cost and related accumulated depreciation are removed from the accounts with the resulting
gains or losses, if any, recognized in the statement of operations. Depreciation of other
property and equipment is computed using the straight-line method based on the estimated
useful lives of the property and equipment.
 (e)
    
    Income TaxesThe Company accounts for income taxes using the liability method. Under the liability
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under the
liability method, the effect on previously recorded deferred tax assets and liabilities
resulting from a change in tax rates is recognized in earnings in the period in which the
change is enacted.The Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of
FASB Statement No. 109 (FIN 48), on January 1, 2007. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprises financial statements in
accordance with FASB Statement 109, Accounting for Income Taxes, and prescribes a
recognition threshold and measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.Based on its evaluation, the Company has concluded that there are no significant uncertain
tax positions requiring recognition in its financial statements. The Companys evaluation
was performed for the tax
 F-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 years ended December 31, 2003, 2004, 2005 and 2006, the tax
years which remain subject to examination by major tax jurisdictions as of December 31,
2007.The Company may from time to time be assessed interest or penalties by major tax
jurisdictions, although any such assessments historically have been minimal and immaterial
to its financial results. In addition, should the Company determine that any of its tax
positions are uncertain it may record related interest and penalties that may be assessed.
Interest recorded, if any, will be charged to interest expense, and penalties recorded
will be charged to other expense in the Companys statement of operations.
 (f)
    
    InvestmentsInvestments in affiliated companies with a 20% to 50% ownership interest are accounted for
under the equity method and, accordingly, net income includes the Companys proportionate
share of their income or loss. In addition, the Company has an investment in a joint
venture which is accounted for by the equity method because the Company does not have
effective control or voting interest although the Company owns approximately 76 1/2% of
the joint venture economic interest.(g)
    
    Stock-Based CompensationParallel accounts for its stock based compensation using the prospective method under
Statement of Financial Accounting Standards No. 123(SFAS 123). Under this method, the
fair values of all options granted since 2003 have been reflected as compensation expense
over the periods in which the services are rendered.Parallel adopted SFAS 123(R) effective January 1, 2006, applying the modified prospective
method, whereby compensation cost associated with the unvested portion of awards granted
during the period of June 2001 to December 2002 were recognized over the remaining vesting
period. Under this method, prior periods were not revised for comparative purposes. No
options that were granted prior to June 2001 remained unvested at January 1, 2006.(h)
    
    Environmental ExpendituresThe Company is subject to extensive federal, state and local environmental laws and
regulations. These laws regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit. Expenditures that
relate to an existing condition caused by past operations and that have no future economic
benefits are expensed.Liabilities for expenditures of a noncapital nature are recorded when environmental
assessment and or remediation is probable, and the costs can be reasonably estimated. Such
liabilities are generally undiscounted unless the timing of cash payments for the
liability or component are fixed or reliably determinable.(i)
    
    Earnings Per ShareBasic earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted
earnings per share are computed similar to basic earnings per share; however, diluted
earnings per share reflect the assumed conversion of all potentially dilutive securities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2007
    
    
    2006
    
    
    2005($ in thousands, except per share data)Basic EPS Comp utation:NumeratorNet income (loss)
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    (271
    )Net income (loss) available to common stockholders
    
    
    (4,661
    )
    
    
    26,155
    
    
    
    (1,860
    )DenominatorWeighted average common shares outstanding
    
    
    38,120
    
    
    
    35,888
    
    
    
    32,253Basic earnings (loss) p er share
    
    $
    (0.12
    )
    
    $
    0.73
    
    
    $
    (0.06
    )Diluted EPS Comp utation:NumeratorNet income (loss)
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )Preferred stock dividend
    
    
    
    
    
    
    
    
    
    
    (271
    )Net income (loss) available to common stockholders
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,860
    )Denominator Weighted average common shares outstanding
    
    
    38,120
    
    
    
    35,888
    
    
    
    32,253Employee stock options
    
    
    
    
    
    
    599
    
    
    
    Warrants
    
    
    
    
    
    
    269
    
    
    
    Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    38,120
    
    
    
    36,756
    
    
    
    32,253Diluted earnings (loss) p er share
    
    $
    (0.12
    )
    
    $
    0.71
    
    
    $
    (0.06
    )
 For the year ended December 31, 2007, the effects of all potentially dilutive securities
(including options and warrants) were excluded from the computation of diluted earnings
per share because the Company had a net loss and, therefore, the effect would have been
anti-dilutive. Approximately 878,000 options and warrants were excluded from the
computation of diluted earnings per share in 2007. For the year ended December 31, 2005,
the effects of all potentially dilutive securities (including options, warrants and the
if converted effects of convertible preferred stock) were excluded from the computation
of diluted earnings per share because the Company had a net loss and, therefore, the
effect would have been antidilutive. Approximately 1.7 million options, warrants and the
if converted effects of convertible preferred stock were excluded from the computation
of diluted earnings per share in 2005.
 (j)
    
    Use of Estimates in the Preparation of Consolidated Financial StatementsPreparation of the accompanying Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America 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
Consolidated Financial Statements and the reported amounts of revenues and expenses during
the reporting period. The oil and natural gas reserve estimates, and the related future
net cash flows derived from those reserves, are used in the determination of depletion
expense and the full-cost ceiling test and are inherently imprecise. Actual results could
differ from those estimates.(k)
    
    Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all demand deposits,
money market accounts and certificates of deposit purchased with an original maturity of
three months or less to be cash equivalents.
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (l)
    
    Restricted CashRestricted cash as of December 31, 2007, includes $50,000 placed in a certificate of
deposit for a Letter of Credit with the State of New Mexico and $25,000 placed in a
certificate of deposit to be held as a Statewide Bond provided under the New Mexico
Surface Owners Protection Act for benefit of surface owners affected. Restricted cash as
of December 31, 2006, includes $50,000 placed in a certificate of deposit for a Letter of
Credit with the State of New Mexico and approximately $275,000 placed in a certificate of
deposit for a drilling bond.(m)
    
    ReclassificationsCertain reclassifications have been made to prior years amounts to conform with current
year presentation.(n)
    
    Derivative Financial InstrumentsDerivative financial instruments, utilized to manage or reduce commodity price risk
related to the Companys production and interest rate risk related to the Companys
long-term debt, are accounted for under the provisions of SFAS No. 133, Accounting for
Derivative Instruments and for Hedging Activities", and related interpretations and
amendments. Under this Statement, derivatives are carried on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the statement of operations when the
hedged item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are also recognized in other expense. If the derivative is not designated as
a hedge, changes in the fair value are recognized in other expense.(o)
    
    Revenue RecognitionOil and natural gas revenues are recorded using the sales method, whereby the Company
recognizes oil and natural gas revenue based on the amount of oil and natural gas sold to
purchasers. For the period ended December 31, 2007, 2006 and 2005, the Company did not
have any significant oil or natural gas imbalances. The Company does not recognize
revenues until they are realized or realizable and earned. Revenues are considered
realized or realizable and earned when: (i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred or services have been rendered; (iii) the sellers price to the
buyer is fixed or determinable; and, (iv) collectibility is reasonably assured.The following summarizes revenue for each of the three years ended December 31 by product
sold.
 2007
    
    
    2006
    
    
    2005($ in thousands)Oil revenue
    
    $
    69,315
    
    
    $
    68,076
    
    
    $
    47,800Effects of oil hedges
    
    
    
    
    
    
    (11,512
    )
    
    
    (12,139
    )Natural gas revenue
    
    
    46,716
    
    
    
    40,461
    
    
    
    30,690Effects of natural gas hedges
    
    
    
    
    
    
    
    
    
    
    (201
    )$
    116,031
    
    
    $
    97,025
    
    
    $
    66,150
 (p)
    
    Recent Accounting PronouncementsIn September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements(FAS 157). FAS 157 defines fair value as used in numerous
accounting pronounce-
 F-12




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ments, establishes a framework for measuring fair value in accordance
with generally accepted accounting principles and expands disclosure requirements related
to the use of fair value measures in financial statements. FAS 157 will be effective for the Companys financial statements for the
fiscal year beginning January 1, 2008; however, earlier application is encouraged. The
Company is currently evaluating the impact that adoption might have on its financial
position or results of operations, although the Company does not expect any impact to be
significant.In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment of FASB Statement No. 115,(FAS 159)
which will become effective on January 1, 2008. FAS 159 permits entities to measure
eligible financial assets, financial liabilities and firm commitments at fair value, on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted for at
fair value under other generally accepted accounting principles. The fair value
measurement election is irrevocable and subsequent changes in fair value must be recorded
in earnings. The Company will adopt this statement in the first quarter of 2008 and the
Company does not expect to elect the fair value option for any eligible financial
instruments and other items.In April 2007, the FASB issued FASB Staff Position FIN 39-1, Amendment of FASB
Interpretation No. 39(FSP FIN 39-1). FSP FIN 39-1 clarifies that a reporting entity
that is party to a master netting arrangement can offset fair value amounts recognized for
the right to reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative instruments
that have been offset under the same master netting arrangement. FSP FIN 39-1 is effective
for financial statements issued for fiscal years beginning after November 15, 2007.
Adoption of FSP FIN 39-1 is not expected to have a material impact on the Companys
consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141(R)), which replaces FASB Statement No. 141. SFAS 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any non- controlling interest
in the acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements that will enable users to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for acquisitions that occur in an entitys
fiscal year that begins after December 15, 2008, which will be the companys fiscal year
2009. The impact, if any, will depend on the nature and size of business combinations the
Company consummates after the effective date.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51(SFAS 160). SFAS 160 requires that
accounting and reporting for minority interests will be recharacterized as noncontrolling
interests and classified as a component of equity. SFAS 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. SFAS
160 applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary.
This statement is effective as of the beginning of an entitys first fiscal year beginning
after December 15, 2008, which will be the companys fiscal year 2009. Based upon the
December 1, 2007 balance sheet, the statement would have no impact.
 (2)
    
    Fair Value of Financial InstrumentsThe carrying amount of cash, accounts receivable, accounts payable, and accrued liabilities
approximates fair value because of the short maturity of these instruments.The carrying amount of long-term debt outstanding under the
Company's revolving credit facility in 2007
and 2006 and its term loan in 2006 approximated fair value because the Companys borrowing
rate on these financial instruments is based on a variable market rate of interest.
 F-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The carrying value of the Companys 10.25% senior notes at December 31, 2007 is approximately $145.4
million and their estimated fair value is approximately $150.0 million. Fair value is
estimated based on market trades at or near December 31, 2007.The Company also has derivative instruments which are described in Footnote 6.
 (3)
    
    Oil and Natural Gas PropertiesThe following table reflects capitalized costs related to the oil and natural gas properties
as of December 31:
 2007
    
    
    2006($ in thousands)Proved properties
    
    $
    562,174
    
    
    $
    451,030Unproved properties, not subject to depletion
    
    
    86,402
    
    
    
    50,375648,576
    
    
    
    501,405Accumulated depletion
    
    
    (143,264
    )
    
    
    (113,467
    )$
    505,312
    
    
    $
    387,938
 The following table reflects, by category of cost, amounts excluded from the depletion base as
of December 31, 2007:
 PrepaidDrillingCosts andLeasehold
    
    
    Geological and
    
    
    Work-in-Year Incurred
    
    Costs
    
    
    Geophysical
    
    
    Progress
    
    
    Total($ in thousands)2007
    
    $
    34,558
    
    
    $
    2,105
    
    
    $
    8,942
    
    
    $
    45,6052006
    
    
    26,314
    
    
    
    2,942
    
    
    
    
    
    
    
    29,2562005
    
    
    6,256
    
    
    
    675
    
    
    
    
    
    
    
    6,931Prior
    
    
    3,575
    
    
    
    1,035
    
    
    
    
    
    
    
    4,610$
    70,703
    
    
    $
    6,757
    
    
    $
    8,942
    
    
    $
    86,402
 At December 31, 2007 and 2006, unevaluated costs of approximately $86.4 million and $50.4
million were excluded from the depletion base. These costs consist primarily of acreage
acquisition, related geological and geophysical costs, prepaid drilling costs and
work-in-progress. The majority of these costs relate to the Companys New Mexico, Utah and
Barnett Shale leasehold positions. The Company transfers these costs to the full cost pool as
wells are drilled or as proven well locations are identified. The timing of these transfers
is highly dependent on the Companys future drilling program.Certain directly identifiable internal costs of property acquisition, exploration, and
development activities are capitalized. Such costs capitalized in 2007, 2006 and 2005 totaled
approximately $1.9 million, $2.3 million and $1.5 million, respectively, including $394,000,
$620,000 and $180,000 of capitalized interest for the year ended December 31, 2007, 2006 and
2005, respectively.Depletion per equivalent unit of production (BOE) was $13.02, $10.88 and $7.61 for 2007, 2006
and 2005, respectively.
 F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The following table reflects costs incurred in oil and natural gas property acquisition,
exploration, and development activities for each of the years in the three year period ended
December 31:
 2007
    
    
    2006
    
    
    2005($ in thousands)Proved property acquisition costs
    
    $
    
    
    
    $
    27,370
    
    
    $
    23,763Unproved property acquisitions costs
    
    
    36,750
    
    
    
    30,058
    
    
    
    11,743Exploration costs
    
    
    55,827
    
    
    
    71,003
    
    
    
    15,455Development costs
    
    
    61,766
    
    
    
    69,285
    
    
    
    26,640$
    154,343
    
    
    $
    197,716
    
    
    $
    77,601
 In November 2005, Parallel purchased producing and undeveloped oil and natural gas properties
in the Harris San Andres Field located in Andrews and Gaines counties, Texas. The net purchase
price was approximately $20.8 million. In January, 2006, Parallel acquired additional interest
in these properties for a net purchase price of approximately $23.4 million, including
adjustments. The 2006 purchase was made utilizing Parallels restricted cash and revolving
credit facility.In March 2006, Parallel purchased additional interests in the Barnett Shale Gas Project
located in Tarrant County, Texas. The additional interests were acquired from five
unaffiliated parties for a total cash purchase price of approximately $5.5 million. In April
2006, Parallel acquired an additional interest in the Barnett Shale Gas Project located in
Tarrant County, Texas from one other unaffiliated third party for approximately $570,000.The following table presents unaudited, pro forma operating results as if these property
purchases had been made at the beginning of each period shown. The pro forma results have been
prepared for comparative purposes only. They are not intended to represent what actual results
would have been if the acquisitions had been made on those dates and these pro forma amounts
are not indicative of future results.
 Twelve Months EndedDecember 31,Pro Forma
    
    Pro Forma2006
    
    2005($ in thousands)Oil and gas revenue
    
    $
    97,500
    
    
    $
    74,270Operating income
    
    $
    40,738
    
    
    $
    38,800Net income available
to common stockholders
    
    $
    26,291
    
    
    $
    (732
    )Net income per common share:Basic
    
    $
    0.73
    
    
    $
    (0.02
    )Diluted
    
    $
    0.72
    
    
    $
    (0.02
    )
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (4)
    
    Other AssetsBelow are the components of other assets as of December 31, 2007 and 2006:
 December 31,2007
    
    
    2006($ in thousands)Bank fees, net of accumulated amortization
    
    $
    1,185
    
    
    $
    1,361Prepaid drilling
    
    
    
    
    
    
    54Fair value of derivative contracts
    
    
    
    
    
    
    3,845Deferred debt offering costs
    
    
    1,575
    
    
    
    Other
    
    
    8
    
    
    
    8$
    2,768
    
    
    $
    5,268
 (5)
    
    Asset Retirement ObligationOn January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement
Obligations". SFAS 143 requires companies to recognize a liability for the present value of
all legal obligations associated with the retirement of tangible long-lived assets and to
capitalize an equal amount as part of the cost of the related oil and natural gas properties.The following table summarizes the Company's asset retirement obligation transactions for the years
ended December 31:
 2007
    
    
    2006
    
    
    2005($ in thousands)Beginning asset retirement obligation
    
    $
    5,063
    
    
    $
    2,495
    
    
    $
    2,132Additions related to new properties
    
    
    257
    
    
    
    406
    
    
    
    370Revisions in estimated cash flows
    
    
    (342
    )
    
    
    1,979
    
    
    
    (3
    )Deletions related to property disposals
    
    
    (365
    )
    
    
    (65
    )
    
    
    (116
    )Accretion expense
    
    
    324
    
    
    
    248
    
    
    
    112Ending asset retirement obligation
    
    $
    4,937
    
    
    $
    5,063
    
    
    $
    2,495
 Accretion expense is recognized as a component of lease operating expense.
 (6)
    
    Derivative InstrumentsThe Company enters into derivative contracts to provide a measure of stability in the cash
flows associated with the Companys oil and natural gas production and interest rate payments
and to manage exposure to commodity price and interest rate risk. The Companys objective is
to lock in a range of oil and natural gas prices and to limit variability in its cash interest
payments. In addition, the Companys revolving credit facility requires the Company to
maintain derivative financial instruments which limit the Companys exposure to fluctuating
commodity prices covering at least 50% of the Companys estimated monthly production of oil
and natural gas extending 24 months into the future.The Company designated all of its interest rate swaps, commodity collars and commodity swaps
entered into in 2002 and 2003 as cash flow hedges (hedges). The effective portion of the
unrealized gain or loss on cash flow hedges is recorded in other comprehensive income (loss)
until the forecasted transaction occurs. During the term of a cash flow hedge, the effective
portion of the change in the fair value of the derivatives is recorded in stockholders equity
as other comprehensive income (loss) and then transferred to oil and natural gas revenues when
the production is sold and interest expense as the interest accrues. Ineffective portions of
 F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 hedges (changes in fair value resulting from changes in realized prices that do not match the
changes in the hedge or reference price) are recognized in other expense as they occur.As of December 31, 2005, the Company had recorded unrealized losses of $9.8 million,
respectively, related to its derivative instruments designated as hedges, which represented
the estimated aggregate fair values of
the Companys open hedge contracts as of that date. All derivative instruments previously
designated as cash flow hedges had been settled prior to December 31, 2006.Derivative contracts not designated as hedges are marked to market at each period end and
the increases or decreases in fair values are recorded to earnings. No derivative instruments
entered into subsequent to June 30, 2004 have been designated as cash flow hedges.The Company is exposed to credit risk in the event of nonperformance by the
counterparties to these contracts, BNP Paribas and Citibank, N.A. The Company periodically
assesses their credit worthiness to mitigate this credit risk.Interest Rate SensitivityUnder the Companys revolving credit facility, the Company may elect an interest rate based
upon the agent banks base lending rate or the LIBOR rate, plus a margin ranging from 2.00% to
2.50% per annum, depending on the Companys borrowing base usage. The interest rate the
Company is required to pay, including the applicable margin, may never be less than 5.00%.
Under the Companys second lien term loan facility, the Company had the option to elect an
interest rate based upon an alternate base rate, or the LIBOR rate, plus a margin of 4.50%.Interest Rate Swaps.The Company has entered into interest rate swaps with BNP Paribas
and Citibank, N.A. (the counterparties) which are intended to have the effect of converting
the variable rate interest payments to be made on the Companys revolving credit agreement to
fixed interest rates for the periods covered by the swaps. Under terms of these swap
contracts, in periods during which the fixed interest rate stated in the swap contract exceeds
the variable rate (which is based on the 90 day LIBOR rate), the Company pays to the
counterparties an amount determined by applying this excess fixed rate to the notional amount
of the contract. In periods when the variable rate exceeds the fixed rate stated in the swap
contracts, the counterparties pay an amount to the Company determined by applying the excess
of the variable rate over the stated fixed rate to the notional amount of the contract.The Company completed a fixed interest rate swap contract with BNP Paribas, based on the
90-day LIBOR rates at the time of the contract. This interest rate swap was treated as a cash
flow hedge as defined by SFAS 133. This interest rate swap was on
$10.0 million of the Company's
variable rate debt for all of 2006. As of December 31, 2006, this contract had expired.The Company has historically employed interest rate swap contracts with BNP Paribas and
Citibank, N.A. exchanging 90-day LIBOR rates for a fixed interest rate. These contracts are
accounted for by mark to market accounting as prescribed
in SFAS 133. The Company has historically
viewed these contracts as additional protection against future interest rate volatility. As a
result of the issuance of senior notes and common stock in 2007, the
Company's indebtedness under the
Revolving Credit Facility has been reduced below the nominal amounts currently covered by
these swap contracts. Under a covenant contained in the Company's Revolving Credit Facility, these swap
contracts for nominal amounts in excess of the Company's outstanding floating rate indebtedness are
considered speculative and are, therefore, not allowed. This covenant
has been waived by the Company's
lenders through the end of 2008.
 F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The table below recaps the nature of these interest rate swaps and the fair market value of
these contracts as of December 31, 2007.
 EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    
    at December 31, 2007($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    $
    (800
    )January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (754
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (441
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (1,995
    )
 Commodity Price Sensitivity
 Collars.Collars are contracts which combine both a put option or floor and a call
option or ceiling. These contracts may or may not involve payment or receipt of cash at
inception, depending on ceiling and floor pricing.A summary of the Companys collar positions at December 31, 2007 is as follows:
 EstimatedBarrles of
    
    NYMEX Oil Prices
    
    Fair MarketPeriod of Time
    
    Oil
    
    Floor
    
    Cap
    
    Value($ in thousands)January 1, 2008 thru December 31, 2008
    
    
    347,700
    
    
    $
    63.42
    
    
    $
    83.86
    
    
    $
    (4,003
    )January 1, 2009 thru December 31, 2009
    
    
    620,500
    
    
    $
    63.53
    
    
    $
    80.21
    
    
    
    (6,846
    )January 1, 2010 thru October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    (5,153
    )M M Btu of
    
    WAHA Gas PricesNatural Gas
    
    Floor
    
    CapJanuary 1, 2008 thru M arch 31, 2008
    
    
    546,000
    
    
    $
    6.50
    
    
    $
    9.50
    
    
    
    87April 1, 2008 thru December 31, 2008
    
    
    1,375,000
    
    
    $
    6.75
    
    
    $
    8.40
    
    
    
    63Total Fair M arket Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (15,852
    )
 Commodity Swaps. Generally, swaps are an agreement to buy or sell a specified
commodity for delivery in the future, at an agreed fixed price. Swap transactions convert a
floating or market price into a fixed price. For any particular swap transaction, the
counterparty is required to make a payment to the Company if the reference price for any
settlement period is less than the swap or fixed price for such contract, and the Company is
required to make a payment to the counterparty if the reference price for any settlement
period is greater than the swap or fixed price for such contract.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Company has entered into oil and natural gas swap contracts with BNP Paribas. A recap for
the period of time, number of barrels, and weighted average swap prices are as follows:
 EstimatedBarrels of
    
    NYMEX Oil
    
    Fair MarketPeriod of Time
    
    Oil
    
    Swap Price
    
    Value($ in thousands)January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    $
    (25,621
    )
 (7)
    
    Equity Investment and Property AcquisitionsPrior to 2006, the Company had three separate partnership investments to construct pipeline
systems which gather natural gas, primarily on its leaseholds in the Barnett Shale area. The
partnership investments included West Fork Pipeline Company I, L.P., West Fork Pipeline
Company II, L.P. and West Fork Pipeline Company V, L.P. These investments were recorded as
equity method investments in the accompanying consolidated balance sheet.In the fourth quarter of 2006, substantially all of the assets of West Fork Pipeline I and
West Fork Pipeline V were sold. The Company received distributions of $16.0 million and
$683,000, respectively, as a result of these asset sales. The total of these distributions,
approximately $16.7 million, is reported in the accompanying statement of cash flows for 2006
in Cash flows from operating activities as Return on investment in pipelines and gathering
systems ventures in the amount of $9.0 million, which represents the excess of distributions
received over the Company's cash investments in these ventures, and in Cash flows from investing
activities as Return of investment in pipelines and gathering systems ventures in the
amount of $7.7 million, representing the return through
distribution of the Company's previous cash
investments in the two joint ventures.The Company has invested $328,000 in West Fork Pipeline II through 2007. West Fork Pipeline II
is currently acquiring the necessary easements and permits to begin transmission of natural
gas.The Company has invested $9.6 million in the Hagerman Gas Gathering System Joint Venture
(Hagerman) to construct pipelines on certain of its leaseholds in New Mexico. In late
September 2006, transmission of natural gas commenced through the first phase of the system.
The Hagerman Gas Gathering System is currently being extended to additional productive areas.
The Company anticipates additional investments in Hagerman during 2008.The Companys investment percentage in each of these ventures was as follows:
 West Fork Pipeline Company II, L.P.
    
    
    23.25848
    %Hagerman Gas Gathering System
    
    
    76.50000
    %
 The Companys investment in Hagerman is accounted for by the equity method because the Company
does not have voting control. All significant actions taken by Hagerman must be approved by
the Company plus one of the two other equity owners. Consequently, the remaining equity
owners can prevent voting control by the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The Companys equity investments for the periods indicated consisted of the following:
 December 31,2007
    
    
    2006($ in thousands)West Fork Pipeline Company II, L.P.
    
    $
    312
    
    
    $
    280Hagerman Gas Gathering System
    
    
    8,326
    
    
    
    6,174$
    8,638
    
    
    $
    6,454
 The Companys earnings from equity investments for the periods indicated were as follows:
 Year Ended December 31,2007
    
    
    2006
    
    
    2005($ in thousands)West Fork Pipeline Company I, L.P.(1)
    
    $
    161
    
    
    $
    9,286
    
    
    $
    (83
    )West Fork Pipeline Company II, L.P.
    
    
    3
    
    
    
    (50
    )
    
    
    (5
    )West Fork Pipeline Company V, L.P.(2)
    
    
    126
    
    
    
    (147
    )
    
    
    (1
    )Hagerman Gas Gathering System
    
    
    (601
    )
    
    
    (496
    )
    
    
    $
    (311
    )
    
    $
    8,593
    
    
    $
    (89
    )
 
 (1)
    
    Included in the Companys earnings for 2007 is its
proportionate share of a final cash disbursement of $161,000
received in the fourth quarter of 2007. Included in the
Companys earnings for 2006 is its proportionate gain in the
sale of the partnership assets of approximately $9.1 million.(2)
    
    Included in the Companys earnings for 2007 is its
proportionate share of a final cash disbursement of $126,000
received in the fourth quarter of 2007. Included in the
Companys earnings for 2006 is its proportionate loss in the
sale of the partnership assets of approximately $90,000. Summarized combined financial information for the Company's equity investments (listed above) is
reported below. Amounts represent 100% of the investees financial information:
 December 31,2007
    
    
    2006($ in thousands)Balance SheetCurrent assets
    
    $
    62
    
    
    $
    94Account receivables  affiliates
    
    
    696
    
    
    
    1,314Total current assets
    
    
    758
    
    
    
    1,408Plan and pipeline costs
    
    
    10,917
    
    
    
    8,351Total assets
    
    $
    11,675
    
    
    $
    9,759Current liabilities
    
    $
    50
    
    
    $
    15Accounts payable  affiliates
    
    
    523
    
    
    
    1,314Total current liabilities
    
    
    573
    
    
    
    1,329Partner capital
    
    
    11,102
    
    
    
    8,430Owners equity
    
    $
    11,675
    
    
    $
    9,759
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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005($ in thousands)Income
StatementRevenues
    
    $
    847
    
    
    $
    2,402
    
    
    $
    627Costs and expenses
    
    
    (1,654
    )
    
    
    (2,597
    )
    
    
    (699
    )Gain/loss on sale of assets
    
    
    782
    
    
    
    23,780
    
    
    
    Net income (loss)
    
    $
    (25
    )
    
    $
    23,585
    
    
    $
    (72
    )
 As of December 31, 2007 and 2006, Hagerman had accounts receivable due from joint venturers of
approximately $0.5 million and $1.3 million, respectively, for operating and pipeline
construction related capital contributions. Parallel advanced funds in these amounts to
Hagerman to meet capital needs until payment on account is received from the other joint
venturers.(8)
    
    Credit ArrangementsIn the past, the Company maintained two separate credit facilities. The Companys Third
Amended and Restated Credit Agreement (or the Revolving Credit Agreement), dated as of
December 23, 2005, with a group of bank lenders provides a revolving line of credit having a
borrowing base limitation of $200.0 million at December 31, 2007. The total amount that the
Company can borrow and have outstanding at any one time is limited to the lesser of $350.0
million or the borrowing base established by the lenders. At December 31, 2007, the principal
amount outstanding under the Companys revolving credit facility was $60.0 million, and
$445,000 was reserved for the Companys letters of credit. The second credit facility (or the
Second Lien Agreement) was a five year term loan facility provided to the Company under a
Second Lien Term Loan Agreement, dated November 15, 2005, with a group of banks and other
lenders. The Second Lien Term Loan Agreement was paid off and terminated on July 31, 2007,
with the Companys payment to the lenders of $50.2 million, including interest. This payment
was made with proceeds from the Companys sale of unsecured senior notes, or senior notes.On July 31, 2007, the Company completed a private offering of unsecured senior notes in the
principal amount of $150.0 million.The credit facilities have varying interest rates and consist of the following banks base
rate and LIBOR tranches at December 31:
 2007
    
    
    2006($ in thousands)Revolving Credit Facility note payable to banks,Agent banks base lending rate of 8.25%
    
    $
    
    
    
    $
    2,000Libor Tranche at 6.84% and 7.61%
    
    
    60,000
    
    
    
    113,000Second Lien Term Loan payable to banks,Libor Tranche at 9.875%
    
    
    
    
    
    
    50,000Senior notes (principal amount $150,000 in 2007)
rate of 10.25%
    
    
    145,383
    
    
    
    Total notes payable to banks
    
    $
    205,383
    
    
    $
    165,000
 Revolving Credit FacilityThe Revolving Credit Agreement provides for a credit facility that allows the Company to
borrow, repay and reborrow amounts available under the revolving credit facility. The amount
of the borrowing base is based
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 primarily upon the estimated value of the Companys oil and
natural gas reserves. The borrowing base amount is redetermined by the lenders semi-annually
on or about April 1 and October 1 of each year or at
other times required by the lenders or at the Companys request. If, as a result of the
lenders redetermination of the borrowing base, the outstanding principal amount of the
Companys loan exceeds the borrowing base, it must either provide additional collateral to the
lenders or repay the principal of the revolving credit facility in an amount equal to the
excess. Except for the principal payments that may be required because of the Companys
outstanding loans being in excess of the borrowing base, interest only is payable monthly.Loans made to the Company under this revolving credit facility bear interest at the banks
base rate or the LIBOR rate, at the Companys election. Generally, the banks base rate is
equal to the prime rate published in the Wall Street Journal.The LIBOR rate is generally equal to the sum of (a) the rate designated as British Bankers
Association Interest Settlement Rates and offered on one, two, three, six or twelve month
interest periods for deposits of $1.0 million, and (b) a margin ranging from 2.00% to 2.50%,
depending upon the outstanding principal amount of the loans. If the principal amount
outstanding is equal to or greater than 75% of the borrowing base, the margin is 2.50%. If the
principal amount outstanding is equal to or greater than 50%, but less than 75% of the
borrowing base, the margin is 2.25%. If the principal amount outstanding is less than 50% of
the borrowing base, the margin is 2.00%.The interest rate the Company is required to pay on its borrowings, including the applicable
margin, may never be less than 5.00%. At December 31, 2007, the Companys Libor interest rate,
plus margin, was 6.84% on $60.0 million.In the case of base rate loans, interest is payable on the last day of each month. In the case
of LIBOR loans, interest is payable on the last day of each applicable interest period.If the total outstanding borrowings under the revolving credit facility are less than the
borrowing base, an unused commitment fee is required to be paid to the lenders. The amount of
the fee is .25% of the daily average of the unadvanced amount of the borrowing base. The fee
is payable quarterly.If the borrowing base is increased, the Company is required to pay a fee of .375% on the
amount of any increase in the borrowing base.The Revolving Credit Agreement contains various restrictive covenants, including (i)
maintenance of a minimum current ratio, (ii) maintenance of a maximum ratio of funded
indebtedness to earnings before interest, income taxes, depreciation, depletion and
amortization, (iii) maintenance of a minimum net worth, (iv) prohibition of payment of
dividends and (v) restrictions on incurrence of additional debt. The Company has pledged
substantially all of its producing oil and natural gas properties to secure the repayment of
its indebtedness under the Revolving Credit Agreement.As of December 31, 2007 the Company was in compliance
with all of the covenants in its Revolving
Credit Agreement.All outstanding principal under the revolving credit facility is due and payable on October
31, 2010. The maturity date of the Companys outstanding loans may be accelerated by the
lenders upon the occurrence of an event of default under the Revolving Credit Agreement.Second Lien Term Loan FacilityUntil July 31, 2007, the Second Lien Agreement provided a $50.0 million term loan to the
Company. Loans made to the Company under this credit facility bore interest at an alternate
base rate or the LIBO rate, at the Companys election. The alternate base rate was the greater
of (a) the prime rate in effect on such day and (b) the Federal Funds Effective Rate in
effect on such day plus 1/2 of 1%, plus a margin of 3.50% per annum.The LIBO rate was generally equal to the sum of (a) a designated rate appearing in the Dow
Jones Market Service for the applicable interest periods offered in one, two, three or six
month periods and (b) an applicable margin rate per annum equal to 4.50%.
 F-22




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 In the case of alternate base rate loans, interest was payable the last day of each March,
June, September and December. In the case of LIBO loans, interest was payable the last day of
the tranche period not to exceed a three month period.Upon completion of the Companys senior notes offering, the Company paid off and terminated
this facility with $50.2 million of the net proceeds from the offering. As a result the
Company charged to earnings $760,000 of previously capitalized debt issuance costs.Senior NotesOn July 31, 2007, the Company completed a private offering of unsecured senior notes
(the senior notes) in the principal amount of $150.0 million. The senior notes mature
on August 1, 2014 and bear interest at 10.25% which is payable semi-annually beginning on
February 1, 2008. Prior to August 1, 2010, the Company may redeem up to 35% of the senior
notes for a price equal to 110.250% of the original principal amount of the senior notes
with the proceeds of certain equity offerings. On or after August 1, 2011 the Company may
redeem all or some of the senior notes at a redemption price that will decrease from
105.125% of the principal amount of the senior notes to 100% of the principal amount on
August 1, 2013. In addition, prior to August 1, 2011, the Company may redeem some or all
of the senior notes at a redemption price equal to 100% of the principal amount of the
senior notes to be redeemed, plus a make-whole premium, plus any accrued and unpaid
interest. Generally, the make-whole premium is an amount equal to the greater of (a)
1% of the principal amount of the senior notes being redeemed and (b) the excess of the
present value of the redemption price of such notes as of August 1, 2011 plus all
required interest payments due through August 1, 2011 (computed at a discount rate equal
to a specified U.S. Treasury Rate plus 50 basis points), over the principal amount of
the senior notes being redeemed.The indenture governing the senior notes restricts the Companys ability to: (i) borrow money;
(ii) issue redeemable and preferred stock; (iii) pay distributions or dividends; (iv) make
investments; (v) create liens without securing the senior notes; (vi) enter into agreements
that restrict dividends from subsidiaries; (vii) sell certain assets or merge with or into
other companies; (viii) enter into transactions with affiliates; (ix) guarantee indebtedness;
and (x) enter into new lines of business.The Company agreed, pursuant to a Registration Rights Agreement with the initial purchasers of
the senior notes, to use its commercially reasonable efforts to prepare and file with the
Securities and Exchange Commission, within 180 days after July 31, 2007, a registration
statement with respect to a registered offer to exchange freely tradable notes having
substantially identical terms as the senior notes and to use its reasonable best efforts to
cause the registration statement to be declared effective within 210 days after July 31, 2007.
The registration statement became effective on January 29, 2008. If the Company fails to meet
certain other obligations under the Registration Rights Agreement, the Company may be required
to pay additional interest to holders of the senior notes. The rate of additional interest
will be .25% per year for the first 90-day period immediately following a determination that
the provisions of the Registration Rights Agreement have not been fulfilled, with the rate
increasing by an additional .25% for each subsequent 90 day period up to a maximum additional
interest rate of 1.0% per year. Under this agreement, the maximum additional interest that the
Company could be required to pay over the life of the senior notes is approximately $9.4
million.
 F-23




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 (9)
    
    Income TaxesThe Companys income tax provision (benefit) consists of the following:
 Years ended December 31,2007
    
    
    2006
    
    
    2005($ in thousands)Deferred income tax (benefit) expense
    
    $
    (4,215
    )
    
    $
    13,894
    
    
    $
    (1,676
    )Deferred tax benefits of stock option exercises credited to
additional paid in capital
    
    
    816
    
    
    
    
    
    
    
    Deferred income tax (benefit) expense related to
loss/gain on derivatives in other comprehensive loss
    
    
    
    
    
    
    3,318
    
    
    
    515Current state tax
    
    
    80
    
    
    
    
    
    
    
    Total income tax provision (benefit)
    
    $
    (3,319
    )
    
    $
    17,212
    
    
    $
    (1,161
    )
 Income tax (benefit) expense differs from the amount computed at the federal statutory rate as
follows:
 Year ended December 31,2007
    
    
    2006
    
    
    2005($ in thousands)Income tax (benefit) expense at statutory rate
    
    $
    (2,712
    )
    
    $
    13,617
    
    
    $
    (1,110
    )Statutory depletion
    
    
    (185
    )
    
    
    37
    
    
    
    (443
    )State tax benefit, net of federal tax effect
    
    
    (592
    )
    
    
    101
    
    
    
    16Nondeductible expenses and other
    
    
    170
    
    
    
    139
    
    
    
    (139
    )Income tax (benefit) expense
    
    $
    (3,319
    )
    
    $
    13,894
    
    
    $
    (1,676
    )
 Prior to 2007, the Company had not recognized the tax
benefits of state net operating loss carryovers due to uncertainty
about their ultimate realization. The Texas Margin Tax, a revision of
Texas state tax laws, applied to earnings for the first time in 2007.
In June 2007, the state of Texas enacted changes to the Texas Margin
Tax legislation originally enacted in 2006, and issued final rules
related to that legislation in December 2007. The utilization of a
credit for prior taxable losses contained in this legislation is
dependent on an election to be made by the taxpayer. Based on the
Companys tax planning strategies and the determination (made in
December 2007) that the election to utilize the credit would
be beneficial to the Companys state and federal tax positions, the
Company decided to make the appropriate election by May 2008, as
required. As a result, the Company has recorded a net state tax
benefit of $592,000. This net state benefit is composed of
(i) current tax expense of $80,000, (ii) deferred tax
expense of $984,000 associated with changes in the state tax rate,
(iii) $156,000 of state tax benefit related to changes in
deferred state tax liabilities, (iv) benefit from the
recognition of business loss credits of approximately
$1.8 million, and (v) $305,000 of federal tax expense
associated with the net state tax benefit.
 F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liability at December 31 are as follows:
 2007
    
    
    2006($ in thousands)Current:Deferred tax assets:Fair market value losses on derivatives expected
to be settled within one year
    
    $
    10,293
    
    
    $
    4,340Noncurrent:Deferred tax assets:Federal
operating loss carryforwards
    
    $
    15,081
    
    
    $
    16,942State
operating loss credit carryforwards
    
    
    1,805
    
    
    
    Statutory depletion carryforwards
    
    
    2,609
    
    
    
    2,424Alternative
minimum tax credit carryforwards
    
    
    157
    
    
    
    157Fair market value losses on derivatives not expected
to be settled within one year
    
    
    5,275
    
    
    
    4,102Asset retirement obligations
    
    
    350
    
    
    
    233Other
    
    
    73
    
    
    
    26Total noncurrent deferred tax assets
    
    
    25,350
    
    
    
    23,884Deferred tax liabilities:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion
    
    
    (50,368
    )
    
    
    (48,019
    )Federal
impact of state operating loss credit carryforwards
    
    
    (614
    )
    
    
    Partnership investments
    
    
    (413
    )
    
    
    (172
    )Total deferred tax liabilities
    
    
    (51,395
    )
    
    
    (48,191
    )Net noncurrent deferred income tax liability
    
    $
    (26,045
    )
    
    $
    (24,307
    )
 As of December 31, 2007, the Company had net operating loss carry forwards for regular tax and
alternative minimum taxable income (AMT) purposes available to reduce future taxable income.
These carry forwards expire as follows:
 Net operating
    
    
    AMTloss
    
    
    operating loss($ in thousands)2019
    
    $
    2,566
    
    
    $
    2,9182021
    
    
    4,576
    
    
    
    4,4982022
    
    
    44
    
    
    
    442023
    
    
    8
    
    
    
    3322024
    
    
    3,718
    
    
    
    3,8062025
    
    
    6,258
    
    
    
    5,0082027
    
    
    27,187
    
    
    
    25,015$
    44,357
    
    
    $
    41,621
 The Company continually assesses its ability to use all of
its federal net operating loss
carryforwards and state operating loss credit carryforwards that result from substantial income tax deductions and prior year losses. The
Company considers future federal and state taxable income in making such assessments. If the Company concludes
that it is more likely than not that some portion or all of the deferred tax assets will not
 F-25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 be realized under accounting standards, they will be reduced by a valuation
allowance. The Company believes that it is more likely than not that it will utilize all of
these federal net operating loss carryforwards and state operating
loss credit carryforwards in connection with federal and state income tax generated
in the future.
 As of December 31, 2007, the Company had approximately $157,000 of AMT credit carryforwards that
have no expiration date.(10)
    
    Equity TransactionsSale of Equity SecuritiesOn August 16, 2006, the Company sold 2,500,000 shares of its common stock, $.01 par value per
share, pursuant to a public offering at a price of $25.25 per share. Gross cash proceeds were
$63.1 million, and net proceeds were approximately $60.3 million. The proceeds were used
for general corporate purposes, including debt repayment and the acceleration of Parallels
drilling and completion operations in certain core areas such as the Barnett Shale natural
gas, New Mexico Wolfcamp natural gas and Permian Basin west Texas oil properties.On December 6, 2007, the Company sold 3,000,000 shares of its common stock in an underwritten
public offering at a price of $18.50. The Company used the net proceeds for general
corporate purposes and for conducting exploitation, development and acquisition activities in
certain core areas such as the Companys Permian Basin properties and its Barnett Shale gas
project.(11)
    
    Stock Compensation, Warrants and RightsThe Company awards both incentive stock options and nonqualified stock options to selected key
employees, officers, and directors. The options are awarded at an exercise price equal to the
closing price of the Companys common stock on the date of grant. These options vest over a
period of two to ten years with a ten-year exercise period. As of December 31, 2007, options
expire beginning in 2008 and extending through 2017.
 (a)
    
    Stock OptionsA summary of the Companys employee stock options as of December 31, 2007, 2006 and 2005,
and changes during the years ended on those dates is presented below:
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2007
    
    
    December 31, 2006
    
    
    December 31, 2005Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weightedshares
    
    
    average price
    
    
    shares
    
    
    average price
    
    
    shares
    
    
    average price(in thousands)
    
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    
    (in thousands)Stock options:Outstanding at
beginning of year
    
    
    1,199
    
    
    $
    5.40
    
    
    
    1,405
    
    
    $
    5.22
    
    
    
    1,919
    
    
    $
    3.71Options granted
    
    
    18
    
    
    
    22.89
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    12.27Options exercised
    
    
    (619
    )
    
    
    3.98
    
    
    
    (176
    )
    
    
    4.35
    
    
    
    (714
    )
    
    
    3.15Options cancelled
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    3.09
    
    
    
    
    
    
    
    Options forfeited
    
    
    (40
    )
    
    
    12.27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at
end of year
    
    
    558
    
    
    $
    7.03
    
    
    
    1,199
    
    
    $
    5.40
    
    
    
    1,405
    
    
    $
    5.22Exercisable at
end of year
    
    
    420
    
    
    $
    5.39
    
    
    
    1,001
    
    
    $
    4.32
    
    
    
    1,160
    
    
    $
    4.01Weighted average
fair value of options
granted during the year
    
    
    
    
    
    $
    12.45
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    7.11
 F-26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The following table summarizes information about the Companys employee stock options
outstanding and exercisable at December 31, 2007:
 Average
    
    
    IntrinsicRemaining Life
    
    
    Value(in thousands)Stock options outstanding
as of December 31, 2007
    
    
    5.1
    
    
    $
    5,909Currently exercisable
as of December 31, 2007
    
    
    4.4
    
    
    $
    5,139
 For the twelve months ended December 31, 2007, 2006 and 2005, Parallel recognized
compensation expense of approximately $247,000, $531,000 and $278,000 with tax benefits of
approximately $84,000, $181,000 and $95,000, respectively, associated with its stock
option grants.The following table presents the future stock-based compensation expense expected to be
recognized over the vesting period:
 ($ in thousands)2008
    
    $
    2282009
    
    
    932010
    
    
    29Total
    
    $
    350
 Nonvested options were 137,500 at December 31, 2007. During the twelve months ended
December 31, 2007, 618,500 options were exercised, options to purchase 17,500 shares of
common stock were granted to one individual, options to purchase 40,000 shares were
forfeited and no options expired. During 2006 the Company settled 30,000 options for
approximately $511,000.The fair value of each option award is estimated on the date of grant. The fair value of
stock options granted prior to and remaining outstanding at December 31, 2007 and that had
option shares subject to future vesting at that date was determined using the
Black-Scholes option valuation method and the assumptions noted in the following table.
Expected volatilities are based on historical volatility of the common stock. The
expected term of the options granted used in the model represent the period of time that
options granted are expected to be outstanding.
 2007
    
    2005
    
    2001Expected volatility
    
    
    52.52
    %
    
    
    54.20
    %
    
    
    57.95
    %Expected dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Expected term (in years)
    
    
    6
    
    
    
    7
    
    
    
    8Risk free rate
    
    
    4.89
    %
    
    
    4.20
    %
    
    
    5.05
    %
 F-27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 ($ in thousands)Intrinsic Value of Options Exercised Twelve Months Ended December 31, 2007
    
    $
    10,071Intrinsic Value of Options Exercised Twelve Months Ended December 31, 2006
    
    $
    2,855Intrinsic Value of Options Exercised Twelve Months Ended December 31, 2005
    
    $
    9,169Fair Market Value of Options Granted Twelve Months Ended December 31, 2007
    
    $
    218Fair Market Value of Options Granted Twelve Months Ended December 31, 2006
    
    $
    Fair Market Value of Options Granted Twelve Months Ended December 31, 2005
    
    $
    1,423
 There were 17,500 stock options granted for the twelve months ended December 31, 2007 with
a fair market value of $218,000. For the twelve months ended December 31, 2005 there were
200,000 options granted with a fair market value of $1.4 million.(b)
    
    Stock WarrantsThe Company has 300,030 perpetual warrants outstanding at December 31, 2007, 2006, and
2005, which were issued as part of the Companys initial public offering in 1980. Each
warrant allows the holder to buy one share of common stock for $6.00. The warrants are
exercisable for a 30 day period commencing on the date a registration statement covering
exercise is declared effective. The warrants contain antidilution provisions.The Company also had an additional 136,708 warrants outstanding at December 31, 2005
issued as partial payment for services rendered for financial and investment advice in
2001. The warrants had a term of five years from date of issuance and a vesting period of
one year. The warrants had an exercise price of $2.95 per share and contain a provision
for cashless exercise. The expense related to these warrants in the amount of $99,000 was
recorded in other expenses in 2001 based on the estimated fair value on the date of grant
using the Black-Scholes option pricing model. As of December 31, 2006 these warrants had
been fully exercised.The Company had 100,000 warrants outstanding at December 31, 2006, 2005 and 2004, which
were issued as partial payment for services rendered for financial and investment advice
for the Companys private placement offering in December, 2003. The warrants had a term of
five years from date of issuance and vesting period of one year. The warrants had an
exercise price of $3.98 per share and contained a provision for cashless exercise. The
fair value related to these warrants in the amount of $157,000 was recorded in other
expenses in 2003 based on the estimated fair value on the date of grant using the
Black-Scholes option pricing model. The holders of these warrants elected to exercise
during 2007 through cashless exercise as allowed under the terms of the warrants. As a
result, 82,734 common shares were issued to the warrant holders.(c)
    
    Stock RightsOn October 5, 2000, the board of directors adopted a Stockholder Rights Plan (the Plan)
and declared a dividend of one Stock Right for each outstanding share of the Companys
common stock. Generally, the Plan is designed to protect the Company from unfair or
coercive takeover attempts, prevent a potential acquiror from gaining control of the
Company without fairly compensating all of the Companys stockholders, and encourage third
parties that may have an interest in acquiring the Company to negotiate with the Companys
board of directors. In particular, the Plan is intended to (i) reduce the risk of coercive
or partial tender offers that may not offer fair value to all stockholders; (ii) deter
purchasers who through open market or private purchase may attempt to achieve a position
of substantial influence or control over the Company without paying a fair control premium
to selling or remaining stockholders; and (iii) preserve the board of directors
bargaining power and flexibility to deal with acquirors and otherwise to seek to maximize
value for all stockholders. The Plan is intended to achieve these goals by confronting a
potential acquiror of the Companys common stock with the possibility that the Company or
its stock-
 F-28




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 holders will be able to substantially dilute the acquirors equity interest by
using the Stock Rights to acquire additional Company common stock, or in certain cases
stock of the acquiror, at a 50% discount.If a person acquires 15% or more of the Companys common stock or a tender offer or
exchange offer is made for 15% or more of the common stock, each Stock Right will entitle
the holder to purchase from the Company one one-thousandth of a share of Series A
Preferred Stock, par value $0.10 per share, at an exercise price of $26.00 per one
one-thousandth of a share, subject to adjustment.Initially, the Stock Rights attach to all common stock certificates representing shares
then outstanding, and no separate Stock Rights certificates will be distributed. The Stock
Rights separate from the common stock upon the earlier of (1) ten business days following
a public announcement that a person or group of affiliated or associated persons has
acquired or obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock or (2) ten business days (or such later date as the
board of directors shall determine) following the commencement of a tender or exchange
offer that would result in a person or group beneficially owning 15% or more of such
outstanding shares of common stock. The date the Stock Rights separate is referred to as
the distribution date.Under certain circumstances the Stock Rights entitle the holders to buy shares of the
acquirers common stock at a 50% discount. In the event that, at any time after a person
has acquired 15% or more of the Companys common stock, (1) the Company enters into a
merger or other business combination transaction in which the Company is not the surviving
corporation; (2) the Company is the surviving corporation in a transaction in which all or
part of the common stock is exchanged for cash, property or securities of any other
person; or, (3) more than 50% of the assets, cash flow or earning power of the Company is
sold, each right holder will have the option to buy for the purchase price stock of the
acquiring company having a value equal to two times the purchase price of the Stock Right.The Stock Rights are not exercisable until the distribution date and will expire at the
close of business on October 5, 2010, unless earlier redeemed by the Company for $0.001
per Stock Right.At issuance, the Stock Rights had no determinable value and, therefore, no accounting
entry was required. The Stock Rights have not had, nor does the Company anticipate that the Stock
Rights will have, an effect on its results of operations.(d)
    
    Non-Employee Director Stock Grant PlanEffective July 1, 2004, the Company began paying an annual retainer fee to each
non-employee Director in the form of shares of the Companys common stock. Under the 2004
Non-Employee Director Stock Grant Plan, each non-employee Director is entitled to receive
an annual retainer fee in the form of shares of common stock having a value of $25,000.
The shares of stock are automatically granted on the first day of July in each year. The
actual number of shares received is determined by dividing $25,000 by the average daily
closing price of the common stock on the Nasdaq Stock Market for the ten consecutive
trading days commencing fifteen trading days before the first day of July of each year. On
July 1, 2007 and in accordance with the terms of the plan, the Company issued a total of
4,400 shares of common stock to four non-employee Directors as follows: Jeffrey G. Shrader
  1,100 shares; Edward A. Nash  1,100 shares; Martin B. Oring  1,100 shares; and Ray
M. Poage  1,100 shares. On July 1, 2006 and in accordance with the terms of the plan,
the Company issued a total of 4,696 shares of common stock to four non-employee Directors
as follows: Jeffrey G. Shrader  1,174 shares; Dewayne E. Chitwood  1,174 shares;
Martin B. Oring  1,174 shares; and Ray M. Poage  1,174 shares. On July 1, 2005, and in
accordance with the terms of the plan, the Company issued a total of 11,596 shares of
common stock to four non-employee Directors as follows: Jeffrey G. Shrader  2,899
shares; Dewayne E. Chitwood  2,899 shares; Martin B. Oring  2,899 shares; and Ray M.
Poage  2,899 shares. The Company has 74,420 remaining shares of common stock available
to issue to directors under this arrangement.
 (12)
    
    Related Party TransactionsAn entity owned by Thomas R. Cambridge, the Companys former Chairman of the Board of
Directors, is the owner and acted as the Companys agent in performing the routine day to day
operations on two wells. In 2007, 2006 and 2005 the Company was billed approximately $27,000,
$23,000 and $20,000, respectively, for
 F-29




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 the Companys pro rata share of lease operating and
drilling expenses and received approximately $65,000, $176,000 and $161,000 in 2007, 2006 and
2005 respectively, in oil and natural gas revenues related to these wells. These two wells
were acquired in 1984.An entity, of which Mr. Cambridge is the President, owned interests in certain wells that are
administered by the Company. During 2007 the Company charged approximately $1,300 for lease
operating expenses and paid approximately $4,600 in oil and natural gas revenues related to
these wells. In June 2007, these wells were sold by the entity and the Company to an
unaffiliated third party and the Company distributed approximately $10,000 to the entity, its
pro rata share of the sales proceeds.Dewayne E. Chitwood, a former Director of the Company, also serves as director of an entity
which owned 110,000 shares of preferred stock of the Company. In addition, a Foundation, where
Mr. Chitwood is the Chairman of the board of directors of the Foundation; and a Trust where he
is Trustee, owned a total of 55,000 shares each of preferred stock of the Company. These shares of preferred stock of the
Company were purchased in 1998 at a price of $10 per share on the same terms as all other
unaffiliated purchasers. On June 6, 2005 the 110,000 and the 55,000 shares of preferred stock
were converted to 314,285 and 157,142 shares of common stock, respectively.An entity, in which Mr. Chitwood is an officer of the managing general partner, owned
interests in certain wells that are operated by the Company. During 2005 the Company charged
approximately $4,000 for lease operating expenses and paid approximately $8,000 in oil and
natural gas revenues related to these wells. In 2005 the Company paid to the entity
approximately $140,000 in payment of net proceeds attributable to its pro rata share from the
sale of the interests.In December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, Parallels
Chief Operating Officer, received a 3% working interest from an unaffiliated third party in
the Diamond M Project in Scurry County, Texas for services rendered in connection with
assembling the project. In August, 2002, shortly after his employment with Parallel, and due
to the personal financial exposure in the Diamond M Project and to prevent the interest from
being acquired by a third party, Mr. Tiffin assigned two-thirds of his ownership interest in
the project to Parallel at no cost, leaving him with a 1% working interest. Parallel acquired
its initial interest in the Diamond M Project in December, 2001. During 2007, the Company
charged approximately $45,000 for capital expenditures and lease operating expenses and paid
approximately $65,000 in oil and natural gas revenues related to this project. In addition,
$5,000 and $8,000 of this balance was for outstanding joint interest billings to an executive
officer as of December 31, 2007 and 2006. These receivables were collected within one month
of billing.As of December 31, 2007 and 2006, the Company had accounts receivable of $4.0 million and $3.3
million, respectively, from affiliates. Joint interest receivables from a joint interest
owner (who is also a joint venture partner in Hagerman) represented $3.4 million and $2.0
million of these balances at the December 31, 2007 and 2006, respectively.The remaining receivables from affiliates represent Parallels advance to Hagerman as described in Note 7.(13)
    
    Statements of Cash FlowsIn 2006, $40,000 was paid for estimated alternative minimum tax. No income taxes were paid in
2007 and 2005.The Company made interest payments of approximately $13.1 million, $12.5 million, and
$5.4 million in 2007, 2006 and 2005, respectively.At December 31, 2007, 2006 and 2005, there were $11.0 million, $8.5 million and $2.5 million,
respectively, of property additions accrued in accounts payable.
 F-30




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (14)
    
    Major CustomersThe following purchasers accounted for 10% or more of the Companys oil and natural gas sales
for the years ended December 31:
 2007
    
    2006
    
    2005Allegro Investments, Inc.
    
    
    (1
    )
    
    
    (1
    )
    
    
    14
    %Conoco, Inc.
    
    
    21
    %
    
    
    20
    %
    
    
    12
    %Texland Petroleum, Inc.
    
    
    30
    %
    
    
    30
    %
    
    
    40
    %Tri-C Resources, Inc.
    
    
    (1
    )
    
    
    12
    %
    
    
    (1
    )Dale Op erating Company
    
    
    (1
    )
    
    
    10
    %
    
    
    (1
    )Chesapeake Op erating, Inc.
    
    
    12
    %
    
    
    (1
    )
    
    
    (1
    )
 
 (1)
    
    Less than 10%. (15)
    
    Commitments and ContingenciesOn May 21, 2007, the Company received a Notice of Proposed Adjustment, or the Notice from
the Internal Revenue Service, or the Service, advising the Company of a proposed adjustment
to its calculations of federal income tax resulting in a proposed alternative minimum tax
liability in the aggregate amount of approximately $2.0 million for the years 2004 and 2005.
After advising the Service that the Company intended to appeal the Notice, the Company
received correspondence from the Service on July 10, 2007 stating that the issue remains in
development pending receipt of additional documents requested and any proposed tax adjustment
would not be made until after reviewing the documents requested. On
November 5, 2007, the Company
received an examination report related to this matter which reduces the amount of proposed
adjustment to approximately $1.1 million, which includes interest. On December 21, 2007, the
Company filed an appeal with the Service protesting the proposed adjustment of $1.1 million.
The Company intends to vigorously contest the adjustment proposed by the Service and believes
that it will ultimately prevail in its position. The Company would expect the recording of any
adjustment, if later determined to be required, to entail recognition of a deferred tax asset
and a corresponding current liability for federal income taxes payable. Such an adjustment
would generally not result in a charge to earnings except for amounts which might be assessed
for penalties or interest on underpayment of current tax for the Companys fiscal years ended
December 31, 2004 and 2005. If a liability for penalties or interest were determined to be
probable, the amounts of such penalties and/or interest would be charged to earnings. The
Company believes that the effects of this matter will not have a material adverse effect on
its financial position or results of operations for any fiscal year, but could have a material
adverse effect on its results of operations for the fiscal quarter in which it actually incurs
or establishes a liability for penalties or interest.On January 1, 2005 the Company established a 401(k) Plan and Trust for eligible employees.
During 2007, 2006 and 2005, the Company contributed an aggregate of approximately $274 000,
$240,000 and $168,000, respectively, to the 401(k) Plan.The Company leases office space under a non-cancelable operating lease expiring in 2010.
Future annual payments under this operating lease are approximately $200,000, $200,000 and
$33,000 for the years ending December 31, 2008 through February 28, 2010, respectively. Rental
expense under the Companys current lease totaled approximately $200,000, $194,000 and
$162,000 for the years ended December 31, 2007, 2006, and 2005, respectively.The Company has three field offices and storage facilities. These facilities are located in
Andrews and Snyder, Texas and Hagerman, New Mexico. The Snyder office lease expires upon the
cessation of production from the Diamond M area wells. Future annual payments under this
lease agreement total approximately $14,000 for 2008 through 2012. Rental expense totaled
approximately $23,000, $23,000 and $23,000 for the years ended December 31, 2007, 2006 and
2005, respectively.
 F-31




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Company has an Incentive and Retention Plan which provides for the payment to eligible
officers and employees of a one time performance bonus and retention payment upon the
occurrence of a change of control as defined in the Plan. Because of the uncertainty of the
occurrence of a change of control or corporate transaction within the meaning of the plan, the amount of
these bonuses is undeterminable. Although the amount of the bonus is undeterminable at this time, if the bonus was calculated
using the December 31, 2007 stock price of $17.63 per share, the amount would be approximately
$18.6 million.In January 2006, the Company adopted a Non-officer Employee Severance Plan for the purpose of
providing the Companys non-officer employees with an incentive to remain employed with the
Company. This Plan provides for a one-time severance payment to the non-officer employees
equal to one year of their then current base salary upon the occurrence of a change of
control within the meaning of the Plan. Based on the aggregate non-officer base salaries in
effect as of December 31, 2007, the total severance amount payable under the plan would have
been approximately $3.8 million.(16)
    
    Supplemental Oil and Natural Gas Reserve Data (Unaudited)The Company has presented the reserve estimates utilizing an oil price of $89.93, $54.67 and
$56.09 per Bbl and a natural gas price of $6.77, $5.00 and $8.68 per Mcf as of December 31,
2007, 2006 and 2005, respectively. Information for oil is presented in barrels (Bbl) and for
natural gas in thousands of cubic feet (Mcf).The estimates of the Companys proved oil and natural gas reserves and related future net cash
flows that are presented in the following tables are based upon estimates made by independent
petroleum engineering consultants.The Companys reserve information was prepared by independent petroleum engineering
consultants as of December 31, 2007, 2006 and 2005. The Company cautions that there are many
inherent uncertainties in estimating proved reserve quantities, projecting future production
rates, and timing of development expenditures. Accordingly, these estimates are likely to
change as future information becomes available. Proved oil and natural gas reserves are the
estimated quantities of crude oil and natural gas which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved developed reserves are those reserves
expected to be recovered through existing wells, with existing equipment and operating
methods.
 F-32




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 A summary of changes in reserve balances is presented below:
 Oil and Condensate (Bbls)For the Year Ended December 31,2007
    
    2006
    
    2005(In thousands)Proved developed and undeveloped reservesBeginning of year
    
    
    28,721
    
    
    
    21,192
    
    
    
    18,916Purchase of oil and natural gas properties
    
    
    
    
    
    
    3,270
    
    
    
    2,299Sales of oil and natural gas properties
    
    
    (75
    )
    
    
    
    
    
    
    (14
    )Extensions and discoveries
    
    
    1,146
    
    
    
    8,182
    
    
    
    944Revisions of previous estimates
    
    
    (307
    )
    
    
    (2,786
    )
    
    
    (30
    )Production
    
    
    (1,051
    )
    
    
    (1,137
    )
    
    
    (923
    )End of Year
    
    
    28,434
    
    
    
    28,721
    
    
    
    21,192Proved developed reserves at year end
    
    
    14,378
    
    
    
    14,932
    
    
    
    13,614
 Natural Gas (MCF)For the Year Ended December 31,2007
    
    2006
    
    2005(In thousands)Proved developed and undeveloped reservesBeginning of year
    
    
    58,896
    
    
    
    25,237
    
    
    
    16,825Purchase of oil and natural gas properties
    
    
    
    
    
    
    4,355
    
    
    
    456Sales of oil and natural gas properties
    
    
    (3,105
    )
    
    
    
    
    
    
    (205
    )Extensions and discoveries
    
    
    25,905
    
    
    
    38,159
    
    
    
    13,106Revisions of previous estimates
    
    
    (17,040
    )
    
    
    (2,316
    )
    
    
    (1,353
    )Production
    
    
    (7,422
    )
    
    
    (6,539
    )
    
    
    (3,592
    )End of Year
    
    
    57,234
    
    
    
    58,896
    
    
    
    25,237Proved developed reserves at year end
    
    
    41,556
    
    
    
    28,741
    
    
    
    17,246
 The Company made significant acquisitions in 2005 and 2006 that resulted in additions to its
estimated proved reserves for those years. In 2005, the Company purchased producing
properties in the Harris San Andres Field located in Andrews and Gaines counties. In 2006,
the Company acquired additional interests in these properties. Also in 2006, the Company
purchased additional interests in the Barnett Shale Gas Project located in Tarrant County,
Texas.The Companys drilling programs over the last three years have resulted in significant natural
gas discoveries and extensions in the Companys Barnett Shale resource gas project and the
Companys New Mexico projects. Over this same time period, the Companys drilling in the
Carm-Ann, Harris and Diamond M fields of west Texas resulted in significant increases in
extensions and discoveries in the Companys oil reserves.The Company experienced downward revisions in estimated proved natural gas reserves in 2007.
This was the result of two factors. First, the Company changed its
method of recognizing proved undeveloped reserves related to its horizontal drilling gas
projects in March 2007. Under this new method, which the Company believes conforms with
regulatory requirements applicable to horizontal well reserve booking practices for publicly
owned exploration and production companies, estimates of proved undeveloped reserves from
horizontal wells are limited to two parallel offset wells to a productive horizontal well,
unless productive continuity is demonstrated through pressure communication between wells more
than an offset location away and on either side of a future horizontal well. Secondly, the
Company adjusted its reserve estimates on certain New Mexico Wolfcamp and Barnett Shale wells
where performance did not meet our 2007 production estimates.The following is a standardized measure of the discounted net future cash flows and changes
applicable to proved oil and natural gas reserves required by Statement of Financial
Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities(SFAS No. 69). The future cash flows are based on
estimated oil and natural gas reserves utilizing prices and costs in effect as of year end,
discounted at 10% per year and assuming continuation of existing economic conditions.
 F-33




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The standardized measure of discounted future net cash flows, in managements opinion, should
be examined with caution. The basis for this table is the reserve studies prepared by
independent petroleum engineering consultants, which contain imprecise estimates of quantities
and rates of production of reserves. Revisions of previous year estimates can have a
significant impact on these results. Also, exploration costs in one year may lead to
significant discoveries in later years and may significantly change previous estimates of
proved reserves and their valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily indicative of the fair value of the Companys proved oil and
natural gas properties.Future income tax expense was computed by applying statutory rates less the effects of tax
credits for each period presented to the difference between pre-tax net cash flows relating to
the Companys proved reserves and the tax basis of proved properties and available net
operating loss and percentage depletion carryovers.
 Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves  ($ in thousands)
 December 31,2007
    
    
    2006
    
    
    2005Future cash inflows
    
    $
    2,944,746
    
    
    $
    1,864,860
    
    
    $
    1,407,153Future costs:Production
    
    
    (824,261
    )
    
    
    (606,138
    )
    
    
    (361,563
    )Development
    
    
    (117,981
    )
    
    
    (138,715
    )
    
    
    (36,335
    )Future income taxes
    
    
    (536,227
    )
    
    
    (292,954
    )
    
    
    (249,621
    )Future net cash flows
    
    
    1,466,277
    
    
    
    827,053
    
    
    
    759,63410% annual discount for estimated timing of cash flows
    
    
    (831,839
    )
    
    
    (490,565
    )
    
    
    (398,844
    )Standardized measure of discounted future net
cash flows
    
    $
    634,438
    
    
    $
    336,488
    
    
    $
    360,790
 Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves  ($ in thousands)
 December 31,2007
    
    
    2006
    
    
    2005Increase (decrease):Purchases of minerals in place
    
    $
    
    
    
    $
    20,698
    
    
    $
    29,354Extensions and discoveries and improved recovery,
net of future production and development costs
    
    
    97,918
    
    
    
    104,622
    
    
    
    87,790
    (1)Accretion of discount
    
    
    46,996
    
    
    
    47,281
    
    
    
    26,625Net change in sales prices net of production costs
    
    
    341,421
    
    
    
    (78,387
    )
    
    
    135,242Changes in estimated future development costs
    
    
    28,424
    
    
    
    12,726
    
    
    
    (10,886
    )Revisions of quantity estimates
    
    
    (64,408
    )
    
    
    (44,561
    )
    
    
    (4,518
    )Net change in income taxes
    
    
    (116,010
    )
    
    
    (21,452
    )
    
    
    (52,181
    )Sales, net of production costs
    
    
    (89,818
    )
    
    
    (86,130
    )
    
    
    (47,974
    )Changes of production rates (timing) and other
    
    
    53,427
    
    
    
    20,901
    
    
    
    (9,071
    )(1)Net increase
    
    
    297,950
    
    
    
    (24,302
    )
    
    
    154,381Standardized measure of discounted future net cash flows:Beginning of year
    
    
    336,488
    
    
    
    360,790
    
    
    
    206,409End of year
    
    $
    634,438
    
    
    $
    336,488
    
    
    $
    360,790
 
 (1)
    
    During 2006, the Company revised its method of calculating Extensions and
discoveries and improved recovery, net of future production and development costs.
Consequently, related calculations in 2005 have been adjusted to be consistent with the
2006 calculation. F-34




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (17)
    
    Selected Quarterly Financial Data (Unaudited)
 QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth($ in thousands, except per share data)2007Oil and natural gas revenues
    
    $
    23,116
    
    
    $
    27,354
    
    
    $
    29,487
    
    
    $
    36,074Total costs and expenses
    
    
    14,827
    
    
    
    15,291
    
    
    
    18,206
    
    
    
    18,742Operating income
    
    
    8,289
    
    
    
    12,063
    
    
    
    11,281
    
    
    
    17,332Net income (loss)
    
    $
    (96
    )
    
    $
    3,464
    
    
    $
    293
    
    
    $
    (8,322
    )Net income (loss) available to common stockholders
    
    $
    (96
    )
    
    $
    3,464
    
    
    $
    293
    
    
    $
    (8,322
    )Net income per common share  basic
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    (0.21
    )Net income per common share  diluted
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    (0.21
    )2006Oil and gas revenues
    
    $
    20,543
    
    
    $
    26,342
    
    
    $
    26,211
    
    
    $
    23,929Total costs and expenses
    
    
    11,102
    
    
    
    13,962
    
    
    
    16,686
    
    
    
    14,856Operating income
    
    
    9,441
    
    
    
    12,380
    
    
    
    9,525
    
    
    
    9,073Net income
    
    $
    1,611
    
    
    $
    2,464
    
    
    $
    10,996
    
    
    $
    11,084
    (1)Net income available to common stockholders
    
    $
    1,611
    
    
    $
    2,464
    
    
    $
    10,996
    
    
    $
    11,084
    (1)Net income per common share  basic
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.30
    
    
    $
    0.30
    (1)Net income per common share  diluted
    
    $
    0.05
    
    
    $
    0.07
    
    
    $
    0.30
    
    
    $
    0.29
    (1)
 
 (1)
    
    2006 results include $9.0 million of equity in income of pipeline and gathering
systems representing the Companys share of net gain on sale of certain pipeline assets.
See Note 7. F-35




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##### Table of Contents



PARALLEL PETROLEUM CORPORATIONFebruary 20, 2008
    By:
    /s/ Larry C. OldhamLarry C. OldhamPresident and Chief Executive OfficerFebruary 20, 2008
    By:
    /s/ Steven D. FosterSteven D. FosterChief Financial Officer S-1




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##### Table of Contents



/s/ Jeffrey G. Shrader
    
    Director and Chairman of the Board of Directors
    
    February 20, 2008Jeffrey G. Shrader/s/ Larry C. Oldham
    
    President and Chief Executive Officer
    
    February 20, 2008Larry C. Oldham
    
    (Principal Executive Officer)/s/ Steven D. Foster
    
    Chief Financial Officer
    
    February 20, 2008Steven D. Foster
    
    (Principal Financial and
Accounting Officer)/s/ Edward A. Nash
    
    Director
    
    February 20, 2008Edward A. Nash/s/ Martin B. Oring
    
    Director
    
    February 20, 2008Martin B. Oring/s/ Ray M. Poage
    
    Director
    
    February 20, 2008Ray M. Poage
 S-2




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##### Table of Contents



(a)
    
    Exhibits
 No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designations, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000)4.4
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.5
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.6
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006)4.8
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. (Incorporated
by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006)4.9
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.10
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.11
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)




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##### Table of Contents



No.
    
    Description of Exhibit4.12
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.13
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.14
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007)4.15
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.7):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the Registrants Form 10-K for the fiscal year
ended December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.5
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.6
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.7
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.8
    
    First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)10.9
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as
Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December
20, 2002)10.10
    
    First Amendment to First Amended and Restated Credit Agreement, dated as of September 12,
2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to
Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)10.11
    
    Second Amended and Restated Credit Agreement, dated September 27, 2004, by and among
Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB,
BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 27, 2004 and filed with the
Securities and Exchange Commission on October 1, 2004)10.12
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)10.13
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, BNP Paribas,




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##### Table of Contents



No.
    
    Description of ExhibitCitibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated December 30, 2004 and filed with the Securities and
Exchange Commission on December 30, 2004)10.14
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American
Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated April 4, 2005 and filed with the
Securities and Exchange Commission on April 8, 2005)10.15
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.16
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.17
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.18
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.19
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.20
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.21
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.22
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)10.23
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.24
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)10.25
    
    Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006)




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##### Table of Contents



No.
    
    Description of Exhibit10.26
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007)10.27
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465)*10.28
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil & Gas Company, L.P.14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley Gillespie & Associates Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.
 
 *
    
    Filed herewith.