<PAGE> 1
                   SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, D.C. 20549

                           FORM 10 - K

   [X]           Annual Report Pursuant to Section 13 or 15(d)
                    of the Securities Exchange Act of 1934 (Fee Required)

           For the fiscal year ended December 31, 1996

   [  ]             Transition Report Under Section 13 or 15(d)
                of the Securities Exchange Act of 1934  (No Fee Required)

               For the transition period from ______ to ______.

               Commission File Number:  0 - 13305

                  PARALLEL PETROLEUM CORPORATION
      (Exact Name of Registrant as Specified in its Charter)

                   Delaware                                     75-1971716
     (State or Other Jurisdiction of                         (I.R.S.Employer
     Incorporation or Organization)                         Identification No.)

           110 North Marienfeld Street
       One Marienfeld Place, Suite 465
                   Midland, Texas                                  79701
     (Address of Principal Executive Offices)                    (Zip Code)

Registrant's telephone number, Including Area Code:  (915) 684-3727

Securities Registered Pursuant to Section 12(b) of the Exchange Act:   None

   Securities Registered Pursuant to Section 12(g) of the Act:

                   Common Stock, $.01 par value
                  Common Stock Purchase Warrants
                         (Title of Class)

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

                        Yes   X         No

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

     The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 10, 1997 was approximately $68,300,000, based on the
last sale price of the Company's Common Stock on the same date.

     At March 10, 1997 there were 17,793,358 shares of Common Stock outstanding.

<PAGE> 2
                            FORM 10-K

                  PARALLEL PETROLEUM CORPORATION

                        TABLE OF CONTENTS



 Item No.                                                                  Page


                              PART I

Item     1.        Business. . . . . . . . . . . . . . . . . . . . . . . .   3
Item     2.        Properties. . . . . . . . . . . . . . . . . . . . . . .  15
Item     3.        Legal Proceedings . . . . . . . . . . . . . . . . . . .  17
Item     4.        Submission of Matters to a Vote
                     of Security Holders . . . . . . . . . . . . . . . . .  17


                             PART II

Item     5.        Market for Registrant's Common Equity and
                     Related Stockholder Matters . . . . . . . . . . . . .  18
Item     6.        Selected Financial Data . . . . . . . . . . . . . . . .  19
Item     7.        Management's Discussion and Analysis of Financial
                     Condition and Results of Operations . . . . . . . . .  20
Item     8.        Financial Statements and Supplementary Data . . . . . .  25
Item     9.        Changes in and Disagreements with
                     Accountants on Accounting and Financial Disclosure. .  25


                             PART III

Item     10.       Directors and Executive Officers of the Registrant. . .  26
Item     11.       Executive Compensation. . . . . . . . . . . . . . . . .  29
Item     12.       Security Ownership of Certain Beneficial Owners and
                     Management  . . . . . . . . . . . . . . . . . . . . .  35
Item     13.       Certain Relationships and Related Transactions. . . . .  37


                             PART IV

Item     14.       Exhibits, Financial Statement Schedules, and Reports
                     on Form 8-K . . . . . . . . . . . . . . . . . . . . .  39


     Certain statements contained in this Form 10-K Report are forward
looking statements, including statements with respect to the Company's oil
and gas reserves, future net revenues, present values of future net revenues,
and budgeted or anticipated expenses.  All of these statements involve
assumptions of future events which may not prove to be accurate and risks
and uncertainties.  These risks and uncertainties include risks associated
with the drilling of wells, competition, financing availability,
fluctuations in prices of oil and gas, governmental regulation, and
geological concentration of the Company's reserves.  For these and other
reasons, actual results may differ materially from those projected or implied.

<PAGE> 3
                             PART I


ITEM  1.   BUSINESS

General

    Parallel Petroleum Corporation (the "Company"), a Delaware corporation, is
engaged in, and its only industry segment is, the exploration for and the
acquisition and development of oil and gas properties.  The Company's primary
operations are carried out in the onshore Gulf Coast areas of Jackson, Lavaca,
Victoria and Wharton Counties, Texas, and in the Permian Basin of West Texas.

    During 1996, the Company participated in the drilling of 29 gross
(7.58 net) exploratory wells, of which 20 gross (5.20 net) wells were productive
and 9 gross (2.38 net) were dry holes.

    At December 31, 1996, the Company had net proved reserves of approximately
32.6 billion cubic feet of natural gas and 1.64 million barrels of oil.
Approximately 77% of the Company's proved reserves are natural gas and
approximately 84% are proved developed.

    The Company was originally incorporated under the laws of the State of
Texas on November 26, 1979.  On December 18, 1984, the Company was
reincorporated in the State of Delaware.

    The executive offices of the Company are located at One Marienfeld Place,
Suite 465, Midland, Texas 79701 and its telephone number at that address is
(915) 684-3727.

Strategy

    The Company's strategy is to continue to increase its reserves and
production and improve its financial results by emphasizing the strategies
set forth below.

    Exploration Activities.  The Company seeks to increase its reserves and
production through exploration.  The Company primarily seeks exploration
prospects which (1) have known geological and reservoir characteristics, (2)
are located near existing wells that can be correlated with seismic
data for the prospect and (3) could have a meaningful impact on the Company's
reserves.

    Producing properties owned and operated by the Company are continually
subjected to rigorous production monitoring and evaluated for possible
enhancement opportunities.  Enhancement activities include recompletions of

<PAGE> 4

existing wellbores, restimulations of producing reservoirs, identifying
potential infill drilling locations, making mechanical improvements to surface
facilities and downhole equipment and reviewing the practicality of applying
new drilling and production technologies that could either improve recovery
potential or result in the discovery of a new reservoir. The Company may also
renegotiate gas purchase contracts or reconfigure gathering lines.  In
connection with its enhancement operations, the Company routinely reviews the
performance and economics of its gas and oil properties and, when it deems
necessary, takes corrective action, such as the shutting-in of temporarily
uneconomic properties, the plugging of wells deemed to be
permanently impaired or depleted, the termination of gas and oil leases
deemed uneconomic under then existing operating conditions and/or the sale of
properties to third parties.  The Company has focused its efforts to acquire
producing properties in the Permian Basin of Texas, where it has extensive
expertise.

    Technology.  The Company uses economically available advanced technology
in its exploration and development activities in order to reduce risks, lower
costs and more efficiently produce oil and gas from its properties.  The
Company believes that the availability of cost effective 3-D seismic surveys
makes its use in exploration and development activities attractive from a risk
management perspective in certain areas and that 3-D seismic surveys provide the
Company with substantially more accurate and comprehensive information for
the evaluation of drilling prospects than does conventional 2-D seismic and
traditional evaluation methods.  The Company evaluates substantially all of
its exploratory prospects using 3-D seismic surveys.

    In evaluating certain of its exploratory prospects, the Company also uses
amplitude versus offset ("AVO") technology.  AVO analysis can show the high
contrast between the sand and shales and provides for better interpretation
of the reservoir sands to determine the presence of gas.

    The Company believes that its use of 3-D seismic and AVO exploration
technology provides it with a competitive advantage over other companies that
do not regularly use such technology by increasing the Company's likelihood
of exploration success.  Nevertheless, in evaluating exploratory prospects
in areas in which the Company believes that using 3-D seismic is not
advantageous, the Company uses traditional evaluation methods.

    The Company retains experienced third-party consultants or participates
with experienced joint working interest owners to acquire, process and interpret
3-D seismic surveys.  When 3-D surveys are to be conducted over prospects
located in the Permian Basin, the Company prefers to serve as geophysical
operator of such projects because of the Company's experience in using 3-D
seismic technology in this area.  The Company attempts to ensure the integrity
of the 3-D seismic analysis in each of its projects by emphasizing quality
control throughout the data acquisition, processing and interpretation.
Whenever possible, the Company also attempts to correlate or "model"
the interpretations of 3-D seismic surveys with wells previously drilled on
or near the prospect being evaluated.

    Acquisitions.  The Company supplements its exploration efforts with
acquisitions of producing properties.  The Company believes that, in certain
circumstances, its small staff gives it a competitive advantage in quickly
responding to acquisition opportunities.  The Company seeks to acquire
producing properties that either are underperforming relative to their
potential or are candidates for 3-D seismic analysis.  The Company seeks to
acquire working interests in producing properties for which it can act as
operator to allow the Company to control decisions regarding operations.

    The Company continually screens, reviews and evaluates potential producing
property acquisitions and undeveloped leases and prospects presented by
independent landmen, geologists and engineers, as well as properties available
for purchase from major oil companies and other independent oil and gas
operators.  If the review of a producing property or undeveloped lease or
prospect indicates that it may be geologically and economically viable, the
Company then attempts to acquire a working interest in the property.  To
reduce the Company's financial exposure in any one prospect and to enable it
to participate in an increased number of prospects, the Company typically

<PAGE> 5

enters into co-ownership arrangements with third parties under standard
industry form operating agreements.  Such arrangements are common in the
industry and enable the Company to share the drilling and related costs and
dry-hole risks with other participants which, in turn, also enables the
Company to participate in the drilling of more wells.  From time to time,
the Company may sell prospects to third parties or farm-out prospects,
retaining an interest in revenues from such prospects.

    Control of Costs.  Throughout its operations, the Company strives to
maintain low general and administrative expenses.  The geographic focus of
the Company's operations allows it to manage a relatively large asset base
with a small number of employees.  The Company believes this base of
operations enables the Company to add exploratory prospects and acquire
producing properties at relatively low incremental costs.

    The Company also pursues cost savings through the use of outside
geological and geophysical consultants for its exploration and development
efforts and uses contractors for much of its field operations.

Principal Activities in 1996

    During 1996, the Company's principal exploration activities were focused
in the onshore Gulf Coast area of Jackson, Lavaca, Victoria and Wharton
Counties in south Texas.  The Company participated in the drilling of 23
wells in this area in 1996, of which 4 were dry holes and 19 are producing.
Under its agreements with the operator and other third party participants in
the Yegua and Frio gas trends in Jackson and Wharton Counties, the Company
participates in the acquisition and ownership of (i) 3-D seismic surveys,
(ii) options to acquire gas and oil leasehold interests and (iii) working
interests in gas and oil leases determined to have drillable features.
Approximately 65% of 1996 capital expenditures, or approximately $11.0
million, was expended in the south Texas operating area.   Although the
Company participates in the acquisition and ownership of three-dimensional
seismic survey data obtained from seismic operations conducted on large
blocks of acreage, the Company's actual working interest ownership in such
acreage is less than the total area surveyed.

    Through December 31, 1996, the Company participated in the drilling of a
total of 53 wells in the Gulf Coast area, of which 42 are producing and 11 of
which have been dry holes.  Of the 42 producing wells, 26 have been drilled
to the Frio formation at a depth of approximately 4,000 feet, and 16 have
been drilled to the Yegua formation at a depth of approximately 9,000 feet.
At March 1, 1997, the 42 producing wells in which the Company owned an
interest were producing, net to the Company's interests, approximately 7,700
Mcf of natural gas per day and approximately 165 barrels of oil and condensate
per day.

    In connection with its operations in the Yegua/Frio gas trends in south
Texas, the Company enters  into exploration agreements with other participants
to explore for gas.  These agreements enable the Company to participate in
the acquisition and ownership of (i) 3-D seismic surveys, (ii) options to
acquire oil and gas leasehold interests, and (iii) working interests in oil

<PAGE> 6

and gas leases determined to have drillable features.  While these agreements
provide for seismic operations on approximately 370,000 gross acres, the
Company has an actual working interest in  only a portion of such acreage.

    Substantially all of the lands covered by the exploration agreements are
subject to "area of mutual interest" provisions which, generally, means an
agreed upon area of land, varying in areal extent, included and described in
an oil and gas exploration agreement which participants agree will be subject
to rights of first refusal as among themselves, such that any participant
acquiring any minerals, royalty, overriding royalty, oil and gas leasehold
estates or similar interests in the designated area, is obligated to offer
the other participants the opportunity to purchase their agreed upon
percentage share of the interest so acquired on the same basis and cost as
purchased by the acquiring participant.  If the other participants, after a
specific time period, elect not to acquire their pro-rata share, the
acquiring participant is typically then free to retain or sell such interests.

Acquisition and Enhancement Activities

    The Company continually screens, reviews and evaluates potential producing
property acquisitions and, when prospects fall within the Company's acquisition
parameters, will offer to purchase specific properties.  Since 1989, the
Company has acquired interests in five significant producing properties in
the Permian Basin of West Texas.  Set forth below is a summary of certain
information regarding the Company's acquisition and enhancement activities
in the Permian Basin of West Texas.

    Page Field - The Company owns an 89% working interest in approximately
4,500 gross (4,005 net) acres in the Page Field of Schleicher County, Texas.
When the Page Field was acquired by the Company in 1989, twenty-one wells
were producing approximately 300 thousand cubic feet ("Mcf") of natural gas
and 30 barrels ("Bbls") of oil per day.   The Company's remedial and
enhancement activities in the Page Field have resulted in gross production
rates at December 31, 1996 of approximately 700 MMcf of natural gas and 30
Bbls of oil per day.  The Company drilled one new well in the Page Field in
December, 1996, and, at March 17, 1997, the well was in process of being
production tested.

    West World Strawn Field - The Company owns an 87.5% working interest in
approximately 5,538 gross (4,846 net) acres in the West World Strawn Field of
Crockett County, Texas.  The West World Field was producing approximately 160
Mcf of natural gas and 20 Bbls of oil per day when the Company purchased its
initial interest.  Immediately after the acquisition, the Company
renegotiated its gas sales contract and commenced remedial and production
enhancement work, including the installation of additional compression
equipment.  At December 31, 1996, the gross production in the West World
Strawn Field was approximately 700 Mcf of natural gas and 50 Bbls
of oil per day.

    Hulldale Penn Reef Field - The Company owns an 84% working interest in
approximately 7,493 gross (6,294 net) acres in the Hulldale Penn Reef Field
of Schleicher County, Texas.  At December 31, 1996, the gross production in
the field was approximately 180 Mcf of natural gas and 60 Bbls of oil per day,
compared to 100 Mcf of natural gas and 50 Bbls of oil per day at the time of
the Company's acquisition.

<PAGE> 7

    North Nena Lucia Unit - The Company owns a 57% non-operated working
interest in approximately 6,640 gross (3785 net) acres in the North Nena Lucia
Unit located in Nolan County, Texas.  At December 31, 1996, the gross
production in the field was approximately 1,100 Mcf of gas and 165 Bbls of
oil per day.  At March 17, 1997, the Company was in process of drilling one
infill well.

    Chenot Gas Field - The Company owns a 97.5% working interest in
approximately 640 gross (624 net) acres and a 70% working interest (60% net
revenue interest) in approximately 400 gross (280 net) acres in the Chenot
Gas Field in Pecos County, Texas.  When the Company acquired its interests,
gross production from the three existing wells totaled approximately 450 Mcf
of natural gas per day, which, through the Company's efforts, had increased
to approximately 600 Mcf of natural gas per day as of December 31, 1995.
The Company conducted a 3-D seismic survey on the property in 1996 and drilled
three successful gas wells.  At December 31, 1996, gross production from the
six wells was approximately 1400 Mcf of gas per day.


Drilling and Acquisition Costs

    The following table reflects costs incurred by the Company in its gas and
oil property acquisition, and exploration and development activities for each
of the years in the five-year period ended December 31, 1996.

<TABLE>
<CAPTION>

                                             Year Ended December 31,
                      ----------------------------------------------------------------
                       1996           1995          1994           1993          1992
                      ------         ------        ------         ------        ------
                                                (In thousands)
<S>                   <C>            <C>           <C>            <C>
Transfer from
  undeveloped leases
  held for sale        $ 60          $ 197         $ 339          $ 705       $   365

Proved property
  acquisition costs   3,839            372           238            546         1,385

Unproved property
  acquisition costs     369            841         2,542            720             -

Exploration           8,669          1,519         3,400          2,225           280

Development           3,963            889         1,226          1,173         1,881
                    -------         ------        ------        -------       -------

                    $16,900         $3,818        $7,745         $5,369        $3,911
                    =======         ======        ======         ======        ======
</TABLE>

<PAGE> 8


Industry Conditions

    From 1982 until recently, there has been an excess supply of, and reduced
demand for, crude oil worldwide and natural gas in the United States.  This
excess supply has placed heavy pressures on prices for oil and gas and has
reduced marketability, particularly for gas.  There is substantial uncertainty
regarding future prices and, accordingly, there can be no assurance that
prices will not decline in the future. During the last two years, however,
industry conditions have improved as a result of stronger oil and gas prices
and technological advances that have reduced exploration, development and
production costs, as well as the risks associated with drilling.  Although
the Company believes that current economic conditions are favorable for
acquiring producing oil and gas properties and for exploratory drilling, no
assurance can be given that these conditions will continue or that prices
ultimately realized by the Company for sales of its oil and gas will be
favorable in relation to drilling and related expenses.

Seasonal Nature of Business

    Generally, the Company's business activities are not seasonal in nature.
However, weather conditions affect the demand for natural gas and can hinder
drilling activities.  Demand for natural gas is typically higher during winter
months.

Risk of Company Operations

    Oil and gas drilling and production operations are highly speculative and
involve a high degree of risk, and are marked by unprofitable efforts, not only
from dry holes but from wells that, though productive, do not produce oil or
gas in sufficient quantities to return a profit on the amounts expended.
Further, the success of the Company's operations depends, in part, upon the
ability of its management and technical personnel.  Accordingly, there is no
assurance that the Company's oil and gas drilling or acquisition activities
will be successful, that any production will be obtained, or that any such
production, if obtained, will be profitable.

    The Company's operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual or unexpected formations and pressures, explosions,
blowouts, fire, environmental pollution and personal injury. The Company
maintains general liability insurance, and obtains insurance against blowouts
on a well-by-well basis, but it has not obtained insurance against such
operating hazards as pollution risks.  If the Company sustains an uninsured
loss or liability, its ability to operate may be materially adversely
affected.

    The Company's oil and gas operations are not subject to renegotiation of
profits or termination of contracts at the election of the federal government.

Executive Officers

    At March 1, 1997, the executive officers of the Company were Thomas R.
Cambridge and Larry C. Oldham.

<PAGE> 9

    Mr. Cambridge, age 61, is the Chief Executive Officer and Chairman of
the Board of Directors of the Company.  Mr. Cambridge is an independent
petroleum geologist engaged in the exploration for, development and
production of oil and natural gas.  From 1970 until 1990, such activities
were carried out primarily through Cambridge & Nail Partnership, a Texas
general partnership.  Since 1990, such activities have been carried out
through Cambridge Production, Inc., a Texas corporation.  Mr. Cambridge has
served as a Director of the Company since February, 1985 and as President
since October, 1985.  He received a Bachelors degree and a Masters of Science
degree in Geology from the University of Nebraska in 1958 and 1960,
respectively.

    Mr. Oldham, age 43, is President, Treasurer, Director and founder of the
Company.  Mr. Oldham has been employed by the Company for seventeen years.
He received a Bachelor of Business Administration degree from West Texas
State University in 1975.  Mr. Oldham is a member of the American Institute
of Certified Public Accountants and a member of the Permian Basin Landman's
Association.

    The term of both officers expires at the Company's annual meeting of
directors or such other time as their respective successors are duly elected
and qualified.  There is no family relationship between the executive officers
of the Company.

    In February, 1997 the Company obtained key-man life insurance on the lives
of Messrs. Cambridge and Oldham in the amounts of $1 million and $5 million,
respectively.

Employees

    At March 1, 1997, the Company had six full time employees.  The Company
also retains, from time to time, independent land, geological, geophysical
and engineering consultants and expects to continue to do so in the future.
Mr. Thomas R. Cambridge, the Chief Executive Officer and Chairman of the
Board of Directors of the Company, serves the Company in the capacity of a
consultant, and not as a full-time employee.  Additionally, the Company
retains seven contract pumpers on a month-to-month basis.  The Company
considers its employee relations to be satisfactory.  None of the Company's
employees are represented by a union and the Company has never experienced
work stoppages or strikes as a result of labor disputes.

<PAGE> 10

Wells Drilled

    Information concerning the number of gross and net wells drilled by the
Company during the three years ended December 31, 1996 is as follows:

<TABLE>
<CAPTION>

                                    Exploratory Wells(1)                         Development Wells(2)
                              -----------------------------------        -------------------------------------
Year Ended                      Productive               Dry                Productive               Dry
December 31,                  Gross       Net      Gross      Net        Gross       Net       Gross       Net
                              -----       ---      -----      ---        -----       ---       -----       ---
<S>                           <C>         <C>      <C>        <C>        <C>         <C>

   1996                       20.0       5.20       9.0       2.38        3.0        1.40       1.0        .42
   1995                       19.0       2.71       7.0       1.19        2.0         .40        -           -
   1994                        6.0       1.74       6.0       1.99        1.0         .81        -           -

</TABLE>
__________________
(1) An exploratory well is a well drilled to find and produce oil or gas in
    an unproved area, to find a new reservoir in a field previously found to
    be productive of oil or 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
    gas reservoir to the depth of a stratigraphic horizon known to be
    productive.

    All of the Company's drilling is performed on a contract basis by third-
party drilling contractors.  The Company owns no drilling equipment.

    At March 17, 1997, the Company was participating in the drilling of one
gross (.20 net) gas well in Wharton County, Texas.  At that same date, the
Company was also participating in the drilling of one gross (.57 net) well
in Nolan County, Texas, and in the completion of one gross (.89 net) well
in Schleicher County, Texas.

<PAGE> 11

Volumes, Prices and Lifting Costs

    The following table sets forth certain information regarding volumes of
the Company's net production of oil and gas, the average sales prices per Bbl
of oil and Mcf of gas produced, and the average production (lifting) cost per
equivalent barrel of oil ("EBO") for the three years ended December 31, 1996.

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                           ----------------------------------------------------------
                                1996                   1995                   1994
                           -------------          -------------           -----------
<S>                        <C>                    <C>                     <C>
Net Production:
   Oil (Bbls)                 221,499                132,579                149,308
   Gas (Mcf)                3,654,897              1,616,105              1,391,846
   EBO(1)                     830,649                401,929                381,282

Average Sales Price:
   Oil (per Bbl)            $   21.83              $   17.26              $   15.81
   Gas (per Mcf)            $    2.55              $    1.50              $    1.68
   EBO(1)                   $   17.06              $   11.72              $   12.31

Average Production
  Cost per EBO(1)           $    3.23              $    3.65              $    3.74

Operating Margin
   per EBO(1)(2)            $   13.83              $    8.07              $    8.57

Depletion per EBO(1)        $    4.47              $    3.97              $    4.07

</TABLE>

(1)   An EBO means one barrel of oil equivalent using the ratio of six Mcf of
      gas to one barrel of oil.
(2)   Operating margin is determined by deducting the average production cost
      per EBO from the average sales price per EBO.

    The Company's 1996 gas sales represented approximately 66% of the Company's
combined gas and oil sales for the year ended December 31, 1996.

Markets and Customers

    Substantially all of the Company's oil and gas production is sold at the
well site on an "as produced" basis.  During the year ended December 31, 1996,
Enron Oil Transportation & Trading Company and Cox & Perkins Exploration, Inc.,
purchasers of the Company's oil and gas, accounted for 11% and 46%,
respectively, of the Company's operating revenues for such period.  The
Company believes the loss of any one of such purchasers would not materially

<PAGE> 12

affect its ability to sell oil or gas, due to the availability of other
purchasers in the Company's areas of operations.

    The nature of the Company's business is such that it does not maintain or
require a "backlog" of products, customer orders or inventory.

Office Facilities

    The Company leases its corporate facilities in Midland, Texas, which consist
of approximately 4,675 square feet of office space, at a rental rate of $2,725
per month.  The lease agreement expires by its own terms in June, 1999.

Competition

     The oil and gas industry is highly competitive, particularly with respect
to the acquisition of development prospects and producing properties. The
principal means of competition for the acquisition of oil and gas properties
are the amount and terms of the consideration offered. Competitors include the
major oil companies, independent oil and gas concerns and individual producers
and operators, many of which have financial resources, staffs and facilities
substantially greater than those of the Company.

    The principal raw materials and resources necessary for the exploration
for, and the acquisition, development, production and sale of, oil and gas are
leasehold prospects under which oil and gas reserves may be discovered, drilling
rigs and related equipment to explore for such reserves, and knowledgeable
personnel to conduct all phases of oil and gas operations.  The Company must
compete for such raw materials and resources with both major companies and
independent oil operators.

Regulation

    Regulation of Oil and Gas Production.  The Company's operations are affected
in various degrees by political developments, federal and state laws and
regulations.  In particular, oil and gas production operations and economics
are affected by price controls, tax and other laws relating to the petroleum
industry, by changes in such laws and by changing administrative regulations
and the interpretation and application of such rules and regulations.

    Legislation affecting the oil and gas industry is under constant review
for amendment or expansion.  Numerous departments and agencies, both federal
and state, are authorized by statute to issue and have issued rules and
regulations binding on the oil and gas industry and its individual
members, some of which carry substantial penalties for failure to comply.
The regulatory burden on the oil and gas industry increases the Company's
cost of doing business and, consequently, affects its profitability.

    Price Controls on Liquid Hydrocarbons.  Sales of oil, condensate and gas
liquids by the Company are not regulated and may be made at uncontrolled
market prices.

<PAGE> 13

    Federal Regulation of Sales of Natural Gas.  Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938 (the "NGA") and the
Natural Gas Policy Act of 1978 (the "NGPA").  These statutes are administered
by the Federal Energy Regulatory Commission ("FERC").  Several major regulatory
changes have been implemented by the FERC that have affected the economics of
natural gas production, transportation and sales.  In the past, the federal
government has regulated the prices at which oil and gas could be sold.
However, as a result of the enactment of the Natural Gas Wellhead Decontrol
Act of 1989 (the "Decontrol Act"), all price controls under the NGPA and all
certificate and abandonment requirements applicable to producers under the
NGA were phased out effective as of January 1, 1993.

    The FERC continues to promulgate revisions to various aspects of the rules
and regulations affecting those segments of the natural gas industry which
remain subject to the FERC's jurisdiction. The stated purpose of many of these
regulatory changes is to promote competition among the various sectors of the
gas industry.  Beginning in 1992, FERC issued Order Nos. 636, 636-A and 636-B
("Order No. 636") for the purpose of restructuring the gas pipeline sales and
transportation services in the United States.  These rules require interstate
pipelines to "unbundle" transportation and sales
services by separately stating the price of each service and by providing
customers only the particular service desired, without regard to the source
for purchase of the gas.  The rule also requires pipelines to (i) provide
non-discriminatory "no-notice" service allowing firm commitment shippers to
receive delivery of gas on demand up to certain limits without penalties,
(ii) establish a basis for release and reallocation of capacity, and (iii)
provide non-discriminatory access to capacity by firm transportation
shippers on a downstream pipeline.  Although Order No. 636 does not directly
regulate the Company's activities, the intended purpose of Order No. 636 is
to increase competition in the natural gas industry.  The impact of these
FERC Orders significantly alters the traditional way natural gas has been
purchased, transported and sold.  However, because the restructuring
requirements that emerge from the administrative and judicial review process
may vary significantly from those presently in effect, and because
implementation of the restructuring may vary by pipeline, it is not possible
to predict the ultimate effects of the restructuring on the Company.

    In addition, many aspects of these regulatory developments have not become
final but are still pending judicial and FERC final decisions.

    The price at which the Company's natural gas may be sold will continue to
be affected by a number of factors, including the price of alternate fuels
such as oil and coal and competition among various natural gas producers and
marketers.

    State Regulation.  Oil and gas operations are subject to a wide variety of
state regulations. Administrative agencies in such jurisdictions may promulgate
and enforce rules and regulations relating to virtually all aspects of the oil
and gas business.

<PAGE> 14

    The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas.
Such states also have statutes or regulations addressing conversation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and
the regulation of spacing, plugging and abandonment of such wells.  The
statutes and regulations of the State of Texas and certain other states limit
the rate at which oil and gas can be produced from the Company's properties.

    Environmental Regulation.  Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, affect the Company's
operations and costs as a result of their effect on oil and gas exploration,
development and production operations.  At present, substantially all the
Company's production of oil, condensate and gas is in states having conservation
laws and regulations.  It is not anticipated that the Company will be required
in the near future to expend amounts that are material in relation to its total
capital expenditures program by reason of environmental laws and regulations,
but inasmuch as such laws and regulations are frequently changed, the Company
is unable to predict the ultimate cost of compliance.  The Company is able to
control directly the operations of only those wells for which it acts as
operator.  Notwithstanding the Company's lack of control over wells
operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, be attributed to the
Company.  The Company believes that the oil and gas industry may experience
increasing liabilities and risks under the Comprehensive Environmental
Response, Compensation and Liability Act, as well as other federal, state and
local environmental laws, as a result of increased enforcement of environmental
laws by various regulatory agencies.  As an "owner" or "operator" of property
where hazardous materials may exist or be present, the Company, like all others
engaged in the petroleum industry, could be liable for fines and/or "clean-up"
costs, regardless of whether the Company was responsible for the release of any
hazardous substances.  Although the Company has not been subject to the
imposition of "clean-up" orders by the government, the potential for sudden
and unpredictable liability attributable to the Company and the petroleum
industry as a whole to environmental problems is a consideration of increasing
importance to the Company and the petroleum industry as a whole.

<PAGE> 15

ITEM 2.  PROPERTIES

General

    The principal properties of the Company consist of developed and undeveloped
gas and oil leases and the gas and oil reserves associated with such leases.
Generally, the terms of developed gas and oil leaseholds are continuing and
such leases remain in force by virtue of, and so long as, production from
lands under lease is maintained.  Undeveloped gas and oil leaseholds are
generally for a primary term, such as five or ten years, subject to maintenance
with the payment of specified minimum delay rentals or extension by production.

Producing Wells and Acreage

    The following table summarizes the gross and net producing oil and gas
wells and the gross and net developed and undeveloped acreage in which the
Company owned an interest at December 31, 1996.  Excluded from the table is
acreage in which the Company's interest is limited to royalty or similar
interests.

<TABLE>
<CAPTION>
                           Producing Wells                   Acreage
                    ------------------------------    -------------------------------
                         Oil             Gas            Developed       Undeveloped
                    -------------    -------------    -------------   ---------------
                    Gross  Net(1)   Gross   Net(1)    Gross   Net(2)  Gross   Net(2)
                    -----  ------   -----   ------    -----   ------  -----   ------
<S>                 <C>    <C>      <C>     <C>       <C>     <C>     <C>     <C>
New Mexico            -        -      -          -         -       -  11,357     355
Texas                93    64.52     83      30.05    44,946  26,160  41,087  11,444
Oklahoma              -        -      1        .25       320      80       -       -
Louisiana             -        -      -          -         -       -     646      84
                    ---    -----    ---      -----    ------  ------  ------  ------
    Total            93    64.52     84      30.30    45,266  26,240  53,090  11,883
                    ===    =====    ===      =====    ======  ======  ======  ======

</TABLE>

(1) Net wells are computed by multiplying the number of gross wells by the
    Company's working interest in the gross wells.

(2) Net acres are computed by multiplying the number of gross acres by the
    Company's working interest in the gross acres.

    Except for its oil and gas leases with third parties, the Company has no
material patents, licenses, franchises, or concessions which it considers
significant to its oil and gas operations.

    At December 31, 1996, the Company was serving as operator of 99 wells in
which it owned interests.  Approximately 27% of the discounted present value
of the Company's gas and oil reserves at December 31, 1996 is attributable to
wells operated by the Company.  As operator, the Company supervises the
drilling and completion of wells and production therefrom and the further
development of surrounding properties.  The operator of a well has significant
control over its location and the timing of its drilling.  In addition, the
operator of a well receives fees from other working interest owners as
reimbursement for the general and administrative expenses attendant to the
operation of the wells.

<PAGE> 16

Title to Properties

    As is customary in the oil and gas industry, the Company makes only a
cursory review of title to undeveloped oil and gas leases at the time they
are acquired by the Company.  Such reviews, while consistent with industry
practices, are incomplete.  The Company believes that it generally is not
economically feasible to review in depth every individual property that the
Company acquires, especially in the case of producing property acquisitions
covering a large number of leases. Ordinarily, when the Company acquires
producing properties, it will focus its review efforts on properties believed
to have higher values and will sample the remainder.  However, even an in-depth
review of all properties and records may not necessarily reveal existing or
potential defects nor will it permit a buyer to become sufficiently familiar
with the properties to assess fully their deficiencies and capabilities.
In the case of producing property acquisitions, inspections may not always be
performed on every well, and environmental problems, such as ground water
contamination, are not necessarily observable even when an inspection is
undertaken.  However, in the case of undeveloped leases or prospects acquired
by the Company, the Company will, before drilling is commenced, generally
cause a more thorough title search to be conducted, and any material defects
in title that are found as a result of the title search are generally remedied
prior to the time actual drilling of a well on the lease is commenced.  The
Company believes that it has good title to its oil and gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions.
The oil and gas properties owned by the Company are also typically subject to
royalty and other similar non-cost bearing interests customary in the industry.
The Company does not believe that any of these encumbrances or burdens will
materially affect the Company's ownership or use of its properties.

Oil and Gas Reserves

    The oil and gas reserves of the Company have been estimated as of December
31, 1996 by Joe C. Neal and Associates, Midland, Texas.  At December 31, 1996,
the Company had proved reserves of 32.6 Bcf of gas and 1.64 million Bbls of
oil for a total of 7.07 million EBO.  Additional information concerning the
Company's estimated proved gas and oil reserves at December 31, 1996 is
included in Note 13 of the notes to financial statements contained herein
under Item 8. - Financial Statements and Supplementary Data.

    No major discovery or other favorable or adverse event has occurred since
January 1, 1997 which is believed to have caused a significant change in the
estimated proved oil and gas reserves of the Company as reported at December
31, 1996.

    Estimates of the Company's proved reserves at December 31, 1996, 1995 and
1994 were made by Joe C. Neal & Associates, Midland, Texas, independent
petroleum engineers, in accordance with guidelines established by the
Securities and Exchange Commission.  There are numerous uncertainties
inherent in estimating natural gas and oil reserves and their estimated
values, including many factors beyond the control of the producer.  The
reserve data set forth herein represent only estimates.  Reservoir engineering
is a subjective process of estimating underground accumulations of natural
gas and oil that cannot be measured in an exact manner.  The accuracy of any
reserve estimate is a function of the quality of available data and of

<PAGE> 17

engineering and geological interpretation and judgment.  As a result,
estimates of different engineers often vary.  In addition, estimates of
reserves are subject to revision by the results of drilling, testing and
production subsequent to the date of such estimates.  Accordingly, reserve
estimates are often different from the quantities of natural gas and oil that
are ultimately recovered.  The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were based.

    In general, the volume of production from natural gas and oil properties
decline as reserves are depleted.  Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will
decline as reserves are produced.  The Company's future natural gas and oil
production is therefore highly dependent upon its level of success in
acquiring or finding additional reserves.

    The Company has no reserves outside the United States.

    The Company's oil and gas reserves and production are not subject to any
long-term supply or similar agreements with foreign governments or authorities.

    The Company's estimate of reserves has not been filed with or included in
reports to any federal agency other than the Securities and Exchange Commission.


ITEM 3.  LEGAL PROCEEDINGS

    The Company is not currently a party to any litigation, nor is it aware of
any threatened litigation.  The Company has not been a party to any bankruptcy,
receivership, reorganization, adjustment, or similar proceeding.


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

    The registrant did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1996.

<PAGE> 18

                              PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

    The Company's Common Stock commenced trading on the Nasdaq National Market
System on June 1, 1994 and, prior to that time, was traded on the Nasdaq Small
Cap Market.  The Common Stock trades under the symbol "PLLL."   The following
table sets forth, on a per share basis for the periods indicated, the high and
low bid quotations for the Common Stock prior to June 1, 1994 and the high and
low last reported sales prices thereafter as reported by Nasdaq.  The bid
quotations represent inter-dealer prices, without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                        Price
<S>                                                 -------------
1994                                                High      Low
                                                   <C>       <C>
    First quarter                                  $4.88     $2.75
    Second quarter                                 $4.75     $3.75
    Third quarter                                  $3.88     $3.44
    Fourth quarter                                 $3.63     $2.88

1995

    First quarter                                  $3.19     $2.00
    Second quarter                                 $2.13     $1.38
    Third quarter                                  $2.50     $1.69
    Fourth quarter                                 $2.00     $1.44

1996

    First quarter                                  $2.75     $1.75
    Second quarter                                 $4.00     $2.50
    Third quarter                                  $5.56     $3.56
    Fourth quarter                                 $5.50     $4.25

</TABLE>

    The last sale price of the Company's Common Stock on March 3, 1997 was
$4.375 per share, as reported on the Nasdaq National Market System.

    As of March 3, 1997, there were approximately 2,391 stockholders of record
of the Company's Common Stock.

    The Company has never declared or paid any cash dividends on shares of its
Common Stock and does not anticipate paying any cash dividends on the Common
Stock in the future.  The Company's loan agreement with its bank lender
prohibits the payment of cash dividends.

<PAGE> 19

ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial data for
each of the years in the five-year period ended December 31, 1996.  This data
should be read in conjunction with the Company's Financial Statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Item 7 below.  The selected
financial data provided below are not necessarily indicative of the future
results of operations or financial performance of the Company:

<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                 --------------------------------------------------------------------------
                                    1996           1995           1994           1993             1992
                                 -----------   -----------    -----------    -----------      -------------
<S>                              <C>           <C>            <C>            <C>              <C>
Operating revenues. . . . . .    $14,167,470   $ 4,713,748    $ 4,692,706    $ 3,466,003      $ 3,075,069
Operating expenses  . . . . .    $ 6,945,168   $ 3,518,163    $ 3,339,478    $ 2,522,002      $ 2,213,700
Income before extraordinary
   item and cumulative effect
   of accounting change . . .    $ 4,330,654   $   137,080    $   444,360    $   376,547      $   379,240
Net income. . . . . . . . . .    $ 4,330,654   $   137,080    $   444,360    $   328,495(1)   $   579,247(2)
Income before extraordinary
   item and cumulative effect
   of accounting change per
   common share . . . . . . .    $       .28   $       .01    $       .03    $       .03      $      .03
Net income per
   common share . . . . . . .    $       .28   $       .01    $       .03    $       .02      $      .05
Cash dividends - Common
   Stock  . . . . . . . . . .    $        -    $         -    $         -    $         -      $        -
Weighted average common
   shares and common stock
   equivalents outstanding. .     15,679,828    15,556,949     14,815,498     13,466,663       12,013,777
Present value of proved oil
   and gas reserves discounted
   at 10% (before estimated
   federal income taxes). . .    $67,015,980   $25,890,050    $20,462,420    $21,137,370      $20,765,388
Working capital(3). . . . . .    $   351,517   $   639,299    $  (233,460)   $  (355,029)     $   592,008
Total assets. . . . . . . . .    $38,098,169   $23,914,698    $22,760,729    $16,180,298      $12,316,768
Total liabilities . . . . . .    $13,380,034   $13,079,285    $13,431,823    $ 7,463,224      $ 6,976,356
Long-term debt, less current
   maturities . . . . . . . .    $ 8,521,391   $11,674,625    $11,000,000    $ 5,809,000      $ 6,220,000
Total stockholders' equity. .    $24,718,135   $10,835,413    $ 9,328,906    $ 8,717,074      $ 5,340,412

</TABLE>

(1) In February 1992, the Financial Accounting Standards Board issued Statement
    of Financial Accounting Standards No. 109, "Accounting for Income Taxes
    (FAS 109)".  The Company adopted FAS 109 in the first quarter of 1993.
    Upon adoption of FAS 109, a net deferred tax liability of $48,052 was
    recognized at January 1, 1993 reflecting the effects of a net book over
    tax basis and limited utilization of the net operating loss carryforwards.

(2) Represents a tax benefit from utilization of loss carryforward of $200,007.

(3) Under the Company's current cash management practices, available cash funds
    that are not required for operations are applied to the repayment of the
    Company's revolving bank debt.

<PAGE> 20

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

General

    Since 1992, the Company's primary focus has been exploratory drilling
through the use of three-dimensional seismic technology.  The Company's
long-term business strategy is to increase the Company's reserve base by
utilizing 3-D seismic technology.

    The Company intends to exploit its existing properties and acquire those
properties which it believes can be exploited by developing reserves not
previously produced.  The Company undertakes projects only when it believes
the project has the potential for initial cash flow adequate to return the
project's capital expenditures within a short period of time, generally less
than 36 months.  The Company also endeavors to maximize the present value of
its projects by accelerating production of its reserves consistent with
prudent reservoir management.

    As part of this business strategy, the Company has acquired oil and gas
producing properties in the Permian Basin of West Texas and has discovered
oil and gas reserves through the use of 3-D seismic technology in the Horseshoe
Atoll Reef Trend of West Texas and the Yegua/Frio Gas Trend onshore the Gulf
Coast of Texas.  Capital utilized to acquire such reserves has been provided
primarily by secured bank financing, sales of the Company's equity securities
and cash flow from operations.

    The Company's oil and gas producing activities are accounted for using the
full cost method of accounting.  Accordingly, the Company capitalizes all costs
incurred in connection with the acquisition of oil and gas properties and with
the exploration for and development of oil and gas reserves.  Normal
dispositions of oil and gas properties are accounted for as adjustments to
capitalized costs, with no gain or loss recognized.  Certain directly
identifiable internal costs of property acquisition, exploration and development
activities are capitalized.  Such costs capitalized in 1996, 1995 and 1994
totaled approximately $587,000, $512,000 and $527,000, respectively. Depletion
of such costs is provided using the units-of-production method based upon
estimates of proved oil and gas reserves with oil and gas production being
converted to a common unit of measure based upon their relative energy content.
Depletion per equivalent unit of production (EBO) was $4.47, $3.97 and $4.07
for 1996, 1995 and 1994, respectively.  Costs from unproved properties are
excluded from depletion until evaluated.  In accordance with the full cost
method of accounting, the net capitalized costs of oil and gas properties
(full cost ceiling limitation) are not to exceed their related estimated
future net revenues discounted at 10%, and lower of cost or estimated fair
value of unproved properties, net of tax considerations.

<PAGE> 21

Results of Operations

    The Company's business activities are characterized by frequent, and
sometimes significant, changes in reserve base, sources of production, product
mix (gas versus oil volumes) and prices received by the Company for its gas
and oil.  Consequently, year to year or other periodic comparisons of the
Company's results of operations can be difficult and may not fully and
accurately describe the Company's condition.  The following table sets forth
selected operating data for the three years ended December 31, 1996:

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                        ---------------------------------------
                                             1996          1995          1994
Production and Prices:                  ------------  -----------    ----------
<S>                                     <C>           <C>            <C>

  Oil (Bbls)                                221,499       132,579        149,308
  Natural gas (Mcf)                       3,654,897     1,616,105      1,391,846

  Oil price (per Bbl)                   $     21.83   $     17.26     $    15.81
  Gas price (per Mcf)                   $      2.55   $      1.50     $     1.68
  Ratio of oil to gas price                  8.56/1       11.51/1         9.41/1
  Equivalent barrels of oil (EBO)(1)        830,649       401,929        381,282

  Increase in production
     volumes over prior year                    107%            5%            50%

  Results of Operations per EBO:

  Oil and gas revenues                  $     17.06   $     11.72     $    12.31

  Costs and expenses:
    Lease operating expense                    3.23          3.65           3.74
    General and administrative                  .36           .57            .54
    Public reporting, auditing
      and legal                                 .27           .51           . 36
    Depreciation, depletion and
      amortization                             4.50          4.02           4.12

Total Costs and Expenses                       8.36          8.75           8.76

  Operating income                             8.70          2.97           3.55

  Other income (expense):
    Interest expense                          (1.50)        (2.58)         (1.87)
    Other income (expense)                      .08           .12            .17
    Income before income taxes          -----------   -----------     ----------
    per EBO                             $      7.28   $       .51     $     1.85
                                        ===========   ===========     ==========

</TABLE>
___________________

(1) An EBO (equivalent barrel of oil) means one barrel of oil equivalent using
    the ratio of six Mcf of gas to one barrel of oil.

<PAGE> 22

    The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on the Company's statements
of operations.

<TABLE>
<CAPTION>
                                                         Year Ended December
                                               --------------------------------------
                                                1996            1995            1994
                                               ------          ------          ------
<S>                                            <C>             <C>             <C>
Oil and gas revenues                           100.0%          100.0%          100.0%
Costs and expenses:
   Production costs                             19.0            31.1            30.4
   General and administrative expense            3.7             9.2             7.2
   Depreciation, depletion and amortization     26.4            34.3            33.5


            Total costs and expenses            49.1            74.6            71.1
Operating Income                                50.9            25.4            28.9
Interest expense, net                            8.2             2.0            15.2
Other expense (income)                           (.5)            (.9)           (1.4)
Pretax income                                   42.7             4.3            15.1
Income tax expense                              12.1             1.4             5.6
Net income                                      30.6%            2.9%            9.5%

</TABLE>

Years Ended December 31, 1996 and December 31, 1995

    Oil and Gas Revenues.  Oil and gas revenues increased $9.5 million, or 201%
to $14.2 million or the twelve months ended December 31, 1996, from $4.7 million
for the same period of 1995.  The increase was primarily the result of a
429,000 EBO, or 107% increase to 831,000 EBO in the Company's oil and gas
production, and an increase of 45% in the average sales price per EBO from
$11.72 in the twelve months ended December 31, 1995 to $17.06 for the same
period of 1996.  Of the $9.5 million increase in revenues, $7.3 million was
attributable to increased oil and gas production volume and $2.2 million was
attributable to the increase in average sales prices, primarily gas prices.
Of the increase in revenues, approximately $7.0 million, or approximately 75%
was due to production from the Yegua/Frio Gas Trend properties which were
drilled, completed and began production during 1996.

    Production Costs.  Production costs increased $1.2 million or 83%, to
$2.7 million for the twelve months ended December 31, 1996, from $1.5 million
for the same period of 1995.  The increase in production of 429,000 EBO was
responsible for the increase in production costs. Production costs as a
percentage of revenues declined primarily because of the 45% increase in the
average sales price per EBO.  Additionally, average production costs per EBO
declined 11% to $3.23 for the twelve months ended December 31, 1996 compared
to $3.65 in the same period of 1995 as a result of new production from the
Company's Yegua/Frio wells.  At December 31, 1996, substantially all of the
Company's oil wells employed artificial lift (pumping) and have higher
associated production costs than its gas wells, which flow.  As a result of
its successful drilling efforts in the Yegua/Frio Gas Trend during 1996, the
Company's production became more weighted toward gas production.

<PAGE> 23

    General and Administrative Expenses.  General and administrative expenses
increased $89,000 or 20% to $521,000 for the year ended December 31, 1996,
from $432,000 for the same period of 1995.  As a result of the Company's low
administrative cost structure and the increase in revenues, the Company's
general and administrative expenses as a percentage of revenues decreased
from 9.2% for the year ended December 31, 1995 to 3.7% for the same period in
1996.

    Depreciation, Depletion and Amortization Expense.  Depreciation, depletion
and amortization ("DD&A")expense increased $2.1 million, or 131% to $3.7 million
in the year ended December 31, 1996, from $1.6 million for the same period of
1995.  The decrease in depletion, depreciation and amortization as a percentage
of revenues is primarily a result of the increase in prices realized per EBO,
partially offset by an increase in the DD&A rate to $4.50 in the year ended
December 31, 1996 from $4.02 in 1995.  The increase in the DD&A rate is
attributable to increased exploration and drilling activities.  During 1996,
the Company added 1.24 million EBO to its reserve base, net of 831,000 EBO of
production, an increase of 21% to its net reserves.  Depreciation, depletion
and amortization expenses increased 12% per EBO, reflecting the Company's
success in drilling activities.

    Net Interest Expense.  Interest expense increased $200,000 or 20%, to
$1.2 million for the year ended December 31, 1996, from $1.0 million for the
same period of 1995, due principally to increased borrowings under the Company's
revolving loan agreement, offset partially by a decrease in interest rates.

    Income Tax Expense.  The effective tax rates were 28% and 34% for the
years ended December 31, 1996 and 1995, respectively.

    Net Income and Operating Cash Flow.  Net income increased $4.2 million, or
3059%, to 4.3 million for the year ended December 31, 1996, compared to $137,000
for the year ended December 31, 1995.  Operating cash flow increased
approximately $8.0 million, or 437%, to $9.8 million for the year ended
December 31, 1996 compared to $1.8 million for the year ended December 31, 1995.
The net income and operating cash flow increases are primarily due to the 201%
increase in oil and gas revenues and, due to the Company's low administrative
cost structure, and costs not increasing in proportion to the increase in
revenues.

    Years Ended December 31, 1995 and December 31, 1994

    Oil and Gas Revenues.  Oil and gas revenues increased $21,000 in 1995,
compared to 1994. The increase was the result of a 5% increase in oil and gas
production from 381,000 EBO to 402,000 EBO, offset by a decrease of 5% in the
average sales price per EBO from $12.31 in 1994 to $11.72 in 1995.

    Production Costs.  Production costs increased $41,000, or 3%, to $1.5
million in 1995 compared to $1.4 million in 1994.  While the average sales
price per EBO, which was slightly lower in 1995, accounted for the small
increase in production costs as a percentage of revenues, average production
costs per EBO were slightly lower at $3.65 in 1995 compared to $3.74 in 1994.

<PAGE> 24

    General and Administrative Expenses.  General and administrative expenses
increased $93,000, or 27%, to $433,000 in 1995 from $340,000 in 1994.
Substantially all of this increase was attributable to the increase in staff
of one employee and overall increases in general corporate expenses.

    Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased approximately $46,000, or 3%.  The increase
was due to a 5% increase in production volumes sold in 1995 and the decline
in the DD&A rate per EBO to $4.02 in 1995 from $4.12 in 1994.

    Net Interest Expense.  Interest expense increased $324,000, or 46%, to
$1.0 million in 1995, compared to $711,000 in 1994, due primarily to increased
borrowings under the Company's revolving loan agreement.

    Income Tax Expense.  The Company had an effective tax rate that approximates
the statutory rate for both 1995 and 1994.

    Net Income and Operating Cash Flow.  Net income decreased $308,000 to
$137,000 in 1995 compared to $445,000 in 1994 and operating cash flow from
operations, before working capital adjustments, decreased $458,000, or 20%,
to $1.8 million in 1995 compared to $2.3 million in 1994.

Liquidity and Capital Resources

    Working capital decreased $287,000 as of December 31, 1996 compared to
December 31, 1995.  Current assets exceeded current liabilities by $352,000 at
December 31, 1996 compared to $639,000 at December 31, 1995.  Current assets
increased primarily due to a decrease in undeveloped leases held for sale of
$60,413, offset by an increase of $2.3 million in accounts receivable.  Current
liabilities increased because of an increase in accounts payables of $1.9
million, resulting from the Company's increased drilling activities.

    On July 1, 1996, the Company entered into its revolving loan agreement,
maturing July 1, 2001, with Bank One, Texas, N.A., to refinance the outstanding
indebtedness under its loan agreement with its former bank lender and to
provide funds for working capital.  The Company may borrow up to the lesser of
$30 million or the "borrowing base" in effect from time to time.  The borrowing
base is redetermined by the bank semi-annually on or about April 1 and October 1
of each year, or at such other times as the bank elects.  On December 18, 1996,
the Company consummated the sale of 2,500,000 shares of its common stock
pursuant to a public offering, and on January 17, 1997, an additional 375,000
shares were sold upon exercise of the underwriters' over-allotment option.
The net proceeds from the sale of the 2,875,000 shares of common stock
(approximately $10.9 million) were used to reduce the Company's outstanding
bank debt. At December 31, 1996, the borrowing base and outstanding bank debt
were $22.0 million and approximately $8.5 million, respectively.

    The Company incurred costs of $15.3 million in its oil and gas property
acquisition and development activities for the year ended December 31, 1996.
Such costs were financed by the utilization of working capital in addition to
<PAGE> 25

the sale of selected properties for $649,000, net cash provided by operating
activities of $7.7 million and net cash provided by financing activities of
$6.4 million, which was attributable to a net decrease in bank borrowings in
the amount of $3.2 million and net proceeds of approximately $9.4 million from
the issuance of 2,500,000 shares of common stock.

    The oil and gas industry is capital intensive.  The Company's cash flow
from operations and the continued availability of credit to it are subject to
a number of variables, including the Company's proved reserves and proved
developed reserves, the level of oil and gas the Company is able to produce
from existing wells, the prices at which oil and gas are sold and the Company's
ability to acquire, locate and produce new reserves, each of which can
materially affect the borrowing base availability under the Company's revolving
loan agreement, its only credit facility.  The Company may from time to time
seek additional financing, either in the form of increased bank borrowings,
sales of the Company's securities or other forms of financing.  Except for the
Company's revolving loan agreement, the Company has no agreements for any such
financing and there can be no assurance as to the availability or terms of any
such financing.

Trends and Prices

    The Company's revenues, cash flows and borrowing capacity are affected by
changes in oil and gas prices.  The markets for oil and gas have historically
been, and will continue to be, volatile. Prices for oil and gas typically
fluctuate in response to relatively minor changes in supply and demand,
market uncertainty, seasonal, political and other factors beyond the control
of the Company.  The Company is unable to accurately predict domestic or
worldwide political events or the effects of such other factors on the prices
received by the Company for its oil and gas.  The Company historically
has not entered into transactions to hedge against changes in oil and gas
prices, but may elect to enter into hedging transactions in the future to
protect against fluctuations in oil and gas prices.

    During 1996, the average sales price received by the Company for its oil
was approximately $21.83 per Bbl, as compared to $17.26 in 1995, while the
average sales prices for the Company's gas was approximately $2.55 per Mcf in
1996, as compared to $1.50 per Mcf in 1995.  At March 1, 1997, the price
received by the Company for its oil production was approximately $20 per Bbl,
while the price received by the Company, at that same date, for its gas
production was approximately $2.00 per Mcf.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Company's financial statements and supplementary financial data, which
begin on page F-1, are included elsewhere herein.


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

    None.

<PAGE> 26

                             PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The Directors, officers and key employees of the Company at March 1, 1997
are as follows:

<TABLE>
<CAPTION>

                                 Director
     Name               Age        Since       Position with Company
--------------------    ---      --------      ---------------------
<S>                     <C>      <C>           <C>

Thomas R. Cambridge      61        1985        Chairman of the Board of Directors
                                               and Chief Executive Officer

Larry C. Oldham          43        1979        President, Treasurer and Director

Danny H. Conklin(1)      62        1985        Director

Ernest R. Duke(1)        69        1980        Director

Myrle Greathouse(2)      74        1993        Director

Charles R. Pannill(2)    71        1982        Director

John S. Rutherford       36           -        Manager of Land/Administration

Eric A. Bayley           48           -        Manager of Engineering

Rebecca A. Burrell       42           -        Manager of Accounting

Thomas W. Ortloff        48           -        Secretary

</TABLE>
______________________
(1)  Member of Audit Committee
(2)  Member of Compensation Committee


    Mr. Cambridge is an independent petroleum geologist engaged in the
exploration for, development and production of oil and natural gas. From 1970
until 1990, such activities were carried out primarily through Cambridge &
Nail Partnership, a Texas general partnership.  Since 1990, such oil and gas
activities have been carried out through Cambridge Production, Inc., a Texas
corporation. He received a Bachelors degree and a Master of Science degree in
Geology from the University of Nebraska in 1958 and 1960, respectively.

    Mr. Oldham, a founder of the Company, has served as an officer and Director
of the Company since its formation in 1979.  Prior to the Company's formation,
Mr. Oldham was employed by Dorchester Gas Corporation during the period 1976
to 1979 and by KPMG Peat Marwick LLP during 1975 and 1976.  Mr. Oldham became
President of the Company in October, 1994, and served as Executive Vice
President of the Company prior to that time.  Mr. Oldham is a member of the

<PAGE> 27

American Institute of Certified Public Accountants and the Permian Basin
Landman's Association. He received a Bachelor of Business Administration
degree from West Texas State University in 1975.

    Mr. Conklin is an independent petroleum geologist and a principal partner
in Philcon Development Co., a privately held oil and gas exploration
partnership.  Mr. Conklin is a director of Boatmens' First National Bank of
Amarillo, Amarillo, Texas, a director of Southwestern Public Service Company,
Amarillo, Texas, and former Chairman of the Independent Petroleum Association
of America.  Mr. Conklin received a Bachelor of Science degree in Geology
from Oklahoma State University in 1957.

    Mr. Duke is the president and majority shareholder of Mustang Mud, Inc.,
a privately held oil field service company.  He received a Bachelor of Science
degree in Geology from Southern Methodist University in 1950.

    Mr. Greathouse is the chairman of the board of directors and sole
shareholder of Wes-Tex Drilling Company, a corporation engaged in contract
drilling of oil and gas wells and, to a lesser extent, oil and gas exploration
and production.  Mr. Greathouse graduated from the University of Oklahoma in
1949 with a degree in Business Administration.

    Mr. Pannill was employed by The Western Company of North America for over
thirty years until his retirement in February, 1982.  During his employment
with The Western Company of North America, Mr. Pannill served in various
capacities, including those of an executive officer and director. He received
a Bachelor of Science degree in Geology from Texas A&M University in 1950.

    Mr. Rutherford has been a full-time employee of the Company since October,
1993.  From May, 1991 to October, 1993, Mr. Rutherford served as a consultant
to the Company, devoting substantially all of his time to the Company's
business.  Mr. Rutherford graduated from Oral Roberts University in 1982 with
a degree in Education and in 1986, he graduated from Baylor University with
a Master's degree in Business Administration.  From April, 1988 to April,
1991, Mr. Rutherford was a Vice President in the energy lending division of
Texas Commerce Bank, National Association, Midland, Texas.

    Mr. Bayley has been a full-time employee of the Company since October,
1993.  From December, 1990 to October, 1993, Mr. Bayley was an independent
consulting engineer and devoted substantially all of his time to the Company.
Mr. Bayley graduated from Texas A&M University in 1978 with a B.S. degree in
Petroleum Engineering, and in 1984, Mr. Bayley graduated from the University
of Texas of the Permian Basin with a Master's of Business Administration
degree.

    Mrs. Burrell has been a full-time employee of the Company since January,
1985.  Mrs. Burrell graduated from Jacksonville College in 1974 with a degree
in accounting and has worked in oil and gas accounting since 1978.

    Mr. Ortloff has been a shareholder in the law firm of Lynch, Chappell &
Alsup, a professional corporation, Midland, Texas, for in excess of the past
five years.

<PAGE> 28

    Directors of the Company hold office until the annual meeting of
stockholders following their election or appointment and until their respective
successors have been duly elected or appointed. Officers of the Company are
appointed annually by the Company's Board of Directors to serve at the
Board's discretion and until their respective successors in office are duly
appointed.  There are no family relationships between any of the Directors or
officers of the Company.

Consulting Arrangements

    In furtherance of its overall business strategy, the Company continually
attempts to maintain and control its general and administrative expenses within
parameters the Company believes to be compatible with the size of the Company,
its level of activities and projected future activities, but without impairing
the quality of services and organizational structure necessary for the efficient
administration of the Company's business.  In addition to the services provided
by Messrs. Cambridge and Oldham, the Company also relies extensively on its
key employees and outside advisors and consultants to provide technical and
administrative services and support in the operation of the Company's business.

<PAGE> 29

ITEM 11.  EXECUTIVE COMPENSATION

Summary of Annual Compensation

    The Summary Compensation Table below sets forth for each of the three
fiscal years ended December 31, 1996, a summary of the types and amounts of
compensation paid to the executive officers of the Company.

<TABLE>
<CAPTION>
                                         Summary Compensation Table

                                                                Long-Term Compensation
                                                             -----------------------------
                                Annual Compensation             Awards         Payouts
                             --------------------------      -------------   -------------
                                                Other
                                                Annual       Restricted   Securities
                                                Compen-        Stock      Underlying    LTIP      All Other
Name and Principal     Year    Salary    Bonus  sation         Awards      Options/   Payouts   Compensation
  Position                      ($)       ($)     ($)           ($)         SARs(#)     ($)          ($)
------------------     ----   -------   ------  -------     ----------    ----------  -------   ------------
<S>                    <C>    <C>       <C>     <C>         <C>           <C>         <C>       <C>

T.R. Cambridge         1996   $66,402   $2,945  $   825          0            0          0            0
 Chief Executive
 Officer and           1995   $62,475   $3,560  $   900          0            0          0            0
 Chairman of
 the Board of          1994   $52,500   $   500 $   900          0            0          0            0
 Directors


L.C. Oldham            1996   $98,766   $4,346  $11,290(1)       0            0          0       $2,963(2)
 President,
 Treasurer             1995   $92,181   $5,015  $11,521(1)       0            0          0       $2,765(2)
 and Director
                       1994   $87,792   $4,800  $10,809(1)       0            0          0       $1,129(2)

</TABLE>

-----------------------
(1) Such amount includes insurance premiums for nondiscriminatory group life,
    medical, disability and dental insurance as follows: $10,417 for 1996;
    $9,171 for 1995; and $8,445 for 1994.

(2) Such amount represents contributions made by the Company to Mr. Oldham's
    individual retirement account maintained under the Company's 408(k)
    simplified employee pension plan/individual retirement account.

<PAGE> 30

Stock Options

    The Company has in the past utilized stock options as part of its overall
compensation of Directors, officers and employees.  Narrative descriptions of
the Company's stock option plans and outstanding stock options are set forth
under the caption "Stock Option Plans" below.  No stock options were granted
in 1996 to the Company's executive officers.

    The following table sets forth certain information with respect to stock
option exercises during the fiscal year ended December 31, 1996 by the executive
officers of the Company and the value of each such executive officer's
unexercised stock options at December 31, 1996.

                  Aggregated Option/SAR Exercises in
       Last Fiscal Year and Fiscal Year - End Option/SAR Values

<TABLE>
<CAPTION>
                                                                                         Value of
                                                     Number of                         Unexercised
                                                 Securities Underlying                 in-the-Money
                    Shares                        Unexercised Options                    Options
                   Acquired                      at Fiscal Year-End (#)          at Fiscal Year-End($)(1)
                     on          Value       ----------------------------     ------------------------------
                   Exercise     Realized
   Name              (#)          ($)        Exercisable    Unexercisable     Exercisable      Unexercisable
---------------    --------     --------     -----------    -------------     -----------      -------------
<S>                <C>          <C>          <C>            <C>               <C>              <C>
T.R. Cambridge        0            0          225,000          25,000          $661,687           $18,562

L.C. Oldham           0            0          612,000          25,000        $2,274,337           $18,562

</TABLE>
_______________
(1) Value of in-the-money options is equal to the fair market value of a share
    of Common Stock at fiscal year-end ($4.68 per share), based on the last
    sale price of the Company's Common Stock, less the exercise price.


Change of Control Arrangements

    The Company's outstanding stock options and stock option plans contain
certain "change of control" provisions which are applicable to the Company's
outstanding stock options, including the options held by Messrs. Cambridge
and Oldham, and other Directors of the Company.  Such provisions include the
following: if (i) the Company is not the surviving entity in any merger or
consolidation, (ii) the Company sells, leases or exchanges all or substantially
all of its assets, (iii) the Company is to be dissolved and liquidated,
(iv) any person or group acquires beneficial ownership of more than 50% of
the Company's outstanding Common Stock, or (v) in connection with a contested
election of directors, the persons who were directors of the Company before
such election cease to constitute a majority of the Board of Directors (each

<PAGE> 31

such event, a "Corporate Change"), then within (a) ten days after approval by
the stockholders of the Company of such merger, consolidation, sale, lease or
exchange of assets or dissolution or election of directors or (b) thirty days
of such change of control, the Compensation Committee (the "Committee") of the
Board of Directors shall effect one or more of the following alternatives:
(1) accelerate the time at which options may be exercised, (2) require the
mandatory surrender to the Company by optionees of some or all of such options,
in which event the Committee shall cancel such options and pay to each the
"Change of Control Value", (3) make such adjustments to such options as the
Committee deems appropriate to reflect such Corporate Change, or (4) provide
that thereafter upon any exercise of an option theretofore granted the optionee
shall be entitled to purchase under such option, in lieu of the number of
shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock or other securities or property to which
the optionee would have been entitled pursuant to the terms of the agreement
of merger, consolidation or sale of assets and dissolution if, immediately
prior to such merger, consolidation or sale of assets and dissolution the
optionee had been the holder of record of the number of shares of Common Stock
as to which such option is then exercisable.  The "Change of Control
Value" is an amount equal to, whichever is applicable, (i) the per share price
offered to stockholders of the Company in any merger, consolidation, sale of
assets or dissolution transaction, (ii) the price per share offered to
stockholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share
of the shares into which such options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be
the date of cancellation and surrender of such options.

Compensation of Directors

    Danny H. Conklin, Ernest R. Duke, Myrle Greathouse and Charles R. Pannill,
non-employee Directors of the Company, each receive $1,000 for attendance at
meetings of the Board of Directors and $500 for attendance at meetings of Board
committees of which they are members.  All Directors are reimbursed for expenses
incurred in connection with attending meetings.

    The Company's 1992 Stock Option Plan provides for the granting of a one-time
option to purchase 25,000 shares of the Company's Common Stock to each
individual who was a non-employee director of the Company on March 1, 1992 and
to each individual who becomes a non-employee director following March 1, 1992.
No options were granted in 1996 pursuant to this arrangement.

Stock Option Plans

    1983 Incentive Stock Option Plan.  In May, 1984, the Company's stockholders
approved and adopted the Company's 1983 Incentive Stock Option Plan (the "1983
Plan").  Options granted under the 1983 Plan are intended to be "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), which, generally, provides the holder of
an "incentive" option with certain favorable tax benefits.  Under the terms
of the 1983 Plan, all employees of the Company were eligible to participate.
The 1983 Plan authorized the granting of options to purchase a total of 750,000
shares of the Company's Common Stock.  The exercise price of options granted
under the 1983 Plan must be at least equal to the fair market value of the
Company's Common Stock on the date of grant.  Options under the 1983 Plan may
not be exercised until one year from the date of grant.  Subject to the right
of accumulation, each option is exercisable as to one-third of the shares
optioned one year after the date of grant, with an additional one-third
of the shares becoming exercisable at the end of each year thereafter.

<PAGE> 32

Options are cumulative and, to the extent not exercised in each annual period,
may be exercised in whole or in part three years after the date of grant.
All options expire, in any event, ten years after the date of grant.
Although the 1983 Plan expired by its own terms on May 19, 1993, incentive
stock options to purchase 537,000 shares of Common Stock, which were granted
prior to May 19, 1993, remain outstanding and subject to all terms and
conditions of the 1983 Plan.  The 1983 Plan is administered by the
Compensation Committee of the Company's Board of Directors.  Members of the
Compensation Committee are not eligible to participate in the 1983 Plan.

    1992 Stock Option Plan.  In May, 1992, the Company's stockholders approved
and adopted the Company's 1992 Stock Option Plan (the "1992 Plan").  The 1992
Plan provides for the granting to key employees (including officers and
Directors who are also key employees) of the Company and Directors who are
not employees of the Company of options to purchase up to an aggregate of
750,000 shares of Common Stock.  Options granted under the 1992 Plan to
employees may be either incentive stock options within the meaning of Section
422 of the Code, or options which do not constitute incentive stock options.
Options granted to non-employee Directors will not be incentive stock options.

    The 1992 Plan is administered by the Board's Compensation Committee, none
of whom are eligible to participate in the 1992 Plan except to receive a
one-time option to purchase 25,000 shares at the time he becomes a Director.
The Compensation Committee has the sole authority to select the employees who
are to be granted options, to establish the number of shares issuable under
each option and to establish such terms and conditions as may be approved by
the Compensation Committee, except that the purchase price of Common Stock
issued under each option shall not be less than the fair market value of the
stock subject to the option at the time of grant.

    The 1992 Plan provides for the granting of an option to purchase 25,000
shares of Common Stock to each individual who was a non-employee Director of
the Company on March 1, 1992 and to each individual who becomes a non-employee
Director following March 1, 1992.  Members of the Compensation Committee are
not eligible to participate in the 1992 Plan other  than to receive a non-
qualified stock option to purchase 25,000 shares of Common Stock as described
above.

    An option may be granted in exchange for an individual's right and option
to purchase shares of Common Stock pursuant to the terms of an agreement that
existed prior to the date such option is granted ("Prior Option").  An option
agreement that grants an option in exchange for a Prior Option must provide
for the surrender and cancellation of the Prior Option.  The purchase price
of Common Stock issued under an option granted in exchange for a Prior Option
shall be determined by the Compensation Committee and, such purchase price may,
without limitation, be equal to the price for which the optionee could have
purchased Common Stock under the Prior Option.

    The Board of Directors of the Company may amend or terminate the 1992 Plan
at any time, but may not in any way terminate or restrict the rights of a
participant under an outstanding option without the consent of such participant.
The Board of Directors may not make any alteration or amendment which would
materially increase the benefits accruing to participants under the 1992 Plan,
increase the aggregate number of shares which may be issued pursuant to the

<PAGE> 33

provisions of the 1992 Plan, change the class of individuals eligible to
receive options under the 1992 Plan, or extend the term of the 1992 Plan,
without the approval of the stockholders of the Company.

    The 1992 Plan will terminate upon and no further options may be granted
thereunder after the expiration of ten years from the date of its adoption by
the Board of Directors.

    Other Option Grants.  In addition to the stock options granted pursuant to
the Company's 1981, 1983 and 1992 stock option plans, the Company has, on two
occasions, granted stock options to Mr. Cambridge pursuant to the general
corporate powers of the Company, rather than pursuant to such plans.  Upon
recommendation of the Company's Compensation Committee, the Board of Directors
of the Company granted a non-qualified stock option to Mr. Cambridge to purchase
150,000 shares of Common Stock at an exercise price of $.64 per share, the fair
market value of the Common Stock on December 11, 1991, the date of grant.
The option became exercisable as to 50,000 shares on each of December 11,
1992, 1993 and 1994.  On October 18, 1993, and upon further recommendation of
the Company's Compensation Committee, the Board of Directors granted a
non-qualified stock option to Mr. Cambridge to purchase 100,000 shares of
Common Stock at an exercise price of $3.9375 per share, the fair market value
of the Common Stock on the date of grant. The option is exercisable in four
equal annual increments of 25,000 shares, commencing on October 18, 1994.
Neither option is transferable other than by will or the laws of descent and
distribution and both options terminate ten years from the date of grant.

Retirement Plan

    The Company maintains under Section 408(k) of the Code a combination
simplified employee pension ("SEP") and individual retirement account ("IRA")
plan (the "SEP/IRA") for eligible employees.  Generally, eligible employees
include all employees who are at least twenty-one years of age.

    Company contributions to employee SEP accounts may be made from time to
time at the discretion of the Company, as authorized from time to time by the
Compensation Committee of the Board of Directors, and the percentage of such
contributions may also vary from time to time. However, the same percentage
contribution must be made for all participating employees.  The Company is
not required to make annual contributions to the employees SEP accounts.
The Company may make tax-deductible contributions for each employee participant
of up to 15% of such participant's compensation or $30,000, whichever is less.
Under the prototype simplified employee pension plan adopted by the Company,
all of the Company's SEP contributions must be made to SEP/IRAs maintained
with the sponsor of the plan, a national investment banking firm.  All
contributions to employees' accounts are immediately 100% vested and become
the property of each employee at the time of contribution, including employer
contributions, income-deferral contributions and IRA contributions.  Generally,
earnings on contributions to an employee's SEP/IRA account are not subject to
federal income tax until withdrawn.

<PAGE> 34

    In addition to receiving SEP contributions by the Company, employees may
make individual annual IRA contributions of up to the lesser of $2,000 or 100%
of compensation.  Each employee is responsible for the investment of funds in
his or her own SEP/IRA and can select investments offered through the sponsor
of the plan.

    Distributions may be taken by employees at any time and must commence by
April 1st following the year in which the employee attains age 70 1/2.

    The Company presently makes matching contributions to employee accounts
in an amount equal to the contribution made by each employee, not to exceed,
however, 3% of each such employee's salary during any calendar year.  During
the fiscal year ended December 31, 1996, the Company contributed an aggregate
of $7,985 to the accounts of five employee participants, of which $2,963 was
allocated to the account of Mr. Oldham, the President and a Director of the
Company.

<PAGE> 35

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

    The following table sets forth certain information as of March 10, 1997
with respect to the beneficial ownership of Common Stock by (i) each person
known to the Company to own beneficially more than five percent of the
outstanding Common Stock, (ii) each executive officer of the Company,
(iii) each Director of the Company, and (iv) all executive officers and
Directors of the Company as a group:

<TABLE>
<CAPTION>
                                                                   Percent
Name and Address                    Amount and Nature of              of
of Beneficial Owner                 Beneficial Ownership (1)      Class (2)
-------------------                 ------------------------      ---------
<S>                                  <C>                          <C>
Thomas R. Cambridge                        842,045 (3)                 4.67%
  216 Texas Commerce Bank Building
  Amarillo, Texas  79109

Danny H. Conklin                           125,624 (4)                  *
  730 First National Place I
  Amarillo, Texas  79101

Ernest R. Duke                             215,973 (5)                 1.21%
  408 West Wall Street
  Midland, Texas  79701

Myrle Greathouse                         1,020,488 (6)                 5.73%
  401 Cypress, Suite 519
  Abilene, Texas  79601

Larry C. Oldham                            806,090 (7)                 4.38%
  One Marienfeld Place, Suite 465
  Midland, Texas  79701

Charles R. Pannill                          95,495 (8)                  *
  3416 Acorn Run
  Fort Worth, Texas  76019

Wes-Tex Drilling Company                   972,488 (9)                 5.47%
  519 First National Bank Building West
  Abilene, Texas 79601

All Executive Officers and Directors     3,105,715 (10)               16.59%
  as a Group (6 persons)

</TABLE>
__________________
*   Less than one percent.

(1) Unless otherwise indicated, all shares of Common Stock are held directly
    with sole voting and investment powers.

<PAGE> 36

(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.

(3) Includes 225,000 shares of Common Stock underlying presently exercisable
    stock options.

(4) Includes 25,000 shares of Common Stock underlying a presently exercisable
    stock option.

(5) Includes 12,500 shares of Common Stock underlying a presently exercisable
    stock option. Also included are 74,395 shares held by Duke and Cain
    Partnership, a general partnership in which Mr. Duke is a partner, and
    16,000 shares held in the name of Mr. Duke's wife.  Mr. Duke has shared
    voting and investment powers with respect to such shares.

(6) Includes 972,488 shares of Common Stock held directly by Wes-Tex Drilling
    Company ("Wes-Tex"), a corporation.  Mr. Greathouse is the chairman of the
    board of directors and sole shareholder of Wes-Tex and, accordingly, has
    shared voting and investment powers with respect to such shares.  Also
    included are 25,000 shares of Common Stock underlying a presently
    exercisable stock option, and 1,000 shares held by a twenty-two member
    investment club, of which Mr. Greathouse is a member, and as to which
    Mr. Greathouse has shared voting and investment powers.  See note 9 below.

(7) Includes 612,000 shares of Common Stock underlying presently exercisable
    stock options.

(8) Includes 25,000 shares of Common Stock underlying a presently exercisable
    stock option. Also included are 1,300 shares held by Mr. Pannill as
    custodian for the benefit of two minor grandchildren and as to which
    Mr. Pannill disclaims beneficial ownership.

(9) Mr. Greathouse, a Director of the Company, is the chairman of the board
    of directors and sole shareholder of Wes-Tex Drilling Company.  Wes-Tex
    has shared voting and investment powers with respect to such shares.
    See note 6 above.

(10)Includes 924,500 shares of Common Stock underlying presently exercisable
    stock options.

<PAGE> 37

Beneficial Ownership Reports

    Section 16(a) of the Securities Exchange Act of 1934 requires, among other
things, that the Company's Directors and officers file with the Securities and
Exchange Commission, at specified times, reports of beneficial ownership and
changes in beneficial ownership of the Company's Common Stock and other equity
securities.  To the Company's knowledge, all Section 16(a) filing requirements
have been complied with during the year ended December 31, 1996, except that
two transactions involving the purchase by Mr. Duke and his wife of a total of
15,000 shares of the Company's Common Stock were reported five days late, and
Mr. Conklin also reported his purchase of 5,000 shares of the Company's
Common Stock five days after the due date of the report.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    Historically, Wes-Tex Drilling Company ("Wes-Tex"), a Texas corporation,
has provided contract drilling and other related oil and gas services to the
Company in connection with the Company's oil and gas exploration and
development activities, and it is anticipated that Wes-Tex will continue to
perform contract drilling services for the Company in the future.  Myrle
Greathouse, a director and the sole shareholder of Wes-Tex, has served as a
Director of the Company since December, 1993.  During the year ended December
31, 1996, the Company paid approximately $176,000 to Wes-Tex for contract
drilling services provided by Wes-Tex during 1996.  The largest aggregate
amount outstanding and owed by the Company to Wes-Tex at one time during the
fiscal year ended December 31, 1996 was approximately $176,000.  At December
31, 1996, the Company was not indebted to Wes-Tex.

    From time to time, Wes-Tex acquires undivided interests in oil and gas
leasehold acreage from the Company and participates with the Company and other
interest owners in the drilling and development of such acreage.  Wes-Tex ]
participates in such operations under standard form operating agreements on
the same or similar terms afforded by the Company to nonaffiliated third
parties.  The Company invoices all working interest owners, including Wes-Tex,
on a monthly basis, without interest, for their pro rata share of lease
acquisition, drilling and operating expenses.  During the year ended December
31, 1996, the Company billed Wes-Tex the aggregate amount of approximately
$42,000 for Wes-Tex's proportionate share of lease operating expenses incurred
on properties operated by the Company.  The largest amount owed to the Company
by Wes-Tex at any one time during the year ended December 31, 1996 for its
share of lease operating expenses was approximately $19,000, and at December
31, 1996 Wes-Tex owed the Company approximately $1,500 for such expenses.
During the fiscal year ended December 31, 1996, the Company disbursed
approximately $80,000 to Wes-Tex in payment of revenues attributable to
Wes-Tex's pro rata share of the proceeds from sales of gas and oil produced
from properties in which Wes-Tex and the Company owned interests.

    E. R. Duke, a Director of the Company, is the sole shareholder and director
of Mustang Mud, Inc. ("Mustang"), an oil field service company primarily
engaged in the sale and application of drilling fluids and chemicals used in
the drilling of wells.  The Company has, from time to time, purchased
supplies and services from Mustang in connection with the Company's drilling
activities.   During 1996, the Company paid approximately $74,000 to Mustang
for supplies and services provided by Mustang to the Company.  The Company
was indebted to Mustang in the amount of approximately $2,600 at December 31

<PAGE> 38

1996.  The largest aggregate amount outstanding and owed by the Company
to Mustang at one time during the fiscal year ended December 31, 1996 was
approximately $56,000.

    Mr. Duke and Mustang each own interests in three oil properties in which
the Company also owns interests, two of which are operated by the Company.
In 1996, the Company billed Mr. Duke and Mustang the aggregate amounts of
approximately $44,000 and $3,000, respectively, for lease operating expenses.
During the same period, Mr. Duke and Mustang paid the Company approximately
$30,000 and $3,000, respectively.  At December 31, 1996, Mr. Duke and Mustang
owed the Company approximately $15,000 and $100, respectively, for their pro
rata share of lease operating expenses.  The Company disbursed approximately
$57,000 and $4,000, respectively, to Mr. Duke and Mustang in 1996 in payment
of their pro rata share of the proceeds from sales of oil produced from
properties in which Mr. Duke, Mustang and the Company owned interests.

    During the year ended December 31, 1996, Cambridge Production, Inc.
("CPI"), a corporation owned by Mr. Cambridge, served as operator of 18 wells
on oil and gas leases in which the Company owned an interest.  Generally, the
operator of a well is responsible for the day to day operations on the lease,
overseeing of production, employment of field personnel, maintenance of
production and other records, determining the location and timing of drilling
of wells, gas contract administration, joint interest billings, revenue
distribution, making various regulatory filings, reporting to working interest
owners and other matters.  During 1996, CPI billed the Company approximately
$199,000, which included $63,000 for the Company's pro rata share of lease
operating expenses and $136,000 for the Company's pro rata share of drilling
expenses.  Of the total amount billed to the Company, approximately $228,000
was paid by the Company to CPI during 1996.  The largest amount owed by the
Company to CPI at any one time during 1996 was approximately $53,000.  At
December 31, 1996, CPI owed the Company approximately $8,200.  CPI's billings
to the Company are made monthly on the same basis as made to all other working
interest owners in the wells.  The Company's pro rata share of oil and gas
sales during 1996 from the wells operated by CPI was approximately $205,000.

    The Company owns a 25% working interest in the Southeast Leedy Prospect in
Custer County, Oklahoma, which is operated by Philcon Development Co.
("Philcon"), a privately owned partnership engaged in the exploration for,
development and production of oil and gas.  Danny H. Conklin, a Director of
the Company, is a principal partner of Philcon.  During 1996, Philcon billed
the Company approximately $6,600 for the Company's pro rata share of lease
costs and related drilling and operating expenses, and approximately $6,200
was paid to Philcon by the Company in 1996.  The Company was indebted to
Philcon in the approximate amount of $600 at December 31, 1996.  The largest
aggregate amount outstanding and owed by the Company to Philcon at any one
time during 1996 was approximately $2,000.

    Management of the Company believes that each of the above referenced
transactions was made on terms no less favorable than if such transactions
had been entered into with an unrelated party.

<PAGE> 39

                             PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K

  (a)    The following documents are filed as part of this report:

         For a list of Financial Statements and Schedules, see "Index to
         the Financial Statements and Schedules" on page F-1, and
         incorporated herein by reference.

  (b)    No reports on Form 8-K were filed by the Company during the last
         quarter of its fiscal year ended December 31, 1996.

  (c)    Exhibits:

         Exhibit
           No.          Description of Exhibit
         -------        ----------------------
           3.1          Certificate of Incorporation of Registrant (Incorporated
                        by reference to Exhibit 3.1 to Form 10-K of the
                        Registrant for the fiscal year ended December 31, 1988.)

           3.2          Bylaws of Registrant (Incorporated by reference to
                        Exhibit 3.2 to Form 10-K of the Registrant for the
                        fiscal year ended December 31, 1995.)

           4.1         Certificate of Merger merging Parallel Petroleum
                       Corporation, a Texas corporation, into Registrant
                       (Incorporated by reference to Exhibit 4.1 to Form 10-K
                       of the Registrant as filed with the Securities
                       and Exchange Commission on April 1, 1985.)

           4.2         Agreement and Plan of Merger Dated July 17, 1984 between
                       Parallel Petroleum Corporation, a Texas corporation,
                       and the Registrant (Incorporated by reference to Exhibit
                       2.1 to Form S-l of the Registrant (File No. 2-92397) as
                       filed with the Securities and Exchange
                       Commission on July 26, 1984, as amended by Amendments No.
                       1 and 2 on October 5, 1984 and October 25, 1984,
                       respectively.)

<PAGE> 40

Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1 through 10.6):
--------------------------------------------------------------------------------
          10.1         1981 Non-Qualified Stock Option Plan (Incorporated by
                       reference to Exhibit 10.1 to Form S-1 of the Registrant
                       (File No. 2-92397) as filed with the Securities and
                       Exchange Commission on July 26, 1984, as amended by
                       Amendments No. 1 and 2 on October 5, 1984 and October 25,
                       1984, respectively.)

          10.2         1983 Incentive Stock Option Plan  (Incorporated by
                       reference to Exhibit 10.2 to Form S-l of the Registrant
                       (File No. 2-92397) as filed with the Securities
                       and Exchange Commission on July 26, 1984, as amended by
                       Amendments No. 1 and 2 on October 5, 1984, and October
                       25, 1984, respectively.)

          10.3         1992 Stock Option Plan  (Incorporated by reference to
                       Exhibit 28.1 to Form S-8 of the Registrant (File No.
                       33-57348) as filed with the Securities and
                       Exchange Commission on January 25, 1993.)

          10.4         Stock Option Agreement between the Registrant and Thomas
                       R. Cambridge dated December 11, 1991  (Incorporated by
                       reference to Exhibit 10.4 of Form 10-K of the
                       Registrant for the fiscal year ended December 31, 1992.)

          10.5         Stock Option Agreement between the Registrant and Thomas
                       R. Cambridge dated October 18, 1993  (Incorporated by
                       reference to Exhibit 10.4(e) of Form 10-K of the
                       Registrant for the fiscal year ended December 31, 1993.)

          10.6         Merrill Lynch, Pierce, Fenner & Smith Incorporated
                       Prototype Simplified Employee Pension Plan
                       (Incorporated by reference to Exhibit 10.6 of the
                       Registrant for the first year ended December 31, 1995.)

          10.7         Loan Agreement dated July 1, 1996 between the
                       Registrant and Bank One, Texas, N.A. (Incorporated by
                       reference to Exhibit 10.1 of Form 10-Q of the
                       Registrant for the fiscal quarter ended June 30, 1996.)

         *23.1         Consent of Independent Auditors

         *23.2         Consent of Independent Petroleum Engineers

         *27           Financial Data Schedule
         _________________________

          *    Filed herewith.

<PAGE> F-1
                        PARALLEL PETROLEUM CORPORATION

               Index to the Financial Statements and Schedules



                                                                         Page
                                                                         ----
Independent Auditors' Report                                             F-2

Financial Statements:

        Balance Sheets at December 31, 1996 and 1995                     F-3

	Statements of Income for the years ended
                December 31, 1996, 1995 and 1994                         F-4

	Statements of Stockholders' Equity for the
                years ended December 31, 1996, 1995 and 1994             F-5

	Statements of Cash Flows for the years ended
                December 31, 1996, 1995 and 1994                         F-6

        Notes to Financial Statements                                    F-7




All schedules are omitted, as the required information is inapplicable or
the information is presented in the financial statements or related notes.

<PAGE> F-2

                        INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
Parallel Petroleum Corporation:


We have audited the financial statements of Parallel Petroleum Corporation as
listed in the accompanying index. These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum Corporation
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.


                                                       KPMG PEAT MARWICK LLP


Midland, Texas
February 21, 1997

<PAGE> F-3

                        PARALLEL PETROLEUM CORPORATION

                               Balance Sheets

                         December 31, 1996 and 1995
<TABLE>
<CAPTION>


Assets                                                    1996                1995
------                                                    ----                ----
<S>                                               <C>                      <C>
Current assets:
Cash and cash equivalents                         $     41,569             558,748
Accounts Receivable:
Oil & Gas                                            2,888,400             648,000
Others, net of allowance for doubtful
  accounts of $28,130 in 1996 and 1995                 127,837             115,318
Affiliate                                               24,991               2,932
                                                  ------------        ------------
                                                     3,041,228             766,250
Other assets                                             7,540             190,946
                                                  ------------        ------------
Total current assets                                 3,090,337           1,515,944
                                                  ------------        ------------
Property and equipment, at cost:
  Oil and gas properties, full cost method          47,130,874          30,879,615
  Other                                                380,207             315,983
                                                  ------------        ------------
                                                    47,511,081          31,195,598
  Less accumulated depreciation and depletion       12,576,560           8,837,838
                                                  ------------        ------------
Net property and equipment                          34,934,521          22,357,760
                                                  ------------        ------------
Other assets, net of accumulated amortization of
  $33,263 in 1996 and $24,500 in 1995                   73,311              40,994
                                                  ------------        ------------
                                                  $ 38,098,169          23,914,698
                                                  ============        ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
  Accounts payable and accrued liabilities:
      Trade                                       $  2,735,639             856,088
      Affiliate                                          3,181              20,557
                                                  ------------        ------------
          Total current liabilities                  2,738,820             876,645
                                                  ------------        ------------
Long-term debt                                       8,521,391          11,674,625
Deferred income taxes                                2,119,823             528,015

Stockholders' equity:
  Preferred stock - par value of $.10 per share,
     authorized 40,000,000 shares, none issued               -                   -
  Common stock - par value of $.01 per share,
     authorized 100,000,000 shares, issued and
     outstanding 17,406,358  in 1996 and 14,854,108
     in 1995                                           174,063             148,540
  Additional paid-in capital                        21,189,442          11,662,897
  Retained earnings (deficit)                        3,354,630            (976,024)
                                                  ------------        ------------
          Total stockholders' equity                24,718,135          10,835,413

Contingencies
                                                  ------------        -----------
                                                  $ 38,098,169         23,914,698
                                                  ============        ===========
</TABLE>

See accompanying notes to financial statements.

<PAGE> F-4

                        PARALLEL PETROLEUM CORPORATION

                             Statements of Income

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                       1996          1995          1994
                                                       ----          ----          ----
<S>                                               <C>              <C>          <C>
Oil and gas revenues                              $ 14,167,470     4,713,748    4,692,706

Costs and expenses:
  Lease operating expense                            2,685,662     1,467,893    1,427,309
  General and administrative                           297,825       227,448      204,092
  Public reporting, auditing and legal                 222,959       204,893      136,375
  Depreciation, depletion and amortization           3,738,722     1,617,929    1,571,702
                                                   -----------    ----------   ----------
           Total costs and expenses                  6,945,168     3,518,163    3,339,478
                                                   -----------    ----------   ----------
           Operating income                          7,222,302     1,195,585    1,353,228
                                                   -----------    ----------   ----------
Other income (expense), net:
  Interest income                                        8,165           316          322
  Other income                                          65,757        51,313       69,216
  Interest expense                                  (1,245,891)   (1,035,093)    (711,519)
  Other expense                                         (1,566)       (7,537)      (3,466)
                                                   -----------    ----------   ----------
         Total other expense, net                   (1,173,535)     (991,001)    (645,447)

Income before income taxes                           6,048,767       204,584      707,781

Income tax expense                                   1,718,113        67,504      263,421
                                                   -----------    ----------   ----------
         Net income                                $ 4,330,654       137,080      444,360
                                                   ===========    ==========   ==========
Net income per common share                              $ .28          0.01         0.03
                                                         =====          ====         ====
Weighted average common shares and common
  stock equivalents outstanding                     15,679,828    15,556,949   14,815,498
                                                   ===========   ===========  ==========
</TABLE>

See accompanying notes to financial statements.

<PAGE> F-5

                        PARALLEL PETROLEUM CORPORATION

                      Statements of Stockholders' Equity

                  Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                Common stock             Additional        Retained       Total
                           Number of                       paid-in       earnings  stockholders'
                            shares       Amount            capital       (deficit)    equity
                            ------       ------            -------       ---------    ------
<S>                          <C>          <C>              <C>             <C>        <C>
Balance,
   January 1, 1994         14,067,388  $ 140,674          10,133,864      (1,557,464)  8,717,074

   Options exercised          107,500      1,075              83,006               -      84,081

   Tax benefits related
        to options                 -           -              83,391               -       83,391

   Net income                      -           -                   -          444,360     444,360

Balance,
   December 31, 1994       14,174,888    141,749          10,300,261       (1,113,104)  9,328,906

   Issuance of stock          644,220      6,441           1,314,679                -   1,321,120

   Options exercised           35,000        350              35,700                -      36,050

   Tax benefits related
        to options                  -          -              12,257                -      12,257

   Net income                       -          -                   -          137,080     137,080
                           ----------  ---------          ----------        ---------  ----------
Balance,
   December 31, 1995       14,854,108    148,540          11,662,897         (976,024) 10,835,413

   Issuance of stock
    net of offering costs   2,500,000     25,000           9,395,630                -   9,420,630

   Options exercised           12,250        123              21,315                -      21,438

   Warrants exercised          40,000        400             109,600                -     110,000

   Net income                       -          -                   -        4,330,654   4,330,654
                           ----------  ---------          ----------        ---------  ----------
Balance,
   December 31, 1996       17,406,358  $ 174,063          21,189,442        3,354,630  24,718,135
                           ==========  =========          ==========        =========  ==========

</TABLE>

See accompanying notes to financial statements.

<PAGE> F-6

                        PARALLEL PETROLEUM CORPORATION

                           Statements of Cash Flows

                 Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                         1996          1995            1994
                                                         ----          ----            ----
<S>                                                     <C>            <C>             <C>
Cash flows from operating activities:
  Net income                                          $ 4,330,654      137,080          444,360
  Adjustments to reconcile net income to net cash
    provided by operating activities:
       Depreciation, depletion and amortization         3,738,722    1,617,929        1,571,702
       Deferred income taxes                            1,706,048       67,504          263,421
  Other, net                                              (32,317)       8,058          (77,088)
  Changes in assets and liabilities:
    Decrease (increase) in trade receivables           (2,274,978)     (51,015)         175,147
    Decrease (increase) in prepaid expenses and
       other                                                8,753       (3,712)          (5,163)
    Increase (decrease) in accounts payable and
       accrued liabilities                                229,866     (281,439)        (518,844)
                                                      -----------    ---------        ---------
          Net cash provided by
               operating activities                     7,706,748    1,494,405        1,853,535
                                                      -----------    ---------        ---------
Cash flows from investing activities:
  Additions to property and equipment                 (15,271,761)  (4,517,692)      (6,317,107)
  Proceeds from disposition of property and equipment     649,000      596,733          571,578
  Acquisition of undeveloped leases held for sale               -     (523,573)        (771,905)
  Proceeds from disposition of undeveloped leases
    held for sale                                               -      730,500           12,105
                                                      -----------    ---------        ---------
         Net cash used in
              investing activities                    (14,622,761)  (3,714,032)      (6,505,329)
                                                      -----------    ---------        ---------
Cash flows from financing activities:
  Proceeds from the issuance of long-term debt         22,387,102     2,285,000       5,191,000
  Payments of long-term debt                          (25,540,336)   (1,610,375)              -
  Proceeds from exercise of options and warrants          131,438        36,050          84,081
  Stock offering costs                                 (1,205,620)     (141,785)       (148,115)
  Proceeds from common stock issuance                  10,626,250     1,611,020               -
                                                      -----------    ----------       ---------
         Net cash provided by
              financing activities                      6,398,834     2,179,910       5,126,966
                                                      -----------    ----------       ---------
         Net increase (decrease) in cash
              and cash equivalents                       (517,179)      (39,717)        475,172

Beginning cash and cash equivalents                       558,748       598,465         123,293
                                                      -----------    ----------        --------
Ending cash and cash equivalents                    $      41,569       558,748         598,465
                                                      ===========    ==========        ========
</TABLE>

See accompanying notes to financial statements.

<PAGE> F-7

                        PARALLEL PETROLEUM CORPORATION

                        Notes to Financial Statements

                       December 31, 1996, 1995 and 1994


(1)     Summary of Significant Accounting Policies
        ------------------------------------------
        Nature of Operations
        --------------------
        Parallel Petroleum Corporation (the Company), a Delaware corporation,
          is primarily engaged in, and its only industry segment is, the
          acquisition of, and the exploration for, development, production
          and sale of, crude oil and natural gas.  The Company's business
          activities are carried out primarily in Texas.  The Company's
          activities in Texas are focused in the onshore Gulf Coast area of
          Jackson, Wharton, Lavaca and Victoria Counties, Texas, and in the
          Permian Basin of West Texas.

        Property and Equipment
        ----------------------
        The Company's oil and gas producing activities are accounted for using
          the full cost method of accounting.  Accordingly, the Company
          capitalizes all costs incurred in connection with the acquisition of
          oil and gas properties and with the exploration for and development
          of oil and gas reserves.  Normal dispositions of oil and gas
          properties are accounted for as adjustments to capitalized costs,
          with no gain or loss recognized.

        Certain directly identifiable internal costs of property acquisition,
          exploration and development activities are capitalized.  Such costs
          capitalized in 1996, 1995 and 1994 totaled $587,198, $512,000, and
          $527,000, respectively.

        Depletion of such costs is provided using the units-of-production
          method based upon estimates of proved oil and gas reserves with oil
          and gas production being converted to a common unit of measure based
          upon their relative energy content.  Depletion per equivalent unit of
          production (EBO) was $4.47, $3.97 and $4.07 for 1996, 1995 and 1994,
          respectively.  Costs from unproved properties are excluded from
          depletion until evaluated.

        In accordance with the full cost method of accounting, the net
          capitalized costs of oil and gas properties (full cost ceiling
          limitation) are not to exceed their related estimated future net
          revenues discounted at 10%, and lower of cost or estimated fair value
          of unproved properties, net of tax considerations.

        Maintenance and repairs are charged to operations; renewals and
          betterments are charged to the appropriate property and equipment
          accounts.

        Upon retirement or disposition of assets other than oil and gas
          properties, the cost and related accumulated depreciation are
          removed from the accounts with the resulting gains or losses, if
          any, reflected in results of operations.  Depreciation of other
          property and equipment is computed using the straight-line method
          based on their estimated useful lives.

<PAGE> F-8

                        PARALLEL PETROLEUM CORPORATION

                   Notes to Financial Statements - (Continued)

        Income Taxes
        ------------
        The Company accounts for federal income taxes using Statement of
          Financial Accounting Standards No. 109, "Accounting for Income Taxes"
          ("FAS 109"). Under the asset and liability method of FAS 109,
          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 FAS 109, 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.

        Environmental
        -------------
        The Company is subject to extensive Federal, state and local
          environmental laws and regulations.  These laws, which are constantly
          changing, 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.

        Revenue Recognition
        -------------------
        The Company uses the sales method of accounting for crude oil revenues.
          To the extent that crude oil is produced but not sold, the oil in
          tanks is not recorded as inventory on the financial statements.  The
          oil in tanks at December 31, 1996, 1995 and 1994 was not material.

        The Company uses the sales method of accounting for natural gas
          revenues.  Under this method, revenues are recognized based on
          actual volumes of gas sold to purchasers.

        Gas Balancing
        -------------
        Deferred income associated with gas balancing is accounted for on the
          entitlements method and represents amounts received for gas sold
          under gas balancing arrangements in excess of the Company's
          interest in properties covered by such agreements.  The Company
          currently has no significant amounts outstanding under gas
          balancing arrangements.

<PAGE> F-9

                        PARALLEL PETROLEUM CORPORATION

                        Notes to Financial Statements - (Continued)


        Net Income Per Common Share
        ---------------------------
        Net income per common share has been computed by dividing net
          earnings by the weighted average number of shares and share
          equivalents, if more than 3% dilutive, outstanding during the
          period.  There was no significant difference between the primary
          and fully dilutive earnings per share.

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

        Cash Management
        ---------------
        The Company maintains a cash management system, whereby it maintains
          minimum cash balances with any excess cash applied against its bank
          line of credit.

        Cash Equivalents
        ----------------
        For 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.

(2)	Disclosures About Fair Value of Financial Instruments
        -----------------------------------------------------
        The 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 approximates fair value because
          the Company's current borrowing rate does not differ from the
          existing rate on the Company's long-term debt balance.

<PAGE> F-10

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


(3)	Long-Term Debt
        --------------
        Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                            1996            1995
                                                            ----            ----
        <S>                                             <C>                 <C>

        Note payable to bank, at the bank's prime rate
          plus .75% (9.25% at December 31, 1995), secured
          by substantially all of the Company's oil and
          gas properties, due in forty-eight monthly
          payments commencing June 1997              $          -        11,674,625


        Note payable to bank, at bank's base lending
          rate (8.25% at December 31, 1996) (a)         8,521,391                 -

        Less:  current maturities                              -                  -
                                                       ---------         ----------
                                                     $ 8,521,391         11,674,625
                                                     ===========         ==========

</TABLE>
_________________
(a)     The note payable is classified as long-term due to a maturity date of
          July 1, 2001.

        On July 31, 1995, the Company amended and renewed its loan agreement.
          The note provided for a two-year revolving line of credit of
          $25,000,000 with a borrowing base of $12,000,000, followed by a
          four-year term loan requiring forty-eight monthly principal
          payments beginning June 1997.  The borrowing base was subject to
          redetermination every six months with the latest redetermination
          date on November 30, 1995.  The note was secured by substantially
          all of the Company's oil and gas properties.  Commitment fees of .5%
          per annum on the difference between the commitment and the average
          daily amount outstanding were due quarterly.

        The amended and renewed loan agreement contained various restrictive
          covenants and compliance requirements, which included (1) maintenance
          of certain financial ratios,   (2) limiting the incurrence of
          additional indebtedness and (3) no payment of dividends.

        On July 1, 1996, the Company entered into a new loan agreement to
          refinance the outstanding indebtedness with its former lender and
          to provide funds for working capital.  The note provides for a
          revolving credit facility of $30,000,000 with a current borrowing
          base of $22,000,000.  The note matures July 1, 2001.  The borrowing
          base is subject to redetermination every six months on April 1 and
          October 1 of each year, or at such other times as the bank elects.
          The latest redetermination date was on August 12, 1996.  The note is
          secured by substantially all of the Company's oil and gas properties.
          Commitment fees of .25% per annum on the difference between the
          commitment and the average daily amount outstanding are due quarterly.


<PAGE> F-11
                        PARALLEL PETROLEUM CORPORATION

                 Notes to Financial Statements - (Continued)


        The unpaid principal balance on the note bears interest at the
          election of the Company at a rate equal to (i) the bank's base
          lending rate or (ii) the bank's Eurodollar rate plus a margin of
          2.5%.  On December 31, 1996, the interest rate in effect was the
          bank's base lending rate of 8.25%.

        The new loan agreement contains various restrictive covenants and
          compliance requirements, which include (1) maintenance of certain
          financial ratios, (2) limiting the incurrence of additional
          indebtedness, and (3) no payment of dividends.

(4)  Stock Options and Warrants
     --------------------------

        At the election of the board of directors, the Company awards both
          incentive stock options and nonqualified stock options to selected
          key employees and officers.  The options are awarded at an exercise
          price based on the closing price of the Company's common stock on
          the date of grant, a two-year and four-year vesting schedule and a
          ten-year exercise period.  As of December 31, 1996, options expire
          beginning in the year-ended December 31, 2000 through 2006.
          Exercise of the nonqualified stock options resulted in a deferred
          tax effect of $0, $12,257 and $83,391 for the years ended December
          31, 1996, 1995 and 1994, respectively.

        The Company applies APB 25 and related Interpretations in accounting
          for its stock option awards.  No compensation expense
          has been recognized for its stock option awards.  If compensation
          expense for the stock option awards had been determined consistent
          with Statement of Financial Accounting Standards No. 123,
          "Accounting for Stock-Based Compensation" ("FAS 123"), the
          Company's net income and net income  per share would have been
          adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                          For the year ended
                                                              December 31,
                                                       ------------------------
                                                          1996           1995
                                                          ----           ----
        <S>                                           <C>            <C>

        Net income                                    $ 4,295,248    $ 127,873
        Net income per share                               $  .27        $ .01

</TABLE>

        The pro forma net income and pro forma net income per share amounts
          noted above are not likely to be representative of the pro forma
          amounts to be reported in future years.  The pro forma amounts for
          1996 and 1995 reflect the initial phase-in of FAS 123 and as a
          result do not reflect any compensation expense for options granted
          prior to 1995.  Pro forma adjustments in future years will include
          compensation expense associated with the options granted in 1996
          and 1995 plus compensation expense associated with any options
          awarded in future years.  As a result, such proforma compensation
          expense is likely to be higher than the levels experienced in 1996
          and 1995.

<PAGE> F-12
                        PARALLEL PETROLEUM CORPORATION

                   Notes to Financial Statements - (Continued)


        Under FAS 123, the fair value of each stock option grant is estimated
          on the date of grant using the Black-Scholes option pricing model
          with the following weighted average assumptions used for grants in
          1996 and 1995:

<TABLE>
<CAPTION>
                                                       1996               1995
                                                       ----               ----
        <S>                                            <C>                <C>
        Risk-free interest rate                        6.15               6.06
        Expected life                               7 years            7 years
        Expected volatility                             .64                .64

</TABLE>
        A summary of the Company's stock option plans as of December 31, 1996,
          1995 and 1994, and changes during the years ended on those dates is
          presented below:

<TABLE>
<CAPTION>
                              For the year ended     For the year ended     For the year ended
                               December 31, 1996      December 31, 1995      December 31, 1994
                              ------------------     ------------------     ------------------
                                        Weighted               Weighted               Weighted
                               Number   Average       Number    Average      Number   Average
                             of Shares   Price       of Shares   Price      of Shares   Price
                             ---------  --------     --------- --------     --------- --------
<S>                          <C>        <C>          <C>       <C>          <C>       <C>
Stock options:
  Outstanding at beginning
    of year                  1,134,500   $ 1.55      1,239,500  $ 1.76      1,232,000   $1.52
      Options granted           85,000     5.40         70,000    1.75        115,000    3.44
      Options exercised       (12,250)     1.75        (35,000)   1.03       (107,500)    .78
      Options canceled              -         -       (140,000)   3.67              -       -

Outstanding at end of year   1,207,250   $ 1.82      1,134,500  $ 1.55      1,239,500  $ 1.76

Exercisable at end of year     987,250   $ 1.35        909,500  $ 1.14        855,750  $  .93

Weighted average fair value
  of options granted during
  the year                               $ 3.70                 $ 1.20

</TABLE>

    The following table summarizes information about the Company's stock options
      outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                      Options Outstanding                                Options Exercisable
                               Number         Weighted Average      Weighted          Number              Weighted
  Range of                Outstanding at         Remaining          Average        Exercisable at         Average
Exercise Prices         December 31, 1996     Contractual Life   Exercise Price    December 31, 1996   Exercise Price
---------------         -----------------     ----------------   --------------    -----------------   --------------
<S>                      <C>                  <C>                <C>               <C>                 <C>
$ .34 -  .69                 652,500              5 years          $   .51              652,500            $   .51
$1.03 - 1.75                 154,750              6 years          $  1.30              102,250            $  1.07
$3.19 - 5.40                 400,000              8 years          $  4.15              232,500            $  3.82
                           ---------                                                  ---------
                           1,207,250                                                    987,250
                           =========                                                  =========
</TABLE>

<PAGE> F-13

                        PARALLEL PETROLEUM CORPORATION

                     Notes to Financial Statements - (Continued)



        Stock Warrants
        --------------
        In connection with the common stock offering in December 1996 (See
          Note 9), an underwriter received a five-year warrant to purchase
          125,000 shares of common stock at an exercise price of $5.10 per
          share.

        In connection with the private placement offering in November 1994
          (See Note 9), a broker-dealer responsible for introducing the
          Company to the Company's principal placement agent received a
          five-year warrant to purchase 64,415 shares of common stock at a
          price of $2.75 per share.  During 1996, 40,000 shares were
          purchased in connection with the five-year warrant.

        The Company has outstanding at December 31, 1996 and 1995, 300,000
          warrants.  Each warrant allows the holder to buy one share of common
          stock for $6.00. The warrants were issued as part of the Company's
          initial public offering in 1980 and are exercisable for a 30 day
          period commencing on the date a registration statement covering
          exercise is declared effective.  The warrants contain antidilution
          provisions and in the event of liquidation, dissolution, or winding
          up of the Company, the holders are not entitled to participate in
          the assets of the Company.

(5)	Income Taxes
        ------------
        Federal income tax expense differs from the amount computed at the
          Federal statutory rate as follows:
<TABLE>
<CAPTION>

                                                              Year ended
                                                              December 31,
                                                    -------------------------------
                                                    1996          1995         1994
                                                    ----          ----         ----
        <S>                                     <C>               <C>         <C>
        Income tax expense at statutory rate    $ 2,056,581       69,559      240,646
        Statutory depletion                        (358,854)      (8,494)     (30,317)
        Nondeductible expenses and other             20,386        6,439       53,092
                                                -----------      -------      -------
              Income tax expense                $ 1,718,113       67,504      263,421
                                                ===========      =======      =======
</TABLE>

        Income tax expense is deferred, with the exception of $12,065 in 1996
        related to alternative minimum tax ("AMT").

<PAGE> F-14

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


        The tax effect of temporary differences that give rise to significant
          portions of the deferred tax assets and deferred tax liabilities at
          December 31 are as follows:

<TABLE>
<CAPTION>
                                                         1996           1995
                                                         ----           ----
                 Current
                 -------
        <S>                                        <C>             <C>
        Deferred income tax assets:
          Net operating loss carryforwards
             expected to be utilized in 1997       $         -        114,240
                                                   -----------    -----------
                 Total current deferred tax
                    assets                         $         -        114,240
                                                   ===========    ===========

               Noncurrent
               ----------
        Deferred income tax assets:
          Net operating loss carryforwards         $ 3,085,699      3,375,760
          Statutory depletion carryforwards            545,462        186,608
                                                   -----------    -----------
              Total noncurrent deferred
                income tax assets                    3,631,161      3,562,368
                                                   -----------    -----------
        Deferred income tax liabilities:
          Property and equipment, principally due
            to differences in basis, expensing of
            intangible drilling costs for tax
            purposes and depletion                   5,750,984      4,090,383
                                                   -----------    -----------
              Total deferred income tax
                liabilities                          5,750,984      4,090,383
                                                   -----------    -----------
              Net noncurrent deferred
                income tax liability               $ 2,119,823        528,015
                                                   ===========    ===========
</TABLE>

        A valuation allowance is provided when it is more likely than not that
          some portion of the deferred tax assets will not be realized.  Based
          on expectations for the future and the availability of certain tax
          planning strategies that would generate taxable income to realize
          the net tax benefits, if implemented, management has determined that
          taxable income of the Company will more likely than not be sufficient
          to fully utilize available carryforwards prior to their ultimate
          expiration.

<PAGE> F-15

                        PARALLEL PETROLEUM CORPORATION

                     Notes to Financial Statements - (Continued)

        As of December 31, 1996, the Company had investment tax credit and net
          operating loss carryforwards for regular and alternative minimum tax
          purposes available to reduce future taxable income and tax liability,
          respectively.  These carryforwards expire as follows:

<TABLE>
<CAPTION>
                                                                         Alternative
                            Net operating        Investments tax       minimum tax net
                                loss                  credit            operating loss
                                ----                  ------            --------------
<S>                         <C>                    <C>                  <C>

1996                        $      -                   3,000                     -
1997                                                  19,000                     -
1998                         524,000                   8,000                     -
1999                         852,000                   7,000                     -
2000                         562,000                  15,000                     -
2001                         684,000                  24,000             1,452,000
2002                         421,000                       -               291,000
2003                         138,000                       -                82,000
2004                         257,000                       -                48,000
2005                          69,000                       -                     -
2006                       1,011,000                       -                     -
2007                         792,000                       -                     -
2008                       1,596,000                       -             1,920,000
2009                       2,170,000                       -             1,974,000
                         -----------                --------             ---------
                         $ 9,076,000                  76,000             5,767,000
                         ===========                ========             =========

</TABLE>

(6)     Major Customers

        The following purchasers accounted for 10% or more of the Company's
          oil and gas sales for the years ended December 31:

<TABLE>
<CAPTION>
                                        1996        1995        1994
                                        ----        ----        ----
        <S>                              <C>         <C>         <C>
        Purchaser A                      11%         28%         31%
        Purchaser B                      46%         16%          -
        Purchaser C                       -          10%         10%
        Purchaser D                       -          10%          -

</TABLE>

<PAGE> F-16

                        PARALLEL PETROLEUM CORPORATION

                    Notes to Financial Statements - (Continued)


(7)     Employee Pension Plan

        Effective September 1, 1988, the Company established a simplified
          employee pension plan covering all salaried employees of the Company.
          The employees voluntarily contribute a portion of their eligible
          compensation, not to exceed $7,000, adjusted for inflation beginning
          in 1988, to the plan.  The Company's contribution, including the
          employees contribution, cannot exceed the lesser of $30,000 or 15%
          of compensation.  During 1996, 1995 and 1994, the Company contributed
          an aggregate of $7,986, $6,739 and $2,626, respectively, of which
          $2,963, $2,765 and $1,129, respectively, was allocated to a Director
          of the Company.   The Company has no obligation to make contributions
          to the plan.

(8)     Statements of Cash Flows

        During 1996, 1995 and 1994, $60,413, $196,582 and $338,821 were
          transferred from leases held for resale to oil and gas properties,
          respectively.  These transfers are considered non-cash transactions.

        No Federal taxes were paid in 1996, 1995 and 1994, as a result of net
          operating losses or loss carryforwards.  Payments of interest were
          $1,221,144, $1,027,461 and $703,775 in 1996, 1995 and 1994,
          respectively.

        At December 31, 1996 and 1995, there were $1,890,172 and $257,863,
          respectively, of property additions accrued in accounts payable.

(9)     Common Stock Offerings

        On December 18, 1996, the Company closed on a common stock offering
          dated December 12, 1996.  The Company sold 2,500,000 shares of its
          common stock at $4.25 per share.  Proceeds received, net of related
          expenses, were approximately $9,421,000.

        On February 7, 1995, the Company closed on a private placement offering
          dated November 7, 1994.  The Company sold 644,150 shares of its common
          stock at $2.50 per share of which 50,000 shares were beneficially
          purchased by certain Directors of the Company.  Proceeds received, net
          of related expenses, were approximately $1,321,000.

<PAGE> F-17
                        PARALLEL PETROLEUM CORPORATION

                    Notes to Financial Statements - (Continued)


(10)    Related Party Transactions

        During 1996 and 1995, the Company was charged $256,000 and $241,000,
          respectively, for drilling services and lease operating expenses by
          entities in which certain Directors are majority owners.  These
          Directors and their companies own interests in certain wells operated
          by the Company.  During 1996 and 1995, the Company charged $89,000 and
          $40,800, respectively, for the lease operating expenses and drilling
          costs and paid $141,000 and $167,000, respectively, in oil and gas
          revenues to these related parties related to these wells.

        An entity in which the Chief Executive Officer and Chairman of the
          Board is the owner acted as the Company's agent in performing the
          routine day to day operations of certain wells.  In 1996 and 1995,
          the Company was billed $199,000 and $348,000, respectively, for the
          Company's pro rata share of lease operating and drilling expenses and
          received $205,000 and $130,000 in 1996 and 1995, respectively, in oil
          and gas revenues related to these wells.

(11)    Oil and Gas Expenditures

        The following table reflects capitalized costs related to the oil and
          gas producing activities as of December 31:

<TABLE>
<CAPTION>
                                                1996              1995
                                                ----              ----
        <S>                                <C>                 <C>
        Capitalized costs:
          Proved properties                $ 41,826,362        29,171,917
          Unproved properties                 5,304,512         1,707,698
                                           ------------       -----------
                                             47,130,874        30,879,615
              Accumulated depletion          12,306,371         8,590,903
                                           ------------       -----------
                                           $ 34,824,503        22,288,712
                                           ============       ===========
</TABLE>

        Costs of unproved properties are not being depleted at December 31,
          1996 and were incurred primarily during 1996 and 1995 and are
          expected to be evaluated in the next two years.


<PAGE> F-18

                        PARALLEL PETROLEUM CORPORATION

                   Notes to Financial Statements - (Continued)


            The following table reflects costs incurred in oil and gas property
          acquisition, exploration and development activities for each of
          the years in the three-year period ended December 31:

<TABLE>
<CAPTION>

                                                1996          1995          1994
                                                ----          ----          ----
        <S>                                     <C>           <C>           <C>
        Transfers from undeveloped leases
          held for sale                     $    60,413      196,582       338,821
        Proved property acquisition costs     3,838,495      372,204       238,288
        Unproved property acquisition costs     369,075      841,321     2,541,929
        Exploration                           8,669,299    1,519,202     3,400,145
        Development                           3,962,977      889,155     1,225,436
                                           ------------    ---------     ---------
                                           $ 16,900,259    3,818,464     7,744,619
                                           ============    =========     =========
</TABLE>

(12)	Subsequent Event

        In connection with the common stock offering in December 1996 (See
          Note 9), an underwriter received an over-allotment option to exercise
          375,000 shares of common stock at a price of $4.25 per share.  In
          January 1997, the options were exercised and 375,000 shares were sold.
          Proceeds received by the Company, net of related expenses, were
          approximately $1,480,000.

<PAGE> F-19
                        PARALLEL PETROLEUM CORPORATION
                     Notes to Financial Statements - (Continued)


(13)    Supplemental Oil and Gas Reserve Data (Unaudited)

        The estimates of the Company's proved oil and gas reserves, which are
          all located in the United States are prepared by independent
          petroleum engineers.  Reserves were estimated in accordance with
          guidelines established by the U.S. Securities and Exchange
          Commission and the Financial Accounting Standards Board, which
          require that reserve estimates be prepared under existing economic
          and operating conditions with no provision for price and cost
          escalations except by contractual arrangements.  Information for oil
          is presented in barrels (BBL) and for gas in thousands of cubic feet
          (MCF).

        A summary of changes in reserve balances is presented below
          (in thousands):
<TABLE>
<CAPTION>
                                                 Total Proved                    Proved Developed
                                             -------------------               ------------------
                                             BBL             MCF               BBL            MCF
                                             ---             ---               ---            ---
        <S>                                 <C>            <C>
        Reserves as of January 1, 1994      1,619          19,096             1,379         13,685
          Extensions and discoveries          134           2,920               134          2,920
          Revisions of previous estimates     (32)            986               (34)         1,173
          Production                         (149)         (1,391)             (149)        (1,391)

        Reserves as of December 31, 1994    1,572          21,611             1,330         16,387
          Purchase of reserves in place         5             147                 5            147
          Extensions and discoveries          147           7,097               147          7,097
          Revisions of previous estimates     (88)         (1,115)              (94)        (1,161)
          Production                         (133)         (1,616)             (133)        (1,616)

        Reserves as of December 31, 1995    1,503          26,124             1,255         20,854
          Purchase of reserves in place       273           4,797               273          4,797
          Extensions and discoveries          128           9,034               128          9,034
          Revisions of previous estimates     (42)         (3,746)              (40)        (3,684)
          Production                         (221)         (3,655)              (221)       (3,655)

        Reserves as of December 31, 1996    1,641          32,554              1,395        27,346
</TABLE>

        The following is a standardized measure of the discounted net future
          cash flows and changes applicable to proved oil and gas reserves
          required by SFAS No. 69.  The future cash flows are based on
          estimated oil and gas reserves utilizing prices and costs in effect
          as of year end discounted at 10% per year and assuming continuation
          of existing economic conditions.

        The standardized measure of discounted future net cash flows, in
          management's opinion, should be examined with caution.  The basis
          for this table are the reserve studies prepared by independent
          petroleum 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 a "best estimate" of the fair value of
          the Company's proved oil and gas properties.

<PAGE> F-20
                        PARALLEL PETROLEUM CORPORATION

                    Notes to Financial Statements - (Continued)


               Standardized Measure of Discounted Future Net Cash Flows
                        Relating to Proved Oil and Gas Reserves
                                    (In Thousands)

<TABLE>
<CAPTION>
                                                      December 31,
                                         -------------------------------------
                                          1996            1995          1994
                                          ----            ----          ----
        <S>                            <C>                <C>           <C>
        Future cash flows              $ 153,441          75,044        63,288
        Future costs:
           Production                    (39,296)        (25,356)      (23,559)
           Development                    (2,790)         (2,853)       (2,375)
        Future net cash flows
          before income taxes            111,355          46,835        37,354
        Future income taxes              (22,493)         (7,242)       (4,322)
        Future net cash flows             88,862          39,593        33,032
        10% annual discount for
          estimated timing of cash flows (31,513)        (14,428)      (12,570)

        Standardized measure of
          discounted net cash flows    $  57,349          25,165        20,462

</TABLE>

<PAGE> F-21

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

                         Changes in Standardized Measure of
                 Discounted Future Net Cash Flows From Proved Reserves
                                    (In Thousands)

<TABLE>
<CAPTION>
                                                          Years ended December 31,
                                                 ---------------------------------------
                                                   1996             1995           1994
                                                   ----             ----           ----
        <S>                                        <C>              <C>            <C>
        Increase (decrease):
          Purchase of minerals in place         $  6,437             182             -
          Extensions and discoveries and
            improved recovery, net of future
            production and development costs      23,660           9,222          3,514
          Accretion of discount                    2,589           2,050          2,114
          Net change in sales prices net of
            production costs                      24,273              35         (1,418)
          Changes in estimated future
            development costs                         40            (323)          (137)
          Revisions of quantity estimates         (6,043)         (1,151)           574
          Net change in income taxes              (8,940)            725          1,063
          Sales, net of production costs         (11,482)         (3,246)        (3,202)
          Changes of production rates (timing)
            and other                              1,650          (2,791)        (2,119)
                                                --------         -------        -------
            Net increase                          32,184           4,703            389

        Standardized measure of discounted future
          net cash flows:

            Beginning of year                     25,165          20,462         20,073
                                                --------         -------        -------
            End of year                         $ 57,349          25,165         20,462
                                                ========         =======        =======
</TABLE>

<PAGE> S-1

                                    SIGNATURES

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

                                           PARALLEL PETROLEUM CORPORATION


March 27, 1997                         By:  /s/ Thomas R. Cambridge
                                           ------------------------------------
                                           Thomas R. Cambridge, Chief Executive
                                           Officer and Chairman of the Board of
                                           Directors

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Thomas R. Cambridge   Chief Executive Officer and Chairman    March 27, 1997
Thomas R. Cambridge       of the Board of Directors (Principal
                          Executive Officer)


/s/ Larry C. Oldham       President and Treasurer                 March 27, 1997
Larry C. Oldham           (Principal Financial Officer)



/s/ Danny H. Conklin      Director                                March 27, 1997
Danny H. Conklin



/s/ Ernest R. Duke        Director                                March 27, 1997
Ernest R. Duke



/s/ Myrle Greathouse      Director                                March 27, 1997
Myrle Greathouse



/s/ Charles R. Pannill    Director                                March 27, 1997
Charles R. Pannill


                                                      INDEX TO EXHIBITS


Exhibit
  No.                   Description of Exhibit
-------                 ----------------------
   3.1   Certificate of Incorporation of Registrant (Incorporated by reference
         to Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year ended
         December 31, 1988.)

   3.2   Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to
         Form 10-K of the Registrant for the fiscal year ended December 31,
         1995.)

   4.1   Certificate of Merger merging Parallel Petroleum Corporation, a Texas
         corporation, into Registrant (Incorporated by reference to Exhibit 4.1
         to Form 10-K of the Registrant as filed with the Securities and
         Exchange Commission on April 1, 1985.)

   4.2   Agreement and Plan of Merger Dated July 17, 1984 between Parallel
         Petroleum Corporation, a Texas corporation, and the Registrant
         (Incorporated by reference to Exhibit 2.1 to Form S-l of the
         Registrant (File No. 2-92397) as filed with the Securities and
         Exchange Commission on July 26, 1984, as amended by Amendments No. 1
         and 2 on October 5, 1984 and October 25, 1984, respectively.)

         Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
         through 10.6):

 10.1    1981 Non-Qualified Stock Option Plan (Incorporated by reference to
         Exhibit 10.1 to Form S-1 of the Registrant (File No. 2-92397) as filed
         with the Securities and Exchange Commission on July 26, 1984, as
         amended by Amendments No. 1 and 2 on October 5, 1984 and October 25,
         1984, respectively.)

 10.2    1983 Incentive Stock Option Plan  (Incorporated by reference to
         Exhibit 10.2 to Form S-l of the Registrant (File No. 2-92397) as filed
         with the Securities and Exchange Commission on July 26, 1984, as
         amended by Amendments No. 1 and 2 on October 5, 1984, and October 25,
         1984, respectively.)

 10.3    1992 Stock Option Plan  (Incorporated by reference to Exhibit 28.1 to
         Form S-8 of the Registrant (File No. 33-57348) as filed with the
         Securities and Exchange Commission on January 25, 1993.)

 10.4    Stock Option Agreement between the Registrant and Thomas R. Cambridge
         dated December 11, 1991  (Incorporated by reference to Exhibit 10.4 of
         Form 10-K of the Registrant for the fiscal year ended December 31,
         1992.)
 10.5    Stock Option Agreement between the Registrant and Thomas R. Cambridge
         dated October 18, 1993  (Incorporated by reference to Exhibit 10.4(e)
         of Form 10-K of the Registrant for the fiscal year ended December 31,
         1993.)

  10.6   Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified
         Employee Pension Plan (Incorporated by reference to Exhibit 10.6
         of the Registrant for the first year ended December 31, 1995.)

  10.7   Loan Agreement dated July 1, 1996 between the Registrant and Bank One
         Texas, N.A. (Incorporated by reference to Exhibit 10.1 of Form 10-Q of
         the Registrant for the fiscal quarter ended June 30, 1996.)

*23.1    Consent of Independent Auditors

*23.2    Consent of Independent Petroleum Engineers

*27      Financial Data Schedule


* Filed herewith.

<PAGE> 1
                                                Exhibit 23.1




               Consent of Independent Auditors




The Board of Directors and Stockholders
Parallel Petroleum Corporation:


We consent to incorporation by reference in the registration statements
(No. 33-46959 and No. 33-57348) on Forms S-8, and the registration statements
(No. 33-77402, No. 33-90296 and No. 333-11021) on Forms S-3, of Parallel
Petroleum Corporation of our report dated February 21, 1997, relating to the
balance sheets of Parallel Petroleum Corporation as of December 31, 1996 and
1995, and the related statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which appears in the December 31, 1996 annual report on Form 10-K of
Parallel Petroleum Corporation.



                        /s/ KPMG PEAT MARWICK LLP


Midland, Texas
March 27, 1997

<PAGE> 1

                                                Exhibit 23.2




         Consent of Independent Petroleum Engineers




    As independent petroleum engineers, we hereby consent to the incorporation
by reference in the registration statements (No. 33-46959 and No. 33-57348)
on Forms S-8, and the registration statements (No. 33-77402, No. 33-90296 and
No. 333-11021) on Forms S-3 of Parallel Petroleum Corporation of our estimates
of reserves, included in the Annual Report on Form 10-K of Parallel Petroleum
Corporation for the fiscal year ended December 31, 1996, and to all references
to our firm.



                        /s/ JOE C. NEAL & ASSOCIATES


Midland, Texas
March 24, 1997