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


                  For the fiscal year ended December 31, 2000

          [ ]  Transition Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934


                For the transition period from ______ to ______.

                       Commission File Number: 0 - 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 Act: None

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


                          Common Stock, $.01 par value
                         Common Stock Purchase Warrants
                  Rights to Purchase Series A Preferred Stock
                                (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 and non-voting  common equity held by
non-affiliates  of  the  Registrant  as of  March  15,  2001  was  approximately
$91,929,861, based on the last sale price of the common stock on the same date.

     At March 15, 2001 there were 20,428,858 shares of common stock outstanding.


<PAGE>
                                      (i)


                                   FORM 10-K

                         PARALLEL PETROLEUM CORPORATION

                               TABLE OF CONTENTS


 Item No.                                                                Page

                                     PART I

Item  1.    Business                                                        1
Item  2.    Properties                                                     22
Item  3.    Legal Proceedings                                              24
Item  4.    Submission of Matters to a Vote
             of Security Holders                                           24

                                     PART II

Item  5.    Market for Registrant's Common Equity and
             Related Stockholder Matters                                   25
Item  6.    Selected Financial Data                                        26
Item  7.    Management's Discussion and Analysis of
             Financial Condition and Results of Operations                 27
Item  7A.   Quantitative and Qualitative Disclosures
             About Market Risk                                             38
Item  8.    Financial Statements and Supplementary Data                    39
Item  9.    Changes in and Disagreements with
             Accountants on Accounting and Financial
             Disclosure                                                    39

                                    PART III

Item  10.   Directors and Executive Officers of the Registrant             40
Item  11.   Executive Compensation                                         42
Item  12.   Security Ownership of Certain Beneficial Owners
             and Management                                                48
Item  13.   Certain Relationships and Related Transactions                 50


                                     PART IV

Item  14.   Exhibits, Financial Statement Schedules, and Reports
             on Form 8-K                                                   51
<PAGE>
                                      (ii)

           Cautionary Statements Regarding Forward-Looking Statements


     Some  statements  contained  in our Form 10-K  report are  "forward-looking
statements".  All statements  other than statements of historical facts included
in this report,  including,  without  limitation,  statements  regarding planned
capital  expenditures,  the  availability  of capital  resources to fund capital
expenditures,  estimates of proved reserves,  our financial  position,  business
strategy   and  other  plans  and   objectives   for  future   operations,   are
forward-looking  statements.  You can identify forward-looking statements by the
use of  forward-looking  terminology such as "may," "will," "expect,"  "intend,"
"anticipate," "estimate," "continue," "present value," "future" or "reserves" or
other variations or comparable terminology.  Although we believe the assumptions
and expectations  reflected in these forward-looking  statements are reasonable,
we can't give any assurance  that our  expectations  will prove to be correct or
that we will be able to take any  actions  that are  presently  planned.  All of
these   statements   involve   assumptions   of  future  events  and  risks  and
uncertainties.   Risks  and   uncertainties   associated  with   forward-looking
statements include, but are not limited to:

     risks associated with the drilling of wells;

     competition;

     future capital requirements and availability of financing;

     fluctuations in prices of oil and gas;

     governmental regulations;

     geological concentration of our reserves; and

     general economic conditions.

     For these and other  reasons,  actual  results may differ  materially  from
those  projected or implied.  We caution you against  putting undue  reliance on
forward-looking  statements  or  projecting  any  future  results  based on such
statements.

     Before you invest in our common  stock,  you should be aware that there are
various risks  associated  with an  investment.  We have described some of these
risks in other sections of this annual report and under the section Risk Factors
beginning on page 18 of this annual report.

<PAGE>
                                       1


                                     PART I


ITEM 1. BUSINESS


General

     Parallel  Petroleum is an  independent  energy  company  engaged in oil and
natural gas  exploration,  development  and  production  and the  acquisition of
producing properties. These activities are concentrated in two areas:

     the onshore gulf coast area of south Texas; and

     the Permian Basin of west Texas.

     Throughout  this report,  we refer to some terms that are commonly used and
understood in the oil and gas industry. These terms are: Mcf, Bcf, Bbls and EBO.
Mcf refers to the quantity of one thousand  cubic feet of natural gas. Bcf means
one billion  cubic feet of natural gas.  Bbls means  barrels of oil or crude oil
condensate.  An EBO is an equivalent  barrel of oil, or 6 Mcf of natural gas for
one barrel of oil.

     As you  read  this  report,  it is  important  for  you to  understand  our
relationship with First Permian,  L.L.C., a Delaware limited liability  company.
If you will turn to page 4 of this report, you will find information about First
Permian and its  acquisition  of  properties  under the heading  First  Permian,
L.L.C.  Unless we state  that the  information  about  Parallel  in this  report
includes  Parallel's  30.675% membership  interest in First Permian,  you should
keep in mind that references to Parallel, we, our or similar terminology exclude
First Permian.

     Proved Reserves as of December 31, 2000

     At December 31, 2000, our estimated proved reserves were  approximately 1.0
million Bbls of oil and 15.7 Bcf of natural gas. The present value of our pretax
future  net  revenues,  discounted  at 10%,  was  approximately  $90.9  million.
Approximately  73% of our proved reserves were natural gas and approximately 70%
were categorized as proved developed reserves.

     As of December 31, 2000, an  independent  engineering  firm  estimated that
First Permian had total proved  reserves of 48.1 million Bbls of oil and 5.9 Bcf
of natural gas with a present value of pretax future net revenues, discounted at
10%, of $300.1 million. Based on our 30.675% interest in First Permian's oil and
gas reserves,  this  represented 14.7 million Bbls of oil and 1.8 Bcf of natural
gas with a present value of $92.1 million, net to Parallel's interest.

     The  First  Permian  properties   complement  our  existing  Permian  Basin
production and reserves.  The properties are long-lived  with low decline rates,
which  helps  offset  the  higher  decline  rates  of our  reserve  base  in the
Yegua/Frio/Wilcox  gas trend in south Texas.  At December 31, 2000,  the reserve
life (total estimated proved reserves divided by the prior 12 months production)
of First Permian's properties was approximately 34.6 years. This compares with a
reserve  life  of  our  existing   proved  reserves  at  December  31,  2000  of
approximately  5.6  years.  At  December  31,  2000,  the  reserve  life  of our
properties,  after including our 30.675% share of First Permian's  reserves,  is
approximately 17.4 years.

<PAGE>
                                        2


     During 2000, we participated in drilling 32 gross (5.6 net) exploratory and
development  wells.  Twenty-three  gross (4.0 net) wells were  productive  and 9
gross (1.7 net) wells were dry holes.

     Parallel was incorporated in Texas on November 26, 1979, and reincorporated
in the State of Delaware on December 18, 1984.

     Our  executive  offices are  located at 110  Marienfeld  Place,  Suite 465,
Midland, Texas 79701. Our telephone number is (915) 684-3727.

     Strategy

     Our primary objectives are to build oil and gas reserves,  production, cash
flow and earnings per share by exploring for new oil and gas reserves, acquiring
oil and gas  properties  and  optimizing  production  from  existing oil and gas
properties. Management seeks to achieve these objectives by:

     using advanced technologies to conduct exploratory activities;

     acquiring  producing  properties  we believe add  incremental  value to our
     asset base;

     keeping debt levels low;

     concentrating activities in core areas to achieve economies of scale; and

     emphasizing cost controls.

     Following this strategy,  we have discovered oil and gas reserves using 3-D
seismic  technology in the  Horseshoe  Atoll Reef Trend of west Texas and in the
Yegua/Frio/Wilcox  gas trend onshore the gulf coast of Texas.  Additionally,  we
have  acquired oil and gas  producing  properties  in the Permian  Basin of west
Texas.  Capital utilized to acquire these properties has been provided primarily
by secured bank  financing,  sales of our equity  securities  and cash flow from
operations.

     We continually screen,  review and evaluate potential leases and prospects.
Our  sources  for  possible   acquisitions  of  leases  and  prospects   include
independent  landmen,   independent  oil  and  gas  operators,   geologists  and
engineers.  We also evaluate  properties that become available for purchase from
major oil  companies.  If our review of an  undeveloped  lease or  prospect or a
producing  property  indicates  that  it  may  have  geological  characteristics
favorable for 3-D seismic analysis,  we may decide to acquire a working interest
in the  property  or an option to  acquire  a working  interest.  In the case of
producing properties,  we also seek properties that are underperforming relative
to their  potential.  To reduce our  financial  exposure in any one prospect and
participate in more  prospects,  we enter into  co-ownership  arrangements  with
third parties under standard industry form operating agreements.  This is common
in the  industry  and enables us to share the  drilling  and  related  costs and
dry-hole risks with other participants.  From time to time, we sell prospects to
third  parties or farm-out  prospects  and retain an  interest in revenues  from
these prospects.

     We strive to  maintain  low  general  and  administrative  expenses  in our
operations.  Our concentrated  geographic focus allows us to manage a relatively
large asset base with few employees. We believe that our operational base allows
us to acquire exploratory  prospects and producing  properties at relatively low
incremental overhead costs and achieve economies of scale.

     We also pursue cost savings by using  outside  geological  and  geophysical
consultants  for our exploration  and  development  efforts.  We use independent
contractors for all of our field operations.

<PAGE>
                                       3


     Intense  competition among independent oil and gas producers requires us to
react quickly to available exploration and acquisition opportunities.  We try to
position for these opportunities by maintaining:

     adequate capital resources for projects in our primary areas of operations;

     the  technological  capabilities  to  conduct a  thorough  evaluation  of a
     particular project; and

     a  small  staff  that  is  able  to  respond  swiftly  to  exploration  and
     acquisition opportunities.

     The steps we use to implement our business strategy include:

     Focusing on Exploration Activities

     We  seek to  increase  our oil and  gas  reserves  and  production  through
targeted  exploration  activities  in our  core  operating  areas.  We  focus on
prospects having the following characteristics:

     known geological and reservoir characteristics;

     locations near existing wells so data from existing wells can be correlated
     with seismic data for prospects; and

     a potential to have a meaningful impact on our reserves.

     When economic  conditions are favorable and when we have sufficient capital
resources,   we  believe  we  can  maximize  the  value  of  our  properties  by
accelerating  drilling  activities.  This provides us an  opportunity to replace
reserves at a more rapid pace than existing reserves are produced.

     Using Advanced Technologies

     We believe  use of 3-D  seismic  surveys  and other  advanced  technologies
provides  us with a risk  management  tool.  Our use of  these  technologies  in
exploring for and developing oil and gas properties can:

     reduce drilling risks;

     lower finding costs;

     provide  for more  efficient  production  of oil and  natural  gas from our
     properties; and

     locate reserves not detectable by using traditional means.

     Generally,  3-D seismic  surveys  provide more  accurate and  comprehensive
information  to  evaluate  drilling  prospects  than  conventional  2-D  seismic
technology. We evaluate substantially all of our exploratory prospects using 3-D
seismic technology.  On some exploratory prospects, we also use amplitude versus
offset, or AVO, analysis. AVO analysis shows the high contrast between sands and
shales and assists in  determining  the  presence  of natural  gas in  potential
reservoir sands.

     We believe that using 3-D seismic,  AVO and other  technologies  gives us a
competitive   advantage  because  of  the  increased  likelihood  of  successful
drilling. When we evaluate exploratory prospects in geographical areas where the
use of 3-D seismic and other advanced technologies are not likely to provide any
advantages,   we  use  traditional  evaluation  methods,  such  as  2-D  seismic
technology.

<PAGE>
                                       4




     Serving as Geophysical Operator

     We prefer to serve as the  geophysical  operator  of  exploratory  projects
located in areas where we have experience using 3-D seismic technology. By doing
so, we control the design,  acquisition,  processing and  interpretation  of 3-D
surveys and, in most cases,  determine  drilling  locations and well depths. The
integrity  of 3-D seismic  analysis in our  projects is enhanced by  emphasizing
quality controls throughout the data acquisition,  processing and interpretation
phases.

     We  retain   experienced   outside   consultants   and   participate   with
knowledgeable  joint  working  interest  owners  when we  acquire,  process  and
interpret 3-D seismic  surveys.  When possible,  we also attempt to correlate or
model the  interpretations  of 3-D seismic surveys with wells previously drilled
on or near the prospect being evaluated.

First Permian, L.L.C.

     We own an equity  interest in First  Permian,  L.L.C.,  a Delaware  limited
liability  company.  On June 30,  1999,  we joined  with three other oil and gas
companies and formed First Permian to acquire oil and gas  properties  from Fina
Oil and Chemical Company.  The acquired assets included oil and gas reserves and
associated  assets in  producing  fields  located in the  Permian  Basin of west
Texas.

     On June 25, 1999,  First Permian entered into a Merger  Agreement with Fina
Oil and Chemical Company. Under terms of the Merger Agreement,  Fina transferred
all of the oil and gas properties to a wholly owned subsidiary of Fina which was
then merged into First Permian.  Upon consummating the merger,  and after giving
effect to the purchase price adjustments required by the Merger Agreement, First
Permian paid to Fina cash in the aggregate amount of approximately $92 million.

     The  purchase  was  financed  primarily  with a bank  credit  facility  for
$74,000,000,  subordinated  notes totaling  $16,000,000 and the sale of minerals
for $5,000,000.  The credit facility is  collateralized  by substantially all of
First Permian's oil and gas properties.

     As of December 31, 2000, the subordinated notes had been paid in full.

     On October 5, 2000,  First Permian restated its credit agreement dated June
30, 1999,  which,  among other things,  released  Parallel from its guarantee of
$10,000,000 of First Permian's bank loans.  First Permian's credit agreement was
further  amended on December 27, 2000 and a revolving  credit  facility of up to
$110,000,000 was established with an initial borrowing base of $75,000,000 as of
December 27, 2000. The loan matures on September 1, 2003.

     The founding  members of First  Permian were Parallel  Petroleum,  Baytech,
Inc., Tejon Exploration Company and Mansefeldt Investment  Corporation.  On June
30, 1999,  Parallel,  Baytech,  Tejon and Mansefeldt each  contributed  cash for
initial membership  interests of 22.5%,  22.5%,  27.5% and 27.5%,  respectively.
Effective May 31, 2000,  First  Permian's  original  limited  liability  company
agreement  was amended and  restated to provide  for,  among other  things,  the
admission  of  additional  members,  the  issuance  of a new class of  preferred
membership  units and the  issuance of  additional  common  membership  units in
return  for  additional  capital  contributions  totaling  $20,000,000  from new
members.  As a result of the issuance of additional common membership units, our
interest at June 30, 2000 was 28.665%.

     Concurrent  with the  cancellation  on September 30, 2000 of a $3.1 million
note  receivable  from one of the other members of First  Permian,  our interest
increased to 30.675%.  The note was  collateralized  by 80,000 common membership
units of First Permian and upon cancellation, the 80,000

<PAGE>
                                       5



common membership units were acquired by First Permian. This transaction had the
effect of reducing  the total  number of common  membership  units  outstanding,
decreasing  one member's pro rata  interest and  increasing  the interest of the
remaining members of First Permian.

     At December 31, 2000, Parallel owned a 30.675% interest in First Permian.

     As a condition of obtaining bank  financing to consummate the  acquisition,
First  Permian  was  required  to hedge a  significant  portion of its crude oil
production.  The remaining required hedge expires on June 30, 2001. A portion of
First  Permian's  production  will remain subject to a collar  through  December
2002, as indicated in the following table.

<TABLE>


                           First Permian, LLC (100%)
                                Hedge Contracts


Type                Volume/Month        Term                     Price          Commodity
----                ------------        ----                     -----          ---------
<S>                <C>                  <C>                      <C>            <C>

Swap                91,000 barrels    1/1/01-6/30/01             $17.70         WTI NYMEX

Collar              40,000 barrels      7/01-12/02               $19.00 floor
                                                                 $24.80 ceiling WTI NYMEX

Collar              40,000 barrels      7/01-12/02               $18.00 floor
                                                                 $28.75 ceiling WTI NYMEX

</TABLE>

Drilling Activities in 2000

     We are engaged in extensive drilling activities, primarily on properties in
which Parallel  already owns  interests and, to a lesser extent,  newly acquired
properties.  The scope of our exploration and development activities is affected
by the price of oil and gas.

     In  2000,   excluding   transfers  of  assets  held  for  sale,   we  spent
approximately  $6.6  million on oil and gas  related  capital  expenditures,  an
increase  of 47% over  that  expended  in 1999.  (See  Note 11 to the  Financial
Statements.) The majority of this was spent in the  Yegua/Frio/Wilcox gas trend.
Because of the significantly  higher oil and gas prices we received during 2000,
our cash flows  increased  and  additional  funds were  available to  accelerate
drilling activities from levels in 1999.

     For the year ended December 31, 2000, we  participated in drilling 32 gross
wells (5.62 net wells), of which 23 gross wells (3.96 net wells) are productive.
This compares  with 18 gross wells (5.0 net wells)  drilled in 1999, of which 13
gross wells (3.32 net wells) were productive.

     Yegua/Frio/Wilcox Gas Trend

     During 2000, our principal  exploration  and  development  activities  were
concentrated in the Yegua/Frio/Wilcox gas trend, onshore the gulf coast of south
Texas, in Dewitt, Jackson, Lavaca, Victoria and Wharton Counties. This trend has
been our primary area of exploration activity since 1993.

     We  participated  in  drilling  32 gross  wells  in 2000,  of which 30 were
drilled in the  Yegua/Frio/  Wilcox gas trend.  The  following  table  shows the
results of drilling activity in this trend.

<PAGE>
                                       6


<TABLE>

                             2000 Drilling Activity
                          Yegua/Frio/Wilcox Gas Trend

 Target                  Depth Range                No. of
Formation                 (feet)                  Wells Drilled       Productive          Dry
---------                ----------               -------------       ----------         -----
<S>                      <C>                      <C>                 <C>                <C>

 Yegua                   6,300 - 13,000                10                 7               3

 Frio                    6,400 -  8,400                20                15               5

 Wilcox                 13,200 - 17,500                 -                 -               -
                                                    --------           -------       -------

          Total                                        30                22               8
                                                    ========           =======       =======

</TABLE>


     At March 1, 2001, we owned interests in 84 gross wells in south Texas.

     Our exploration activities in the Yegua/Frio/Wilcox gas trend are conducted
under  exploration  agreements with third party  participants.  These agreements
allow us to participate in the acquisition and ownership of:

     3-D seismic surveys;

     options to acquire oil and gas leasehold interests; and

     undivided working interests in oil and gas leases.

     Our  exploration  agreements  include area of mutual  interest  provisions.
Generally,  an AMI is an agreed  upon area of land which is subject to rights of
first refusal among the participants.  For example,  if we acquire any minerals,
royalty,  overriding  royalty,  oil and gas leasehold or other  interests in the
AMI, we would be obligated to offer the other participants the right to purchase
their pro rata  share of the  interest  we  acquired  on the same  terms that we
acquired the interest.  If the other participants elect not to acquire their pro
rata share,  we would then  typically be free to retain or sell our interest for
our own account.

     The 3-D seismic survey data we obtain is  proprietary  and shared only with
our working interest partners.  Typically, seismic data is obtained from seismic
operations  conducted over large blocks of acreage.  Our actual working interest
ownership in acreage surveys is less than the total area surveyed.

Drilling and Acquisition Costs

     The following table shows our oil and gas property acquisition, exploration
and development costs for the periods indicated.

<PAGE>
                                       7

<TABLE>

                                                          Year Ended December 31,
                                            --------------------------------------------------------
                                             2000 (1)       1999 (1)       1998      1997      1996
                                            ---------      ---------      ------    ------    ------
                                                            (in thousands)
<S>                                        <C>             <C>            <C>        <C>      <C>

Transfers from (to) undeveloped leases
    held for sale                           $ 2,128        $ (2,128)    $    -    $    -     $    60

Proved property acquisition  costs               23              42         89        918      3,839

Unproved property acquisition costs           3,372           1,979      6,034      7,710        369

Exploration costs                             2,163           1,856      8,556      9,604      8,669

Development costs                             1,087             639      3,873      4,877      3,963
                                            -------        --------     -------   -------    -------
                                            $ 8,773        $  2,388     $18,552   $23,109    $16,900
                                            =======        ========     =======   =======    =======

</TABLE>


 -------------------

(1)  Reflects  costs  associated  with  assets  being  held for sale in 1999 and
     transferred  back to oil and gas property in 2000. The actual amounts spent
     on capital  expenditures during 2000 and 1999,  excluding  transfers,  were
     approximately $6.6 million and $4.5 million, respectively.


Drilling and Production Activities

     We have assembled a balanced portfolio of:

     lower risk natural gas projects in the Yegua/Frio/Wilcox gas trend;

     low risk infill oil development  projects in the Permian Basin (through our
     interest in First Permian); and

     high risk/high potential Wilcox natural gas projects.

     Following are brief  descriptions  of the primary areas in which we conduct
our drilling and production activities.

     Yegua/Frio/Wilcox Gas Trend

     Since  1993,  we  have   concentrated   our  exploration   efforts  in  the
Yegua/Frio/Wilcox  gas trend,  drilling  more than 140 wells with a 70% drilling
success  ratio and  acquiring  more than 800  square  miles of  proprietary  3-D
seismic data on 22 projects.  This seismic  library is  proprietary in the sense
that only  Parallel and its working  interest  partners have access to the data,
and, most  importantly,  Parallel is the only partner with an interest in all of
the 22  projects.  In our  opinion,  it would be cost  prohibitive  for  another
company to  duplicate  this data base.  With  seismic  data  processing  methods
continually improving, we believe this data library has an indefinite shelf life
and could yield new generations of prospects for many years.

     Using this data base,  we have  generated a multi-year  prospect  inventory
ranging from lower risk/moderate  impact to higher risk/higher impact prospects.
With the cost of seismic  acquisition  activities paid for, we can allocate most
of our future capital  expenditure  funds to data  interpretation,  drilling and
completion activities and leasehold acquisition.

<PAGE>
                                       8


     The  Yegua/Frio/Wilcox  gas  trend  is  a  multi-pay  trend  with  numerous
productive  formations.  The primary  producing  formations,  listed in order of
depth,  are the Miocene,  Frio,  Vicksburg,  Yegua, and Wilcox  formations.  Our
strategy  has  been  to  drill  lower  risk  prospects  in the  Frio  and  Yegua
formations, then to evaluate Miocene, Vicksburg and Wilcox leads.

     This trend, in our opinion,  ranks among the top domestic exploration areas
at this time.

     First, the trend contains primarily natural gas reserves.  With the current
     strength of natural gas prices and with demand forecasted to remain strong,
     this is an excellent area to concentrate capital dollars.

     Second,  the trend is located  in what is often  referred  to as  "pipeline
     alley."  Natural  gas  pipelines  and  distribution  systems  are in  close
     proximity,  which means  successful wells can usually be connected within a
     30-day time period.

     Third,  we have  extensive  experience  in the area and have been  actively
     exploring for new reserves since 1993.

     Fourth,  the return on  investment  is  attractive,  as is the potential to
     discover significant natural gas reserves.

     Using this same data base,  we completed a regional  Wilcox study last year
and  identified 12 high  potential/high  risk Wilcox  prospects.  We believe our
Wilcox  3-D  Gas  Project  presents  a  unique  opportunity  to  drill  untested
structures in the Wilcox formation and have leased approximately 30,000 acres in
connection with the project.  If any one of the Wilcox  prospects is successful,
it would have a major positive impact on Parallel's proved reserves.

     To manage financial risks  associated with the Wilcox Project,  which has a
significantly  higher risk profile than Yegua and Frio  prospects,  we intend to
bring in industry  partners  and reduce our average 50% working  interest in the
project.

     Contingent  on rig  availability,  we plan to spud the first Wilcox well in
the second quarter of 2001. We have initially budgeted $3.0 million,  net to our
interest, in 2001 to drill Wilcox prospects.

     Permian Basin of West Texas

     Before  entering the gulf coast area of south Texas in 1993,  our principal
activities were focused on acquiring  producing  properties in the Permian Basin
of west Texas.  These  properties  produce  primarily crude oil. At December 31,
2000,  excluding  our  ownership  interest  in First  Permian's  properties,  we
operated of all our Permian Basin properties.

     We emphasize an ongoing  program of  enhancement,  remedial and development
drilling  activities  on our  Permian  Basin  properties  when oil prices are at
levels to support these activities. In 2000, because we concentrated our capital
budget in the  Yegua/Frio/Wilcox  gas trend, we limited our capital expenditures
on our Permian  Basin  properties  primarily  to those  activities  necessary to
maintain optimum well performance.

     When funds are available to support  enhancement,  remedial and development
drilling  activities  on our  Permian  Basin  properties,  we intend to allocate
available  funds for  these  activities.  Enhancement  and  remedial  activities
include:

<PAGE>
                                       9


     recompleting existing wellbores;

     restimulating 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.

     From  time to time,  we may also  renegotiate  gas  purchase  contracts  or
reconfigure gathering lines. In connection with our enhancement  operations,  we
routinely  review the  performance  and economics of our oil and gas properties.
When necessary, we take corrective action, such as:

     shutting in temporarily uneconomic properties;

     plugging wells we believe to be permanently impaired or depleted;

     terminating oil and gas leases that are uneconomic under existing operating
     conditions; and/or

     selling properties to third parties.

     During 2001, we expect our principal exploration and development activities
will continue to be concentrated in the  Yegua/Frio/Wilcox  gas trend and in the
Permian Basin, primarily through our 30.675% ownership in First Permian.

     With the  benefit of stable oil and gas prices,  we expect to increase  our
oil and gas related  capital  expenditure  budget by 21% to  approximately  $8.0
million  in  2001.  Of  this  amount,   $5.0  million  will  be  used  to  drill
approximately  30 Frio and Yegua  wells and $3.0  million to  commence  drilling
activities on our Wilcox 3-D Gas Project.

     First Permian, L.L.C. Operations

     Through  our  30.675%  interest,  in  2001  we will  participate  in  First
Permian's   infill  drilling  and  major  workover   program.   First  Permian's
exploitation  and production  activities are focused  primarily on oil producing
properties  in the Permian Basin of west Texas.  The majority of its  properties
produce from shallow  producing  intervals  well depths range from 2,500 feet to
7,500 feet and include the San Andres, Glorietta and Clearfork formations.

     These are mature, long-lived reserves with low decline rates, a predictable
production  profile and successful  secondary and tertiary  recovery programs in
place and field-tested.  Proved undeveloped potential is significant,  with more
than 450 low risk infill locations  identified that will require minimal capital
expenditures to exploit.

     For the year 2001, First Permian has budgeted  approximately  $18.0 million
to continue  drilling  low-risk,  infill  wells and conduct  major  remedial and
workover activities. This is an increase of approximately 33% when compared with
its $13.5  million  budget  implemented  in July 2000.  The majority of the 2001
budget will be spent on properties operated by First Permian and will be used to
drill  approximately 94 infill wells,  primarily on the Southeast  Westbrook and
North Robertson Units, for recompletions,  workovers and facilities upgrades and
for secondary and tertiary activities.

<PAGE>
                                       10


     First  Permian  operates  each of its  largest  four  core  properties,  as
detailed in the following table.
<TABLE>


                               First Permian, LLC
                                Core Properties


                                                  Working Interest/
Property            Acres          Operator       Net Revenue Interest     Formation
---------           -----          --------       --------------------     ----------
<S>                 <C>            <C>           <C>                       <C>


Westbrook SE        3,680          First Permian       87.6/72.5%          Clearfork/3200'

N. Robertson        5,633          First Permian       42.5/35.0%          Clearfork/5900-7200'

East Penwell        3,900          First Permian       53.1/46.3%          San Andres/3800'

Whiteface           3,375          First Permian       100.0/85.0%         San Andres/5000'

</TABLE>

Oil and Natural Gas Prices are Volatile

     Our  revenues,  profitability  and cash flows are highly  dependent  on the
prices we receive for our oil and natural  gas.  Oil and natural gas prices have
continued to improve and stabilize since mid-1999.

     If prices should decline  substantially from current levels for a sustained
period  of time,  this  could  have a  material  adverse  effect  on our  future
operations and financial condition.

     Oil and natural gas prices can fluctuate widely on a  month-to-month  basis
in response to a variety of factors beyond our control. These factors include:

     weather conditions;

     the supply of foreign oil;

     the level of product demand;

     overall economic conditions;

     the price and availability of alternative fuels; and

     changes in the supply of and demand for oil and natural gas in domestic and
     foreign markets.

     The average  prices we received  for the oil and natural gas we produced in
2000, 1999 and 1998 are shown in the following table:

<TABLE>

                               Average Price Received for the
                                   Year Ended December 31,
                         --------------------------------------
                            2000          1999          1998
                           ------        ------        ------
<S>                      <C>           <C>            <C>
Oil (Bbl)                $ 28.88       $ 17.32        $ 12.49

Natural gas (Mcf)        $  4.38       $  2.27        $  2.04

</TABLE>

     The  average  price we  received  for our oil sales at March  15,  2001 was
approximately  $25.25 per Bbl. At the same date,  the average  price we received
for our natural gas was approximately  $5.00 per Mcf. At December 31, 2000, on a
Mcfe basis,  approximately  78% of our daily  production was natural

<PAGE>
                                       11



gas and 22% was oil. There is substantial  uncertainty  regarding future oil and
gas prices and we can  provide no  assurance  that prices will remain at current
levels.

Part of Our Business is Seasonal in Nature

     Weather  conditions affect the demand for and prices of natural gas and can
also  delay  drilling   activities,   disrupting  our  overall  business  plans.
Historically,  demand for natural gas has been  typically  higher  during winter
months.

Our Oil and Gas Operations Are Subject to Many Inherent Risks

     Oil and gas  drilling  activities  and  production  operations  are  highly
speculative  and involve a high degree of risk.  These  operations are marked by
unprofitable  efforts  because of dry holes and wells that do not produce oil or
gas in sufficient  quantities to return a profit.  The success of our operations
depends,  in part,  upon the ability of our management and technical  personnel.
The cost of drilling,  completing and operating wells is often uncertain.  There
is no assurance that our 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.

     Our  operations  are  subject  to all of the  operating  hazards  and risks
normally  incident to drilling for and producing oil and gas.  These hazards and
risks include:

     encountering unusual or unexpected formations and pressures;

     explosions, blowouts and fires;

     pipe and tubular failures and casing collapses;

     environmental pollution; and

     personal injuries.

     Any one of these potential hazards could result in accidents, environmental
damage,  personal  injury,  property  damage and other harm that could result in
substantial liabilities to us.

     As is customary in the industry,  we maintain  insurance  against some, but
not all, of these risks.  We maintain  general  liability  insurance  and obtain
insurance  against  blowouts on a well-by-well  basis. We do not carry insurance
against  pollution  risks.  If we sustain an uninsured  loss or  liability,  our
ability to operate could be materially adversely affected.

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

Executive Officers of Parallel

     At March 15, 2001,  Parallel's  executive officers were Thomas R. Cambridge
and Larry C. Oldham.

     Mr.  Cambridge,  age 65, is the Chief Executive Officer and Chairman of the
Board of Directors of Parallel. He 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

<PAGE>
                                       12



been carried out through Cambridge  Production,  Inc., a Texas corporation.  Mr.
Cambridge has served as a Director of Parallel since February 1985; as President
during the period  from  October  1985 to October  1994;  and as Chairman of the
Board of Directors and Chief Executive Officer since October 1985. He received a
Bachelors  degree in  geology  from the  University  of  Nebraska  in 1958 and a
Masters of Science degree in 1960.

     Mr. Oldham,  age 47, is a founder of Parallel.  He has served as an officer
and Director  since  Parallel's  formation in 1979. He served as Executive  Vice
President until October 1994 when he became President. He received a Bachelor of
Business  Administration  degree from West Texas State  University in 1975.  Mr.
Oldham is a member of the Permian Basin Landman's Association.

     The term of both officers expires at Parallel's annual meeting of Directors
or when their respective successors are duly elected and qualified.  There is no
family relationship between the executive officers.

     Parallel is the beneficiary of a $1.0 million key-man life insurance policy
on the life of Mr. Cambridge and a $5.0 million key-man life insurance policy on
the life of Mr. Oldham.

Employees

     At March 15, 2001,  Parallel had seven full time employees.  Mr.  Cambridge
serves in the capacity of a consultant and not as a full-time employee. Parallel
also  retains   independent  land,   geological,   geophysical  and  engineering
consultants  and  expects  to  continue  to do so in the  future.  Additionally,
Parallel retains six contract pumpers on a month-to-month basis.

     We  consider  our  employee  relations  to be  satisfactory.  None  of  our
employees are represented by a union and we have not experienced  work stoppages
or strikes.

Wells Drilled

     The following  table shows  certain  information  concerning  the number of
gross and net wells we drilled during the  three-year  period ended December 31,
2000.

<TABLE>


                          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>       <C>      <C>


   2000             20.0     3.40      7.0     1.22       3.0     .56         2.0    .45

   1999             11.0     2.50      5.0     1.70       2.0     .80          .0    .00

   1998              9.0     2.16      8.0     1.71       4.0    1.16         2.0    .45

</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 our  drilling  is  performed  on a  contract  basis  by  third-party
drilling contractors. We do not own any drilling equipment.

<PAGE>
                                       13


     At March 15, 2001,  we were  participating  in the drilling of 3 gross (.86
net) gas wells in Victoria, Dewitt and Jackson Counties, Texas.

Volumes, Prices and Lifting Costs

     The  following  table  shows  certain  information  about  our  production,
including  the volumes of oil and gas we produced,  the average sales prices per
Mcf of gas and Bbl of oil produced, and the average production, or lifting, cost
per EBO for the three-year period ended December 31, 2000.

<TABLE>
                                                       Year Ended December 31,
                                             ------------------------------------------
                                                  2000           1999           1998
                                             ------------    -----------    ----------
<S>                                          <C>             <C>            <C>

Net Production:
     Oil (Bbls)                                   165,137        163,696        185,474
     Gas (Mcf)                                  2,821,815      2,708,516      3,275,882
     EBO(1)                                       635,440        615,115        731,454

Average Sales Price:
     Oil (per Bbl)                           $     28.88     $    17.32       $   12.49
     Gas (per Mcf)                           $      4.38     $     2.27       $    2.04
     EBO                                     $     26.96     $    14.59       $   12.31

Average Production (Lifting) Cost per EBO    $      4.88     $     3.83       $    3.33

Operating Margin per EBO(2)                  $     22.08     $    10.76       $    8.98

Depletion per EBO                            $      8.18     $     8.30       $    8.07

</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.

     Our gas sales  represented  approximately  72% of our  combined oil and gas
sales for the year ended December 31, 2000 versus 68% for December 31, 1999.

Markets and Customers

     Our oil and gas production is sold at the well site on an as produced basis
at  market-related  prices  in the  areas  where the  producing  properties  are
located.  We do not refine or process  any of the oil or natural  gas we produce
and all of our production is sold to unaffiliated purchasers on a month-to-month
basis.

     In the following  table,  we show the purchasers  that accounted for 10% or
more of our revenues during the specified years.

<TABLE>

                                                  2000           1999           1998
                                                  ----           ----           ----
<S>                                               <C>            <C>            <C>

EOTT Energy Operating Limited Partnership           -              -             11%

Cox & Perkins Exploration, Inc.                     -             14%            24%

Allegro Investments, Inc.                          22%            27%            22%

Brayton Operating Corp.                            -              26%            18%

Pure Resources, Inc.                               16%             -              -

</TABLE>

<PAGE>
                                       14


     We do not believe the loss of any one of our  purchasers  would  materially
affect our  ability to sell the oil and gas we  produce.  Other  purchasers  are
available in our areas of operations.

     Our future  ability to market our oil and gas  production  depends upon the
availability  and  capacity of gas  gathering  systems and  pipelines  and other
transportation  facilities. We do not currently own or operate our own pipelines
or transportation facilities, and we are dependent on third parties to transport
our products.

     We are not obligated to provide a fixed and determinable quantity of oil or
natural gas under any existing arrangements or contracts.

     Our  business  does not  require  us to  maintain  a backlog  of  products,
customer orders or inventory.

Office Facilities

     Our corporate offices consist of approximately  5,776 square feet of leased
space in Midland,  Texas.  Our current rental rate is $3,927 per month until May
31, 2004, when the lease expires.

Competition

     The oil and gas industry is highly  competitive,  particularly in the areas
of acquiring exploration and development prospects and producing properties. The
principal  means of competing for the  acquisition of oil and gas properties are
the amount and terms of the consideration offered. Our competitors include major
oil companies,  independent  oil and gas concerns and  individual  producers and
operators.  Many of these  competitors  have  financial  resources,  staffs  and
facilities much larger than ours.

     We are also affected by competition for drilling rigs and the  availability
of related  equipment.  With relatively high oil and gas prices, the oil and gas
industry typically experiences  shortages of drilling rigs, equipment,  pipe and
qualified field  personnel.  We are unable to predict when or to what extent our
exploration  and development  activities  will be affected by rig,  equipment or
personnel shortages.

     The  principal  resources  we need for  acquiring,  exploring,  developing,
producing and selling 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  and  experienced  personnel to conduct all phases of oil and
     gas operations.

Oil and Gas Regulations

     Our operations are regulated by certain federal and state agencies. Oil and
gas production and related operations are or have been subject to:

     price controls;

     taxes; and

<PAGE>
                                       15


     environmental and other laws relating to the oil and gas industry.

     We cannot predict how existing laws and  regulations  may be interpreted by
enforcement  agencies or court rulings,  whether additional laws and regulations
will be adopted, or the effect such  interpretations or new laws and regulations
may have on our business, financial condition or results of operations.

     Our oil and gas exploration,  production and related operations are subject
to extensive rules and regulations that are enforced by federal, state and local
agencies.  Failure to comply  with  these  rules and  regulations  can result in
substantial  penalties.  The  regulatory  burden  on the oil  and  gas  industry
increases  our cost of doing  business  and affects our  profitability.  Because
these rules and regulations are frequently amended or reinterpreted,  we are not
able to predict the future cost or impact of complying with such laws.

     Texas and many other states require drilling  permits,  bonds and operating
reports.  Other  requirements  relating to the exploration and production of oil
and gas are also  imposed.  These  states  also  have  statutes  or  regulations
addressing conservation 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 wells.

     Sales of natural  gas we produce are not  regulated  and are made at market
prices.  However, the Federal Energy Regulatory  Commission regulates interstate
and certain intrastate gas transportation rates and services  conditions,  which
affect the marketing of our gas, as well as the revenues we receive for sales of
our  production.  Since  the  mid-1980s,  FERC has  issued a series  of  orders,
culminating in Order Nos. 636, 636-A,  636-B and 636-C.  These orders,  commonly
known as Order 636, have significantly  altered the marketing and transportation
service,  including  the  unbundling  by  interstate  pipelines  of  the  sales,
transportation,  storage and other  components of the city-gate  sales  services
these pipelines previously performed.

     One of FERC's purposes in issuing the orders was to increase competition in
all phases of the gas industry.  Order 636 and subsequent  FERC orders issued in
individual pipeline restructuring  proceedings have been the subject of appeals,
the results of which have  generally been  supportive of the FERC's  open-access
policy. In 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636. Because further review of certain of these
orders is still possible,  and other appeals remain pending,  it is difficult to
predict  the  ultimate  impact of the orders on Parallel  and our gas  marketing
efforts.  Generally,  Order 636 has  eliminated  or  substantially  reduced  the
interstate   pipelines'   traditional  role  as  wholesalers  of  gas,  and  has
substantially  increased  competition  and  volatility  in  gas  markets.  While
significant regulatory uncertainty remains, Order 636 may ultimately enhance our
ability to market and  transport  our gas,  although  it may also  subject us to
greater competition.

     Sales of oil we produce are not  regulated  and are made at market  prices.
The  price  we  receive  from  the  sale  of oil is  affected  by  the  cost  of
transporting the product to market.  Effective January 1, 1995, FERC implemented
regulations  establishing  an  indexing  system  for  transportation  rates  for
interstate  common carrier oil  pipelines,  which,  generally,  would index such
rates to  inflation,  subject  to  certain  conditions  and  limitations.  These
regulations could increase the cost of transporting oil by

<PAGE>
                                       16


interstate  pipelines,  although the most recent adjustment  generally decreased
rates. These regulations have generally been approved on judicial review. We are
unable to predict with certainty what effect,  if any,  these  regulations  will
have on us. The  regulations  may,  over time,  tend to increase  transportation
costs or reduce wellhead prices for oil.

     We are  required  to comply  with  various  federal  and state  regulations
regarding plugging and abandonment of oil and gas wells.

Environmental Regulations

     Various  federal,  state  and  local  laws and  regulations  governing  the
discharge  of  materials  into the  environment,  or  otherwise  relating to the
protection of the  environment,  health and safety,  affect our  operations  and
costs. These laws and regulations sometimes:

     require prior governmental authorization for certain activities;

     limit or prohibit activities because of protected areas or species;

     impose  substantial  liabilities for pollution related to our operations or
     properties; and

     provide significant penalties for noncompliance.

     In particular, our exploration and production operations, our activities in
connection with storing and transporting oil and other liquid hydrocarbons,  and
our  use  of  facilities   for  treating,   processing  or  otherwise   handling
hydrocarbons  and  related  exploration  and  production  wastes are  subject to
stringent environmental regulations. As with the industry generally,  compliance
with  existing  and  anticipated  regulations  increases  our  overall  cost  of
business.  While these regulations affect our capital expenditures and earnings,
we believe  that they do not affect our  competitive  position  in the  industry
because our competitors are also affected by environmental  regulatory programs.
Since  environmental  regulations  have  historically  been  subject to frequent
change,  we cannot  predict  with  certainty  the future  costs or other  future
impacts of environmental  regulations on our future  operations.  A discharge of
hydrocarbons or hazardous  substances  into the environment  could subject us to
substantial  expense,  including the cost to comply with applicable  regulations
that  require  a  response  to the  discharge,  such as  claims  by  neighboring
landowners, regulatory agencies or other third parties for costs of:

     containment or cleanup;

     personal injury;

     property damage; and

     penalties assessed or other claims sought for natural resource damages.

     The  following  are examples of some  environmental  laws that  potentially
impact our operations.

     Water.  The Oil  Pollution  Act,  or OPA,  was  enacted  in 1990 and amends
     provisions  of the Federal  Water  Pollution  Control Act of 1972 and other
     statutes as they pertain to prevention of and response to major oil spills.
     The OPA subjects  owners of  facilities  to strict,  joint and  potentially
     unlimited  liability for removal costs and certain other consequences of an
     oil spill,  where such spill is into navigable waters, or along shorelines.
     In the event of an oil  spill  into such  waters,  substantial  liabilities
     could be



<PAGE>
                                       17


     imposed upon Parallel.  States in which Parallel operates have also enacted
     similar laws.  Regulations  are currently being developed under the OPA and
     similar state laws that may also impose  additional  regulatory  burdens on
     Parallel.

     The FWPCA imposes  restrictions and strict controls regarding the discharge
     of produced waters,  other oil and gas wastes, any form of pollutant,  and,
     in some  instances,  storm water runoff,  into waters of the United States.
     The FWPCA provides for civil, criminal and administrative penalties for any
     unauthorized  discharges  and,  along  with  the OPA,  imposes  substantial
     potential  liability  for the  costs of  removal,  remediation  or  damages
     resulting from an unauthorized  discharge and, along with the OPA,  imposes
     substantial  potential  liability for the costs of removal,  remediation or
     damages  resulting  from an  unauthorized  discharge.  State  laws  for the
     control of water pollution also provide civil,  criminal and administrative
     penalties and  liabilities  in the case of an  unauthorized  discharge into
     state waters.  The cost of  compliance  with the OPA and the FWPCA have not
     historically been material to our operations, but there can be no assurance
     that changes in federal,  state or local water pollution  control  programs
     will  not  materially  adversely  affect  us in  the  future.  Although  no
     assurances can be given, we believe that  compliance with existing  permits
     and compliance  with  foreseeable new permit  requirements  will not have a
     material   adverse  effect  on  our  financial   condition  or  results  of
     operations.

     Solid Waste. Parallel generates  non-hazardous solid wastes that fall under
     the requirements of the Federal Resource  Conservation and Recovery Act and
     comparable  state statutes.  The EPA and the states in which we operate are
     considering  the adoption of stricter  disposal  standards  for the type of
     non-hazardous waste we generate. The Resource Conservation and Recovery Act
     also governs the generation,  management, and disposal of hazardous wastes.
     At present,  we are not required to comply with substantial  portion of the
     Resource  Conservation and Recovery Act requirements because our operations
     generate minimal quantities of hazardous wastes. However, it is anticipated
     that  additional  wastes,  which could include wastes  currently  generated
     during  operations,  could in the future be designated as hazardous wastes.
     Hazardous  wastes are  subject to more  rigorous  and costly  disposal  and
     management  requirements than are non-hazardous  wastes. Such change in the
     regulations   may  result  in   Parallel   incurring   additional   capital
     expenditures or operating expenses.

     Superfund.  The Comprehensive  Environmental  Response,  Compensation,  and
     Liability Act,  sometimes  called CERCLA or Superfund,  imposes  liability,
     without  regard to fault or the  legality of the  original  act, on certain
     classes of persons in connection with the release of a hazardous  substance
     into the  environment.  These persons include the current owner or operator
     of any site  where a  release  historically  occurred  and  companies  that
     disposed or arranged for the disposal of the hazardous  substances found at
     the site.  CERCLA also  authorizes  the EPA and, in some  instances,  third
     parties  to  act  in  response  to  threats  to the  public  health  or the
     environment and to seek to recover from the responsible  classes of persons
     the costs they incur. In the course of our ordinary operations, we may have
     managed substances that may fall within CERCLA's  definition of a hazardous
     substance.  We may be jointly and severally  liable under CERCLA for all or
     part of the  costs  required  to  clean up sites  where we  disposed  of or
     arranged for the disposal of these  substances.  This  potential  liability
     extends to properties  that we owned or operated,  as well as to properties
     owned and  operated  by others at which  disposal of  Parallel's  hazardous
     substances occurred.
<PAGE>
                                       18


     Parallel may also fall into the category of a current owner or operator. We
currently own or lease  numerous  properties  that for many years have been used
for exploring  and  producing oil and gas.  Although we believe we use operating
and disposal  practices  standard in the industry,  hydrocarbons or other wastes
may have been disposed of or released by us on or under  properties that we have
owned or leased.  In addition,  many of these  properties  have been  previously
owned  or  operated  by  third  parties  who may have  disposed  of or  released
hydrocarbons or other wastes at these  properties.  Under CERCLA,  and analogous
state  laws,  we could be required to remove or  remediate  previously  disposed
wastes,  including  wastes disposed of or released by prior owners or operators,
to clean up contaminated  property,  including contaminated  groundwater,  or to
perform remedial plugging operations to prevent future contamination.

Risk Factors

Declining oil and gas prices may cause us to record ceiling test write-downs

     We use the full cost  method of  accounting  to account for our oil and gas
operations.  This means that we capitalize the costs to acquire, explore for and
develop  oil  and  gas  properties.   Under  full  cost  accounting  rules,  the
capitalized  costs of oil and gas properties  may not exceed a "ceiling  limit",
which is based on the present  value of estimated  future net  revenues,  net of
income tax effects,  from proved reserves,  discounted at 10%, plus the lower of
cost or fair market value of unproved properties. Theses rules generally require
pricing  future  oil and gas  production  at the  unescalated  oil and prices in
effect at the end of each fiscal  quarter.  If capitalized  costs of oil and gas
properties  exceed the  ceiling  limit,  we must charge the amount of the excess
against  earnings.  This is  called a  ceiling  test  write-down.  This  noncash
impairment  charge does not affect cash flow from  operating  activities  but it
does reduce stockholders' equity.

     The risk that we will be required to write down the  carrying  value of oil
and gas  properties  increases  when oil and gas prices  decline.  In  addition,
write-downs may occur if we experience  substantial  downward adjustments to our
estimated proved reserves.

     During  the fourth  quarter of 1999,  we  recognized  a noncash  impairment
charge  of  $1,705,000  related  to  our  oil  and  gas  reserves  and  unproved
properties.  This  impairment of our oil and gas assets was primarily the result
of a  decrease  in our  year-end  proved  reserves.  We  did  not  recognize  an
impairment  in 2000. We cannot  assure you that we will not  experience  ceiling
test write-downs in the future.

We are subject to many restrictions under our loan agreement

     Under our loan agreement with Bank United,  Midland,  Texas,  substantially
all of our assets are encumbered and we are subject to various  restrictions  on
our ability to obtain additional  financing,  make  investments,  pay dividends,
lease equipment,  sell assets and engage in business  combinations.  We are also
required under the loan agreement to comply with certain financial covenants and
maintain  certain  financial  ratios.  The  loan  agreement  prohibits  us  from
declaring or paying  dividends  on our common stock but we are  permitted to pay
dividends on our  outstanding 6% convertible  preferred  stock as long as we are
not in default under the loan agreement. Although we are currently in compliance
with  the  foregoing  restrictions  and  provisions,  in the past we have had to
request  waivers  from our banks  because  of our  non-compliance  with  certain
financial  covenants and ratios.  Our ability to comply in the future with these
restrictions  and  covenants is uncertain  and will be affected by the levels of
cash flow from our  operations and events or  circumstances  beyond our control.
Our failure to comply with any of the  restrictions and covenants under the loan
agreement could result in a default under the loan agreement,  which could cause
all of our existing  indebtedness to be immediately due and payable.  It is also
an event


<PAGE>
                                       19


of default under the loan  agreement if a material  adverse change occurs in our
financial or business condition.

     The loan  agreement  limits the amounts we can borrow to a  borrowing  base
amount,  determined by Bank United in its sole discretion,  based upon projected
revenues  from the oil and gas  properties  securing  our loan.  Bank United can
unilaterally  adjust  the  borrowing  base and the  borrowings  permitted  to be
outstanding  under the loan agreement.  Outstanding  borrowings in excess of the
borrowing base must be repaid  immediately,  or we must pledge other oil and gas
properties as additional  collateral.  We do not currently have any  substantial
unpledged  properties  and no assurance can be given that if the borrowing  base
was reduced  significantly that we would be able to make any mandatory principal
prepayments required by Bank United.

Our producing properties are concentrated

     Substantially  all of our producing  properties are located in the State of
Texas.  At  December  31,  2000,   excluding  our  interest  in  First  Permian,
approximately  47% of the PV-10 value of our proved reserves was concentrated in
the Gulf Coast region of south Texas and approximately 53% of the PV-10 value of
our proved reserves was concentrated in the Permian Basin of west Texas.

     The occurrence of mechanical problems, adverse weather conditions, or other
events that cause  curtailment or cessation of production from wells in which we
own an  interest  could have a  material  adverse  effect on us. We will  remain
vulnerable to a disproportionate impact of delays or interruptions of production
from these wells until we develop a more diversified production base.

     Any material harm to the current  producing  reservoirs or any  significant
governmental regulations with respect to these wells, including any curtailments
of production or interruptions of transportation of oil or gas produced from the
wells  could have a material  adverse  effect on our  liquidity  and  results of
operations.

We do not control all operations and development

     Substantially  all of our business  activities are conducted  through joint
operating agreements under which we own partial interests in oil and gas wells.

     At December 31, 2000,  excluding  our interest in First  Permian,  we owned
interests in 76 gross (69.7 net) oil and gas wells where we are the operator and
100 gross (24.5 net) oil and gas wells where we are not the operator.

     If we do not operate the wells in which we own an interest,  we do not have
control over normal operating procedures,  expenditures or future development of
underlying properties.

     Since we do not have a majority  interest in most wells we do not  operate,
we may  not be in a  position  to  remove  the  operator  in the  event  of poor
performance.

We are highly dependent upon key personnel and a small management team

     Our success is highly dependent upon the services, efforts and abilities of
Thomas R. Cambridge,  the Chairman of the Board of Directors and Chief Executive
Officer of our company, and Larry C. Oldham, the President and a Director of our
company.  Our  operations  could be  materially  and  adversely  affected if Mr.
Cambridge or Mr. Oldham become unavailable for any reason.

<PAGE>
                                       20


     We believe  that our  operations  are  dependent  to some  degree  upon the
availability of outside advisors and consultants,  including  geophysicists  who
provide 3-D seismic survey expertise.

     We do not have employment agreements or long term contractual  arrangements
with any of our  officers,  employees  or  consultants.  In periods of improving
market conditions,  our ability to obtain and retain qualified  consultants on a
timely basis may be adversely affected.

     Parallel is the owner and  beneficiary  of life  insurance  policies on the
lives of Mr.  Cambridge  and Mr.  Oldham in the  amounts  of $1  million  and $5
million, respectively.

     At December 31, 2000, we had seven full-time  employees.  Our future growth
and profitability  will also be dependent upon our ability to attract and retain
other qualified management personnel and to effectively manage our growth. There
can be no assurance that we will be successful in doing so.

The oil and gas industry is capital intensive

     The oil and gas industry is capital intensive.  We make substantial capital
expenditures for the acquisition, exploration for and development of oil and gas
reserves.

     Historically,  we have financed  capital  expenditures  primarily with cash
generated  by  operations,  proceeds  from bank  borrowings  and sales of equity
securities.  In  addition,  we may  consider  selling  non-core  assets to raise
additional  operating  capital.  From  time to  time,  we may  also  reduce  our
ownership  interests  in 3-D seismic  and other  projects in order to reduce our
capital expenditure requirements, depending on our working capital needs.

     Our cash flow from operations and access to capital are subject to a number
of variables, including:

     our proved reserves;

     the level of oil and gas we are able to produce from existing wells;

     the prices at which oil and gas are sold; and

     our ability to acquire, locate and produce new reserves.

     Any one of  these  variables  can  materially  affect  the  borrowing  base
availability under our revolving credit facility with our bank lender.

     If our revenues or the borrowing base under our loan agreement  decrease as
a result  of lower  oil and gas  prices,  operating  difficulties,  declines  in
reserves  or for any other  reason,  we may have  limited  ability to obtain the
capital necessary to undertake or complete future drilling projects.

     We may, from time to time, seek additional financing, either in the form of
increased bank borrowings,  sales of debt or equity securities or other forms of
financing.  We do not have any agreements at the present time for any additional
financing and there can be no assurance as to the  availability  or terms of any
additional financing.

     If our  capital  resources  and  earnings  are  insufficient  to  fund  our
exploration and development  activities or repay our bank debt when due, we will
need to  obtain  additional  funds  through  public  or  private  financings  or
additional borrowings. No assurance can be given as to our ability to obtain any
such capital resources.  If we are not able to obtain the necessary capital, our
results of operations  and

<PAGE>
                                       21


financial  condition  could  be  materially  adversely  affected.  If,  however,
additional  funds are raised  through  the  issuance of equity  securities,  the
percentage  ownership of our  stockholders at that time could be diluted and, in
addition,  such equity  securities  may have rights,  preferences  or privileges
senior to those of the common stock.

We don't pay dividends on our common stock

     We have never paid dividends on our common stock,  and do not intend to pay
cash dividends on the common stock in the  foreseeable  future.  Net income from
our  operations,  if any,  will be used  for the  development  of our  business,
including  capital  expenditures,  to retire  debt and to pay  dividends  on our
outstanding  shares of preferred  stock.  Any  decision to pay  dividends on our
common stock in the future will depend upon our  profitability at that time, the
available  cash and other  factors.  Our ability to pay  dividends on our common
stock is further limited by the terms of our loan agreement and the terms of our
preferred stock.

Changes in control may be discouraged

     Our  certificate  of  incorporation,  our bylaws and the  Delaware  General
Corporation  Law contain  provisions  that may  discourage  other  persons  from
initiating a tender offer or takeover attempt that a stockholder  might consider
to be in the best interests of all  stockholders,  including  takeover  attempts
that might result in a premium to be paid over the market price of our stock.

     On October 5, 2000,  our Board of Directors  adopted a  stockholder  rights
plan designed to protect Parallel from unfair or coercive  takeover attempts and
to prevent a potential  acquiror from gaining control of Parallel without fairly
compensating all of the stockholders. The plan authorized 50,000 shares of $0.10
par Series A Preferred Stock Purchase  Rights.  A dividend of one Right for each
share of our outstanding  common stock was distributed to stockholders of record
at the close of business on October 16, 2000. If a public  announcement  is made
that a person has acquired 15% or more of Parallel's common stock or a tender or
exchange offer is made for 15% or more of the common stock,  each Right entitles
the holder to purchase from the company one  one-thousandth of a share of Series
A Preferred  Stock, at an exercise price of $26.00 per one  one-thousandth  of a
share,  subject to adjustment.  In addition,  under certain  circumstances,  the
rights entitle the holders to buy Parallel's stock at a 50% discount.  See Notes
4 and 9 to  Financial  Statements,  on pages  F-14 and F-19,  respectively,  for
additional information.

     We are authorized to issue 10,000,000  shares of preferred  stock,  974,500
shares of which are outstanding.  Our Board of Directors has total discretion in
the issuance and the determination of the rights and privileges of any shares of
preferred stock which might be issued in the future, which rights and privileges
may be  detrimental  to the holders of the common stock.  Also,  the issuance of
preferred stock in the future could discourage, delay or prevent a tender offer,
proxy  contest or other  similar  transaction  involving a  potential  change in
control of Parallel that might by viewed favorably by stockholders.

<PAGE>
                                       22

ITEM 2. PROPERTIES



General

     Our principal  properties  consist of developed and undeveloped oil and gas
leases and the reserves associated with these leases.  Generally,  developed oil
and gas leases remain in force so long as production is maintained.  Undeveloped
oil and gas leaseholds are generally for a primary term of five or ten years. In
most cases,  we can extend the term of our  undeveloped  leases by paying  delay
rentals or by producing reserves that we discover under our leases.

Producing Wells and Acreage

     We have presented the following  table to provide you with a summary of the
producing oil and gas wells and the developed and  undeveloped  acreage in which
we owned an interest at December  31,  2000.  We have not  included in the table
acreage in which our  interest  is  limited  to  options  to  acquire  leasehold
interests, royalty or similar interests.

<TABLE>


                         Producting 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>

Texas            78        60.9        98      34.2      51,467     30,996     52,123      13,014

New Mexico       -          -          -         -           -         -       11,357         340
                ---        ----       ---      ----      ------     ------     ------      ------
     Total       78        60.9        98      34.2      51,467     30,996     63,480      13,354
                ===        ====       ===      ====      ======     ======     ======      ======
</TABLE>

--------------------

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

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

     At December  31,  2000,  we were  operating 76 gross wells in which we also
owned interests.  Approximately  48% of the discounted  present value of our oil
and gas reserves as of December 31, 2000 is  attributable  to wells  operated by
us. As operator,  we supervise the drilling,  completion and production of wells
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 general and  administrative
expenses for operating the wells.

     Except for our oil and gas  leases,  we do not own any  patents,  licenses,
franchises or concessions which are significant to our oil and gas operations.

Title to Properties

     As is customary in the oil and gas industry,  we make only a cursory review
of title to undeveloped oil and gas leases at the time they are acquired.  These
cursory title reviews, while consistent with industry practices, are necessarily
incomplete.  We believe that it is not economically  feasible to review in depth
every  individual  property  we  acquire,  especially  in the case of  producing
property  acquisitions  covering a large number of leases.  Ordinarily,  when we
acquire producing properties, we focus our review efforts on properties believed
to have higher values and will sample the remainder.

<PAGE>
                                       23


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.  In the case of  undeveloped  leases or
prospects we acquire,  before any drilling  commences,  we will usually  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  before
drilling a well on the lease  commences.  We believe  that we have good title to
our  oil  and  gas   properties,   some  of  which  are  subject  to  immaterial
encumbrances,  easements and restrictions. The oil and gas properties we own are
also typically  subject to royalty and other similar non-cost bearing  interests
customary in the industry.  We do not believe that any of these  encumbrances or
burdens will materially affect our ownership or the use of our properties.

Oil and Gas Reserves

     Our oil  and  gas  reserves  were  estimated  as of  December  31,  2000 by
Williamson Petroleum Consultants, Inc., Midland, Texas.

     At December 31, 2000, excluding our 30.675% interest in First Permian's oil
and gas reserves,  our estimated proved reserves were  approximately 1.0 million
Bbls of oil and 15.7 Bcf of gas, or 3.6 million EBO.

     The   information  in  the  following   table  provides  you  with  certain
information regarding our proved reserves at December 31, 2000.

<TABLE>

                                               Proved                Proved
                                             Developed           Undeveloped         Total
                                              ---------           -----------         -----
<S>                                          <C>                 <C>                 <C>

Oil (Bbls)                                      570,851               402,156           973,007

Gas (Mcf)                                    11,576,608             4,109,360        15,685,968

Future Net Revenues (before income taxes) $ 107,229,435         $  37,038,329     $ 144,267,764

Present Value of Future Net Revenues
   (before income taxes)                  $  72,486,636         $  18,463,955     $  90,950,591

</TABLE>


     For  additional  information  concerning  our estimated  proved oil and gas
reserves,  you should  read Note 17 to the  Financial  statements.  See Item 8 -
Financial Statements and Supplementary Data.

     The   information  in  the  following   table  provides  you  with  certain
information regarding our 30.675% interest in First Permian's proved reserves at
December 31, 2000.

<TABLE>


                                              Developed           Undeveloped         Total
                                              ---------           -----------         -----
<S>                                          <C>                 <C>                 <C>
Oil (Bbls)                                    7,505,547             7,236,780         14,742,327

Gas (Mcf)                                     1,251,195               567,432          1,818,627

Future Net Revenues (before income taxes)  $113,962,997          $106,096,369       $220,059,366

Present Value of Future Net Revenues
   (before income taxes)                   $ 54,513,476          $ 37,536,012       $ 92,049,488

</TABLE>

<PAGE>
                                       24



     For  additional  information  concerning  our  30.675%  interest  in  First
Permian's estimated proved oil and gas reserves,  you should read Note 15 to the
Financial statements. See Item 8 - Financial Statements and Supplementary Data.

     The reserve  data in these  reports  represent  estimates  only.  Reservoir
engineering is a subjective process.  There are numerous  uncertainties inherent
in estimating our oil and natural gas reserves and their estimated values.  Many
factors are beyond our control.  Estimating underground accumulations of oil and
natural gas cannot be measured in an exact  manner.  The accuracy of any reserve
estimate is a function of the quality of available data and of  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  after the date of such
estimates.   Consequently,  reserve  estimates  are  often  different  from  the
quantities  of  oil  and  natural  gas  that  are  ultimately   recovered.   The
meaningfulness  of such  estimates is highly  dependent upon the accuracy of the
assumptions upon which they were based.

     Generally,  the volume of  production  from oil and natural gas  properties
declines as reserves  are produced and  depleted.  Unless we acquire  properties
containing proved reserves or conduct successful drilling activities, our proved
reserves  will decline as we produce our existing  reserves.  Our future oil and
natural  gas  production  is  highly  dependent  upon our  level of  success  in
acquiring or finding additional reserves.

     We do not have any oil or gas reserves outside the United States.

     Our oil and gas  reserves and  production  are not subject to any long term
supply or similar agreements with foreign governments or authorities.

     Other than estimated  reserve  volumes we file with the U.S.  Department of
Energy,  our estimated  reserves have not been filed with or included in reports
to any federal agency other than the SEC.

ITEM 3. LEGAL PROCEEDINGS

     At March  15,  2001 we were  involved  in two  lawsuits  incidental  to our
business.  In the opinion of management,  the ultimate outcome of these lawsuits
will not have a material  adverse  effect on  Parallel's  financial  position or
results of operations.  We are not aware of any other threatened litigation.  We
have  not  been  a  party  to  any  bankruptcy,  receivership,   reorganization,
adjustment or similar  proceeding.  See Note 16 to the Financial  Statements for
additional information.

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

          We did not submit any matter to a vote of our stockholders  during the
     fourth quarter of 2000.

<PAGE>
                                       25


                                     PART II


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

          Our common stock trades on the Nasdaq National Market under the symbol
     PLLL. The following table shows,  for the periods  indicated,  the high and
     low closing sales prices for the common stock as reported by Nasdaq.

<TABLE>
                                                           Price Per Share
                                                       ------------------------
                                                          High            Low
                                                       --------        --------
<S>                                                    <C>             <C>
       1998

                First quarter                           $7.06           $5.37
                Second quarter                          $6.25           $4.12
                Third quarter                           $4.93           $2.62
                Fourth quarter                          $2.93           $1.34

        1999

                First quarter                           $1.87           $1.00
                Second quarter                          $2.34           $1.25
                Third quarter                           $3.00           $1.75
                Fourth quarter                          $2.53           $1.37

        2000

                First quarter                           $4.19           $1.59
                Second quarter                          $3.00           $1.75
                Third quarter                           $4.69           $2.56
                Fourth quarter                          $4.69           $3.00
</TABLE>


     The last sale  price of our  common  stock on March 15,  2001 was $4.50 per
share, as reported on the Nasdaq National Market.

     As of March 15,  2001,  there  were  approximately  3,064  stockholders  of
record.

Dividends

     We have not paid, and do not intend to pay in the foreseeable  future, cash
dividends on our common stock.  The revolving  credit  facility we have with our
bank lender  prohibits  the payment of  dividends  on the common  stock.  Our 6%
convertible  preferred  stock also  contains  provisions  that  restrict us from
paying dividends or making distributions on our common stock if all dividends on
the preferred  stock have not been paid in full.  Any dividends on our preferred
stock  that  are not  declared  and paid  will  accumulate  and all  accumulated
dividends must be paid in full before dividends may be paid to holders of common
stock. The credit facility allows us to pay dividends on our outstanding  shares
of  preferred  stock as long as we are not in  default  under  the  terms of the
credit  facility.  The holders of the preferred


<PAGE>
                                       26


stock are entitled,  as and when declared by the Board of Directors,  to receive
an annual  dividend  of $.60 per  share,  payable  semi-annually  on June 15 and
December  15 of each  year.  See  "Risk  Factors"  on page 18 and  "Management's
Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity" on page 34.

ITEM 6. SELECTED FINANCIAL DATA

     In the following table, we provide you with selected  historical  financial
data. We have prepared this information using the audited  financial  statements
of Parallel for the  five-year  period ended  December 31, 2000. It is important
that you read this data along with our financial  statements  and related notes,
and "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  under Item 7 below.  The selected  financial  data provided are not
necessarily  indicative  of  our  future  results  of  operations  or  financial
performance.

<TABLE>

                                                                 Year Ended December 31,
                                       -------------------------------------------------------------------------
                                            2000            1999(1)        1998(2)        1997          1996
                                       -------------    ------------   ------------   ------------  ------------
<S>                                    <C>              <C>            <C>            <C>           <C>

Operating revenues                      $ 17,134,502    $  8,974,041   $  9,001,582   $ 12,614,242  $ 14,167,470

Operating expenses                      $  9,530,266    $ 10,173,995   $ 24,056,923   $  7,968,146  $  6,945,168

Net income (loss)                       $  5,977,328    $ (2,450,457)  $(12,995,910)  $  2,743,930  $  4,330,654

Cumulative preferred stock dividend     $   (609,063)   $   (609,063)  $   (276,712)            -             -

Net income (loss) available to
   common  stockholders                 $  5,368,265    $ (3,059,520)  $(13,272,622)  $  2,743,930  $  4,330,654

Net income (loss) per common share
     Basic                              $       0.26    $      (0.16)  $      (0.73)  $       0.15  $       0.29

     Diluted                            $       0.25    $      (0.16)  $      (0.73)  $       0.15  $       0.28

Cash dividends - common stock                     -               -              -              -             -

Weighted average common shares
  and common  stock equivalents
   outstanding:
     Basic                                20,331,858      18,549,214     18,300,998     17,862,792    14,957,404

     Diluted                              23,465,492      18,549,214     18,300,998     18,640,990    15,693,258

Present value of proved oil and gas
   reserves  discounted at 10% (before
   estimated federal income taxes)      $ 90,950,591    $ 25,498,996   $ 26,822,980   $ 46,419,580  $ 67,015,980

Working capital                         $  2,760,837    $    (71,647)  $    128,813   $ (2,162,139) $    351,517

Total assets                            $ 46,456,437    $ 43,264,070   $ 46,564,782   $ 49,855,532  $ 38,098,169

Total liabilities                       $ 15,288,069    $ 17,463,967   $ 20,839,642   $ 20,736,779  $ 13,380,034

Long term debt, less current maturities $ 11,624,000    $ 12,300,000   $ 18,035,889   $ 12,182,610  $  8,521,391

Total stockholders' equity              $ 31,168,368    $ 25,800,103   $ 25,725,140   $ 29,118,753  $ 24,718,135

</TABLE>

-------------------

(1)  Results include a noncash charge of $1,705,000 related to the impairment of
     oil and gas properties incurred in the fourth quarter of 1999,  primarily a
     result of a decrease in year-end  reserves.

(2)  Results  include a noncash charge of $14,757,028  related to the impairment
     of oil and gas properties incurred in the fourth quarter of 1998, primarily
     a result of low oil and gas prices at year-end.

<PAGE>
                                       27


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

     The  following  discussion  and  analysis  are  intended  to assist  you in
understanding our financial  position and results of operations for each year in
the  three-year  period ended  December 31, 2000.  You should read the following
discussion  and analysis in  conjunction  with our financial  statements and the
related notes.

     The  following  discussion  contains  forward-looking   statements.  For  a
description  of  limitations   inherent  in  forward-looking   statements,   see
"Cautionary Statement Regarding Forward-Looking Statements" on page ii.

Basis of Presentation

     We account  for our  30.675%  interest  in First  Permian  using the equity
method of  accounting.  Under the  equity  method of  accounting,  we record our
investment in First Permian at cost on the balance  sheet.  This is increased or
reduced by our  proportionate  share of First Permian's income or loss, which is
presented as one amount in the  statement of income.  Our 30.675% share of First
Permian's  oil and gas  reserves is presented  separately  under our oil and gas
reserve information in Note 15 to the Financial Statements.

     At December 31, 2000, we had recorded a loss of $500,576 in our  investment
in First  Permian.  Our loss is recorded as a net liability in our investment to
the extent  that we had  guaranteed  $10,000,000  of the debt of First  Permian.
Effective  October 25, 2000, we were released from this guarantee and , although
we continue to utilize the equity method of accounting, our financial statements
no longer  include  First  Permian's  losses  because we are  released  from our
guarantee.  To the extent First Permian generates income in excess of losses, we
will then recognize our share of the net income on our financial statements.

General

     Our primary objectives are to build oil and gas reserves,  production, cash
flow and earnings per share by exploring for new oil and gas reserves, acquiring
oil and gas  properties  and  optimizing  production  from  existing oil and gas
properties. Management seeks to achieve these objectives by:

     using advanced technologies to conduct exploratory activities;

     acquiring  producing  properties  we believe add  incremental  value to our
     asset base;

     keeping debt levels low;

     concentrating activities in core areas to achieve economies of scale; and

     emphasizing cost controls.

     Since  1992,  our primary  focus has been  exploratory  drilling  using 3-D
seismic  technology.  Our long term business strategy is to increase our reserve
base by using this and other advanced technologies.  Additionally,  we intend to
exploit our  existing  properties  and to acquire  properties  we believe can be
exploited by developing reserves not previously produced.

<PAGE>
                                       28


     We undertake  projects  only when we believe 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.  We also endeavor
to maximize the present value of our projects by accelerating  production of our
reserves  consistent  with prudent  reservoir  management and prevailing  energy
prices.

     Following this strategy,  we have discovered oil and gas reserves using 3-D
seismic  technology  in the  Horseshoe  Atoll  Reef  Trend of west Texas and the
Yegua/Frio/Wilcox  gas trend onshore the gulf coast of Texas.  Additionally,  we
have  acquired  producing  oil and gas  properties  in the Permian Basin of west
Texas.  Capital used to acquire these properties has been provided  primarily by
secured  bank  financing,  sales of our  equity  securities  and cash flows from
operations.

Operating Performance

     Our  operating  performance  is  influenced  by several  factors,  the most
significant  of which  are the  prices  we  receive  for our oil and gas and our
production volumes.  The world price for oil has overall influence on the prices
that we receive for our oil production. The prices received for different grades
of oil are based upon the world price for oil, which is then adjusted based upon
the particular  grade.  Typically,  light oil is sold at a premium,  while heavy
grades of crude are discounted. Gas prices we receive are influenced by:

     seasonal demand;

     weather;

     hurricane conditions in the Gulf of Mexico;

     availability of pipeline transportation to end users;

     proximity of our wells to major  transportation  pipeline  infrastructures;
     and

     to a lesser extent, world oil prices.

     Additional factors influencing our overall operating performance include:

     production expenses;

     overhead requirements; and

     costs of capital.

     Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital  expenditures.  Historically,  the sources of
financing to fund our capital expenditures have included:

     cash flow from operations,

     sales of our equity securities, and

     bank borrowings.

     Our oil and gas producing  activities are accounted for using the full cost
method of  accounting.  Under this method,  we capitalize  all costs incurred in
connection  with the  acquisition of oil and gas properties and the  exploration
for and  development  of oil and gas  reserves.  (See  Note 11 to the  Financial

<PAGE>
                                       29


Statements.)  These  costs  include  lease  acquisition  costs,  geological  and
geophysical  expenditures,  costs of drilling both productive and non-productive
wells,  and  overhead   expenses   directly  related  to  land  acquisition  and
exploration and development activities. Proceeds from the disposition of oil and
gas properties are accounted for as a reduction in  capitalized  costs,  with no
gain or loss recognized  unless such  disposition  involves a material change in
reserves, in which case the gain or loss is recognized.

     Depletion of the  capitalized  costs of oil and gas  properties,  including
estimated   future   development   costs,   is  provided  using  the  equivalent
unit-of-production  method  based upon  estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content.  Unproved oil and gas properties are not amortized, but
are individually  assessed for impairment.  The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.

     Depletion per  equivalent  unit of production EBO was $8.18 versus $8.30 in
1999 and $8.07 in 1998.  The decrease per BOE in 2000 was a result of a decrease
of $2,890,373 in the net oil and gas properties  depletable  base coupled with a
disproportionate  decrease in total  beginning  of the year  reserves of 289,156
BOEs.

Results of Operations

     Our  business  activities  are  characterized  by frequent,  and  sometimes
significant, changes in our:

     reserve base;

     sources of production;

     product mix (oil versus gas volumes); and

     the prices we receive for our oil and gas production.

     Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not fully and accurately  describe our  condition.  The
following table shows selected  operating data for each of the three years ended
December 31, 2000, 1999 and 1998.

<PAGE>
                                       30

<TABLE>

                                                            Year Ended December 31,
                                                 -------------------------------------------
                                                      2000         1999(1)         1998(2)
                                                  ----------    -----------     -----------
<S>                                               <C>            <C>            <C>

Production and prices:
    Oil (Bbls)                                       165,137        163,696        185,474
    Natural gas (Mcf)                              2,821,815      2,708,516      3,275,882
    EBO (Bbls)                                       635,440        615,115        731,454
    Oil price (per Bbl)                           $    28.88      $   17.32     $    12.49
    Gas price (per Mcf)                           $     4.38      $    2.27     $     2.04
    Ratio of oil to gas price                         6.59/1         7.63/1         6.12/1
    Increase (decrease) in production
        volumes over prior year                           3%          (16%)           (1%)

Results of operations per EBO:
    Oil and gas revenues                          $    26.96     $    14.59     $    12.31

    Costs and expenses:
        Production costs                               4.88            3.83           3.33                        -
        General and administrative                     1.88            1.31           1.23
        Provision for losses on trade receivables        -              .14             -
        Depreciation, depletion and amortization       8.25            8.49           8.16
        Impairment of oil and gas properties             -             2.77          20.17
                                                  ---------      ----------     ----------
             Total costs and expenses                 15.01           16.54          32.89
                                                  ---------      ----------     ----------
    Operating income (loss)                           11.97           (1.95)        (20.58)

    Equity interest in earnings (loss) of
        First Permian, L.L.C.                         (0.79)           0.32            -

    Interest expense, net                             (1.76)          (2.39)       (1 .89)

    Other income, net                                   .19             .03           .46
                                                  ---------      ----------     ----------
        Pretax income (loss) per EBO              $    9.61      $    (3.99)    $   (22.01)
                                                  =========      ==========     ==========
</TABLE>

-------------------

(1)  Results include a noncash charge of $1,705,000 related to the impairment of
     oil and gas properties incurred in the fourth quarter of 1999,  primarily a
     result of a decrease in year-end reserves.

(2)  Results  include a noncash charge of $14,757,028  related to the impairment
     of oil and gas properties incurred in the fourth quarter of 1998, primarily
     a result of low oil and gas prices at year-end.

     The following  table shows the percentage of total revenues  represented by
each item reflected on our statements of operations for the periods indicated.

<PAGE>
                                       31

<TABLE>

                                                        Year Ended December 31,
                                                 -------------------------------------
                                                   2000          1999(1)       1998(2)
                                                 -------        --------       -------
<S>                                              <C>            <C>            <C>
Oil and gas revenues                              100.0%         100.0%         100.0%

Costs and expenses:
    Production costs                               18.1           26.2           27.0
    General and administrative                      6.9            8.9            9.5
    Provision for loss on trade receivables          -             1.0             .5
    Depreciation, depletion and
        amortization                               30.6           58.2           66.3
    Impairment of oil and gas properties             -            19.0          163.9

                                                -------        -------        -------
        Total costs and expenses                   55.6          113.3          267.2
                                                -------        -------        -------
        Total costs and expenses

Operating income (loss)                            44.4          (13.3)        (167.2)

Equity interest in earnings (loss) of
     First Permian, L.L.C.                         (2.9)           2.2             -

Interest expense, net                              (6.5)         (16.4)         (15.3)

Other income, net                                    .7             .2            3.8
                                                -------        -------        -------
Pretax income (loss)                               35.7          (27.3)        (178.7)

Income tax (expense) benefit                       (0.8)            -            34.4
                                                -------        -------        -------
Net income (loss)                                  34.9%         (27.3%)       (144.3%)
                                                -------        -------        -------
</TABLE>

-------------------

(1)  Results include a noncash charge of $1,705,000 related to the impairment of
     oil and gas properties incurred in the fourth quarter of 1999,  primarily a
     result of a decrease in year-end  reserves.

(2)  Results  include a noncash charge of $14,757,028  related to the impairment
     of oil and gas properties incurred in the fourth quarter of 1998, primarily
     a result of low oil and gas prices at year-end.

Years Ended December 31, 2000 and December 31, 1999

     Oil and Gas Revenues.  Parallel's  total oil and gas revenues for 2000 were
$17,134,502,  an increase of $8,160,461,  or approximately  91%, from $8,974,041
for 1999.  The increase in revenues for 2000 when  compared with 1999 is related
to a 3% increase in production  volumes and an 85% increase in the average price
per EBO we received for our oil and gas sales.

     Production.  On an  equivalent  barrel  basis,  production  volumes in 2000
totaled  635,440 EBOs  compared  with  615,115 EBOs in 1999.  The 3% increase in
production  was  primarily  due to increased  drilling  activity in 2000,  which
resulted in more wells being placed in production.

     Production Costs. The rise in production costs for 2000, when compared with
1999, was primarily the result of increased  production  taxes  associated  with
increased  revenues  and, to a lesser  degree,  a slight  increase in production
volumes.  Production  costs  increased  $745,802 or 32%, to  $3,099,534  for the
twelve months ended  December 31, 2000,  from  $2,353,732 for the same period of

<PAGE>
                                       32


1999.  Production costs as a percentage of revenues decreased  primarily because
of  higher  oil and gas  prices,  which  resulted  in higher  revenues.  Average
production  costs per EBO  increased  27% to $4.88 for the twelve  months  ended
December  31,  2000  compared  to $3.83 in the same  period  of 1999,  primarily
because of increased production taxes.

     General and Administrative  Expenses.  General and administrative  expenses
increased $385,593,  or 48%, to $1,191,527 for the year ended December 31, 2000,
from  $805,934 in 1999.  The  increase  was  primarily  related to  increases in
automobile  and  salary  expenses.  General  and  administrative  expenses  as a
percentage  of revenues  decreased to 6.9% for the year ended  December 31, 2000
versus 8.9% for the same period in 1999.  This decrease is primarily a result of
higher oil and gas prices, which increased revenues.

     Depreciation,  Depletion and Amortization  Expense.  DD&A expenses for 2000
increased  $15,705 to $5,239,205  versus  $5,223,500 in 1999.  This increase was
primarily the result of a 3% increase in production  volumes.  DD&A expense as a
percentage  of  revenues  decreased  primarily  because  of  higher  oil and gas
revenues.

     Impairment of Oil and Gas Properties. During 2000, we did not recognize any
impairment  charge.  During the fourth  quarter of 1999, we recognized a noncash
impairment charge of $1,705,000 related to our oil and gas reserves and unproved
properties.  The  impairment  of oil and gas  assets in 1999 was  primarily  the
result of a decrease in our year-end proved reserves.

     Under full cost accounting rules, each quarter we are required to perform a
ceiling test  calculation.  The full cost pool  carrying  values cannot exceed a
company's  future net revenues from its proved  reserves,  discounted at 10% per
annum using constant current product prices,  and the lower of cost or market of
unproved properties.

     The ceiling  test was computed  using the net present  value of reserves at
December 31, 2000 based on prices of $25.00 per Bbl of oil and $10.18 per Mcf of
natural gas. The prices used to compute the ceiling test in 1999 were $24.75 per
Bbl and $2.20 per Mcf.

     Net Interest Expense.  Net interest expense decreased $349,127,  or 24%, to
$1,120,080 for the year ended December 31, 2000 compared with $1,469,207 for the
same period of 1999.  This  decrease was  principally  a result of lower average
borrowings  from our  revolving  line of  credit  facility  and an  increase  in
interest income.

     Income Tax Benefit  (Expense).  For the year ended  December 31,  2000,  we
recognized tax expense of $130,000. For the year ended December 31, 1999, we did
not recognize an income tax benefit or expense.

     Our effective tax rate for 2000 was  approximately  2.1% versus 0% in 1999.
You should read Note 5 to the  Financial  Statements  on page F-14,  included in
Item 8 - Financial  Statements and Supplementary Data, for further discussion of
our income tax provisions and benefits.

     Net Income (Loss) and Operating Cash Flow. Our net income, before preferred
stock  dividends,  was  $5,977,328 for the year ended December 31, 2000 compared
with a net loss of $2,450,457  for the year ended December 31, 1999. We realized
net income in 2000 primarily because of substantially higher oil and gas prices,
which increased revenues, and a 3% increase in production volumes. The 1999 loss
was primarily caused by a fourth quarter 1999 noncash  impairment  charge to oil

<PAGE>
                                       33


and gas properties  totaling  $1,705,000 and decreased revenues resulting from a
decline in production volumes.

     Operating cash flow for 2000 increased approximately  $7,566,877,  or 177%,
to $11,847,109 compared with $4,280,232 for the year ended December 31, 1999.

Years Ended December 31, 1999 and December 31, 1998

     Oil  and Gas  Revenues.  Our  total  oil and gas  revenues  for  1999  were
$8,974,041,  a decrease of $27,541,  or less than 1%, from  $9,001,582 for 1998.
The  decrease  in revenues  for 1999,  compared  with 1998,  is related to a 16%
decline in production volumes,  which was partially offset by higher oil and gas
prices.

     Production.  On an equivalent barrel basis, 1999 production totaled 615,115
EBOs  compared  with  731,454  EBOs in 1998.  The  decrease  in  production  was
primarily due to normal production  declines associated with producing wells and
decreased  drilling  activity in 1999, which affected our ability to replace oil
and gas produced during the year.

     Production  Costs. The decrease in production costs for 1999, when compared
with  1998,  was  primarily  the  result of a decrease  in  production  volumes.
Production costs decreased  $80,926,  or 3%, to $2,353,732 for the twelve months
ended December 31, 1999, from $2,434,658 for the same period of 1998. Production
costs as a percentage of revenues decreased  primarily because of higher oil and
gas prices.  Average  production  costs per EBO  increased  15% to $3.83 for the
twelve months ended  December 31, 1999 compared with $3.33 in the same period of
1998,  primarily  because  of  lower  production  volumes  and the  fixed  costs
associated with producing wells.

     General and Administrative  Expenses.  General and administrative  expenses
decreased $49,854, or 6%, to $805,934 for the year ended December 31, 1999, from
$855,788 for the same period of 1998. The decrease in general and administrative
expenses was  primarily  related to a decrease in property  insurance  costs and
legal expenses.  General and administrative expenses as a percentage of revenues
decreased to 8.9% for the year ended  December 31, 1999 versus 9.5% for the same
period in 1998. This decrease is primarily a result of higher oil and gas prices
and a 6% decline in general and administrative expenses.

     Depreciation,  Depletion and Amortization  Expense.  DD&A expenses for 1999
decreased  $742,721,  or 12%, to  $5,223,500  versus  $5,966,221  in 1998.  This
decrease was a result of lower production volumes.  DD&A expense as a percentage
of revenues decreased primarily because of lower production volumes.

     Impairment of Oil and Gas Properties. During the fourth quarter of 1999, we
recognized a noncash  impairment charge of $1,705,000 related to our oil and gas
reserves  and  unproved  properties.  The  impairment  of oil and gas assets was
primarily  the  result  of a  decrease  in  our  year-end  proved  reserves.  We
recognized an impairment  charge in 1998 of  $14,757,028,  or $12,269,834 net of
tax, related to our oil and gas reserves and unproved properties. The impairment
of oil and gas  assets  in 1998  was  primarily  the  result  of the  effect  of
significantly  lower oil and natural gas prices on both proved and  unproved oil
and gas properties.

     Under full cost accounting rules, each quarter we are required to perform a
ceiling test  calculation.  The full cost pool  carrying  values cannot exceed a
company's future net revenues from its


<PAGE>
                                       34


proved  reserves,  discounted at 10% per annum using  constant  current  product
prices, and the lower of cost or market of unproved properties.

     The ceiling  test was computed  using the net present  value of reserves at
December  31, 1999 based on prices of $24.75 per Bbl of oil and $2.20 per Mcf of
natural gas. The prices used to compute the ceiling test in 1998 were $10.50 per
Bbl and $2.00 per Mcf.

     Net Interest  Expense.  Net interest expense increased  $90,875,  or 6%, to
$1,469,207  for the year ended December 31, 1999,  from  $1,378,332 for the same
period of 1998. This increase was principally a result of an increase in average
borrowings from our revolving line of credit facility.

     Income Tax Benefit (Expense).  For the year ended December 31, 1999, we did
not  recognize  an income tax benefit or expense  because we  generated  net tax
losses  during the year.  For the year ended  December 31, 1998, we recognized a
tax benefit of  $3,100,027.  At  December  31,  1999 and 1998,  we reviewed  our
deferred tax assets and, in light of the current economic  conditions in the oil
and gas  industry,  the outlook for future  commodity  prices,  and our expected
operational results in future periods, we believe that some of our net operating
losses may expire  unused.  Therefore,  we  established  a  valuation  allowance
against them of $4,248,480 and $2,530,196 for 1999 and 1998, respectively.

     Our effective tax rate for 1999 was  approximately  0% versus a 19% benefit
in 1998.  You  should  read Note 5 to the  Financial  Statements  on page  F-14,
included in Item 8 - Financial  Statements and  Supplementary  Data, for further
discussion of our income tax provisions and benefits.

     Net Income (Loss) and Operating Cash Flow. Our net loss,  before  preferred
stock  dividends,  was  $2,450,457 for the year ended December 31, 1999 compared
with a net loss of  $12,995,910  for the year ended  December 31, 1998. The 1999
loss was primarily caused by a fourth quarter 1999 noncash  impairment charge to
oil and gas properties  totaling  $1,705,000 as a result of a decrease in proved
reserves  and a decline  in  production  volumes.  This  compares  with a fourth
quarter  1998  noncash  impairment  charge  to oil and gas  properties  totaling
$14,757,028,  the result of  significantly  lower oil and gas prices at year-end
1998.

     Factors  contributing  to the  net  loss  were  partially  offset  by a 19%
increase in 1999 oil and gas prices,  on an EBO basis,  when  compared with 1998
prices.

     Operating cash flow for 1999 decreased  approximately  $347,000,  or 8%, to
$4,280,232  compared with $4,627,312 for the year ended December 31, 1998. Other
sources of funds  included  net  proceeds of $17,188  from the exercise of stock
options, net proceeds of $3,117,295,  excluding offering costs, from the private
placement of common stock, net proceeds from property sales totaling  $1,111,525
and bank borrowings under our credit facility.

Capital Resources and Liquidity

     Our capital  resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves.  Our level
of earnings and cash flows depends on many  factors,  including the price of oil
and natural gas.

     Our primary source of cash during 2000 was funds generated from operations.
Such funds were used primarily for  exploration  and  development  expenditures,
preferred stock dividend payments and the repayment of borrowings under our bank
credit facility.

<PAGE>
                                       35


     During 2000, we spent  $6,645,737 on exploration and  development,  seismic
data processing and leasehold  acquisitions.  Long term debt,  excluding current
maturities, decreased by $676,000 to $11,624,000. At December 31, 2000, Parallel
had  $2,000,826 in cash and total assets of  $46,456,437.  The unused  borrowing
base available from our revolving credit facility was  approximately  $3,100,000
at December 31, 2000.

     Bank Facility

     On  December  18,  2000,  we entered  into a new loan  agreement  with Bank
United, Midland, Texas, to refinance the outstanding indebtedness under the loan
agreement with our former bank lender, and to provide funds for working capital.
The loan agreement  provides for a revolving  credit facility under which we may
borrow up to the lesser of $30.0 million or the borrowing  base amount in effect
from time to time. At December 31, 2000,  the borrowing base in effect was $15.5
million, and $12.4 million,  bearing interest at 9.5%, was outstanding under the
credit  facility.  The interest rate on amounts drawn under the revolving credit
facility is, at our election, either the bank's base rate or the eurodollar rate
plus a margin of 2.75% during the related  eurodollar  interest rate period. The
borrowing base is redetermined by the bank  semi-annually  on or about May 1 and
November 1 of each year,  or at other times as the bank  elects.  The  borrowing
base automatically  reduces by $323,000 each month beginning January 1, 2001. If
the outstanding principal amount of our loan ever exceeds the borrowing base, we
are required to either provide  additional  collateral to the bank or prepay the
principal of the note in an amount at least equal to such  excess.  Unless there
is a  borrowing  base  deficiency  and we prepay the  amount of the  deficiency,
interest only is payable  monthly.  The  revolving  credit  facility  matures on
October 1, 2003.

     Commitment  fees of .25% per annum on the difference  between the revolving
commitment and the average daily amount of the loan are due quarterly.

     Our obligations to the bank are secured by substantially all of our oil and
gas  properties.  Our bank borrowings have been incurred to finance our property
acquisition, 3-D seismic surveys, enhancement and drilling activities.

     In addition to customary affirmative covenants, the loan agreement contains
various restrictive covenants and compliance requirements, including:

     maintaining certain financial ratios;

     limitations on incurring additional indebtedness;

     prohibiting the payment of dividends on our common stock;

     limitations of the disposition of assets; and

     permitting liens (other than in favor of the lender) to exist on any of our
     properties.

     If we have  borrowing  capacity  under  our loan  agreement,  we  intend to
borrow, repay and reborrow under the revolving credit facility from time to time
as necessary, subject to borrowing base limitations, to fund:

     3-D seismic surveys;

     lease option exercises;

<PAGE>
                                       36


     drilling activities on our properties in the Yegua/Frio/Wilcox gas trend;

     developmental  drilling on our Permian Basin properties,  when economically
     feasible;

     other drilling expenditures and acquisition opportunities; and

     general corporate purposes.

     Preferred Stock

     At December 31, 2000,  we had 974,500  shares of 6%  convertible  preferred
stock outstanding. The preferred stock:

     requires us to pay  dividends of $.60 per annum,  semi-annually  on June 15
     and December 15 of each year.

     can be  converted  into  common  stock at any  time,  at the  option of the
     holder,  into 2.8751 shares of common stock at an initial  conversion price
     of $3.50 per share, subject to adjustment in certain events.

     is redeemable at our option,  in whole or in part, for $10 per share,  plus
     accrued dividends.

     has no voting  rights,  except as required by applicable  law, and,  except
     that as long as any  shares of  preferred  stock  remain  outstanding,  the
     holders of a majority of the outstanding  shares of the preferred stock may
     vote on any proposal to change any provision of the  preferred  stock which
     materially and adversely  affects the rights,  preferences or privileges of
     the preferred stock.

     is senior to the common stock with respect to dividends and on liquidation,
     dissolution or winding up of Parallel.

     has a  liquidation  value  of  $10  per  share,  plus  accrued  and  unpaid
     dividends.

Future Capital Requirements

     Our capital  expenditure  budget for 2001 is highly dependent on future oil
and gas  prices  and  the  availability  of  other  sources  of  funding.  These
expenditures will be governed by the following factors:

     internally generated cash flows;

     availability of borrowing under our current credit facility;

     additional sources of financing; and

     future drilling successes.

     In 2001,  we  intend  to drill  lower  risk  prospects  that  could  have a
meaningful  effect on our reserve base and cash flows. In selected cases, we may
elect to reduce our  interests in higher risk,  higher impact  projects.  We may
also sell  certain  non-core  producing  properties  to raise  funds for capital
expenditures.
<PAGE>
                                       37



Outlook

     The oil and gas industry is capital intensive. We make, and anticipate that
we will continue to make,  substantial  capital  expenditures in the exploration
for,  development  and  acquisition of oil and gas reserves.  Historically,  our
capital expenditures have been financed primarily with:

     internally generated cash from operations;

     funds provided from bank borrowings; and

     proceeds from sales of equity securities.

     The continued  availability  of these capital sources depends upon a number
of variables, including:

     our proved reserves,

     the volumes of oil and gas we produce from existing wells;

     the prices at which we sell oil and gas; and

     our ability to acquire, locate and produce new reserves.

     Each of these variables materially affects our borrowing capacity.  We may,
from time to time, seek additional financing in the form of:

     increased bank borrowings;

     sales of Parallel's securities;

     sales of non-core properties; or

     other forms of financing.

     We do not currently have agreements for any future  financing and there can
be no assurance as to the availability or terms of any such financing.

Trends and Prices

     Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. 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 our control.  We are unable to  accurately
predict  domestic or worldwide  political events or the effects of other factors
on the prices we receive for our oil and gas. Historically,  we have not entered
into  transactions  to hedge against  changes in oil and gas prices,  but we may
elect to enter  into  hedging  transactions  in the  future to  protect  against
fluctuations in oil and gas prices.

     During 2000, the average sales price we received for our oil production was
approximately $28.88 per Bbl, as compared with $17.32 in 1999, while the average
sales  price for our gas was  approximately  $4.38 per Mcf in 2000,  as compared
with $2.27 per Mcf in 1999. At March 15, 2001,  we
<PAGE>
                                       38


were receiving an average of approximately $25.25 per Bbl for our oil production
and approximately $5.00 per Mcf for our gas production.

Inflation

     Inflation  has not had a significant  impact on our financial  condition or
results of operations. We do not believe that inflation poses a material risk to
our business.

Recent Accounting Pronouncements

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and  Hedging  Activities.   (FAS  No.  133),  which  establishes  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts,  and for hedging  activities.  FAS No. 133  requires an entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure those  instruments at fair value. It establishes
conditions under which a derivative may be designated as a hedge and establishes
standards  for reporting  changes in the fair value of a derivative.  We adopted
FAS No.  133,  as amended by FAS No.  138,  Accounting  for  Certain  Derivative
Instruments and Certain Hedging  Activities,  an amendment of FASB Statement No.
133, effective January 1, 2001. After assessing our contracts,  we are not aware
of any  freestanding or embedded  derivative  instruments  that would need to be
recorded as either  assets or  liabilities  in the  Financial  Statements  as of
January 1, 2001, in accordance with FAS No. 133.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Interest Rate Sensitivity

     We do not have or trade in derivative  financial  instruments and we do not
have firmly  committed  sales  transactions.  We have not entered  into  hedging
arrangements   and  do  not  have  any  delivery   commitments.   While  hedging
arrangements reduce exposure to losses as a result of unfavorable price changes,
they also limit the ability to benefit from favorable market price changes.

     Our major market risk exposure is in the pricing  applicable to our oil and
natural gas production.  Realized  pricing is primarily driven by the prevailing
domestic  price for crude oil and spot prices  applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have  been  volatile  and  unpredictable.  Pricing  volatility  is  expected  to
continue. Oil prices ranged from a monthly low of $23.57 per barrel to a monthly
high of $31.80 per barrel  during  2000.  Natural gas prices we received  during
2000 ranged  from a monthly low of $1.83 per Mcf to a monthly  high of $6.36 per
Mcf. A  significant  decline  in the  prices of oil or natural  gas could have a
material adverse effect on our financial condition and results of operations.

     Our only financial instrument sensitive to changes in interest rates is our
bank debt. Our annual  interest costs in 2001 will fluctuate based on short-term
interest  rates.  As the interest rate is variable and reflects  current  market
conditions,  the carrying  value  approximates  the fair value.  The table below
shows  principal  cash flows and  related  weighted  average  interest  rates by
expected  maturity dates.  Weighted average interest rates were determined using
weighted  average  interest paid and accrued in December

<PAGE>
                                       39


2000. You should read Note 3 to the Financial  Statements and Supplementary Data
for further discussion of our debt that is sensitive to interest rates.

<TABLE>

                                        2001       2002      2003      Total     Fair Value
                                       ------     ------    ------    -------   ------------
                                                (in 000s, except interest rates)
<S>                                    <C>        <C>       <C>       <C>        <C>
Variable rate debt:                     $804      $3,876    $7,478    $12,428     $12,428

   Revolving Facility (secured)
      Average interest rate             9.5%         9.5%      9.5%

</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Parallel's  financial  statements  and  supplementary  financial  data  are
included elsewhere in this report beginning on page F-1.


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

        None.

<PAGE>
                                       40

                                    PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The Directors  and executive  officers of Parallel at March 15, 2001 are as
follows:

<TABLE>
                                                 Director
         Name                   Age               Since         Position with Company
-------------------------      -----            ---------       ---------------------
<S>                            <C>              <C>              <C>
Thomas R. Cambridge              65               1985          Chairman of the Board of Directors and
                                                                Chief Executive Officer

Larry C. Oldham                  47               1979          President, Treasurer and Director

Ernest R. Duke (1)(2)            74               1980          Director

Dewayne E. Chitwood (1)          65               2000          Director

Charles R. Pannill (1)(2)        75               1982          Director

</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 in geology from the  University of
Nebraska in 1958 and a Master of Science degree in
geology from the University of Nebraska in 1960.

     Mr.  Oldham,  a founder of Parallel,  has served as an officer and Director
since its  formation  in 1979.  Before  Parallel'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
Parallel in October 1994,  and served as Executive  Vice  President  before that
time.  He is a member of the Permian  Basin  Landman's  Association.  Mr. Oldham
received a Bachelor  of  Business  Administration  degree  from West Texas State
University in 1975.

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

     Mr. Chitwood is the chairman of the board of directors of Wes-Tex  Drilling
Company,  a corporation  engaged in oil and gas exploration and production.  Mr.
Chitwood has been an officer and director of Wes-Tex Drilling Company,  Abilene,
Texas,  since 1997. Mr. Chitwood currently serves

<PAGE>
                                       41


as Executor and Trustee of the Myrle Greathouse  Estate,  Executive  Director of
the  Greathouse  Foundation  and as an officer and  director of Symbol,  Inc. He
graduated from Southern  Methodist  University in 1958 with a degree in Business
Administration.  Mr. Chitwood was appointed to Parallel's  Board of Directors in
December 2000 to fill the vacancy created by the resignation of Myrle Greathouse
in the same month.  Mr.  Greathouse  served as a director of Parallel  for seven
years.

     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.

     Directors  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 are  appointed  annually by the 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 Parallel's  Directors or
officers.

Key Employees

     In  addition to the  services  provided by Mr.  Cambridge  and Mr.  Oldham,
Parallel also relies extensively on the key employees identified below.

     Eric A. Bayley,  Manager of Engineering,  has been a full-time  employee of
Parallel since October 1993.  From December 1990 to October 1993, Mr. Bayley was
an independent  consulting engineer and devoted substantially all of his time to
Parallel.  He  graduated  from Texas A&M  University  in 1978 with a Bachelor of
Science degree in Petroleum Engineering,  and in 1984, Mr. Bayley graduated from
the  University  of  Texas of the  Permian  Basin  with a  Masters  of  Business
Administration degree.

     Rebecca A. Burrell, Manager of Accounting, has been a full-time employee of
Parallel 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.

     Rhonda L.  Keller,  Manager of  Investor  Relations,  has been a  full-time
employee since August 1997. From October 1991 to July 1997, Ms. Keller served as
President of Corporate Perspective,  Inc., an independent investor relations and
corporate  communications  firm,  providing services primarily to publicly owned
companies.  From  January  1986 to September  1991,  Ms.  Keller was Director of
Investor Relations for Edisto Resources Corporation, Dallas, Texas.

     John S. Rutherford,  Manager of  Land/Administration,  has been employed by
Parallel  since October  1993.  From May 1991 to October  1993,  Mr.  Rutherford
served as a consultant to Parallel,  devoting  substantially  all of his time to
Parallel'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
Chase Bank of Texas, National Association, Midland, Texas.

<PAGE>
                                       42


Consulting Arrangements

     As part of our  overall  business  strategy,  we  continually  monitor  and
control our general and administrative expenses. Decisions regarding our general
and  administrative  expenses  are  made  within  parameters  we  believe  to be
compatible  with our size,  the level of our  activities  and  projected  future
activities.  Our  goal  is  to  keep  general  and  administrative  expenses  at
acceptable levels,  without impairing the quality of services and organizational
structure  necessary  for  conducting  our business.  In this regard,  we retain
outside advisors and consultants to provide technical and administrative support
services  in the  operation  of our  business.  From  time  to  time,  we  grant
consultants  overriding  royalty  interests,  working  interests,  or options to
acquire  working  interests,  in wells in which we own an  interest.  We believe
these  types of  compensation  arrangements  enable us to  attract,  retain  and
provide additional incentives to qualified and experienced consultants.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the  Securities  Exchange Act of 1934 requires  Parallel's
Directors and officers to file periodic reports with the SEC. These reports show
the  Directors'  and  officers'  ownership,  and the  changes in  ownership,  of
Parallel's  common  stock and other equity  securities.  To our  knowledge,  all
Section 16(a) filing  requirements  have been complied with during 2000,  except
that Charles R.  Pannill,  a director,  did not timely  report the sale of 3,400
shares of common  stock on  December  28,  1999 and the sale of 3,000  shares of
common stock on January 11, 2000.

ITEM 11. EXECUTIVE COMPENSATION

Summary of Annual Compensation

     The table below  shows a summary of the types and  amounts of  compensation
paid to our executive officers during the last three years.

<TABLE>

                         Summary Compensation Table

                                                                Long Term Compensation
                                                          ----------------------------------
                                Annual Compensation                 Awards           Payouts
                            ----------------------------  -------------------------- -------
                                                 Other                                           All
                                                 Annual    Restricted   Securities              Other
                                                 Compen-    Stock       Underlying     LTIP     Compen-
      Name and                 Salary    Bonus   sation     Awards      Options/      Payouts   sation
Principal Position    Year      ($)      ($)       ($)        ($)        SARs(#        ($)        ($)
-------------------   ----   --------  --------  -------    --------    ----------    -------   --------
<S>                   <C>    <C>       <C>       <C>        <C>         <C>           <C>       <C>
T.R. Cambridge,       2000   $ 77,755  $  2,000  $   900      0                0         0         0
Chief Executive
 Officer and          1999   $ 77,755  $  1,000  $   900      0           50,000         0         0
 Chairman of the
 Board of Directors   1998   $ 73,631  $    500  $   900      0           50,000         0         0


L.C. Oldham,          2000   $161,000  $  2,000  $ 10,067(1)  0                0         0  $ 12,230(2)
President, Treasurer
  and Director        1999   $125,000  $  1,000  $ 20,221(1)  0          100,000         0  $  5,771(2)

                      1998   $112,923  $    500  $ 23,150(1)  0          100,000         0  $  5,139(2)
</TABLE>

<PAGE>
                                       43

-------------------

(1)  Such amount includes insurance premiums for  nondiscriminatory  group life,
     medical,  disability  and dental  insurance  as  follows:  $7,058 for 2000;
     $18,534 for 1999; and $17,445 for 1998.

(2)  For 1998,  such  amount  includes  $3,388  contributed  by  Parallel to Mr.
     Oldham's   individual   retirement  account  maintained  under  the  408(k)
     simplified  employee  pension  plan/individual  retirement  account and the
     reimbursement  to Mr.  Oldham of $1,751  for  income  tax  preparation  and
     planning.  For 1999, such amount includes $3,750 contributed by Parallel to
     Mr.  Oldham's  retirement  account and the  reimbursement  to Mr. Oldham of
     $2,021 for income tax preparation  and planning.  The amount shown for 2000
     includes  Parallel's  contribution  of  $9,750 to Mr.  Oldham's  retirement
     account and reimbursement of $2,480 for income tax preparation.

Stock Options

     Parallel  uses  stock  options  as  part  of the  overall  compensation  of
Directors,  officers and employees.  However, we did not grant any stock options
to our executive officers in fiscal year 2000. Summary descriptions of our stock
option  plans are included in this report so you can review the types of options
we have granted and the significant features of our stock options.

     The following table shows certain  information with respect to stock option
exercises in 2000 and the value of unexercised  stock options held by Parallel's
executive officers at December 31, 2000.

<TABLE>

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

                                                 Number of Securities               Value of
                       Shares        Value      Underlying Unexercised             Unexercised
                      Acquired      Realized       Options at Fiscal            in-the-Mondy Options
   Name              on Exercise     ($) (1)          Year-End (2)            at Fiscal Year-End ($)(2)
----------------     -----------    -------- ----------------------------  -----------------------------
                                             Exercisable    Unexercisable  Exercisable     Unexercisable
                                             -----------    -------------  -----------     -------------
<S>                  <C>            <C>       <C>           <C>            <C>             <C>
T. R. Cambridge        0               0      275,000          25,000      $  60,475 (2)   $  49,825 (2)

L. C. Oldham           0               0      557,000          90,000      $ 967,201       $ 200,000 (3)

</TABLE>

-------------------

(1)  The value of in-the  money  options is equal to the fair market  value of a
     share of common stock at fiscal year-end  ($3.813 per share),  based on the
     last sale price of Parallel's common stock, less the exercise price.

(2)  At  December  31,  2000,  the  exercise  price of  excercisable  options to
     purchase a total of 200,000  shares of common  stock held by Mr.  Cambridge
     exceeded $3.813, the fair market value of our common stock on that date.

(3)  At  December  31,  2000,  the  exercise  prices of  exercisable  options to
     purchase  160,000  shares of common stock exceeded the fair market value of
     our  common  stock  on  December  31,  2000,  and  the  exercise  price  of
     unexercisable  options to purchase  40,000 shares  exceeded the fair market
     value of our common stock at that same date.

Change of Control Arrangements

     Parallel's outstanding stock options and stock option plans contain certain
change of control  provisions  which are  applicable to  Parallel's  outstanding
stock options,  including the options held by Messrs.  Cambridge and Oldham, and
other  Directors of Parallel.  For purposes of our options,  a change of control
occurs if:

     Parallel is not the surviving entity in a merger or consolidation;

     Parallel sells, leases or exchanges all or substantially all of its assets;
<PAGE>
                                       44




     Parallel is to be dissolved and  liquidated;

     any  person  or group  acquires  beneficial  ownership  of more than 50% of
     Parallel's common stock; or

     in connection with a contested election of directors,  the persons who were
     Directors of Parallel before the election cease to constitute a majority of
     the Board of Directors.

     If a change of control occurs,  the Compensation  Committee of the Board of
Directors can:

     accelerate the time at which options may be exercised;

     require optionees to surrender some or all of their options and pay to each
     optionee the change of control value;

     make adjustments to the options to reflect the change of control; or

     permit  the  holder of the  option to  purchase,  instead  of the shares of
     common  stock as to which the  option is then  exercisable,  the number and
     class of shares of stock or other securities or property which the optionee
     would  acquire  under the  terms of the  merger,  consolidation  or sale of
     assets and dissolution if, immediately before the merger,  consolidation or
     sale of assets or  dissolution,  the optionee had been the holder of record
     of the shares of common stock as to which the option is then exercisable.

     The change of control value is an amount equal to, whichever is applicable:

     the per  share  price  offered  to  Parallel's  stockholders  in a  merger,
     consolidation, sale of assets or dissolution transaction;

     the price per share offered to Parallel's stockholders in a tender offer or
     exchange offer where a change of control takes place; or

     if a change of control occurs,  other than from a tender or exchange offer,
     the fair market value per share of the shares into which the options  being
     surrendered are exercisable, as determined by the Committee.

Compensation of Directors

     Parallel's   non-employee  Directors  each  receive  $1,000  for  attending
meetings  of the Board of  Directors  and $500 for  attending  meetings of Board
committees that they serve on. Under these arrangements, during 2000, Dewayne E.
Chitwood received $0, Ernest R. Duke received $14,510, Myrle Greathouse received
$12,000 and Charles R. Pannill  received  $14,000.  All Directors are reimbursed
for expenses incurred in connection with attending meetings.

     Parallel's  1992 Stock Option Plan  provides for the granting of a one-time
stock  option to  purchase  25,000  shares of common  stock to each  person  who
becomes a non-employee  director after March 1, 1992. No options were granted in
2000 under this plan.

     Directors   who  are  not  employees  of  Parallel  are  also  eligible  to
participate  in the  Non-Employee  Directors  Stock Option Plan.  On October 28,
1999,  Messrs.  Duke,  Greathouse  and  Pannill  were each  granted an option to
purchase 25,000 shares of common stock.  Mr.  Cambridge was granted an option to
purchase 50,000 shares of common stock.  All of the options were granted with an
exercise price of $1.82 per share,  the fair market value of the common stock on
the date of grant.  The options are exercisable

<PAGE>
                                       45


with  respect to  one-half of the shares on October 28,  2000,  and  one-half on
October 28, 2001. The options expire on October 28, 2009.

Stock Option Plans

     1983 Incentive  Stock Option Plan. In May 1984, our  stockholders  approved
and adopted the 1983 Incentive  Stock Option Plan.  Stock options  granted under
the 1983 Plan are intended to be "incentive stock options" within the meaning of
the Internal Revenue Code which,  generally,  provides the optionee with certain
favorable tax benefits. Although the 1983 Plan expired by its own terms in 1993,
incentive  stock  options to  purchase  157,000  shares of common  stock  remain
outstanding.  The 1983 Plan is administered by the Compensation Committee of the
Board of Directors.  Under the terms of the 1983 Plan, all employees of Parallel
were eligible to  participate.  The 1983 Plan authorized the granting of options
to purchase a total of 750,000 shares of common stock. All options granted under
the 1983 Plan were granted with  exercise  prices equal to the fair market value
of the common stock on the date of grant. All options expire,  in any event, ten
years after the date of grant.

     1992 Stock Option Plan. In May 1992, our stockholders  approved and adopted
the 1992  Stock  Option  Plan.  The  1992  Plan  provides  for  granting  to key
employees,  including  officers  and  Directors  who are also key  employees  of
Parallel,  and  Directors  who are not  employees,  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 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  selects the employees who are to be granted options and
establishes the number of shares issuable under each option and other such terms
and conditions as may be approved by the  Compensation  Committee.  The purchase
price of common  stock  issued  under each option must not be less than the fair
market value of the common stock 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
Parallel  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 a prior  option
agreement.  An  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 is determined by the Compensation Committee and may be equal to the
price for which the optionee could have  purchased  common stock under the prior
option.

     The 1992 Plan will expire by its own terms in May 2002.

     Non-Employee   Directors   Stock  Option  Plan.   The  Parallel   Petroleum
Non-Employee Directors Stock Option Plan was approved by our stockholders at the
annual meeting of stockholders held in May 1997. This plan provides for granting
to  Directors  who are not  employees  of Parallel  options to purchase up to an
aggregate of 500,000 shares of common stock. Options granted under the plan will
not be incentive stock options within the meaning of the Internal  Revenue Code.

<PAGE>
                                       46

     The Directors Plan is  administered  by the  Compensation  Committee of the
Board of Directors.  The Compensation Committee has sole authority to select the
Non-Employee Directors who are to be granted options; to establish the number of
shares which may be issued to Non-Employee  Directors under each option;  and to
prescribe such terms and conditions,  as the Committee shall prescribe from time
to time in accordance with the Plan. Under provisions of the Directors Plan, the
option  exercise price must be the fair market value of the stock subject to the
option on the date the option is  granted.  Options are not  transferable  other
than by will or the laws of descent  and  distribution  and are not  exercisable
after ten years from the date of grant.

     The  purchase  price of shares as to which an option is  exercised  must be
paid in full at the time of exercise (1) in cash,  (2) by delivering to Parallel
shares of stock having a fair market value equal to the purchase price, or (3) a
combination of cash or stock, as established by the Compensation Committee.

     1998 Stock Option Plan.  In June 1998,  our  stockholders  adopted the 1998
Stock  Option  Plan.  The 1998 Plan  provides  for the  granting  of  options to
purchase up to 850,000 shares of common stock.  Stock options  granted under the
1998 Plan may be either  incentive  stock  options or stock options which do not
constitute incentive stock options.

     The 1998 Plan is administered by the Compensation Committee of the Board of
Directors. Members of the Compensation Committee are not eligible to participate
in the 1998 Plan.  Only employees are eligible to receive options under the 1998
Plan. The Compensation  Committee  selects the employees who are granted options
and establishes the number of shares issuable under each option.

     Options granted to employees contain terms and conditions that are approved
by the  Compensation  Committee.  The  Compensation  Committee is empowered  and
authorized,  but is not  required,  to provide  for the  exercise  of options by
payment in cash or by  delivering  to Parallel  shares of common  stock having a
fair market value equal to the purchase  price,  or any  combination  of cash or
common stock.  The purchase  price of common stock issued under each option must
not be less than the fair market value of the common stock at the time of grant.

     Options granted under the 1998 Plan are not transferable other than by will
or the laws of descent and distribution. The 1998 Plan will expire in June 2008.

     Other Option Grants.  The Board of Directors granted a non-qualified  stock
option to Mr.  Cambridge in October 1993 under the general  corporate  powers of
Parallel. Upon recommendation of the Board's Compensation  Committee,  the Board
granted the 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 not  transferable,  except by will or
the laws of descent and distribution. The option expires in October 2003.

Retirement Plan

     Parallel   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.

     Contributions  to employee SEP accounts  may be made at the  discretion  of
Parallel, as authorized by the Compensation Committee of the Board of Directors.
The percentage of contributions  may vary from time to time.  However,  the same
percentage contribution must be made for all participating  employees.  Parallel
is not required to make annual  contributions  to the  employees  SEP  accounts.
Parallel may make tax-deductible  contributions for each employee participant of
up to 15% of a

<PAGE>
                                       47



participant's  compensation,  or $30,000, whichever is less. Under the prototype
simplified   employee  pension  plan  adopted  by  Parallel,   all  of  the  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.

     In addition to receiving SEP contributions made by Parallel,  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 .

     Parallel presently makes matching  contributions to employee accounts in an
amount equal to the contribution made by each employee, not to exceed,  however,
6% of each  employee's  salary during any calendar year.  During 2000,  Parallel
contributed   an  aggregate  of  $36,077  to  the  accounts  of  seven  employee
participants. Of this amount, $9,750 was allocated to Mr. Oldham's account.

<PAGE>
                                       48



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     This table  shows  information  as of March 15,  2001 about the  beneficial
ownership of common  stock by: (1) each person  known by us to own  beneficially
more than five  percent of our  outstanding  common  stock;  (2) each  executive
officer of Parallel;  (3) each  Director of Parallel;  and (4) all of Parallel's
executive officers and Directors as a group.

<TABLE>


Name and Address                        Amount and Nature
      of                                       of                          Percent of
Beneficial Owner                        Beneficial Ownership (1)           Class (2)
----------------                        ------------------------           ----------
<S>                                      <C>                                <C>
Thomas R. Cambridge
2201 Civic Circle, Suite 216
Amarillo, Texas  79109                     1,042,045  (3)                    5.03%

Dewayne E. Chitwood
P.O. Box 379
Abilene, TX 79604                          1,659,557  (4)                    7.84%

Ernest R. Duke
P.O. Box 1919
Midland, Texas  79702                        327,473  (5)                    1.60%

Larry C. Oldham
One Marienfeld Place, Suite 465
Midland, Texas  79701                        867,090  (6)                    4.15%

Charles R. Pannill
3416 Acorn Run
Fort Worth, Texas  76019                     116,995  (7)                      *

Wes-Tex Drilling Company, L.P.
P.O. Box 379
Abilene, Texas 79604                       1,246,773  (8)                    6.04%

Dian Graves Owen
400 Pine, Suite 1000
Abilene, Texas 79601                       1,281,428  (9)                    6.10%

Julia Jones Matthews
400 Pine, Suite 900
Abilene, Texas 79601                       1,942,428  (10)                   9.00%

Dodge Jones Foundation
400 Pine, Suite 900
Abilene, Texas 79601                       1,371,428  (11)                   6.41%

All Executive Officers and Directors
as a Group (5 persons)                     4,013,160  (12)                  18.20 %

</TABLE>

__________________
*   Less than one percent.

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

<PAGE>
                                       49


(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  767,045  shares  held  indirectly  through  Cambridge  Collateral
     Services,  Ltd., a limited  partnership of which Mr. Cambridge and his wife
     are  the  general  partners.   Includes  275,000  shares  of  common  stock
     underlying  presently  exercisable  stock  options  held  directly  by  Mr.
     Cambridge.

(4)  Includes  932,488 shares of common stock held directly by Wes-Tex  Drilling
     Company,  L.P., a limited  partnership  ("Wes-Tex"),  and 314,285 shares of
     common  stock that may be acquired by Wes-Tex  upon  conversion  of 110,000
     shares of preferred  stock held by Wes-Tex.  In his capacity as  president,
     chief  executive  officer  and a manager  of Wes- Tex  Holdings,  LLC,  the
     general  partner of  Wes-Tex,  Mr.  Chitwood  may be deemed to have  shared
     voting and investment powers with respect to such shares. See note 8 below.
     Also  included  are  97,500  shares of common  stock  underlying  presently
     exercisable  stock  options  held by the  Estate of Myrle  Greathouse  (the
     "Estate");  1,000  shares of common  stock held  indirectly  by the Estate;
     157,142 shares that may be acquired by the Greathouse  Charitable Remainder
     Trust (the  "Trust") upon  conversion of 55,000 shares of preferred  stock;
     and 157,142  shares of common stock that may be acquired by the  Greathouse
     Foundation (the "Foundation") upon conversion of 55,000 shares of preferred
     stock.  Mr. Chitwood is the executor of the Estate,  the trustee (but not a
     beneficiary) of the Trust and the executive  director and a director of the
     Foundation.  In these  capacities,  Mr. Chitwood may also be deemed to have
     shared  voting and  investment  powers with respect to the shares of common
     stock  beneficially  owned by the  Estate,  the Trust  and the  Foundation.
     However,  Mr.  Chitwood  disclaims  beneficial  ownership  of all shares of
     common stock shown in the table.

(5)  Includes  72,500 shares of common stock  underlying  presently  exercisable
     stock  options.  Also  included  are  74,395  shares  held by Duke and Cain
     Partnership,  a general  partnership  in which Mr.  Duke is a partner,  and
     30,000  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  480,000 shares of common stock underlying  presently  exercisable
     stock options.

(7)  Includes  72,500 shares of common stock  underlying  presently  exercisable
     stock  options.  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.

(8)  Includes  314,285  shares  of  common  stock  that  may  be  acquired  upon
     conversion of 110,000 shares of preferred stock.  Wes-Tex has shared voting
     and investment powers with respect to all such shares. See note 4 above.

(9)  Includes  700,000  shares of common stock held  directly by the Dian Graves
     Owen Trust and 285,714  shares of common stock that may be acquired by Mrs.
     Owen upon  conversion of 100,000 shares of preferred stock held directly by
     her. Also included are 285,714  shares that may be acquire upon  conversion
     of 100,000 shares of preferred  stock held directly by the Dian Graves Owen
     Foundation,  a non-profit  organization.  Mrs.  Owen  disclaims  beneficial
     ownership  of all  shares of common  stock  beneficially  owned by the Dian
     Graves Owen Foundation.

(10) Includes  400,000  shares of common stock owned directly by the Julia Jones
     Matthews  Family  Trust and  171,428  shares of  common  stock  that may be
     acquired by the Trust upon  conversion of 60,000 shares of preferred  stock
     held directly by the Trust.  By virtue of her position as the President and
     a Director of the Dodge Jones  Foundation,  Matthews has shared  voting and
     investment  powers  with  respect  to,  and may  also be  deemed  to be the
     beneficial owner of, 971,428 shares of common stock that may be acquired by
     the Dodge Jones  Foundation  upon conversion of 340,000 shares of preferred
     stock  held by it,  and  400,000  shares  of  common  stock  that are owned
     directly  by the Dodge  Jones  Foundation.  Matthews  disclaims  beneficial
     ownership  of all shares of common  stock  beneficially  owned by the Dodge
     Jones Foundation. See note 11.

(11) Includes  971,428  shares that may be acquired  upon  conversion of 340,000
     shares of preferred stock. The Dodge Jones Foundation has shared voting and
     investment powers with respect to such shares of common stock. See note 10.

(12) Includes  997,500 shares of common stock underlying  presently  exercisable
     stock options and 628,569  shares of common stock that may be acquired upon
     conversion of 220,000 shares of preferred stock.
<PAGE>
                                       50


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     From  time to time,  Wes-Tex  Drilling  Company,  a  corporation,  acquires
undivided  interests  in oil and gas  leasehold  acreage  from our  company  and
participates  with us and other interest  owners in the drilling and development
of such  acreage.  Myrle  Greathouse,  a director  and the sole  shareholder  of
Wes-Tex  until his death in  December  2000,  was also a Director  of  Parallel.
Wes-Tex   participates  in  these   operations  under  standard  form  operating
agreements  on the same or similar terms  afforded by Parallel to  nonaffiliated
third parties.  We invoice 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 2000, we billed Wes-Tex $14,892 for its
proportionate  share of lease operating  expenses  incurred.  The largest amount
owed to us by  Wes-Tex  at any one  time  during  2000  for its  share  of lease
operating  expenses was $2,219.  At December 31, 2000,  Wes-Tex owed us $429 for
these  expenses.  During  2000,  we  disbursed  $71,297 to Wes-Tex in payment of
revenues  attributable to Wes-Tex's pro rata share of the proceeds from sales of
oil and gas  produced  from  properties  in which  Wes-Tex  and  Parallel  owned
interests.

     During  2000,  Cambridge  Production,  Inc.,  a  corporation  owned  by Mr.
Cambridge,  served as  operator  of two wells on oil and gas  leases in which we
also owned an interest. Generally, the operator of a well is responsible for the
day to day  operations  on the lease,  overseeing  production,  employing  field
personnel,  maintaining  production and other records,  determining the location
and timing of drilling of wells,  administering  gas  contracts,  joint interest
billings, revenue distribution,  making various regulatory filings, reporting to
working  interest owners and other matters.  During 2000,  Cambridge  Production
billed  us  $169,906  for our pro rata  share of lease  operating  expenses  and
drilling and workover expenses.  We paid $153,690 to Cambridge Production during
2000, which included amounts  remaining unpaid and owed to Cambridge  Production
at the end of 1999. The largest outstanding amount we owed Cambridge  Production
at any one time  during  2000 was  $20,255.  At  December  31,  2000,  Cambridge
Production owed us $334.  Cambridge  Production's  billings to Parallel are made
monthly on the same basis as all other working interest owners in the wells. Our
pro rata  share of oil and gas sales  during  2000 from the  wells  operated  by
Cambridge  Production  was  $274,065.  At December 31, 2000,  we owed  Cambridge
Production $18,694.

     During 2000, we paid $45,762 to First Permian for  reimbursement of general
and administrative  expense.  First Permian paid $78,720 to us for reimbursement
of general and  administrative  expense.  At December  31,  2000,  we owed First
Permian $374. At that same date, First Permian owed us $2,875.

     We  believe  the  transactions  described  above were made on terms no less
favorable than if we had entered into the transactions with an unrelated party.

<PAGE>
                                       51


                                     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) We filed one report on Form 8-K  during the last  quarter of our fiscal
     year ended  December 31, 2000.  In the Form 8-K,  dated October 9, 2000 and
     filed with the Securities  and Exchange  Commission on October 10, 2000, we
     reported the  adoption of a  stockholder  rights plan.  As reported in Form
     8-K,  the plan is  designed  to protect  Parallel  from  unfair or coercive
     takeover attempts and to prevent a potential  acquiror from gaining control
     of Parallel without fairly compensating all of the stockholders.

     (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, 1998.)

          3.2                      Bylaws of Registrant (Incorporated by
                                   reference to Exhibit 3 to the Registrant's
                                   Form 8-K, dated October 9, 2000, as filed
                                   with the Securities and Exchange Commission
                                   on October 10, 2000.)

          4.1                      Certificate of Designations, Preferences and
                                   Rights of Serial Preferred Stock - 6%
                                   Convertible Preferred Stock (Incorporated by
                                   reference to Exhibit 4.1 to Form 10-Q of the
                                   Registrant for the fiscal quarter ended
                                   September 30, 1998.)

         *4.2                      Certificate of Designation, Preferences and
                                   Rights of Series A Preferred Stock.

         *4.3                      Rights Agreement, dated as of October 5,
                                   2000, between the Registrant and
                                   Computershare Trust Company, Inc.,
                                   as Rights Agent.
<PAGE>
                                       52


        Exhibit
           No.                            Description of Exhibit
         -------                          ----------------------

                                   Executive Compensation Plans and Arrangements
                                   (Exhibit No.'s 10.1 through 10.7):

          10.1                     1983 Incentive Stock Option Plan
                                   (Incorporated by reference to Exhibit 10.2 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                     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.)

          10.3                     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.)

          10.4                     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.)

          10.5                     Merrill Lynch, Pierce, Fenner & Smith
                                   Incorporated Prototype Simplified Employee
                                   Pension Plan (Incorporated by reference to
                                   Exhibit 10.6 of the Registrant's Form 10-K
                                   for the fiscal year ended December 31, 1995.)

          10.6                     Non-Employee Directors Stock Option Plan
                                   (Incorporated by reference to Exhibit 10.6
                                   of the Registrant's Form 10-K Report for the
                                   fiscal year ended December 31, 1997).

          10.7                     1998 Stock Option Plan (Incorporated by
                                   reference to Exhibit 10.7 of Form 10-K of the
                                   Registrant for the fiscal year ended
                                   December 31, 1998.)

          10.8                     Restated Loan Agreement dated December 27,
                                   1999, between the Registrant and Bank One,
                                   Texas, N.A. (Incorporated by reference to
                                   Exhibit 10.8 of Form 10-K of the Registrant
                                   for the fiscal year ended December 31, 1999.)

         *10.9                     Loan Agreement dated December 18, 2000
                                   between the Registrant and Bank United.

<PAGE>
                                       53



          10.10                    Letter agreement, dated March 24, 1999,
                                   between the Registrant and Bank One, Texas,
                                   N.A. (Incorporated by reference to Exhibit
                                   10.9 of Form 10-K for the fiscal year ended
                                   December 31, 1998.)

          10.11                    Certificate of Formation of  First Permian,
                                   L.L.C. (Incorporated by reference to Exhibit
                                   10.1 of the Registrant's Form 8-K report
                                   dated June 30, 1999.)

          10.12                    Limited Liability Company Agreement of First
                                   Permian, L.L.C. (Incorporated by reference to
                                   Exhibit 10.2 of the Registrant's Form 8-K
                                   report dated June 30, 1999.)

          10.13                    Merger Agreement, dated June 25, 1999.
                                   (Incorporated by reference to Exhibit 10.3 of
                                   the Registrant's Form 8-K report dated
                                   June 30, 1999.)

          10.14                    Agreement and Plan of Merger of First
                                   Permian, L.L.C. and Nash Oil Company, L.L.C.
                                   (Incorporated by reference to Exhibit 10.4 of
                                   the Registrant's Form 8-K report dated June
                                   30, 1999.)

          10.15                    Certificate of Merger of First Permian,
                                   L.L.C. and Nash Oil Company, L.L.C
                                   (Incorporated by reference to Exhibit 10.5 of
                                   the Registrant's Form 8-K Report dated June
                                   30, 1999.)

         *10.16                    Amended and Restated Limited Liability
                                   Company Agreement of First Permian, L.L.C.
                                   dated as of May 31, 2000.

          10.17                    Credit Agreement dated June 30, 1999, by and
                                   among First Permian, L.L.C., Parallel
                                   Petroleum Corporation, Baytech, Inc., and
                                   Bank One, Texas, N.A. (Incorporated by
                                   reference to Exhibit 10.6 of the Registrant's
                                   Form 8-K report dated June 30, 1999.)

          10.18                    Limited Guaranty, dated June 30, 1999, by and
                                   among First Permian, L.L.C., Parallel
                                   Petroleum Corporation, and Bank One, Texas,
                                   N.A. (Incorporated by reference to Exhibit
                                   10.7 of the Registrant's Form 8-K report
                                   dated June 30, 1999.)

          10.19                    Intercreditor Agreement, dated as of June 30,
                                   1999, by and among First Permian, L.L.C.,Bank
                                   One, Texas, N.A., Tejon Exploration Company,
                                   and Mansefeldt Investment Corporation
                                   (Incorporated by reference to Exhibit 10.8 of
                                   the Registrant's Form 8-K report dated June
                                   30, 1999.)

          10.20                    Subordinated Promissory Note, dated June 30,
                                   1999, in the original principal amount of
                                   $8.0 million made by First Permian, L.L.C.
                                   payable to the order of Tejon Exploration
                                   Company (Incorporated by reference to Exhibit
                                   10.9 of the Registrant's Form 8-K report
                                   dated June 30, 1999.)

          10.21                    Subordinated Promissory Note, dated June 30,
                                   1999, in the original principal amount of
                                   $8.0 million made by First Permian, L.L.C.
                                   payable to the order of Mansefeldt Investment
                                   Corporation (Incorporated by reference to
                                   Exhibit 10.10 of the Registrant's Form 8-K
                                   report dated June 30, 1999.)

<PAGE>
                                       54



        Exhibit
           No.                            Description of Exhibit
         -------                          ----------------------

         *10.22                         Second Restated Credit Agreement,
                                        dated October 25, 2000, among First
                                        Permian, L.L.C., Bank One, Texas, N.A.,
                                        and Bank One Capital Markets, Inc.

          *23.1                         Consent of Independent Auditors

          *23.2                         Consent of Independent Petroleum
                                        Engineers

         *23.3                          Consent of Independent Petroleum
                                        Engineers


------------------------
 *    Filed herewith.





<PAGE>
                                       F-1

                         PARALLEL PETROLEUM CORPORATION

                       Index to the Financial Statements



                                                                      Page

Independent Auditors' Report                                          F-2

Financial Statements:

        Balance Sheets at December 31, 2000 and 1999                  F-3

        Statements of Income for the years ended
                December 31, 2000, 1999, and 1998                     F-4

        Statements of Stockholders' Equity for the
                years ended December 31, 2000, 1999 and 1998          F-5

        Statements of Cash Flows for the years ended
                December 31, 2000, 1999 and 1998                      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 (the
"Company")  as of December  31, 2000 and 1999,  and the  related  statements  of
income,  stockholders'  equity  and  cash  flows  for  each of the  years in the
three-year  period ended December 31, 2000.  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 auditing standards generally accepted
in the  United  States of  America.  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, 2000 and 1999, and the results of their  operations and their
cash flows for each of the years in the  three-year  period  ended  December 31,
2000, in conformity with accounting  principles generally accepted in the United
States of America.



                                        KPMG LLP


Midland, Texas
February 2, 2001

<PAGE>
                                       F-3


                         PARALLEL PETROLEUM CORPORATION

                                 Balance Sheets

                           December 31, 2000 and 1999
<TABLE>

               Assets                                                           2000           1999
<S>                                                                        <C>            <C>

Current assets:
     Cash and cash equivalents                                             $  2,000,826   $  1,276,417
     Accounts receivable
          Oil and gas                                                         4,057,527      1,312,923
          Others, net of allowance for doubtful accounts of $51,136 in
               2000 and $157,187 in 1999                                        319,818        314,911
          Affiliate                                                              19,569         20,658
                                                                           ------------   ------------
                                                                              4,396,914      1,648,492
     Other assets                                                                27,166         39,677
     Assets held for sale                                                             _      2,127,734
                                                                           ------------   ------------

          Total current assets                                                6,424,906      5,092,320
                                                                           ------------   ------------
Property and equipment, at cost:
     Oil and gas properties, full cost method (Note 11)                      72,316,384     65,136,783
     Other                                                                      372,765        289,720
                                                                           ------------   ------------
                                                                             72,689,149     65,426,503
     Less accumulated depreciation and depletion                            (32,742,060)   (27,502,855)
                                                                           ------------   ------------
          Net property and equipment                                         39,947,089     37,923,648
                                                                           ------------   ------------
Investment in First Permian, LLC (Note 15)                                           _         201,311
Other assets, net of accumulated amortization of $114,791 in 2000 and
     $141,428 in 1999                                                            84,442         46,791
                                                                           ------------   ------------
                                                                           $ 46,456,437   $ 43,264,070
                                                                           ============   ============

          Liabilities and Stockholders' Equity

Current liabilities:
     Current maturities of long-term debt (Note 3)                         $    803,531   $  3,665,889
     Investment liability in First Permian (Note 15)                            366,765             _
     Accounts payable and accrued liabilities:
          Trade                                                               2,443,773      1,495,376
          Affiliate                                                                  _           2,702
     Income taxes payable (Note 5)                                               50,000             _
                                                                           ------------   ------------
          Total current liabilities                                           3,664,069      5,163,967
                                                                           ------------   ------------
Long-term debt, excluding current maturities (Note 3)                        11,624,000     12,300,000

Stockholders' equity:
     Series A preferred stock - par value of $.10 per share
       (aggregate liquidation preference of $26) authorized 50,000 shares            _              _
     Preferred stock - $.60 cumulative convertible preferred stock - par
       value of $.10 per share, (aggregate liquidation preference of $10)
       authorized 10,000,000 shares, issued and outstanding 974,500 in
       2000 and 1999                                                             97,450         97,450
     Common stock - par value of $.01 per share, authorized 60,000,000 shares,
       issued and outstanding 20,331,858 in 2000 and 20,331,858 in 1999         203,319        203,319
     Additional paid-in surplus                                              34,238,078     34,847,141
     Retained earnings (deficit)                                             (3,370,479)    (9,347,807)
                                                                           ------------   ------------
          Total stockholders' equity                                         31,168,368     25,800,103
                                                                           ------------   ------------

Commitments and contingencies (Note 16)                                    ------------   ------------

                                                                           $ 46,456,437   $ 43,264,070
                                                                           ============   ============
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-4


                         PARALLEL PETROLEUM CORPORATION

                              Statements of Income

                  Years ended December 31, 2000, 1999 and 1998

<TABLE>

                                                            2000                1999                1998
<S>                                                          <C>                 <C>                 <C>

Oil and gas revenues                                   $ 17,134,502        $   8,974,041       $   9,001,582
                                                       ------------        -------------       -------------

Costs and expenses:
     Lease operating expense                              3,099,534            2,353,732           2,434,658
     General and administrative                           1,191,527              805,934             855,788
     Provision for losses on trade receivables                   _                85,829              43,228
     Depreciation and depletion                           5,239,205            5,223,500           5,966,221
     Impairment of oil and gas properties                        _             1,705,000          14,757,028
                                                       ------------        -------------       -------------
          Total costs and expenses                        9,530,266           10,173,995          24,056,923
                                                       ------------        -------------       -------------
          Operating income (loss)                         7,604,236           (1,199,954)        (15,055,341)
                                                       ------------        -------------       -------------

Other income (expense), net:
     Equity in income (loss) of First Permian, LLC
          (Note 15)                                        (500,576)             197,811                  -
     Interest income                                        220,280               65,333               2,771
     Other income                                           130,368               26,847             395,683
     Interest expense                                    (1,340,360)          (1,534,540)         (1,381,103)
     Other expense                                           (6,620)              (5,954)            (57,947)
                                                       ------------        -------------       -------------
          Total other expense, net                       (1,496,908)          (1,250,503)         (1,040,596)
                                                       ------------        -------------       -------------
Income (loss) before income taxes                         6,107,328           (2,450,457)        (16,095,937)

Income tax (expense) benefit                               (130,000)                  _            3,100,027
                                                       ------------        -------------       -------------
          Net income (loss)                            $  5,977,328        $  (2,450,457)      $ (12,995,910)
                                                       ============        =============       =============
Cumulative preferred stock dividend                    $   (609,063)       $    (609,063)      $    (276,712)
                                                       ------------        -------------       -------------

          Net income (loss) available to common
               stockholders                            $  5,368,265        $  (3,059,520)      $ (13,272,622)
                                                       ============        =============       =============

Net income (loss) per common share:
     Basic                                                  $   .26              $  (.16)            $  (.73)
                                                            =======              =======             =======
     Diluted                                                $   .25              $  (.16)            $  (.73)
                                                            =======              =======             =======
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-5



                         PARALLEL PETROLEUM CORPORATION

                       Statements of Stockholders' Equity

                  Years ended December 31, 2000, 1999 and 1998


<TABLE>

                                    Common stock             Preferred stock          Additional        Retained       Total
                              -----------------------     ------------------------      paid-in         earnings    stockholders'
                              Number of                    Number of
                               Shares        Amount         Shares        Amount        surplus         (deficit)      equity
                              ---------      ------        ---------      ------        -------         ---------      -------

<S>                           <C>            <C>           <C>            <C>            <C>             <C>           <C>

Balance,
     January 1, 1998         18,114,358     181,144              -            -        22,839,049       6,098,560     29,118,753

     Issuance of stock, net          -           -          974,500       97,450        9,531,477              -       9,628,927

     Options exercised          192,500       1,925              -            -           164,700              -         166,625

     Tax benefits related
        to options                   -           -               -            -            83,457              -          83,457

     Net loss                        -           -               -            -                -      (12,995,910)   (12,995,910)

     Dividends ($.60 per
        share)                       -           -               -            -          (276,712)             -        (276,712)

                             ----------    --------         -------       ------       ----------     -----------    -----------
Balance,
     December 31, 1998       18,306,858     183,069         974,500       97,450       32,341,971      (6,897,350)    25,725,140

     Issuance of stock, net   2,000,000      20,000              -            -         3,097,295              -       3,117,295

     Options exercised           25,000         250              -            -            16,938              -          17,188

     Net loss                        -           -               -            -                -       (2,450,457)    (2,450,457)

     Dividends ($.60 per
         share)                      -           -               -            -          (609,063)             -        (609,063)
                             ----------    --------         -------       ------       ----------     -----------    -----------
Balance,
     December 31, 1999       20,331,858   $ 203,319         974,500     $ 97,450      $34,847,141    $ (9,347,807)   $25,800,103

     Net income                      -           -               -            -                -        5,977,328      5,977,328

     Dividends ($.60 per
        share)                      -           -               -            -          (609,063)             -        (609,063)
                             ----------    --------         -------       ------       ----------     -----------    -----------

Balance,
     December 31, 2000       20,331,858   $ 203,319         974,500     $ 97,450      $34,238,078    $ (3,370,479)   $31,168,368
                             ==========    ========         =======       ======       ==========     ===========    ===========
</TABLE>


See accompanying notes to financial statements.

<PAGE>
                                       F-6


                         PARALLEL PETROLEUM CORPORATION

                            Statements of Cash Flows

                  Years ended December 31, 2000, 1999 and 1998

<TABLE>

                                                                      2000          1999           1998
<S>                                                                   <C>           <C>            <C>

Cash flows from operating activities:
     Net income (loss)                                           $  5,977,328   $ (2,450,457)  $  (12,995,910)
     Adjustments to reconcile net income (loss) to net cash
          provided by operating activities:
               Depreciation and depletion                           5,239,205      5,223,500        5,966,221
               Equity loss (income) from investment                   500,576       (197,811)              -
               Deferred income taxes                                                      _        (3,100,027)
               Loss on disposal of equipment                            1,000             _                _
               Impairment of oil and gas properties                        _       1,705,000       14,757,028
               Provision for losses on trade receivables                   _          85,829           43,228
     Other, net                                                       (37,651)        11,728            9,077
     Changes in assets and liabilities:
          Decrease (increase) in accounts receivable               (2,748,422)       (42,078)         838,743
          Decrease (increase) in prepaid expenses                      12,511         21,827          (24,321)
          Increase (decrease) in accounts payable and accrued
               liabilities                                          1,773,692       (927,304)         123,421
                                                                 ------------   ------------   --------------

                    Net cash provided by
                         operating activities                      10,718,239      3,430,234        5,617,460
                                                                 ------------   ------------   --------------

Cash flows from investing activities:
     Additions to oil and gas property                             (8,847,482)    (4,896,081)     (21,237,837)
     Proceeds from disposition of oil and gas property              3,017,618      1,111,525          683,592
     Additions to other property and equipment                        (84,045)            _           (62,582)
     Proceeds from disposition of other property and equipment             _              _           208,918
     Distribution received from investment in First Permian, LLC       67,500             _                _
     Investment in First Permian, LLC                                      _          (3,500)              _
                                                                 ------------   ------------   --------------
                    Net cash used in
                         investing activities                      (5,846,409)    (3,788,056)     (20,407,909)
                                                                 ------------   ------------   --------------

Cash flows from financing activities:
     Borrowings from bank line of credit                           12,427,531        780,000       18,182,279
     Payments on bank line of credit                              (15,965,889)    (2,850,000)     (12,329,000)
     Proceeds from exercise of options and warrants                        _          17,188          166,625
     Stock offering costs                                                            (82,705)        (116,072)
     Proceeds from common stock issuance                                   _       3,200,000               _
     Proceeds from preferred stock issuance                                _              _         9,744,999
     Payments of preferred stock dividend                            (609,063)      (609,063)        (276,712)
                                                                 ------------   ------------   --------------

                    Net cash provided by (used in)
                         financing activities                      (4,147,421)       455,420       15,372,119
                                                                 ------------   ------------   --------------
                    Net increase in cash
                         and cash equivalents                         724,409         97,598          581,670

Beginning cash and cash equivalents                                 1,276,417      1,178,819          597,149
                                                                 ------------   ------------   --------------
Ending cash and cash equivalents                                 $  2,000,826   $  1,276,417   $    1,178,819
                                                                 ============   ============   ==============
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-7

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



(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, Dewitt and Victoria Counties,  Texas, and in the Permian Basin
          of West Texas.

     Concentration of Credit Risk

     Financial instruments that potentially expose the Company to concentrations
          of credit risk consist primarily of unsecured accounts receivable from
          unaffiliated  working  interest  owners and crude oil and  natural gas
          purchasers.

     Property and Equipment

     The Company's oil  and gas producing activities are accounted for using the
          full cost method of accounting. Accordingly, all costs associated with
          acquisition,  exploration,  and  development  of oil and gas reserves,
          including directly related overhead costs, are capitalized.

     Management and service fees received for contractual arrangements,  if any,
          are treated as reimbursement  of costs,  offsetting the costs incurred
          to provide those services, with any excess of fees over costs credited
          to the full cost pool and recognized  through lower cost  amortization
          only as production occurs.

     Depletion is  provided  using  the  unit-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.   Investments  in  unproved   properties  and  major
          development   projects  are  not  amortized   until  proved   reserves
          associated  with the projects can be  determined  or until  impairment
          occurs.  If the results of an assessment  indicate that the properties
          are impaired, the amount of the impairment is added to the capitalized
          costs to be amortized.

     In   addition, the capitalized costs are subject to a "ceiling test", which
          basically limits such costs to the aggregate of the "estimated present
          value",  discounted  at a  10-percent  interest  rate,  of future  net
          revenues,  net of income tax effects,  from proved reserves,  based on

<PAGE>
                                       F-8

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          current economic and operating  conditions,  plus the lower of cost or
          fair market value of unproved properties.

     Salesof proved and unproved  properties are accounted for as adjustments of
          capitalized  costs  with  no  gain or  loss  recognized,  unless  such
          adjustments  would  significantly   alter  the  relationship   between
          capitalized  costs and proved oil and gas reserves,  in which case the
          gain or loss is recognized in income.  Abandonments  of properties are
          accounted  for as  adjustments  of  capitalized  costs  with  no  loss
          recognized.

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

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

     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.

     Investments

     Investments in affiliated  companies  with a 20% to 50% ownership  interest
          are  accounted  for on an equity  basis and,  accordingly,  net income
          includes the Company's share of their income or loss.

     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, 2000, 1999, and 1998 was not material.

<PAGE>
                                       F-9

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

     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.
          Such liabilities are generally  undiscounted unless the timing of cash
          payments  for  the  liability  or  component  are  fixed  or  reliably
          determinable.

     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.

     Net  Income Per Share

     Basicearnings per share excludes any dilutive  effects of option,  warrants
          and  convertible   securities  and  is  computed  by  dividing  income
          available to common  stockholders  by the weighted  average  number of
          common shares  outstanding for the period.  Diluted earnings per share
          is computed similar to basic earnings per share, however fully diluted
          earnings per share reflects the assumed  conversion of all potentially
          dilutive securities.

     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.
<PAGE>
                                       F-10

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     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.

     Reclassifications

     Certain  reclassifications  have been made to the 1999 and 1998  amounts to
          conform to the 2000 presentation.

(2)  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 is based on a variable market rate of
          interest.

(3)  Long-Term Debt

     Long-term debt consists of the following at December 31:

<TABLE>

                                                                      2000               1999

<S>                                                                   <C>                <C>


     Revolving  Facility  note payable to bank, at bank's base
       lending rate plus .25% (8.75% at December 31, 1999)         $        _       $  15,965,889
     Revolving Facility note payable to bank, at bank's base
       lending rate (9.5% at December 31, 2000)                      12,427,531               _
                                                                    -----------      ------------
     Less:  current maturities                                          803,531         3,665,889
                                                                    -----------      ------------
                                                                   $ 11,624,000     $  12,300,000
                                                                    ===========      ============
</TABLE>

     On   December 27, 1999, the Company restated its note agreement with a bank
          ("Note").  Pursuant to the restated note agreement,  the Company could
          borrow  $30,000,000  or the  "borrowing  base"  then  in  effect.  The
          borrowing  base was  reduced  by a  monthly  commitment  reduction  of
          $300,000 beginning January 1, 2000. Indebtedness under the Note was to
          mature July 1, 2001. The note was secured by substantially  all of the


<PAGE>
                                       F-11

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



          Company's oil and gas properties. Commitment fees of .25% per annum on
          the  difference  between the  commitment  and the average daily amount
          outstanding were due quarterly.

     On   December 18, 2000,  the Company  entered into a note  agreement with a
          bank ("Revolving Facility") to refinance the outstanding  indebtedness
          with its former lender.  Pursuant to the note  agreement,  the Company
          may borrow  $30,000,000  or the "borrowing  base" then in effect.  The
          borrowing  base in effect at December  31, 2000 was  $15,500,000.  The
          borrowing  base  is  reduced  by a  monthly  commitment  reduction  of
          $323,000  beginning  January 1, 2001.  The borrowing  base and monthly
          commitment reduction are subject to redetermination semi-annually,  on
          or about May 1 and November 1 of each year, beginning May 1, 2001. The
          lender may require a redetermination of the Borrowing Base and Monthly
          Automatic Borrowing Base Reduction at any time in its sole discretion.
          Indebtedness under the Revolving Facility matures October 1, 2003. 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 revolving  commitment and the average daily amount are due
          quarterly.

     The  unpaid principal balance for the Revolving  Facility bears interest at
          the  election  of the  Company at a rate equal to (i) the bank's  base
          lending rate, or (ii) the applicable  adjusted  eurodollar rate plus a
          margin  of  2.75%  during  the  related  Eurodollar  Interest  Period.
          Interest is due and  payable on the day which the  related  Eurodollar
          Interest Period ends.

     The  restated note 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 for common stock.

     Scheduled maturities of long-term debt at December 31, 2000 are as follows:

     2001                                       $   803,531
     2002                                         3,876,000
     2003                                         7,748,000
                                                -----------
                                                $12,427,531
                                                ===========


(4)  Stock Options, Warrants and Rights

     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, 2000,  options expire beginning in
          the year-ended  December 31, 2001 through 2009.  There were no options
          exercised  in the  year  ended  December  31,  2000.  Exercise  of the
          nonqualified stock options resulted in a deferred tax effect of $6,375
          and  $83,457  for  the  years  ended   December  31,  1999  and  1998,
          respectively.

<PAGE>
                                       F-12

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



     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 (loss) and net
          income  (loss)  per share  would have been  adjusted  to the pro forma
          amounts indicated below for the years ended December 31:

<TABLE>

                                                  2000           1999           1998
<S>                                               <C>            <C>            <C>

Net income (loss)                            $ 5,832,237    $ (3,107,170)  $ (13,452,020)
Basic net income (loss) per share                  $ .29          $ (.17)        $  (.74)
Diluted net income (loss) per share                $ .25          $ (.17)        $  (.74)
</TABLE>


     The  pro forma net income  (loss) and pro forma net income (loss) per share
          amounts  noted  above are not likely to be  representative  of the pro
          forma amounts to be reported in future years. Pro forma adjustments in
          future years will include compensation expense associated with options
          granted  beginning in 1995 plus compensation  expense  associated with
          any options awarded in subsequent  years. As a result,  such pro forma
          compensation   expense  is  likely  to  be  higher   than  the  levels
          experienced in 2000, 1999 and 1998.

     UnderFAS 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 1999 and
          1998. No options were granted in 2000.

<TABLE>

                                                  2000           1999           1998
<S>                                               <C>            <C>            <C>

Risk-free interest rate                            _             5.98           5.61
Expected life                                      _          8 years        7 years
Expected volatility                                _              .74            .71
</TABLE>

<PAGE>
                                       F-13


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     A summary of the Company's stock option plans as of December 31, 2000,
       1999 and 1998, and changes during the years ended on those dates is
       presented below:

<TABLE>

                                             For the year ended     For the year ended      For the year ended
                                             December 31, 2000       December 31, 1999       December 31, 1998
                                            ---------------------   --------------------    --------------------
                                                         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       1,951,750    $  3.13    1,541,750   $  3.46     1,364,250    $ 3.06
          Options granted                          _          _       435,000      1.29       370,000      3.60
          Options exercised                        _          _       (25,000)     (.69)     (192,500)     (.87)
          Options canceled                         _          _            _         _             _         _
                                            ---------    -------    ---------   -------     ---------    ------
     Outstanding at end of year             1,951,750    $  3.13    1,951,750   $  3.13     1,541,750    $ 3.46
                                            =========    =======    =========   =======     =========    ======
     Exercisable at end of year             1,689,250    $  3.26    1,200,500   $  3.35       816,750    $ 2.97
                                            =========    =======    =========   =======     =========    ======
Weighted average fair value
     of options granted during
     the year                                 $   _                   $  1.40                 $  2.58
                                              =======                 =======                 =======
</TABLE>

     The  following  table  summarizes  information  about the  Company's  stock
          options outstanding at December 31, 2000:

<TABLE>

                              Options Outstanding                                  Options Exercisable
                 --------------------------------------------------------   ------------------------------------
                       Number          Weighted Average      Weighted          Number              Weighted
   Range of        Outstanding at         Remaining           Average        Exercisable at         Average
Exercise Prices  December 31, 2000     Contractual Life    Exercise Price   December 31, 2000     Exercise Price
---------------  -----------------     ----------------    --------------   -----------------     --------------

<S>              <C>                   <C>                 <C>              <C>                    <C>

$.64 - $.69         150,000                  2 years             $  .64         150,000             $  .64
$1.03 - $1.82       558,000                  3 years             $ 1.68         340,500             $ 1.59
$3.19 - $5.50     1,243,750                  8 years             $ 3.46       1,198,750             $ 4.06
                  ---------                                                   ---------
                  1,951,750                                                   1,689,250
                  =========                                                   =========
</TABLE>

<PAGE>
                                       F-14

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)




     Stock Warrants

     In   connection  with a  common  stock  offering  in 1996,  an  underwriter
          received a  five-year  warrant to  purchase  125,000  shares of common
          stock at an exercise  price of $5.10 per share.  At December 31, 2000,
          no  shares  have  been  purchased  in  connection  with the  five-year
          warrant.

     The  Company  has  outstanding  at  December  31,  2000 and  1999,  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.

     Stock Rights

     On   October 5, 2000,  the Board of  Directors  declared a dividend  of one
          Right for each outstanding share of the Company's common stock,  $0.01
          par value,  distributable  to  stockholders  of record at the close of
          business on October 16, 2000. If a public  announcement  that a person
          has  acquired  15% or more of the  Company's  common stock or a tender
          offer or exchange  offer is made for 15% or more of the common  stock,
          each Right will  entitle the holder to  purchase  from the Company one
          one-thousandth of a share of Series A Preferred Stock, par value $0.10
          per share, at an exercise price of $26.00 per one  one-thousandth of a
          share, subject to adjustment.

     Initially, the Rights attach to all common stock certificates  representing
          shares then outstanding,  and no separate rights  certificates will be
          distributed.  The  Rights  separate  from the  common  stock  upon the
          earlier of (1) ten business days following a public  announcement that
          a person or group of affiliated or associated  persons has acquired or
          obtained the right to acquire, beneficial ownership of fifteen percent
          (15%) or more of the  outstanding  shares of  common  stock or (2) ten
          business  days (or such  later  date as the Board of  Directors  shall
          determine)  following the  commencement  of a tender or exchange offer
          that would  result in a person or group  beneficially  owning  fifteen
          percent (15%) or more of such outstanding  shares of common stock. The
          date the Rights separate is referred to as the "distribution date".

     Undercertain  circumstances  the  rights  entitle  the  holders  to buy the
          Company's  stock at a 50% discount.  In the event that (1) the Company
          is the surviving corporation in a merger or other business combination
          with an  entity  that  owns 15% or more of the  Company's  outstanding

<PAGE>
                                       F-15

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          stock; (2) any person shall acquire beneficial ownership of 15% of the
          Company's   outstanding   stock;   or  (3)   there   is  any  type  of
          recapitalization  of the Company  that  results in an increase by more
          than 1% the  proportionate  share of equity  securities of the Company
          owned by a person  who owns 15% or more of the  Company's  outstanding
          stock,  each right holder will have the option to buy for the purchase
          price  common  stock of the Company  having a value equal to two times
          the purchase price of the right.

     Under certain circumstances the rights entitle the holders to buy shares of
          the acquiror's  common stock at a 50% discount.  In the event that, at
          any time  after a person  has  acquired  15% or more of the  Company's
          common stock,  (1) the Company  enters into a merger or other business
          combination  transaction  in which the  Company  is not the  surviving
          corporation;  (2)  the  Company  is  the  surviving  corporation  in a
          transaction  in which all or part of the common stock is exchanged for
          cash, property or securities of any other person; or (3) more than 50%
          of the assets, cash flow or earning power of the Company is sold, each
          right holder will have the option to buy for the purchase  price stock
          of the  acquiring  company  having  a value  equal  to two  times  the
          purchase price of the right.

     The  Rights are not exercisable until the distribution date and will expire
          at the close of business on October 5, 2010,  unless earlier  redeemed
          by the Company for $0.001 per right.

(5)  Income Taxes

     Federal income tax expense  (benefit)  differs from the amount  computed at
          the Federal statutory rate as follows:


<TABLE>

                                                                           Year ended
                                                                           December 31,
                                                       --------------------------------------------
                                                            2000             1999           1998
                                                            ----             ----           ----


<S>                                                     <C>              <C>            <C>

     Income tax expense (benefit) at statutory
          rate                                          $ 2,076,492      $  (833,156)   $ (5,472,619)
     Change in valuation allowance for deferred
          tax assets                                     (2,185,526)       1,718,284       2,530,196
     Adjustment to deferred tax liability for
          changes in estimates                              669,533         (649,920)             _
     Statutory depletion                                   (445,941)        (237,047)       (171,803)
     Nondeductible expenses and other                        15,442            1,839          14,199
                                                        -----------      -----------    ------------

               Income tax expense (benefit)             $   130,000      $        _     $ (3,100,027)
                                                        ===========      ===========    ============

</TABLE>

     Income tax  expense is  deferred,  with the  exception  of $130,000 in 2000
          related to alternative minimum tax ("AMT").


<PAGE>
                                       F-16


                         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>


                                                                      2000           1999
                                                                      ----           ----
<S>                                                               <C>           <C>


               Noncurrent
               ----------

     Deferred tax assets:
          Net operating loss carryforwards                       $ 4,840,778    $ 7,217,369
          Statutory depletion carryforwards                        1,635,931      1,190,146
          Alternative minimum tax credit carryforward                125,523             _
          Equity loss in First Permian, LLC                          124,700             _
          Allowance for accounts receivable                           17,386             _
                                                                 -----------    -----------

               Total deferred tax assets                          6,744,318      8,407,515

               Less valuation allowance                          (2,062,954)    (4,248,480)
                                                                -----------    -----------
               Net deferred tax assets                            4,681,364      4,159,035
                                                                -----------    -----------
     Deferred tax liabilities:
          Equity income in First Permian, LLC                           _          187,568
          Property and equipment, principally due to
               differences in basis, expensing of intangible
               drilling costs for tax purposes and depletion      4,681,364      3,971,467
                                                                -----------    -----------

               Total deferred tax liabilities                     4,681,364      4,159,035
                                                                -----------    -----------

               Net noncurrent deferred income tax
                    liability                                   $        _     $        _
                                                                ===========    ===========
</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.  Due to
          the historical volatility in crude oil and gas prices, the uncertainty
          of future commodity  prices,  and the Company's  history of generating
          net losses,  management  has been  unable to conclude  that it is more
          likely  than not  that the  Company  will be able to  utilize  all the
          available  carryforwards prior to their ultimate expiration.  As such,
          the Company has established a valuation allowance against deferred tax
          assets which is $2,062,954 as of December 31, 2000.

<PAGE>
                                       F-17

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

     As   of December 31, 2000,  the Company had  investment  tax credit and net
          operating  loss  carryforwards  for regular tax purposes  available to
          reduce future taxable income and tax  liability,  respectively.  These
          carryforwards expire as follows:

<TABLE>

                                                                 Alternative
                                                                 minimum tax
                   Net operating          Investment            net operating
                      loss                tax credit                  loss
                   -------------          ----------            -------------
<S>                <C>                    <C>                   <C>

2001             $         _                $ 24,000           $         _
2009                  329,000                     _                      _
2018                8,658,000                     _               6,748,000
2019                5,250,000                     _               4,883,000
                 ------------               --------           ------------
                 $ 14,237,000               $ 24,000           $ 11,631,000
                 ============               ========           ============
</TABLE>


     As   of  December  31,  2000,  the Company  had  approximately  $127,000 of
          minimum tax credit available indefinitely.

(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>

                                           2000         1999        1998
                                           ----         ----        ----
<S>                                        <C>          <C>         <C>

          Purchaser A                       _             5%         11%
          Purchaser B                       _            14%         24%
          Purchaser C                      22%           27%         22%
          Purchaser D                       _            26%         18%
          Purchaser E                      16%            _           _
</TABLE>

(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 2000, 1999 and 1998, the Company  contributed an
          aggregate  of $36,077,  $14,338 and  $11,632,  respectively,  of which
          $9,750, $3,750 and $3,388,  respectively,  was allocated to a Director
          of the Company. The Company has no obligation to make contributions to
          the plan.

<PAGE>
                                       F-18

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


(8)  Statements of Cash Flows

     During 2000,  management  of the Company  made the decision to not sell its
          assets held for sale and $2,127,734 was  transferred  from assets held
          for sale to oil and gas  properties  and in 1999 and 1998,  $2,127,734
          and $0 were transferred from oil and gas properties to assets held for
          sale,   respectively.   These   transfers  are   considered   non-cash
          transactions.

     No   Federal  taxes  were paid in 2000,  1999 and 1998,  as a result of net
          operating losses or loss carryforwards.

     The  Company  made  interest   payments  of   $1,340,002,   $1,534,023  and
          $1,349,786 in 2000, 1999 and 1998, respectively.

     At   December  31,  2000 and 1999,  there  were  $711,873  and  $1,489,870,
          respectively, of property additions accrued in accounts payable.

(9)  Equity Transactions

     Common Stock

     On   November  19,  1999,  the  Company  completed a private  placement  of
          2,000,000  shares of its common  stock for a price of $1.60 per share.
          Proceeds  received,  net  of  related  expenses,   were  approximately
          $3,117,000 and were used to pay down debt,  fund capital  projects and
          pay for operations.

     Preferred Stock

     On   April 8, 1998,  the Company  completed a private  placement of 600,000
          shares of its $.60 Cumulative  Convertible  Preferred Stock,  $.10 par
          value per share ("Old Preferred Stock").  Cumulative dividends of $.60
          per share were  payable  semi-annually  on June 15 and  December 15 of
          each year.  Each share of Old Preferred  Stock was  convertible at the
          option of the holder, into 1.5625 shares of common stock at an initial
          conversion price of $6.40 per share,  subject to adjustment in certain
          events. Proceeds received, net of related expenses, were approximately
          $5,919,000. The net proceeds from the sale of Old Preferred Stock were
          used to reduce the indebtedness  outstanding  under the Company's loan
          agreement.

     On   October 16, 1998,  the Company  exchanged  600,000  shares of its $.60
          Cumulative Convertible Preferred Stock ("Old Preferred Stock"), issued
          in a private  placement  transaction  dated April 8, 1998, for 600,000
          shares  of its 6%  Convertible  Preferred  Stock,  $0.10 par value per
          share  ("Preferred  Stock").  Each  share of  Preferred  Stock  may be
          converted,  at the option of the holder,  into 2.8571 shares of common
          stock at an initial  conversion  price of $3.50 per share,  subject to
          adjustment  in certain  events.  The Company may redeem the  Preferred
          Stock,  in whole or part,  after  October 20, 1999,  for $10 per share
          plus accrued dividends.

<PAGE>
                                       F-19


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     On   October 30, 1998, the Company completed a private placement of 374,500
          shares  of its 6%  Convertible  Preferred  Stock,  $0.10 par value per
          share  ("Preferred  Stock").  Each  share of  Preferred  Stock  may be
          converted,  at the option of the holder,  into 2.8571 shares of common
          stock at an initial  conversion  price of $3.50 per share,  subject to
          adjustment  in certain  events.  The Company may redeem the  Preferred
          Stock,  in whole or part,  after  October 20, 1999,  for $10 per share
          plus accrued  dividends.  Proceeds  received,  net of  expenses,  were
          approximately  $3,709,000.  The  net  proceeds  from  the  sale of the
          Preferred  Stock  were  used to  reduce  the  indebtedness  under  the
          Company's loan agreement.

     Cumulative  dividends  of $0.60 are  payable  semi-annually  on June 15 and
          December 15 of each year, commencing on December 15, 1998.

     On   October 5, 2000,  the Company  authorized  50,000  shares of $0.10 par
          Series  A  Preferred  Stock.  These  shares  will be  issued  upon the
          exercise of the Company's Preferred Stock Purchase Rights.  Subject to
          the rights of the  holders of any series of  preferred  stock  ranking
          prior and  superior  to the Series A preferred  stock with  respect to
          dividends, the holders of shares of the Series A Preferred Stock shall
          be  entitled  to  receive,  when,  and if  declared  by the  Board  of
          Directors,  quarterly  dividends  payable  in cash on the first day of
          July,  October,  January and April,  in each year  beginning  in 2001,
          commencing  on the first  quarterly  dividend  payment  Date after the
          first  issuance of a fraction of a share of Series A Preferred  Stock.
          Each share of Series A Preferred Stock shall entitle the holder to one
          one-thousandth  of a vote on all  matters  submitted  to a vote of the
          stockholders of the Company.

(10) Related Party Transactions

     Certain  Directors  and their  companies  own  interests  in certain  wells
          operated by the  Company.  During 2000 and 1999,  the Company  charged
          $305,304 and $114,000,  respectively, for lease operating expenses and
          drilling costs and paid $160,704 and $68,000, 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 2000 and 1999, the Company
          was billed $169,906 and $34,000,  respectively,  for the Company's pro
          rata share of lease  operating  and  drilling  expenses  and  received
          $274,065 and $197,000 in 2000 and 1999,  respectively,  in oil and gas
          revenues related to these wells.

     During 2000 and 1999,  the Company  received  from First  Permian,  LLC net
          reimbursement of general and  administrative  expenses of $115,471 and
          $78,720, respectively, with the reimbursement netted against the costs
          incurred to provide those services.

     During 2000,  the Company  received  management  fees of $75,000 from First
          Permian, LLC. No such fees were received in 1999.

<PAGE>
                                      F-20


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



     During 2000, the Company received  $67,500 from First Permian,  LLC for tax
          withholdings  associated with the Company's interest in First Permian.
          No such distribution was received in 1999.

     An   entity  in  which  a  certain  Director  of the  Company  is the  sole
          shareholder  purchased a total of 110,000 shares of preferred stock of
          the Company during 1998. In addition, during 1998, a Foundation, where
          this same  Director is the  chairman of the board of  directors of the
          Foundation,  and  a  Trust,  where  this  same  Director  is  trustee,
          purchased  a total of 55,000  shares  each of  preferred  stock of the
          Company.  All of the shares of  preferred  stock of the  Company  were
          purchased  at a price of $10 per share on the same  terms as all other
          unaffiliated  purchasers.  (See  Note 9) Total  proceeds  received  of
          $2,200,000 were used to reduce the Company's bank debt.

(11) Oil and Gas Expenditures

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

<TABLE>


                                                  2000                1999
                                                  ----                ----
<S>                                              <C>                 <C>


     Proved properties                       $ 57,915,944        $ 52,795,570
     Unproved properties                       14,400,440          12,341,213
                                             ------------        ------------
                                               72,316,384          65,136,783
     Accumulated depletion                    (32,495,930)        (27,296,752)
                                             ------------        ------------
                                             $ 39,820,454        $ 37,840,031
                                             ============        ============
</TABLE>

     Certain  directly  identifiable  internal  costs of  property  acquisition,
          exploration and  development  activities are  capitalized.  Such costs
          capitalized  in 2000,  1999 and 1998  totaled  $624,007,  $508,883 and
          $527,500, respectively.

     Depletion per  equivalent  unit of  production  (BOE) was $8.18,  $8.30 and
          $8.07 for 2000, 1999 and 1998, respectively.

     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>

                                                       2000                1999             1998
                                                       ----                ----             ----
<S>                                                    <C>                 <C>              <C>

     Transfers (to)/from assets held for sale     $ 2,127,734         $ (2,127,734)     $         -
     Proved property acquisition costs                 23,291               41,768            88,747
     Unproved property acquisition costs            3,371,898            1,978,964         6,034,025
     Exploration                                    2,163,124            1,855,948         8,555,741
     Development                                    1,087,424              638,845         3,873,168
                                                  -----------         ------------      ------------
                                                  $ 8,773,471         $  2,387,791      $ 18,551,681
                                                  ===========         ============      ============
</TABLE>

<PAGE>
                                      F-21

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)




(12) Impairment of Oil and Gas Properties

     As   a result of a  ceiling  test  calculation,  which  limits  capitalized
          costs, net of related deferred tax liability,  to the aggregate of the
          estimated  present  value,  discounted  at  10-percent  of future  net
          revenues from proved  reserves plus lower of cost or fair market value
          of  unproved  properties,  the Company  recognized  an  impairment  of
          approximately  $1,705,000 related to its oil and gas properties during
          1999. There was no impairment recorded for 2000.

(13) Earnings per Share

     In   accordance  with  the  provisions  of FAS  128,  the  following  table
          provides a reconciliation between basic and diluted earnings per share
          for the year ended December 31:

<TABLE>


                                                                      2000           1999           1998
                                                                      ----           ----           ----
<S>                                                                   <C>            <C>            <C>

     Basic EPS Computation:
     Numerator -
          Net income (loss)                                      $  5,977,328   $ (2,450,457)  $ (12,995,910)
          Preferred stock dividend                                   (609,063)      (609,063)       (276,712)
                                                                 ------------   ------------   -------------
          Net income (loss) available to common
               stockholders                                      $  5,368,265   $ (3,059,520)  $ (13,272,622)
                                                                 ============   ============   =============
     Denominator -
          Weighted average common shares outstanding               20,331,858     18,549,214      18,300,998
                                                                  ===========   ============   =============

     Basic net earnings (loss) per share                              $   .26        $  (.16)       $   (.73)
                                                                      =======        =======        ========

     Diluted EPS Computation:
     Numerator -
          Net income (loss)                                      $ 5,977,328    $ (2,450,457)  $ (12,995,910)
          Preferred stock dividend                                       _          (609,063        (276,712)
                                                                 -----------    ------------   -------------
          Net income (loss) available to common
               stockholders                                      $ 5,977,328    $ (3,059,520)  $ (13,272,622)
                                                                 ===========    ============   =============
     Denominator -
          Weighted average common shares for basic
               earnings (loss) per share                          20,331,858      18,549,214      18,300,998

     Effect of dilutive securities:
          Employee stock options                                     348,787              _               _
          Warrants                                                       603              _               _
          Preferred stock                                          2,784,244              _               _
                                                                 -----------    ------------   -------------
          Weighted average common shares for diluted
               earnings (loss) per share assuming conversions     23,465,492      18,549,214      18,300,998
                                                                 ===========    ============   =============

         Diluted net earnings (loss) per share                       $   .25         $  (.16)       $   (.73)
                                                                     =======         =======        ========
</TABLE>

<PAGE>
                                      F-22

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



     Employee stock options to purchase  shares of common stock and  convertible
          preferred  stock were  outstanding  during  1999 and 1998 but were not
          included in the  computation of diluted net earnings  (loss) per share
          because  either (i) the employee  stock  options'  exercise  price was
          greater  than the  average  market  price of the  common  stock of the
          Company,  (ii) the effect of the assumed  conversion  of the Company's
          preferred  stock to common stock would be  antidilutive,  or (iii) the
          Company had a net loss from continuing operations and, therefore,  the
          effect would be antidilutive.

(14) Recently Announced Accounting Pronouncements

     In   June 1998, the Financial  Accounting  Standards  Board ("FASB") issued
          Financial  Accounting  Standards No. 133,  Accounting  for  Derivative
          Instruments and Hedging  Activities ("FAS No. 133"), which establishes
          standards for derivative  instruments,  including  certain  derivative
          instruments  embedded in other contracts,  and for hedging activities.
          FAS No. 133  requires  that an entity  recognize  all  derivatives  as
          either assets or  liabilities  in the statement of financial  position
          and measure those instruments at fair value. It establishes conditions
          under which a derivative may be designated as a hedge and  establishes
          standards for reporting changes in the fair value of a derivative. The
          Company adopted FAS No. 133, as amended by FAS No. 138, Accounting for
          Certain  Derivative  Instruments  and Certain Hedging  Activities,  an
          amendment of FASB Statement No. 133,  effective January 1, 2001. After
          assessing its contracts,  the Company is not aware of any freestanding
          or embedded derivative instruments that would need to be accounted for
          in accordance with FAS No. 133.

(15) Equity Investment

     On   June 30,  1999,  the Company  acquired a 22.5%  interest for $2,250 in
          First Permian,  LLC ("First  Permian"),  a Delaware limited  liability
          company. On December 31, 2000, the Company's interest in First Permian
          was 30.675%.

     On   June  25,  1999,  First  Permian  and Fina  Oil and  Chemical  Company
          ("Fina")  entered  into a  Merger  Agreement  in which  First  Permian
          purchased oil and gas properties  located in the Permian Basin of west
          Texas for  $96,125,000.  Under the Merger  Agreement,  the oil and gas
          properties  were conveyed to Nash Oil Company,  LLC ("Nash"),  a newly
          formed  Delaware   Limited   Liability   Company  and  a  wholly-owned
          subsidiary of Fina.  Effective  June 30, 1999,  First Permian and Nash
          were merged with the surviving  limited  liability company being First
          Permian,  LLC. The purchase was financed  primarily with a bank credit
          facility for $74,000,000,  subordinated notes totaling $16,000,000 and
          sale of minerals for $5,000,000. The credit facility is collateralized
          by substantially all of First Permian's oil and gas properties.

<PAGE>
                                      F-23

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



     At   December 31, 2000,  the Company has recorded a loss of $500,576 in its
          investment  of First  Permian,  LLC to the extent that the Company had
          guaranteed $10,000,000 of the debt of First Permian. Effective October
          25,  2000,  the  Company  was  released  from  its  guarantee  and has
          discontinued  the equity method of accounting for it's share of losses
          in First Permian from that date. When First Permian begins to generate
          net income,  the Company will resume  application of the equity method
          of accounting  only after the +Company's share in First  Permian's net
          income equals or exceeds the share of net losses not recognized during
          the period the equity  method was  suspended.  For 1999,  the  Company
          recorded equity in income of $197,811 of First Permian.

Commodity Hedges

     First Permian  utilizes   various  swap   contracts  and  other   financial
          instruments  to hedge  the  effect  of price  changes  on  future  oil
          production.

     The  following  table  sets forth  First  Permian's  outstanding  oil hedge
          contracts at December 31, 2000:
<TABLE>

     Type           Volume/Month             Term           Price               Commodity
     ----           ------------             ----           -----               ---------
     <S>            <C>                      <C>            <C>                 <C>

     Swap           91,000 barrels      1/1/01 - 6/30/01    $17.70              WTI NYMEX
     Collar         40,000 barrels        7/01 - 12/02      $18.00 - $28.75     WTI NYMEX
     Collar         40,000 barrels        7/01 - 12/02      $19.00 - $24.80     WTI NYMEX

</TABLE>


     During 2000 and at December 31, 1999, First Permian evaluated its oil hedge
          contracts and determined that a portion of oil subject to the contract
          did not  qualify  for hedge  accounting.  As a result,  First  Permian
          marked-to-market the contract for $441,180 and $576,000, respectively,
          recognizing  a loss in other  income.  As of December 31, 2000,  First
          Permian's oil hedge contracts qualified for hedge accounting.

     Interest Rate Swap Agreements

     Theseinstruments  are used to reduce the  potential  impact of increases in
          interest rates on  floating-rate  long-term debt. At December 31, 2000
          and 1999,  First Permian was party to one interest rate swap agreement
          to  provide  the  Company  with a  fixed  interest  rate of  6.52%  on
          $40,000,000 of its revolving line of credit through July 1, 2002.

     FAS  133

     Pursuant to FAS 133,  First Permian  recorded a net  transition  adjustment
          loss of  $6,105,108  in  accumulated  other  comprehensive  income  on
          January 1, 2001.


<PAGE>
                                      F-24


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     The  following summarizes selected audited financial  information for First
          Permian, LLC as of December 31:
<TABLE>

                    Assets                                  2000                     1999
                    ------                                  ----                     ----
<S>                                                          <C>                 <C>

Current assets:
     Cash and cash equivalents                         $ 3,836,840              $ 4,476,669
     Accounts receivable                                 6,337,595                4,653,020
     Prepaids                                               61,218                   25,311
     Assets held for sale                                       _                 2,300,000
                                                       -----------              -----------
          Total current assets                          10,235,653               11,455,000
                                                       -----------              -----------

Property and equipment, at cost:
     Oil and gas properties, full cost method           87,527,750               71,967,245
     Other property                                      1,086,427                  252,453
                                                       -----------              -----------
                                                        88,614,177               72,219,698
     Less accumulated depletion and depreciation        (8,251,530)              (2,974,973)
                                                       -----------              -----------
          Net property and equipment                    80,362,647               69,244,725


Other non-current assets, net of accumulated
     amortization of $986,350 in 2000 and $223,800
     in 1999                                             1,664,528                1,064,113
                                                       -----------              -----------
                                                       $92,262,828              $81,763,838
                                                       ===========              ===========

     Liabilities and Members' Equity
     --------------------------------
Current liabilities:
     Current maturities of long-term debt              $        _               $ 3,000,000
     Accounts payable and accrued liabilities-trade      7,042,264                5,848,150
     Liability for commodity swap                           58,450                  576,000
                                                       -----------              -----------
          Total current liabilities                      7,100,714                9,424,150
                                                       -----------              -----------
Long-term debt, net of current maturities               67,400,000               63,950,000
Notes payable to related parties                                _                 7,500,000
Redeemable preferred units                              14,224,946                       _
Members' equity                                          3,537,168                  889,688
                                                       -----------              -----------
                                                       $92,262,828              $81,763,838
                                                       ===========              ===========
Revenues                                               $24,713,111              $14,627,611
Cost and expenses                                       16,870,023                8,825,266
                                                       -----------              -----------
          Operating income                               7,843,088                5,802,345

Other expense, net                                       7,220,136               (4,923,183)
                                                       -----------              -----------
Net income before extraordinary item                   $   622,952              $   879,162

Extraordinary loss from debt restructure                  (960,825)                      _
                                                       -----------              -----------
Net income (loss)                                      $  (337,873)             $   879,162
                                                       ===========              ===========
Redeemable preferred unit dividends                       (724,946)                      _
                                                       -----------              -----------
Net income (loss) available to common members          $(1,062,819)             $   879,162
                                                       ===========              ===========

</TABLE>

<PAGE>
                                      F-25

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     The  following  summarizes the Company's  30.675% interest in First Permian
          LLC's unaudited oil and gas reserve data (in thousands):

                          Changes in Reserve Balances

<TABLE>

                                                         Total Proved          Proved Developed
                                                       ----------------       ------------------
                                                       BBL          MCF       BBL            MCF
                                                       ---          ---       ---            ---
<S>                                                    <C>          <C>      <C>            <C>


     Reserves as of June 30, 1999 (date of
          inception)                                     _              _         _            _
          Purchase of reserves in place              10,521          9,360     6,249        8,934
          Sales of reserves in place                 (1,162)          (533)   (1,162)        (533)
          Revisions of previous estimates             1,115           (180)    1,110         (180)
          Production                                   (248)          (457)     (248)        (457)
                                                     ------         ------    ------       ------
     Reserves as of December 31, 1999                10,226          8,190     5,949        7,764
          Purchase of reserves in place               1,266            246     1,266          246
          Sales of reserves in place                     (3)        (2,014)       (3)      (2,014)
          Revisions of previous estimates             3,639         (4,253)      680       (4,395)
          Production                                   (386)          (350)     (386)        (350)
                                                     ------         ------    ------       ------
     Reserves as of December 31, 2000                14,742          1,819     7,506        1,251
                                                     ======         ======    ======       ======

</TABLE>


            Standardized Measure of Discounted Future Net Cash Flows
                    Relating to Proved Oil and Gas Reserves

<TABLE>

                                                                      December 31,
                                                            ---------------------------
                                                                 2000         1999
                                                                 ----         ----
     <S>                                                     <C>            <C>

     Future cash flows                                       $  374,869     $ 238,996
     Future costs:
          Production                                           (126,082)      (71,878)
          Development                                           (28,728)      (13,001)
                                                             ----------     ---------
     Future net cash flows                                      220,059       154,117
     10% annual discount for estimated timing of cash flows    (128,010)      (80,448)
                                                             ----------     ---------
     Standardized measure of discounted net cash flows       $   92,049     $  73,669
                                                             ==========     =========
</TABLE>

<PAGE>
                                      F-26

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


     Changes in  Standardized  Measure of Discounted  Future Net Cash Flows From
          Proved Reserves



<TABLE>

                For the year ended December 31, 2000 and for the
       period June 30, 1999 (date of inception) through December 31, 1999


                                                                         2000           1999
                                                                         ----           ----
     <S>                                                              <C>            <C>
     Increase (decrease):
          Sales of minerals in place                                  $ (1,380)      $ (6,612)
          Accretion of discount                                          7,367             _
          Net change in sales prices net of production costs            24,997             _
          Purchase of minerals in place                                  9,755         51,125
          Changes in estimated future development costs                 (6,514)          (337)
          Revisions of prices and costs                                (11,603)        32,266
          Sales, net of production costs                                (4,242)        (2,773)
                                                                      --------       --------
               Net increase                                             18,380         73,669
          Standardized measure of discounted net cash flows:
               Beginning of year                                        73,669             _
                                                                      --------       --------
               End of year                                            $ 92,049       $ 73,669
                                                                      ========       ========

</TABLE>


(16) Commitments and Contingencies

     At   December 31, 2000,  the Company is party to two legal actions  arising
          incidental  to  its  business.  It is  managements  opinion  that  the
          ultimate  outcome  of these  legal  actions  will not have a  material
          adverse effect on the Company's operations or financial position.

(17) 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.   The  Company  has  presented  the  reserve   estimates
          utilizing an oil price of $25.09,  $24.75 and $10.50 per Bbl and a gas
          price of $10.18, $2.20 and $2.00 per Mcf as of December 31, 2000, 1999
          and 1998,  respectively.  Information  for oil is presented in barrels
          (BBL) and for gas in thousands of cubic feet (MCF).

<PAGE>
                                      F-27

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

     A summary of changes in reserve balances is presented below (in thousands):

<TABLE>


                                                Total Proved        Proved Developed
                                             -----------------    --------------------
                                              BBL         MCF        BBL         MCF
                                              ---         ---        ---         ---
<S>                                           <C>       <C>         <C>         <C>
     Reserves as of January 1, 1998          1,894      30,548       837       20,328
          Extensions and discoveries           281       7,554       210        5,634
          Revisions of previous estimates     (265)     (8,806)       (9)      (3,614)
          Production                          (186)     (3,275)     (185)      (3,276)
                                             -----      ------      ----       ------
     Reserves as of December 31, 1998        1,724      26,021       853       19,072
          Sales of reserves in place            _         (241)       _          (241)
          Extensions and discoveries            28       2,167        28        1,910
          Revisions of previous estimates     (580)     (7,903)     (128)      (5,296)
          Production                          (164)     (2,760)     (164)      (2,760)
                                             -----      ------      ----       ------
     Reserves as of December 31, 1999        1,008      17,284       589       12,685
          Sales of reserves in place            _         (383)       _          (383)
          Extensions and discoveries            37       1,143        37        1,143
          Revisions of previous estimates       94         464       111          953
          Production                          (165)     (2,822)     (165)      (2,822)
                                             -----      ------      ----       ------
     Reserves as of December 31, 2000          974      15,686       572       11,576
                                             =====      ======      ====       ======

</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.

     During 2000,  the average  sales price  received by the Company for its oil
          was approximately $28.88 per Bbl, as compared to $17.32 in 1999, while
          the average sales price for the Company's gas was approximately  $4.38
          per Mcf in 2000,  as compared  to $2.27 per Mcf in 1999.  At March 15,
          2001,  the price  received by the Company for its oil  production  was
          approximately $25.25 per Bbl, while the price received by the Company,
          at that same date, for its gas production was approximately  $5.00 per
          Mcf.

     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-28

                         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>

                                                                     December 31,
                                                       --------------------------------------
                                                          2000          1999           1998
                                                       ---------      --------       --------
<S>                                                     <C>            <C>           <C>

Future cash flows                                      $ 184,045      $ 62,967       $ 70,141
Future costs:
     Production                                          (35,550)      (18,632)       (20,706)
     Development                                          (4,228)       (4,797)        (5,740)
                                                       ---------      --------       --------
Future net cash flows before income taxes                144,267        39,538         43,695
Future income taxes                                      (24,321)           _              _
                                                       ---------      --------       --------
Future net cash flows                                    119,946        39,538         43,695
10% annual discount for estimated timing of
     cash flows                                          (38,658)      (14,039)       (16,872)
                                                       ---------      --------       --------
Standardized measure of discounted net cash flows      $  81,288      $ 25,499       $ 26,823
                                                       =========      ========       ========

</TABLE>

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


<TABLE>

                                                                     December 31,
                                                       --------------------------------------
                                                          2000          1999           1998
                                                       ---------      --------       --------
<S>                                                     <C>            <C>           <C>

Increase (decrease):
     Sales of minerals in place                        $   (136)      $   (238)      $     -
     Extensions and discoveries and improved recovery,
          net of future production and development costs  8,398          3,067          8,916
     Accretion of discount                                2,550          2,682          4,642
     Net change in sales prices net of production costs  66,306         11,882        (16,036)
     Changes in estimated future development costs          204            789            664
     Revisions of quantity estimates                      4,496        (13,371)        (8,325)
     Net change in income taxes                          (9,662)            _             365
     Sales, net of production costs                     (14,035)        (6,620)        (6,588)
     Changes of production rates (timing) and other      (2,332)           485         (2,870)
                                                       --------       --------       --------
               Net increase (decrease)                   55,789         (1,324)       (19,232)

     Standardized measure of discounted future net cash
         flows:
               Beginning of year                         25,499         26,823         46,055
                                                       --------       --------       --------
               End of year                             $ 81,288       $ 25,499       $ 26,823
                                                       ========       ========       ========
</TABLE>

<PAGE>
                                       29


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


(18) Selected Quarterly Financial Results (Unaudited)

<TABLE>

                                                       Quarter
                                       -------------------------------------------------
                                       First          Second         Third        Fourth
                                       -----          ------         -----        ------
                                            (in thousands, except per share data)
<S>                                    <C>            <C>            <C>          <C>

2000:

     Oil and gas revenues          $    2,775     $    3,197     $   4,163      $   7,000
     Total costs and expense            1,875          2,098         2,220          3,337
     Net income                           194            695         1,699          3,389
     Net income per common share   $     .001     $     .027     $    .076      $     .16
     Net income per common share
          - assuming dilution      $     .001     $     .027     $    .072      $     .14


1999:
     Oil and gas revenues          $    1,963     $    1,992     $   2,291      $   2,728
     Total costs and expenses           1,621          1,729         2,239          4,585
     Net income (loss)                    (10)           (94)         (150)        (2,196)
     Net income (loss) per common
          share                    $    (.010)    $    (.013)    $   (.016)     $    (.18)
     Net income (loss) per common
          share-assuming dilution  $    (.010)    $    (.013)    $   (.016)     $    (.16)


</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 30, 2001                           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         March 30, 2001
-----------------------         and Chairman of the
    Thomas R. Cambridge         Board of Directors
                                (Principal Executive
                                Officer)


/s/ Larry C. Oldham
-----------------------         President and Treasurer         March 30, 2001
Larry C. Oldham                 (Principal Financial and
                                Accounting Officer)


/s/ Dewayne E. Chitwood
-----------------------         Director                        March 30, 2001
Dewayne E.  Chitwood


s/ Ernest R. Duke
-----------------------         Director                        March 30, 2001
Ernest R. Duke


/s/ Charles R. Pannill
-----------------------         Director                        March 30, 2001
Charles R. Pannill

<PAGE>
                                      E-1

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, 1998.)

3.2                 Bylaws of Registrant (Incorporated by reference to Exhibit 3
                    to the  Registrant's  Form 8-K,  dated  October 9, 2000,  as
                    filed with the Securities and Exchange Commission on October
                    10, 2000.)


4.1                 Certificate  of  Designations,  Preferences  and  Rights  of
                    Serial  Preferred  Stock - 6%  Convertible  Preferred  Stock
                    (Incorporated  by  reference  to Exhibit 4.1 to Form 10-Q of
                    the Registrant  for the fiscal  quarter ended  September 30,
                    1998.)

*4.2                Certificate of Designation, Preferences and Rights of Series
                    A Preferred Stock.

*4.3                Rights Agreement,  dated as of October 5, 2000,  between the
                    Registrant and Computershare Trust Company,  Inc., as Rights
                    Agent.


                    Executive Compensation Plans and Arrangements (Exhibit No.'s
                    10.1 through 10.7):

10.1                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.)

10.2                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.)

10.3                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.)

10.4                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.)
<PAGE>
                                       E-2


Exhibit
  No.                              Description of Exhibit


10.5                Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
                    Simplified  Employee Pension Plan (Incorporated by reference
                    to Exhibit 10.6 of the Registrant's Form 10-K for the fiscal
                    year ended December 31, 1995.)

10.6                Non-Employee  Directors Stock Option Plan  (Incorporated  by
                    reference  to  Exhibit  10.6 of the  Registrant's  Form 10-K
                    Report for the fiscal year ended December 31, 1997).

10.7                1998 Stock Option Plan (Incorporated by reference to Exhibit
                    10.7 of Form  10-K of the  Registrant  for the  fiscal  year
                    ended December 31, 1998.)

10.8                Restated Loan Agreement  dated December 27, 1999 between the
                    Registrant  and  Bank  One,  Texas,  N.A.  (Incorporated  by
                    reference to Exhibit 10.8 of Form 10-K of the Registrant for
                    the fiscal year ended December 31, 1999.)


*10.9               Loan  Agreement,   dated  December  18,  2000,  between  the
                    Registrant and Bank United.

10.10               Letter  agreement,   dated  March  24,  1999,   between  the
                    Registrant  and  Bank  One,  Texas,  N.A.  (Incorporated  by
                    reference to Exhibit 10.9 of Form 10-K of the Registrant for
                    the fiscal year ended December 31, 1998.)

10.11               Certificate   of   Formation   of  First   Permian,   L.L.C.
                    (Incorporated   by   reference   to  Exhibit   10.1  of  the
                    Registrant's  Form 8-K report  dated June 30,  1999.)

10.12               Limited Liability Company Agreement of First Permian, L.L.C.
                    (Incorporated   by   reference   to  Exhibit   10.2  of  the
                    Registrant's Form 8-K report dated June 30, 1999.)


10.13               Merger  Agreement,  dated June 25,  1999.  (Incorporated  by
                    reference  to  Exhibit  10.3 of the  Registrant's  Form  8-K
                    report dated June 30, 1999.)


10.14               Agreement and Plan of Merger of First  Permian,  L.L.C.  and
                    Nash Oil  Company,  L.L.C.  (Incorporated  by  reference  to
                    Exhibit 10.4 of the Registrant's  Form 8-K report dated June
                    30, 1999.)

10.15               Certificate of Merger of First Permian,  L.L.C. and Nash Oil
                    Company,  L.L.C.  (Incorporated by reference to Exhibit 10.5
                    of the Registrant's Form 8-K report dated June 30, 1999.)
<PAGE>
                                       E-3


Exhibit
  No.                              Description of Exhibit




*10.16              Amended and Restated Limited  Liability Company Agreement of
                    First Permian, L.L.C. dated as of May 31, 2000.

10.17               Credit  Agreement,  dated June 30,  1999 by and among  First
                    Permian,  L.L.C.,  Parallel Petroleum Corporation,  Baytech,
                    Inc., and Bank One, Texas,  N.A.  (Incorporated by reference
                    to Exhibit  10.6 of the  Registrant's  Form 8-K report dated
                    June 30, 1999.)

10.18               Limited  Guaranty,  dated June 30, 1999,  by and among First
                    Permian,  L.L.C.,  Parallel Petroleum Corporation,  and Bank
                    One, Texas, N.A.  (Incorporated by reference to Exhibit 10.7
                    of the Registrant's Form 8-K report dated June 30, 1999.)

10.19               Intercreditor  Agreement,  dated as of June 30, 1999,  among
                    First  Permian,   L.L.C.,   Bank  One,  Texas,  N.A.,  Tejon
                    Exploration Company, and Mansefeldt Investment  Corporation.
                    (Incorporated   by   reference   to  Exhibit   10.8  of  the
                    Registrant's Form 8-K report dated June 30, 1999).

10.20               Subordinated  Promissory  Note,  dated June 30, 1999, in the
                    original  principal  amount  of $8.0  million  made by First
                    Permian,  L.L.C.  payable to the order of Tejon  Exploration
                    Company  (Incorporated  by  reference to Exhibit 10.9 of the
                    Registrant's Form 8-K report dated June 30, 1999.)

10.21               Subordinated  Promissory  Note,  dated June 30, 1999, in the
                    original  principal  amount  of $8.0  million  made by First
                    Permian,   L.L.C.   payable  to  the  order  of   Mansefeldt
                    Investment Corporation (Incorporated by reference to Exhibit
                    10.9 of the  Registrant's  Form 8-K  report  dated  June 30,
                    1999.)

*10.22              Second  Restated Credit  Agreement,  dated October 25, 2000,
                    among First Permian, L.L.C., Bank One, Texas, N.A., and Bank
                    One Capital Markets, Inc.

*23.1               Consent of Independent Auditors

*23.2               Consent of Independent Petroleum Engineers


*23.3               Consent of Independent Petroleum Engineers



----------------------
* Filed herewith.




<PAGE>
                                       1


                                                      Exhibit 4.2



                         CERTIFICATE OF
             DESIGNATION, PREFERENCES AND RIGHTS OF
                    SERIES A PREFERRED STOCK

                               of

                 PARALLEL PETROLEUM CORPORATION

     Pursuant to Section 151 of the General Corporation Law
                    of the State of Delaware

     Pursuant  to Section  151 of the  General  Corporation  Law of the State of
Delaware,  the undersigned  authorized officer of Parallel Petroleum Corporation
(the "Corporation"), on behalf of the Corporation, DOES HEREBY CERTIFY

     That pursuant to the authority  conferred  upon the Board of Directors (the
"Board") by the Certificate of Incorporation of the Corporation, as amended, and
the General Corporation Law of the State of Delaware,  the Board of Directors on
October 5, 2000,  adopted the following  resolutions  creating a series of fifty
thousand shares of Preferred Stock,  par value $0. 1 0 per share,  designated as
Series A Preferred Stock:

     RESOLVED, that, pursuant to the authority vested in the Board in accordance
with the provisions of its Certificate of Incorporation,  as amended,  the Board
and the General  Corporation  Law of the State of Delaware,  does hereby create,
authorize  and provide for the issuance  upon the exercise of the  Corporation's
Preferred  Stock  Purchase  Rights,  of a  series  of  Preferred  Stock  of  the
Corporation,  and does  hereby  fix and state  that the  designations,  amounts,
powers,   preferences   and   relative   and  other   special   rights  and  the
qualifications, limitations or restrictions thereof are as follows:

Series A Preferred Stock

     Section 1.  Designation  and  Amount.  The shares of such  series  shall be
designated  as Series A  Preferred  Stock and the number of shares  constituting
such series shall be 50,000, which number may be increased or decreased (but not
below the number of shares thereof then outstanding) from time to time by action
of the Board of Directors.

<PAGE>
                                       2


     Section 2. Dividends and Distributions.

     (A) Subject to the prior and  superior  rights of the holders of any shares
of any series of  Preferred  Stock  ranking  prior and superior to the shares of
Series A Preferred  Stock with  respect to  dividends,  the holders of shares of
Series A Preferred Stock shall be entitled to receive,  when, as and if declared
by the Board of  Directors  out of funds  legally  available  for that  purpose,
quarterly  dividends payable in cash on the I st day of July,  October,  January
and  April,  in each year  commencing  January  1, 2001  (each  such date  being
referred to herein as a "Quarterly  Dividend  Payment Date"),  commencing on the
first  Quarterly  Dividend  Payment Date after the first  issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the  nearest  cent)  equal to the  greater of (a) $0.01 or (b) subject to the
provision for adjustment  hereinafter set forth,  one thousand (1,000) times the
aggregate per share amount of all cash dividends, and one thousand (1,000) times
the  aggregate per share amount  (payable in kind) of all non-cash  dividends or
other  distributions other than a dividend payable in shares of the common stock
of the  Corporation,  par value  $0.01  per share  ("the  Common  Stock"),  or a
subdivision of the outstanding  shares of Common Stock (by  reclassification  or
otherwise),  declared  on the  Common  Stock,  since the  immediately  preceding
Quarterly  Dividend  Payment  Date,  or,  with  respect  to the first  Quarterly
Dividend  Payment Date,  since the first  issuance of any share or fraction of a
share of Series A Preferred  Stock.  In the event the  Corporation  shall at any
time after  October 5, 2000 (the  "Rights  Declaration  Date") (i)  declare  any
dividend on Common Stock payable in shares of Common Stock,  (ii)  subdivide the
outstanding  Common Stock, or (iii) combine the outstanding  Common Stock into a
smaller number of shares,  then in each such case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction  the  numerator  of which is the number of shares of Common
Stock  outstanding  immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding  immediately prior to
such event.

     (B) The Corporation  shall declare a dividend or distribution on the Series
A Preferred  Stock as  provided  in  paragraph  (A) above  immediately  after it
declares a dividend or distribution on the Common

<PAGE>
                                       3


Stock (other than a dividend payable in shares of Common Stock);  provided that,
in the event no dividend or distribution  shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $0.01 per share on the
Series A  Preferred  Stock  shall  nevertheless  be payable  on such  subsequent
Quarterly Dividend Payment Date.

     (C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A  Preferred  Stock  from the  Quarterly  Dividend  Payment  Date next
preceding the date of issue of such shares of Series A Preferred  Stock,  unless
the date of issue of such  shares  is  prior to the  record  date for the  first
Quarterly  Dividend  Payment Date, in which case  dividends on such shares shall
begin to accrue  from the date of issue of such  shares,  or unless  the date of
issue is a Quarterly  Dividend  Payment  Date or is a date after the record date
for the  determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly  Dividend  Payment Date.  Accrued but unpaid dividends shall
not bear interest.  Dividends paid on the shares of Series A Preferred  Stock in
an amount less than the total  amount of such  dividends at the time accrued and
payable on such shares shall be allocated  pro rata on a share-  by-share  basis
among all such shares at the time outstanding.  The Board of Directors may fix a
record  date for the  determination  of holders of shares of Series A  Preferred
Stock  entitled  to  receive  payment  of a dividend  or  distribution  declared
thereon,  which  record  date shall be no more than sixty (60) days prior to the
date fixed for the payment thereof.

     Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:

     (A) Subject to the provision for  adjustment  hereinafter  set forth,  each
share of Series A  Preferred  Stock  shall  entitle  the  holder  thereof to one
thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration  Date (i) declare any dividend on Common Stock  payable in shares of
Common Stock, (ii) subdivide the outstanding  Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per

<PAGE>
                                       4



share to which  holders  of shares of Series A  Preferred  Stock  were  entitled
immediately  prior to such event shall be adjusted by multiplying such number by
a  fraction  the  numerator  of which is the  number of  shares of Common  Stock
outstanding  immediately  after such event and the  denominator  of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.

     (B) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred  Stock and the  holders of shares of Common  Stock shall vote
together as one class on all matters  submitted to a vote of stockholders of the
Corporation.  Except as otherwise  provided herein or by law, the holders of the
shares of Series A  Preferred  Stock shall not be entitled to vote as a separate
class on any matters submitted to a vote of the stockholders.

     (C) (i) If at any time  dividends on any Series A Preferred  Stock shall be
in  arrears  in an amount  equal to six (6)  quarterly  dividends  thereon,  the
occurrence  of such  contingency  shall mark the  beginning of a period  (herein
called a "default  period")  which shall extend until such time when all accrued
and unpaid  dividends for all previous  quarterly  dividend  periods and for the
current quarterly dividend period on all shares of Series A Preferred Stock then
outstanding  shall have been declared and paid or set apart for payment.  During
each default period, all holders of Series A Preferred Stock, voting as a class,
shall have the right to elect two (2) Directors to the Board of Directors of the
Corporation.

          (ii) During any default  period,  such voting  right of the holders of
     Series A Preferred  Stock may be exercised  initially at a special  meeting
     called pursuant to subparagraph (iii) of this Section 3(C) or at any annual
     meeting  of  stockholders  of the  Corporation,  and  thereafter  at annual
     meetings of  stockholders  of the  Corporation,  provided  that such voting
     right  shall not be  exercised  unless the  holders of  one-third  (1/3) in
     number of shares of Series A Preferred Stock  outstanding  shall be present
     in person or by proxy.  The  absence  of a quorum of the  holders of Common
     Stock  shall not affect the  exercise  by the holders of Series A Preferred
     Stock of such voting right. At any meeting at which the holders of Series A
     Preferred  Stock shall  exercise  such  voting  right  initially  during an
     existing default period,  they shall have the right,  voting as a class, to
     elect Directors to fill such  vacancies,  if any, in the Board of Directors
     as may then exist up to two (2) Directors or, if such right is exercised at
     an annual

<PAGE>
                                       5



     meeting, to elect two (2) Directors.  If the number which may be so elected
     at any special meeting does not amount to the required number,  the holders
     of the Series A Preferred  Stock shall have the right to make such increase
     in the number of  Directors  constituting  the whole Board of  Directors as
     shall be necessary  to permit the election by them of the required  number.
     After the  holders of the Series A  Preferred  Stock  shall have  exercised
     their  right to elect  Directors  in any  default  period  and  during  the
     continuance of such period, the number of Directors  constituting the whole
     Board of Directors  shall not be  increased or decreased  except by vote of
     the holders of Series A Preferred  Stock as herein  provided or pursuant to
     the rights of any equity  securities  ranking  senior to or pari passu with
     the Series A Preferred Stock.

          (iii) Unless the holders of Series A Preferred Stock shall,  during an
     existing  default period,  have  previously  exercised their right to elect
     Directors,  the  Board  of  Directors  may  order,  or any  stockholder  or
     stockholders  owning in the  aggregate  not less than ten percent (I 0%) of
     the total  number of shares of Series A  Preferred  Stock  outstanding  may
     request,  the  calling  of a special  meeting  of the  holders  of Series A
     Preferred Stock,  which meeting shall thereupon be called by the President,
     a Vice  President  or the  Secretary  of the  Corporation.  Notice  of such
     meeting  and of any annual  meeting at which  holders of Series A Preferred
     Stock are entitled to vote pursuant to this subparagraph  (C)(iii) shall be
     given to each  holder of record of Series A  Preferred  Stock by  mailing a
     copy of such notice to him at his last  address as the same  appears on the
     books of the  Corporation.  Such  meeting  shall be  called  for a time not
     earlier than twenty (20) days and not later than sixty (60) days after such
     order or request or in default of the calling of such meeting  within sixty
     (60) days  after  such  order or  request,  such  meeting  may be called on
     similar notice by any stockholder or  stockholders  owning in the aggregate
     not less than ten percent  (10%) of the total  number of shares of Series A
     Preferred  Stock  outstanding.   Notwithstanding  the  provisions  of  this
     subparagraph  (C)(iii),  no such special meeting shall be called during the
     period within sixty (60) days immediately  preceding the date fixed for the
     next annual meeting of the stockholders of the Corporation.

          (iv) In any default  period,  the holders of Common  Stock,  and other
     classes of stock of the  Corporation  if  applicable,  shall continue to be
     entitled to elect the whole  number of  Directors  until the holders of the
     Series A Preferred Stock shall have exercised their right to elect two (2)

<PAGE>
                                       6



     Directors  voting as a class,  after the  exercise  of which  right (x) the
     Directors  so elected by the holders of the Series A Preferred  Stock shall
     continue in office until their  successors  shall have been elected by such
     holders or until the expiration of the default period,  and (y) any vacancy
     in the Board of Directors may (except as provided in  subparagraph  (C)(ii)
     of  this  Section  3) be  filled  by vote of a  majority  of the  remaining
     Directors  theretofore  elected by the  holders of the class of stock which
     elected the Director whose office shall have become  vacant.  References in
     this  paragraph  (C) to  Directors  elected by the holders of a  particular
     class of stock shall include  Directors  elected by such  Directors to fill
     vacancies as provided in clause (y) of the foregoing sentence.

          (v) Immediately upon the expiration of a default period, (x) the right
     of the  holders  of the  Series  A  Preferred  Stock  as a class  to  elect
     Directors shall cease, (y) the term of any Directors elected by the holders
     of Series A Preferred  Stock as a class shall  terminate and (z) the number
     of Directors constituting the whole Board of Directors shall be such number
     as may be provided for in the Corporation's Certificate of Incorporation or
     bylaws  irrespective  of any increase  made  pursuant to the  provisions of
     subparagraph (C)(ii) of this Section 3 (such number being subject, however,
     to change  thereafter in any manner provided by law or in the Corporation's
     Certificate  of  Incorporation  or bylaws).  Any  vacancies in the Board of
     Directors  effected  by  the  provisions  of  clauses  (y)  and  (z) in the
     preceding  sentence may be filled as provided in the Corporation's  Amended
     and Restated Certificate of Incorporation.

     (D) Except as set forth herein,  holders of Series A Preferred  Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are  entitled to vote with  holders of Common Stock as set forth
herein) for taking any corporate action.

     Section 4. Certain Restrictions.

     (A)  Whenever  quarterly  dividends  or other  dividends  or  distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared,  on shares of Series A Preferred Stock  outstanding  shall have
been paid in full, the Corporation shall not:

<PAGE>
                                       7


          (i) declare or pay dividends on, make any other  distributions  on, or
     redeem or purchase or  otherwise  acquire for  consideration  any shares of
     stock  ranking  junior  (either  as  to  dividends  or  upon   liquidation,
     dissolution or winding up) to, the Series A Preferred Stock;

          (ii) declare or pay dividends on, or make any other  distributions on,
     any  shares  of  stock  ranking  junior  (either  as to  dividends  or upon
     liquidation,  dissolution  or winding up) to the Series A Preferred  Stock,
     except  dividends paid ratably on the Series A Preferred Stock and all such
     junior stock on which  dividends are payable or in arrears in proportion to
     the  total  amounts  to  which  the  holders  of all such  shares  are then
     entitled;

          (iii) redeem or purchase or otherwise acquire for consideration shares
     of  any  stock  ranking  on a  parity  (either  as  to  dividends  or  upon
     liquidation,  dissolution or winding up) with the Series A Preferred Stock,
     provided that the Corporation may at any time redeem, purchase or otherwise
     acquire shares of any such parity stock in exchange for shares of any stock
     of  the  Corporation  ranking  junior  (either  as  to  dividends  or  upon
     dissolution, liquidation or winding up) to the Series A Preferred Stock; or

          (iv)  purchase or otherwise  acquire for  consideration  any shares of
     Series A Preferred  Stock,  or any shares of stock ranking on a parity with
     the Series A Preferred  Stock,  except in accordance  with a purchase offer
     made in writing or by publication (as determined by the Board of Directors)
     to all holders of such  shares  upon such terms as the Board of  Directors,
     after  consideration  of the  respective  annual  dividend  rates and other
     relative rights and preferences of the respective series and classes, shall
     determine in good faith will result in fair and equitable  treatment  among
     the respective series or classes.

     (B) The  Corporation  shall not permit any subsidiary of the Corporation to
purchase  or  otherwise  acquire  for  consideration  any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.


<PAGE>
                                       8


     Section  5.  Reacquired  Shares.  Any  shares of Series A  Preferred  Stock
purchased  or otherwise  acquired by the  Corporation  in any manner  whatsoever
shall be retired and canceled promptly after the acquisition  thereof.  All such
shares shall upon their  cancellation  become  authorized but unissued shares of
Preferred  Stock and may be reissued as part of a new series of Preferred  Stock
to be created by resolution or resolutions of the Board of Directors, subject to
the conditions and restrictions on issuance set forth herein.

     Section 6. Liquidation, Dissolution or Winding Up.

     (A) Upon any liquidation  (voluntary or otherwise),  dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless,  prior thereto,  the holders
of shares of Series A Preferred  Stock shall have received $250 per share,  plus
an amount  equal to accrued  and unpaid  dividends  and  distributions  thereon,
whether or not declared,  to the date of such  payment(the"Series  A Liquidation
Preference").  Following  the  payment  of  the  full  amount  of the  Series  A
Liquidation Preference, no additional distributions shall be made to the holders
of shares of Series A Preferred  Stock  unless,  prior  thereto,  the holders of
shares of Common  Stock  shall have  received  an amount per share (the  "Common
Adjustment")  equal  to the  quotient  obtained  by  dividing  (i) the  Series A
Liquidation  Preference by (ii) one thousand (1,000) (as appropriately  adjusted
as set forth in  paragraph  (C) of this  Section to reflect such events as stock
splits, stock dividends and recapitalizations  with respect to the Common Stock)
(such  number  in  clause  (ii)  immediately  above  being  referred  to as  the
"Adjustment  Number").  Following the payment of the full amount of the Series A
Liquidation  Preference and the Common  Adjustment in respect of all outstanding
shares of Series A Preferred  Stock and Common Stock,  respectively,  holders of
Series A  Preferred  Stock and holders of shares of Common  Stock shall  receive
their ratable and proportionate  share of the remaining assets to be distributed
in the ratio of the Adjustment  Number to one (1) with respect to such Preferred
Stock and Common Stock, on a per share basis, respectively.

     (B) In the event,  however,  that there are not sufficient assets available
to  permit  payment  in full of the  Series  A  Liquidation  Preference  and the
liquidation preferences of all other series of preferred stock, if any,

<PAGE>
                                       9



which rank on a parity with the Series A Preferred  Stock,  then such  remaining
assets  shall be  distributed  ratably to the holders of such  parity  shares in
proportion to their respective liquidation  preferences . In the event, however,
that there are not sufficient  assets available to permit payment in full of the
Common  Adjustment,  then such remaining assets shall be distributed  ratably to
the holders of Common Stock.

     (C) In the  event  the  Corporation  shall at any  time  after  the  Rights
Declaration  Date (i) declare any dividend on Common Stock  payable in shares of
Common Stock, (ii) subdivide the outstanding  Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the  Adjustment  Number  in  effect  immediately  prior to such  event  shall be
adjusted by multiplying  such  Adjustment  Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the  denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.

     Section 7. Consolidation,  Merger, etc. In case the Corporation shall enter
into any  consolidation,  merger,  combination or other transaction in which the
shares  of  Common  Stock  are  exchanged  for  or  changed  into  other  stock,
securities,  cash or any other  property,  then in any such  case the  shares of
Series A  Preferred  Stock  shall at the same  time be  similarly  exchanged  or
changed  in an  amount  per  share  (subject  to the  provision  for  adjustment
hereinafter set forth) equal to one thousand  (1,000) times the aggregate amount
of stock,  securities,  cash and/or any other property (payable in kind), as the
case may be,  into which or for which  each share of Common  Stock is changed or
exchanged.  In the  event the  Corporation  shall at any time  after the  Rights
Declaration  Date (i) declare any dividend on Common Stock  payable in shares of
Common Stock,  (ii) subdivide the outstanding  Common Stock, or (ii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the  preceding  sentence with respect to the exchange or
change of shares of Series A Preferred  Stock  shall be adjusted by  multiplying
such  amount by a  fraction  the  numerator  of which is the number of shares of
Common Stock  outstanding  immediately  after such event and the  denominator of
which is the number of shares of Common Stock that were outstanding  immediately
prior to such event.


<PAGE>
                                       10


     Section 8. Redemption.  The outstanding  shares of Series A Preferred Stock
may be redeemed at the option of the Board of Directors  as a whole,  but not in
part,  at any time,  or from to time to time, at a cash price per share equal to
one hundred  five  percent  (105%) of (i) the product of the  Adjustment  Number
times the  Average  Market  Value (as such term is  hereinafter  defined) of the
Common Stock,  plus (ii) all dividends which on the redemption date have accrued
on the shares to be  redeemed  and have not been  paid,  or  declared  and a sum
sufficient for the payment  thereof set apart,  without  interest.  The "Average
Market  Value" is the  average of the closing  sale  prices of the Common  Stock
during the thirty  (30) day period  immediately  preceding  the date  before the
redemption date on the Composite Tape for New York Stock Exchange Listed Stocks,
or, if such stock is not  quoted on the  Composite  Tape,  on the New York Stock
Exchange,  or, if such stock is not listed on such  Exchange,  on the  principal
United States securities  exchange  registered under the Securities Exchange Act
of 1934,  as  amended,  on which such stock is listed,  or, if such stock is not
listed on any such exchange, the average of the closing sale prices with respect
to a share of Common Stock during such thirty (30) day period,  as quoted on the
National Association of Securities Dealers,  Inc. Automated Quotations System or
any system then in use, or if no such quotations are available,  the fair market
value of the Common Stock as determined by the Board of Directors in good faith.

     Section 9. Ranking.  The Series A Preferred  Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of dividends
and the  distribution  of  assets,  unless  the terms of any such  series  shall
provide otherwise.

     Section 10. Amendment.  Except as otherwise  provided in the Certificate of
Incorporation,  as amended,  or by law, the Certificate of  Incorporation of the
Corporation,  as amended, shall not be further amended in any manner which would
materially  alter or change the  powers,  preferences  or special  rights of the
Series A Preferred Stock so as to affect them adversely  without the affirmative
vote of the holders of a majority or more of the outstanding  shares of Series A
Preferred Stock, voting separately as a class.

     Section 11. Fractional Shares. At the Corporation's sole discretion, Series
A Preferred  Stock may be issued in fractions of a share which shall entitle the
holder,  in proportion to such holder's  fractional


<PAGE>
                                       11


shares,   to  exercise  voting  rights,   receive   dividends,   participate  in
distributions and to have the benefit of all other rights of holders of Series A
Preferred Stock.

     IN WITNESS WHEREOF, I have executed this Certificate as of October 5, 2000.

                              PARALLEL PETROLEUM CORPORATION


                              By: /s/ Larry C.  Oldham
                                  --------------------------------
                                  Larry C. Oldham, President


<PAGE>

                                                            Exhibit 4.3





                         PARALLEL PETROLEUM CORPORATION

                                      and

                       COMPUTERSHARE TRUST COMPANY, INC.,

                                as Rights Agent

                                Rights Agreement

                           Dated as of October 5,2000
<PAGE>
                                       i


                                TABLE OF CONTENTS

Section                                                                   Page

Section 1.  Certain Definitions                                            1

Section 2.  Appointment of Rights Agent                                    5

Section 3.  Issuance of Rights  Certificates                               6
           (a)  Distribution  Date;  Rights Certificates                   6
           (b)  Common Stock Certificates; Summary of Rights               6
           (c)  Legend                                                     6

Section 4.  Form of Rights  Certificates                                   7
           (a)  Form; Date                                                 7
           (b)  Acquiring  Person Legend                                   8

Section 5.  Countersignature and Registration                              8
           (a)  Signatures                                                 8
           (b)  Registration and Transfer                                  8

Section 6.  Transfer, Split Up, Combination and Exchange of Rights
            Certificates; Mutilated, Destroyed, Lost or Stolen
            Rights Certificates                                            9
           (a)  Procedure                                                  9
           (b)  Issuance of New Rights Certificates                        9

Section 7.  Exercise of Rights; Purchase Price; Expiration Date of Rights  9
           (a)  Exercise                                                   9
           (b)  Purchase Price                                             10
           (c)  Rights Agent Actions                                       10
           (d)  Partial Exercise                                           11
           (e)  Termination of Acquiring Person's Rights                   11
           (f)  Surrender of Rights Certificates; Identity of
                Beneficial Owner                                           11

Section 8.  Cancellation and Destruction of Rights Certificates            11

Section 9.  Reservation and Availability of Capital Stock                  12
           (a)  Reservation of Capital Stock                               12
           (b)  Listing                                                    12
           (c)  Registration under the Act                                 12

<PAGE>
                                       ii

           (d)  Covenant Regarding Capital Stock                           12
           (e)  Transfer Taxes and Charges                                 13

Section 10. Preferred Stock Record Date                                    13

Section 11. Adjustment of Purchase Price; Number and Kind of
            Shares or Number of Rights                                     13
          (a)  Certain Adjustments                                         13
          (b)  Purchase Price Adjustment - Capital Stock                   16
          (c)  Purchase Price Adjustment - Cash, Assets, etc.              17
          (d)  Current Market Price                                        17
          (e)  Purchase Price Adjustment Threshold                         18
          (f)  Equivalent Adjustments                                      19
          (h)  Preferred Stock Anti-Dilution                               19
          (i)  Adjustment of Number of Rights                              19
          (j)  Rights Certificates                                         20
          (k)  Adjustment Below Par Value                                  20
          (1)  Adjustment Effective as of Future Date; Exercise            20
          (m)  Tax Adjustments                                             20
          (n)  Restriction on Certain Transactions                         21
          (o)  Restriction Against Diminishing Benefits of the Rights      21
          (p)  Common Stock Adjustments                                    21

Section 12. Certificate of Adjusted Purchase Price or
            Number of Shares                                               21

Section 13. Consolidation, Merger or Sale or Transfer of
            Assets or Earning Power                                        22
          (a   Flip-over Event                                             22
          (b)  Principal Party                                             23
          (c)  Supplemental Agreement                                      23
          (d)  Exceptions                                                  24

Section 14. Fractional Rights and Fractional Shares                        24
          (a)  Fractional Rights                                           24
          (b)  Fractional Shares of Preferred Stock                        25
          (c)  Fractional Shares of Common Stock                           25
          (d)  Waiver of Fractional Rights and Shares                      25

<PAGE>
                                       iii


Section 15. Rights of Action                                               25

Section 16. Agreement of Rights Holders                                    26

Section 17. Rights Certificate Holder Not Deemed a Stockholder             26

Section 18. Concerning the Rights Agent                                    27
          (a)  Compensation                                                27
          (b)  Reliance                                                    27

Section 19. Merger or Consolidation or Change of Name of
            Rights Agent                                                   27
          (a)  Successor                                                   27
          (b)  Prior Countersignatures                                     27

Section 20. Duties of Rights Agent                                         28
          (a)  Legal Counsel                                               28
          (b)  Certification by the Company                                28
          (c)  Liability for Gross Negligence, etc.                        28
          (d)  Statements of Fact or Recitals                              28
          (e)  Agreement; Adjustments                                      28
          (f)  Further Assurances                                          28
          (g)  Instructions                                                29
          (h)  Dealing in Rights                                           29
          (i)  Agents; Reasonable Care                                     29
          (j)  Expenses; Repayment Assurances                              29
          (k)  Exercise of Rights; Consultation with Company               29

Section 21. Change of Rights Agent                                         29

Section 22. Issuance of New Rights Certificates                            30

Section 23. Redemption and Termination                                     30
          (a)  Redemption                                                  30
          (b)  Effect of Redemption; Procedure                             31

Section 24. Exchange                                                       31
          (a)  Right to Exchange                                           31
          (b)  Effect of Exchange; Procedure                               31

<PAGE>
                                       iv


          (c)  Common Stock Equivalents                                    32
          (d)  Insufficient Common Stock                                   32
          (e)  Fractional Shares                                           32

Section 25. Notice of Certain Events                                       32
          (a)  Preferred Stock Transactions, etc.                          32
          (b)  Other Transactions                                          33

Section 26. Notices                                                        33

Section 27. Supplements and Amendments                                     34

Section 28. Successors                                                     34

Section 29. Determinations and Actions by the Board of
            Directors, etc.                                                34

Section 30. Benefits of this Agreement                                     34

Section 31. Severability                                                   35

Section 32. Governing Law                                                  35

Section 33. Counterparts                                                   35

Section 34. Descriptive Headings                                           35

Exhibit A   Certificate of Designation, Preferences and Rights
            of Series A Preferred Stock

Exhibit B   Form of Rights Certificate

Exhibit C   Letter to Stockholders

Exhibit D   Form of Press Release

<PAGE>
                                       1


                               RIGHTS AGREEMEENT


     RIGHTS AGREEMENT,  dated as of October 5, 2000,  between PARALLEL PETROLEUM
CORPORATION,  a Delaware  corporation (the "Company"),  and COMPUTERSHARE  TRUST
COMPANY, INC., a Colorado corporation, as rights agent (the "Rights Agent").

                                    RECITAL

     On October 5, 2000 (the "Rights Dividend  Declaration Date "), the Board of
Directors of the Company authorized and declared a dividend  distribution of one
Right for each share of Common  Stock (as  hereinafter  defined)  of the Company
outstanding  at the close of business on October 16, 2000 (the  "Record  Date"),
and has  authorized  the issuance of one Right (as such number may  hereafter be
adjusted  as  provided  herein)  for each share of Common  Stock of the  Company
issued between the Record Date (whether  originally issued or delivered from the
Company's treasury) and the Distribution Date, each Right initially representing
the right to purchase one  one-thousandth of a share of Series A Preferred Stock
of the Company having the rights,  powers and  preferences set forth in the form
of Certificate of Designation, Preferences and Rights attached hereto as Exhibit
A, upon the terms and  subject  to the  conditions  hereinafter  set forth  (the
"Rights");

                                   AGREEMENT

     In  consideration  of the  premises  and the mutual  agreements  herein set
forth, the parties hereby agree as follows:

     Section  1.  Certain  Definitions.  For  purposes  of this  Agreement,  the
following terms have the meanings indicated:

          (a)  "Acquiring  Person" shall mean any Person who or which,  together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
(as such term is  hereinafter  defined)  of 15% or more of the  shares of Common
Stock  then  outstanding,  but  shall  not  include  (i) the  Company,  (ii) any
Subsidiary of the Company,  (iii) any employee benefit plan of the Company or of
any Subsidiary of the Company,  or any Person or entity organized,  appointed or
established  by the Company  for or  pursuant to the terms of any such plan,  or
(iv) any  Person  who  becomes  an  Acquiring  Person  solely  as a result  of a
reduction  in the  number  of  shares of  Common  Stock  outstanding  due to the
repurchase of shares of Common

<PAGE>
                                       2



Stock by the Company,  unless and until such Person shall  purchase or otherwise
become  (as a result  of  actions  taken by such  Person  or its  Affiliates  or
Associates)  the  Beneficial   Owner  of  additional   shares  of  Common  Stock
constituting  1% or  more  of the  then  outstanding  shares  of  Common  Stock.
Notwithstanding  the  foregoing,  if (i) the Board of  Directors  of the Company
determines  in good  faith  that a Person who would  otherwise  be an  Acquiring
Person, as defined pursuant to the foregoing  provisions of this paragraph,  has
become  such  inadvertently  (including,  without  limitation,  because (A) such
Person was unaware that it beneficially  owned a percentage of Common Stock that
would otherwise cause such Person to be an Acquiring  Person, or (B) such Person
was aware of the extent of its  Beneficial  Ownership of Common Stock but had no
actual  knowledge of the  consequences of such  Beneficial  Ownership under this
Agreement) and without any intention of changing or  influencing  control of the
Company,  and (ii) within ten Business Days of being requested by the Company to
advise it  regarding  the same,  such Person  certifies to the Company that such
Person  acquired  shares of Common  Stock in excess of 14.99%  inadvertently  or
without  knowledge  of the  terms  of the  Rights  and  who,  together  with all
Affiliates and  Associates,  thereafter  does not acquire  additional  shares of
Common Stock and within ten Business  Days of being  requested by the Company to
do so disposes of the  portion of such  Common  Stock in excess of 14.99%,  then
such Person shall not be deemed to be or to have become an Acquiring  Person for
any purposes of this Agreement;  provided, however, that if the Person requested
to so certify fails to do so within ten Business  Days of the Company's  request
or such Person fails to dispose of such Common Stock in excess of 14.99%  within
ten Business  Days of the  Company's  request,  then such Person shall become an
Acquiring Person immediately after such ten Business Day period.

          (b) "Act"  shall mean the  Securities  Act of 1933,  as amended and in
effect from time to time.

          (c)  "Adjustment  Shares"  shall have the meaning set forth in Section
11(a)(ii)  (Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights - Certain Adjustments)

          (d)  "Affiliate" and  "Associate"  shall have the respective  meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations  under
the Exchange Act.

          (e)  "Agreement",  shall  mean this  Rights  Agreement  as  originally
executed or as it may from time to time be supplemented or amended pursuant


<PAGE>
                                       3


to the applicable provisions hereof.

          (f) A Person shall be deemed the  "Beneficial  Owner" of, and shall be
deemed to "beneficially own," any securities:

                    (i) which such Person or any of such Person's  Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is  exercisable  immediately  or only after the passage of time) pursuant to any
agreement,  arrangement or understanding (whether or not in writing) or upon the
exercise of conversion rights,  exchange rights, rights, warrants or options, or
otherwise;  provided,  however  that a Person  shall not,  for  purposes of this
paragraph  (i),  be dee  "Beneficial  Owner"  of or to  "beneficially  own," (A)
securities  tendered  pursuant to a tender or exchange offer made by such Person
or any of such Person's  Affiliates or Associates until such tendered securities
are accepted for purchase or exchange,  or (B) securities issuable upon exercise
of Rights at any time prior to the  occurrence  of a  Triggering  Event,  or (C)
securities  issuable upon exercise of Rights from and after the  occurrence of a
Triggering  Event,  which  Rights  were  acquired  by such Person or any of such
Person's  Affiliates or Associates prior to the Distribution Date or pursuant to
Section 3(a)  (Issuance  of Rights  Certificates  -  Distribution  Date,  Rights
Certificates) or Section 22 (Issuance of New Rights Certificates) (the "Original
Rights") or pursuant to Section 11(i) (Adjustment of Purchase Price,  Number and
Kind of  Shares  or Number of  Rights -  Adjustment  of  Number  of  Rights)  in
connection with an adjustment made with respect to any Original Rights;

                    (ii) which such Person or any of such Person's Affiliates or
Associates,  directly or indirectly,  has the right to vote or dispose of or has
"beneficial  ownership" of (as determined  pursuant to Rule 13d-3 of the General
Rules and  Regulations  under  the  Exchange  Act),  including  pursuant  to any
agreement,  arrangement or understanding,  whether or not in writing;  provided,
however,  that a Person  shall not be deemed the  "Beneficial  Owner,  of, or to
"beneficially  own," any securi under this  subparagraph  (ii) as a result of an
agreement, arrangement or understanding to vote such security if such agreement,
arrangement or understanding:  (A) arises solely from a revocable proxy given in
response to a public  proxy or consent  solicitation  made  pursuant  to, and in
accordance with, the applicable  provisions of the General Rules and Regulations
under the Exchange Act, and (B) is not also then  reportable by such Person on a
Schedule 13D under the Exchange Act (or any comparable or successor report); or

<PAGE>
                                       4



                    (iii)   which  are   "beneficially   owned,"   directly   or
indirectly,  by any other Person (or any  Affiliate or Associate  thereof)  with
which such Person (or any of such  Person's  Affiliates or  Associates)  has any
agreement,  arrangement or  understanding  (whether or not in writing),  for the
purpose of acquiring,  holding,  voting (except pursuant to a revocable proxy as
described  in the  proviso  to  subparagraph  (ii)  of  this  paragraph  (f)) or
disposing of any voting securities of the Company;

provided,  however,  that  nothing in this  paragraph  (f) shall  cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner,
of or to  "beneficially  own," any  securities  acquired  through such  Person's
participation  in  good  faith  in a  firm  commitment  underwriting  until  the
expiration of forty (40) calendar days after the date of such acquisition.

          (g) "Board" means the Board of Directors of the Company.

          (h) "Business Day" shall mean any day other than a Saturday, Sunday or
a day on which banking  institutions  in the State of New York are authorized or
obligated by law or executive order to close.

          (i) "Close of  Business"  on any given date shall mean 5:00 P.M.,  New
York, New York time, on such date; provided, however, that if such date is not a
Business  Day it shall mean 5:00  P.M.,  New York,  New York  time,  on the next
succeeding Business Day.

          (j) "Common  Stock" shall mean the common  stock,  par value $0.01 per
share,  of the Company,  except that "Common  Stock" when used with reference to
any Person  other than the Company  shall mean the capital  stock of such Person
with the  greatest  voting  power,  or the  equity  securities  or other  equity
interest having power to control or direct the management, of such Person.

          (k)  "Common  Stock  Equivalents"  shall have the meaning set forth in
Section 11(a)(iii)  (Adjustment of Purchase Price,  Number and Kind of Shares or
Number of Rights - Certain Adjustments).

          (l)  "Company"  shall mean the Person  named as the  "Company"  in the
first  paragraph  of this  Agreement  until a successor  corporation  shall have
become such, or until a Principal  Party shall assume,  and thereafter be liable
for,  all  obligations  and duties of the  Company  hereunder,  pursuant  to the
applicable  provisions of this  Agreement,  and thereafter  "Company" shall mean
such

<PAGE>
                                       5


successor corporation or Principal Party.

          (m) "Current Market Price" shall have the meaning set forth in Section
11(d)  (Adjustment  of  Purchase  Price;  Number and Kind of Shares or Number of
Rights - Current Market Price).

          (n)  "Current  Value"  shall  have the  meaning  set forth in  Section
11(a)(iii) (Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights - Certain Adjustments).

          (o)  "Distribution  Date"  shall have the meaning set forth in Section
3(a) (Issuance of Rights Certificates - Distribution Date, Rights Certificates).

          (p) "Equivalent  Preferred  Stock" shall have the meaning set forth in
Section  II (b)  (Adjustment  of  Purchase  Price;  Number and Kind of Shares or
Number of - Purchase Price Adjustment - Capital Stock).

          (q) "Exchange Act" shall mean the Securities  Exchange Act of 1934, as
amended and in effect on the date of this Agreement.

          (r)  "Exchange  Number" shall mean one-half of the number of shares of
Common Stock,  one-thousandths of a share of Preferred Stock, or shares or other
units of other  property for which a Right is exercisable  immediately  prior to
the time of the action of the Board to exchange the Rights.

          (s) "Expiration Date" shall have the meaning set forth in Section 7(a)
(Exercise of Rights; Purchase Price; Expiration Date of Rights - Exercise).

          (t)  "Final  Expiration  Date"  shall  mean the Close of  Business  on
October 5, 2010.

          (u)  "Flip-in  Event"  shall  mean  any  event  described  in  Section
11(a)(ii) (A) or (B) (Adjustment of Purchase Price, Number and Kind of Shares or
Number of Rights - Certain Adjustments).

          (v) "Flip-in Trigger Date" shall have the meaning set forth in Section
11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights - Certain Adjustments).

          (w) "Flip-over Event" shall mean any event described in clauses (x),

<PAGE>
                                       6


(y) or (z) of Section 13(a) (Consolidation, Merger or Sale or Transfer of Assets
or Earning Power - Flip-over Event).

          (x)  "Original  Rights"  shall have the  meaning  set forth in Section
l(f)(i) (Certain Definitions).

          (y) "Person" shall mean any individual, firm, corporation, partnership
or other entity.

          (z) "Preferred  Stock" shall mean shares of Series A Preferred  Stock,
par  value  $0.10,  of the  Company,  and,  to the  extent  that  there is not a
sufficient number of shares of Series A Preferred Stock authorized to permit the
full  exercise of the Rights,  any other  series of preferred  stock,  par value
$0.10, of the Company designated for such purpose containing terms substantially
similar to the terms of the Series A Preferred Stock.

          (aa)  "Principal  Party"  shall have the  meaning set forth in Section
13(b)  (Consolidation,  Merger or Sale or Transfer of Assets or Earning  Power -
Principal Party).

          (bb) "Purchase Price" shall have the meaning set forth in Section 4(a)
(Form of Rights Certificates - Form; Date).

          (cc) "Record  Date" shall have the meaning set forth in the Recital at
the beginning of the Agreement.

          (dd)  "Redemption  Date"  shall have the  meaning set forth in Section
23(a) (Redemption and Termination - Redemption).

          (ee)  "Redemption  Price"  shall have the meaning set forth in Section
23(a) (Redemption and Termination - Redemption).

          (ff)  "Rights"  shall have the meaning set forth in the Recital at the
beginning of the Agreement.

          (gg) "Rights  Agent" shall mean the Person named as the "Rights Agent"
in the first  paragraph of this Agreement  until a successor  Rights Agent shall
have become such pursuant to the  applicable  provisions  hereof and  thereafter
"Rights Agent" shall mean such successor  Rights Agent.  If at any time there is
more than one Person appointed by the Company as Rights Agent

<PAGE>
                                       7


pursuant to the applicable  provisions of this  Agreement,  "Rights Agent" shall
mean and include each such Person.

          (hh) "Rights Certificates" shall have the meaning set forth in Section
3(a) (Issuance of Rights Certificates - Distribution Date; Rights Certificates).

          (ii)  "Rights  Dividend  Declaration  Date" shall have the meaning set
forth in the Recital at the beginning of the Agreement.

          (jj) "Spread"  shall have the meaning set forth in Section  11(a)(iii)
(Adjustment of Purchase  Price;  Number and Kind of Shares or Number of Rights -
Certain Adjustments).

          (kk)  "Stock  Acquisition  Date"  shall  mean the first date of public
announcement  (which,  for purposes of this definition,  shall include,  without
limitation,  a report  filed or  amended  pursuant  to Section  13(d)  under the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has
become such.

          (ll)  "Subsidiary"  shall mean,  with  reference  to any  Person,  any
corporation  or other  entity of which a majority of the voting  power of equity
securities or majority of the equity interest is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such Person.

          (mm) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights - Certain Adjustments).

          (nn)  "Trading  Day"  shall  have the  meaning  set  forth in  Section
11(d)(i)  (Adjustment of Purchase Price,  Number and Kind of Shares or Number of
Rights - Current Market Price).

          (oo) "Triggering  Event" shall mean any Flip-in Event or any Flip-over
Event.

     Section 2.  Appointment of Rights Agent.  The Company  hereby  appoints the
Rights  Agent to act as agent for the Company in  accordance  with the terms and
conditions  hereof,  and the Rights Agent hereby accepts such  appointment.  The
Company  may from  time to time  appoint  such  Co-Rights  Agents as it may deem
necessary or desirable.

<PAGE>
                                       8



     Section 3. Issuance of Rights Certificates.

          (a) Distribution Date; Rights  Certificates.  Until the earlier of (i)
the Close of Business on the tenth Business Day after the Stock Acquisition Date
(or, if the tenth  Business Day after the Stock  Acquisition  Date occurs before
the Record Date, the Close of Business on the Record Date), or (ii) the Close of
Business  on the tenth  Business  Day (or such  later  date as the  Board  shall
determine  prior to such time as any Person  becomes an Acquiring  Person) after
the date that a tender or exc offer by any Person  (other than the Company,  any
Subsidiary  of the Company,  any employee  benefit plan of the Company or of any
Subsidiary  of the  Company,  or any Person or entity  organized,  appointed  or
established  by the  Company  for or  pursuant to the terms of any such plan) is
first  published  or sent or given  within the  meaning of Rule  14d-2(a) of the
General  Rules and  Regulations  under the  Exchange  Act, if upon  consummation
thereof such Person would be the  Beneficial  Owner of 15% or more of the shares
of Common  Stock then  outstanding  (the  earlier  of (i) and (ii) being  herein
referred  to as the  "Distribution  Date"),  (x) the  Rights  will be  evidenced
(subject  to  the  provisions  of  paragraph  (b)  of  this  Section  3) by  the
certificates  for the Common Stock registered in the names of the holders of the
Common  Stock  (which  certificates  for Common Stock shall be deemed also to be
certificates  for Rights) and not by separate  certificates,  and (y) the Rights
will be  transferable  only in  connection  with the transfer of the  underlying
shares of Common Stock (including a transfer to the Company,  except pursuant to
the  provision  of  Section  23  (Redemption  and  Termination)).   As  soon  as
practicable  after  the  Distribution  Date,  the  Rights  Agent  will  send  by
first-class,  insured, postage prepaid mail, to each record holder of the Common
Stock as of the Close of Business on the  Distribution  Date,  at the address of
such  holder  shown  on  the  records  of  the  Company,   one  or  more  rights
certificates,  in  substantially  the  form of  Exhibit  B hereto  (the  "Rights
Certificates"),  evidencing  one Right for each  share of Common  Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in the
number of Rights  per share of Common  Stock has been made  pursuant  to Section
11(p)  (Adjustment  of  Purchase  Price,  Number and Kind of Shares or number of
Rights  -Common Stock  Adjustments)  at the time of  distribution  of the Rights
Certificates,  the Company  shall make the necessary  and  appropriate  rounding
adjustments (in accordance with Section 14(a) (Fractional  Rights and Fractional
Shares-Fractional  Rights)) so that Rights Certificates  representing only whole
numbers of Rights  are  distributed  and cash is paid in lieu of any  fractional
Rights.  As of and after the  Distribution  Date,  the Rights will be  evidenced
solely by such Rights Certificates.

<PAGE>
                                       9


          (b) Common  Stock  Certificates,  Summary of Rights.  With  respect to
certificates  for the Common Stock  outstanding as of the Record Date, until the
Distribution  Date, the Rights  associated with the Common Stock  represented by
such  certificates  will  be  evidenced  by  such  certificates  alone  and  the
registered  holders of such Common Stock shall also be the registered holders of
the  associated  Rights.  Until  the  earlier  of the  Distribution  Date or the
Expiration Date, the transfer of any certificates  representing shares of Common
Stock in respect of which  Rights have been  issued  shall also  constitute  the
transfer  of the Rights  associated  with such  shares of Common  Stock.  On the
Record Date, or as soon as practicable thereafter,  the Company will send a copy
of a Summary of Rights to Purchase Preferred Stock, in substantially the form of
Exhibit C hereto (the  "Summary of  Rights"),  by  first-class,  postage-prepaid
mail,  to each  record  holder  of  shares  of  Common  Stock as of the close of
business of the Record Date,  at the address of such holder shown on the records
of the Company.

          (c) Legend.  Rights shall be issued in respect of all certificates for
shares of Common Stock which are issued (whether  originally  issued or from the
Company's  treasury)  after the Record Date but prior to the earliest of the (i)
Distribution  Date, (ii) the Expiration  Date, or (iii) the Redemption Date, or,
in  certain  circumstances  provided  in  Section  22  (Issuance  of New  Rights
Certificates) after the Distribution Date. Certificates representing such shares
of Common Stock shall also be deemed to be  certificates  for Rights,  and shall
bear the following legend:

                    This  certificate  also  evidences  and  entitles the holder
                    hereof  to  certain  Rights  as  set  forth  in  the  Rights
                    Agreement  dated  as of  October  5,  2000,  by and  between
                    Parallel   Petroleum   Corporation   (the   "Company")   and
                    Computershare  Trust  Company,  Inc.,  as Rights  Agent (the
                    "Rights   Agreement"),   the  terms  of  which  are   hereby
                    incorporated  herein by reference  and a copy of which is on
                    file at the principal offices of the Company.  Under certain
                    circumstances,  as set  forth in the  Rights  Agreement,  su
                    Rights will be evidenced by separate  certificates  and will
                    no longer be evidenced by this certificate. The Company will
                    mail to the holder of this  certificate a copy of the Rights
                    Agreement,  as in  effect  on the date of  mailing,  without
                    charge promptly after receipt of a written request therefor.
                    Under  certain   circumstances   set  forth  in  the  Rights
                    Agreement, Rights

 <PAGE>                                         10


                    issued  to, or held by, any Person who is, was or becomes an
                    Acquiring  Person or any Affiliate or Associate  thereof (as
                    such terms are  defined in the  Rights  Agreement),  whether
                    currently  held by or on  behalf  of such  Person  or by any
                    subsequent holder, may become null and void.

With respect to such  certificates  containing the foregoing  legend,  until the
earliest of (i) the  Distribution  Date, (ii) the Expiration Date, and (iii) the
Redemption Date, (x) the Rights  associated with the Common Stock represented by
such  certificates  shall  be  evidenced  by such  certificates  alone,  (y) the
registered  holders of such Common Stock shall also be the registered holders of
the associated  Rights,  and (z) the transfer of any of such certificates  shall
also constitute the transfer ofthe Rights  associated with such shares of Common
Stock. In the event that the Company purchases, or acquires any shares of Common
Stock  after the  Record  Date but prior to the  Distribution  Date,  any rights
associated with such shares of Common Stock shall be deemed canceled and retired
so that the Company shall not be entitled to exercise any Rights associated with
shares of Common Stock which are no longer outstanding.

     Section 4. Form of Rights Certificates.

          (a) Form; Date. The Rights  Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse  thereof)  shall each be
substantially  in the form set forth in Exhibit B hereto and may have such marks
of  identification  or designation  and such legends,  summaries or endorsements
printed thereon as the Company may deem  appropriate and as are not inconsistent
with the provisions of this Agreement,  or as may be required to comply with any
applicable  law or with a rule or regulation  made pursuant  thereto or with any
rule or  regulation  of any stock  exchange on which the Rights may from time to
time be listed or any  securities  association  on whose  interdealer  quotation
system the  Rights  may be from time to time  authorized  for  quotation,  or to
conform  to usage.  Subject to the  provisions  of  Section  11  (Adjustment  of
Purchase  Price,  Number and Kind of Shares or Number of Rights)  and Section 22
(Issuance  of  New  Rights  Certificates),  the  Rights  Certificates,  whenever
distributed,  shall be  dated as of the  Record  Date  and on their  face  shall
entitle the holders thereof to purchase such number of one  one-thousandths of a
share of  Preferred  Stock as shall be set forth  therein at the price set forth
therein (such  exercise price per one  one-thousandth  of a share is referred to
herein  as the  "Purchase  Price"),  but  the  amount  and  type  of  securities
purchasable upon the exercise of each Right and the Purchase Price thereof shall
be subject to

<PAGE>
                                       11


adjustment as provided herein.

          (b) Acquiring Person Legend. Any Rights Certificate issued pursuant to
Section 3(a)  (Issuance  of Rights  Certificates  -  Distribution  Date:  Rights
Certificates)  or  Section  22  (Issuance  of  New  Rights   Certificates)  that
represents Rights beneficially owned by (i) an Acquiring Person or any Associate
or Affiliate of an Acquiring  Person,  (ii) a transferee of an Acquiring  Person
(or of any such  Associate  or  Affiliate)  who becomes a  transferee  after the
Acquiring Person becomes such, or (iii) transferee of an Acquiring Person (or of
any  such  Associate  or  Affiliate)  who  becomes  a  transferee  prior  to  or
concurrently  with the Acquiring  Person  becoming such and receives such Rights
pursuant to either (A) a transfer  (whether or not for  consideration)  from the
Acquiring  Person to holders of equity  interests in such Acquiring Person or to
any  Person  with whom  such  Acquiring  Person  has any  continuing  agreement,
arrangement or understanding  regarding the transferred Rights or (B) a transfer
which is part of a plan,  arrangement  or  understanding  which has as a primary
purpose or effect avoidance of Section 7(e) (Exercise of Rights, Purchase Price,
Expiration  Date of Rights - Termination of Acquiring  Person's  Rights) and any
Rights Certificate issued pursuant to Section 6 (Transfer, Split Up, Combination
and Exchange of Rights Certificates: Mutilated, Destroyed, Lost or Stolen Rights
Certificates),  Section 11  (Adjustment  of Purchase  Price;  Number and Kind of
Shares or Number of Rights) or Section 22 (Issuance of New Rights  Certificates)
upon  transfer,  exchange,   replacement  or  adjustment  of  any  other  Rights
Certificate referred to in this sentence, shall contain (to the extent feasible)
the following legend:

     The Rights  represented by this Rights Certificate are or were beneficially
     owned by a Person who was or became an Acquiring  Person or an Affiliate or
     Associate of an  Acquiring  Person (as such terms are defined in the Rights
     Agreement  dated as of October 5, 2000, by and between  Parallel  Petroleum
     Corporation  and  Computershare  Trust  Company,  Inc.,  as Rights  Agent).
     Accordingly,  this Rights Certificate and the Rights represented hereby may
     become  null  and  void in the  circumstances  specified  in  Section  7(e)
     (Exercise  of  Rights:   Purchase  Price:   Expiration  Date  of  Rights  -
     Termination of Acquiring Person's Rights) of such Agreement.

     Section 5. Countersignature and Registration.


<PAGE>
                                       12


          (a) Signatures. The Rights Certificates shall be executed on behalf of
the Company by its Chairman of the Board,  its President or any Vice  President,
either  manually or by facsimile  signature,  and shall have affixed thereto the
Company's  seal  or a  facsimile  thereof  which  shall  be  attested  to by the
Secretary  or an  Assistant  Secretary  of the  Company,  either  manually or by
facsimile signature. The Rights Certificates shall be countersiped by the Rights
Agent,  either  manually or by facsi  signature,  and shall not be valid for any
purpose  unless so  countersigned.  In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights  Agent and issued and  delivered  by the Company  with the same force and
effect as though the person who signed such Rights  Certificates  had not ceased
to be such officer of the Company;  and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the  execution of
such Rights  Certificate,  shall be a proper officer of the Company to sign such
Rights  Certificate,  although  at the  date of the  execution  of  this  Rights
Agreement any such person was not such an officer.

          (b)  Registration and Transfer.  Following the Distribution  Date, the
Rights Agent will keep or cause to be kept, at its  principal  office or offices
designated as the appropriate  place for surrender of Rights  Certificates  upon
exercise  or  transfer,  books  for  registration  and  transfer  of the  Rights
Certificates issued hereunder.  Such books shall show the names and addresses of
the  respective  holders  of the  Rights  Certificates,  the  number  of  Rights
evidenced  on its face by each of the Rig  Certificates  and the date of each of
the Rights Certificates.

     Section  6.  Transfer,   Split  Up,  Combination  and  Exchange  of  Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.

          (a)  Procedure.  Subject to the  provisions  of Section  4(b) (Form of
Rights  Certificates  - Acquiring  Persons  Legend),  Section 7(e)  (Exercise of
Rights,  Purchase  Price,  Expiration  Date of Rights  Termination  of Acquiring
Person's Rights) and Section 14 (Fractional  Rights and Fractional  Shares),  at
any time after the Close of Business on the  Distribution  Date, and at or prior
to the Close of Business  on the  Expiration  Date,  any Rights  Certificate  or
Certificates  may be  transferred,  split up,  combined or exchanged for another
Rights Certificate or Certificates,  entitling the registered holder to purchase
a like  number  of one  one-thousandths  of a  share  of  Preferred  Stock  (or,
following a Triggering Event,

<PAGE>
                                       13


Common Stock, other securities, cash or other assets, as the case may be) as the
Rights  Certificate or  Certificates  surrendered  then entitled such holder (or
former  holder in the case of a transfer) to  purchase.  Any  registered  holder
desiring to transfer,  split up,  combine or exchange any Rights  Certificate or
Certificates  shall make such request in writing  delivered to the Rights Agent,
and shall  surrender the Rights  Certificate or  Certificates to be transferred,
split up, combined or exchanged at the principal office or offices of the Rights
Agent  designated  for such  purpose.  Neither the Rights  Agent nor the Company
shall be obligated to take any action whatsoever with respect to the transfer of
any such surrendered  Rights  Certificate until the registered holder shall have
completed and signed the certificate  contained in the form of assignment on the
reverse side of such Rights  Certificate and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates  or  Associates  thereof as the  Company  shall  reasonably  request.
Thereupon,  the Rights Agent shall,  subject to Section  4(b),  Section 7(e) and
Section  14,  countersign  and deliver to the Person  entitled  thereto a Rights
Certificate  or Rights  Certificates,  as the case may be, as so requested.  The
Company may require payment of a sum sufficient to cover any tax or governmental
charge  that  may  be  imposed  in  connection  with  any  transfer,  split  up,
combination or exchange of Rights Certificates.

          (b) Issuance of New Rights  Certificates.  Upon receipt by the Company
and the Rights Agent of evidence  reasonably  satisfactory  to them of the loss,
theft, destruction or mutilation of a Rights Certificate,  and, in case of loss,
theft or destruction,  of indemnity or security reasonably satisfactory to them,
and reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental  thereto,  and upon surrender to the Rights Agent and cancellation of
the Rights  Certificate  mutilated,  the Company  will execute and deliver a new
Rights  Certificate of like tenor to the Rights Agent for  countersignature  and
delivery  to the  registered  owner in lieu of the Rights  Certificate  so lost,
stolen, destroyed or mutilated.

     Section 7. Exercise of Rights, Purchase Price, Expiration Date of Rights.

          (a) Exercise.  Subject to Section 7(e)  (Exercise of Rights:  Purchase
Price:  Expiration Date of Rights - Termination of Acquiring  Person's  Rights),
the  registered  holder  of any  Rights  Certificate  may  exercise  the  Rights
evidenced  thereby  (except as otherwise  provided  herein,  including,  without
limitation,  the  restrictions  on  exercisability  set  forth in  Section  9(c)
(Reservation  and  Availability of Capital Stock - Registration  under the Act),
Section 11(a)(iii)  (Adjustment of Purchase Price;  Number and Kind of Shares or
Number of Rights - Certain

<PAGE>
                                       14


Adjustments), Section 23(a) (Redemption and Termination Redemption), and Section
24(b)  (Exchange - Effect of  Exchange:  Procedure))  in whole or in part at any
time after the Distribution Date upon surrender of the Rights Certificate,  with
the form of election to purchase and the certificate on the reverse side thereof
duly  executed,  to the Rights Agent at the  principal  office or offices of the
Rights Agent designated for such purpose, together with payment of the aggregate
Purchase  Price with  respect to the total  number of one  one-thousandths  of a
share of Preferred Stock (or other securities, cash or other assets, as the case
may be) as to which such  surrendered  Rights are then exercisable and an amount
equal to any  applicable  transfer  tax, at or prior to the  earliest of (i) the
Final  Expiration Date, (ii) the Redemption Date, or (iii) the expiration of the
Rights pursuant to Section 13(d)  (Consolidation,  Merger or Sale or Transfer of
Assets or Earning Power - Exceptions) (the earliest of (i), (ii) and (iii) being
herein referred to as the "Expiration  Date"). The payment of the Purchase Price
and the applicable  transfer tax, if any (as such amount may be reduced pursuant
to Section 11(a)(iii)  (Adjustment of Purchase Price;  Number and Kind of Shares
or Number of Rights -  Certain  Adjustments)),  may be made (x) in cash,  (y) by
certified  check,  cashier's  check or money  order  payable to the order of the
Company,  or (z) by delivery of a certificate or certificates  (with appropriate
stock powers executed in blank attached  thereto)  evidencing a number of shares
of Common Stock equal to the then  Purchase  Price  divided by the closing price
(as determined  pursuant to Section 11(d) (Adjustment of Purchase Price,  Number
and Kind of Shares or Number  of Rights - Current  Market  Price))  per share of
Common Stock on the Trading Day immediately preceding the date of such exercise.
In the event that the Company is obligated to issue other securities  (including
Common Stock) of the Company, pay cash and/or distribute other property pursuant
to Section 11(a) the Company will make all  arrangements  necessary so that such
other  securities,  cash and/or other property are available for distribution by
the Rights Agent,  if and when  appropriate.  The Company  reserves the right to
require prior to the occurrence of a Triggering  Event that upon any exercise of
Rights,  a number of Rights be  exercised so that only whole shares of Preferred
Stock would be issued.

          (b) Purchase Price. The Purchase Price for each one  one-thousandth of
a share of Preferred  Stock pursuant to the exercise of a Right shall  initially
be $26.00,  and shall be subject to adjustment  from time to time as provided in
Section 11 (Adjustment of Purchase Price; Number and Kind of Shares or Number of
Rights) and Section 13(a)  (Consolidation,  Merger or Sale or Transfer of Assets
or Earning  Power -  Flip-over  Event) and shall be payable in  accordance  with
paragraph (a) of this Sect 7.

<PAGE>
                                       15


          (c)  Rights  Agent  Actions.  Upon  receipt  of a  Rights  Certificate
representing  exercisable Rights and the compliance by the holder of such Rights
Certificate  with  paragraph  (a) of this  Section  7, the Rights  Agent  shall,
subject  to  Section  20(k)  (Duties  of  Rights  Agent -  Exercise  of  Rights,
Consultation  with Company),  thereupon  promptly (i) (A)  requisition  from any
transfer  agent of the  shares of  Preferred  Stock (or make  available,  if the
Rights Agent is the transfer agent for such shares)  certificates  for the total
number of one  one-thousandths of a share of Preferred Stock to be purchased and
the Company hereby irrevocably  authorizes its transfer agent to comply with all
such  requests,  or (B) if the Company  shall have  elected to deposit the total
number of  shares of  Preferred  Stock  issuable  upon  exercise  of the  Rights
hereunder  with a  depositary  agent,  requisition  from  the  depositary  agent
depositary  receipts  representing such number of one one-thousandths of a share
of Preferred  Stock as are to be purchased (in which case  certificates  for the
shares of Preferred Stock represented by such receipts shall be deposited by the
transfer  agent with the  depositary  agent)  and the  Company  will  direct the
depositary agent to comply with such request,  (ii) requisition from the Company
the  amount  of  cash,  if any,  to be paid in  lieu  of  fractional  shares  in
accordance  with Section 14  (Fractional  Rights and Fractional  Shares),  (iii)
after receipt thereof,  deliver such  certificates or depositary  receipts to or
upon the order of the registered holder of such Rights  Certificate,  registered
in such  name or names  as may be  designated  by such  holder,  and (iv)  after
receipt  thereof,  deliver  such  cash,  if any,  to or upon  the  order  of the
registered holder of such Rights Certificate.

          (d)  Partial  Exercise.  In case the  registered  holder of any Rights
Certificate  shall exercise less than all the Rights  evidenced  thereby,  a new
Rights  Certificate   evidencing  Rights  equivalent  to  the  Rights  remaining
unexercised  shall be issued by the Rights Agent and  delivered  to, or upon the
order of the registered  holder of such Rights  Certificate,  registered in such
name or names as may be designated by such holder,  subject to the provisions of
Section 14 (Fractional Rights and Fract Shares).

          (e) Termination of Acquiring Person's Rights. Notwithstanding anything
in this  Agreement to the  contrary,  from and after the first  occurrence  of a
Flip-in Event, any Rights  beneficially  owned by (i) an Acquiring Person, or an
Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring
Person (or of any such  Associate or Affiliate)  who becomes a transferee  after
such Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person
(or of any  such  Associat  Affiliate)  who  becomes  a  transferee  prior to or
concurrently  with the Acquiring  Person  becoming such and receives such Rights
pursuant to

<PAGE>
                                       16


either (A) a transfer  (whether  or not for  consideration)  from the  Acquiring
Person to holders of equity  interests in such Acquiring Person or to any Person
with whom the Acquiring  Person has any  continuing  agreement,  arrangement  or
understanding  regarding the transferred  Rights or (B) a transfer which is part
of a plan, arrangement or understanding which has as a primary purpose or effect
the  avoidance  of this  Section  7(e),  shall  become null and void without any
further  action and no holder of such  Rights  shall have any rights  whatsoever
with respect to such Rights,  whether under any  provision of this  Agreement or
otherwise.  The  Company  shall use all  reasonable  efforts to ensure  that the
provisions of this Section 7(e) and Section 4(b) (Form of Rights  Certificates -
Acquiring  Person  Legend) are complied with, but shall have no liability to any
holder of Rights Certificates or other Person as a result of its failure to make
any determinations  with respect to an Acquiring Person or any of its respective
Affiliates, Associates or transferees hereunder.

          (f) Surrender of Rights  Certificates;  Identity of Beneficial  Owner.
Notwithstanding  anything in this Agreement to the contrary,  neither the Rights
Agent nor the Company shall be obligated to undertake any action with respect to
a registered  holder upon the occurrence of any purported  exercise as set forth
in this Section 7 unless such  registered  holder shall have (i)  completed  and
signed the  certificate  contained in the form of election to purchase set forth
on the reverse side of the Rights Certificate surrendered for such exercise, and
(ii) provided such additional  evidence of the identity of the Beneficial  Owner
(or former Beneficial Owner) or Affiliates or Associates  thereof as the Company
shall reasonably request.

     Section 8. Cancellation and Destruction of Rights Certificates.  All Rights
Certificates  surrendered  for the  purpose  of  exercise,  transfer,  split up,
combination  or  exchange  shall,  if  surrendered  to the Company or any of its
agents,  be delivered to the Rights Agent for  cancellation or in canceled form,
or, if surrendered  to the Rights Agent,  shall be canceled by it, and no Rights
Certificates  shall be issued in lieu thereof  except as expressly  permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement,  and the Rights Agent shall so cancel and
retire,  any other  Rights  Certificate  purchased  or  acquired  by the Company
otherwise  than upon the exercise  thereof.  The Rights Agent shall  deliver all
canceled Rights Certificates to the Company, or shall, at the written request of
the Company,  destroy such canceled Rights Certificates,  and in such case shall
deliver a certificate of destruction thereof to the Company.

<PAGE>
                                       17


     Section 9. Reservation and Availability of Capital Stock.

          (a)  Reservation  of  Capital  Stock.  The  Company  will use its best
efforts to reserve and keep available out of its authorized and unissued  shares
of Preferred Stock (and,  following the occurrence of a Triggering Event, out of
its  authorized and unissued  shares of Common Stock and/or other  securities or
out of its  authorized  and issued shares of Common Stock held in its treasury),
the number of shares of Preferred  Stock (and,  following  the  occurrence  of a
Triggering  Event,  Common Stock an other  securities) that, as provided in this
Agreement,  including  the  rights  of  the  Company  under  Section  11(a)(iii)
(Adjustment of Purchase  Price;  Number and Kind of Shares or Number of Rights -
Certain Adjustments) to otherwise fulfill its obligations, will be sufficient to
permit the exercise in full of all outstanding Rights.

          (b) Listing. So long as the shares of Preferred Stock (and,  following
the  occurrence  of a Triggering  Event,  Common Stock and/or other  securities)
issuable  and  deliverable  upon the exercise of the Rights may be listed on any
national  securities  exchange or authorized  for  quotation on any  interdealer
quotation system of any securities  association,  the Company shall use its best
efforts to cause, from and after such time as the Rights become exercisable, all
shares  reserved for such issua to be listed on such  exchange or quoted on such
system upon official notice of issuance upon such exercise.

          (c) Registration  under the Act. The Company will use its best efforts
to (i) file, as soon as practicable  following the earliest date after the first
occurrence of a Flip-in Event on which the  consideration to be delivered by the
Company  upon  exercise of the Rights has been  determined  in  accordance  with
Section 11(a)(iii)  (Adjustment of Purchase Price,  Number and Kind of Shares or
Number  of  Rights  Certain  Adjustments),  or as  soon  as is  required  by law
following the Distribution  Date, a case may be, a registration  statement on an
appropriate  form under the Act with respect to the securities  purchasable upon
exercise  of the  Rights,  (ii)  cause  such  registration  statement  to become
effective  as soon as  practicable  after  such  filing,  and (iii)  cause  such
registration  statement  to remain  effective  (with a  prospectus  at all times
meeting  the  requirements  of the Act) until the  earlier of (A) the date as of
which the  Rights are no longer  exercisable  for such  securities,  and (B) the
Expiration  Date.  The Company will also take such action as may be  appropriate
under,  or to ensure  compliance  with, the securities or "blue sky" laws of the
various states in connection with the  exercisability of the Rights. The Company
may temporarily suspend, for a period of time not to exceed ninety (90) calendar
days after the date set forth in clause


<PAGE>
                                       18


(i) of the first sentence of this Section 9(c), the exercisability of the Rights
in order to prepare and file such registration statement and permit it to become
effective.  Upon  any  such  suspension,   the  Company  shall  issue  a  public
announcement  stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer  in  effect.  In  addition,   if  the  Company  shall  determine  that  a
registration  statement is required following the Distribution Date, the Company
may temporarily  suspend the  exercisability  of the Rights until such time as a
registration   statement  has  been  declared  effective.   Notwithstanding  any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the requisite  qualification in such  jurisdiction  shall
not have been  obtained,  the  exercise  thereof  shall not be  permitted  under
applicable  law  or a  registration  statement  shall  not  have  been  declared
effective.

          (d) Covenant  Regarding  Capital Stock. The Company will take all such
action as may be necessary to ensure that all one  one-thousandths of a share of
Preferred  Stock (and,  following the occurrence of a Triggering  Event,  Common
Stock and/or other  securities)  delivered upon exercise of Rights shall, at the
time of delivery of the  certificates for such shares (subject to payment of the
Purchase  Price),  be duly and validly  authorized and issued and fully paid and
nonassessable.

          (e)  Transfer  Taxes and  Charges.  The Company  will pay when due and
payable any and all federal and state  transfer  taxes and charges  which may be
payable in respect of the issuance or delivery of the Rights Certificates and of
any  certificates  for a number of one  one-thousandths  of a share of Preferred
Stock (or Common  Stock and/or  other  securities,  as the case may be) upon the
exercise  of Rights.  The  Company  shall not,  however,  be required to pay any
transfer  tax which may be  payable i respect of any  transfer  or  delivery  of
Rights  Certificates  to a Person  other than,  or the issuance or delivery of a
number of one  one-thousandths  of a share of  Preferred  Stock (or Common Stock
and/or  other  securities,  as the case may be) in respect of a name other than,
that of the  registered  holder of the  Rights  Certificates  evidencing  Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one  one-thousandths of a share of Preferred Stock (or Common Stock and/or other
securities,  as the case may be) in a name  other  than  that of the  registered
holder upon the  exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights  Certificate  at the time of
surrender) or until it has been established to the Company's  satisfaction  that
no such tax is due.

<PAGE>
                                       19


     Section 10.  Preferred  Stock  Record  Date.  Each Person in whose name any
certificate  for a number of one  one-thousandths  of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such  fractional  shares of  Preferred  Stock (or Common  Stock and/or
other  securities,  as the  case  may  be)  represented  thereby  on,  and  such
certificate  shall be dated as of, the date upon  which the  Rights  Certificate
evidencing  such Rights was duly  surrendered  and payment of the Purchase Price
(and all applicable  transfer taxes) was made;  provided,  however,  that if the
date of such surrender and payment is a date upon which the Preferred  Stock (or
Common Stock and/or other securities,  as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such shares  (fractional  or  otherwise)  on, and such  certificate  shall be
dated, the next succeeding  Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights  Certificate  shall not be entitled to any rights of a stockholder of the
Company  with  respect  to shares  for which the  Rights  shall be  exercisable,
including,  without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.

     Section  11.  Adjustment  of Purchase  Price,  Number and Kind of Shares or
Number of Rights.  The Purchase Price,  the number and kind of shares covered by
each Right and the number of Rights  outstanding  are subject to adjustment from
time to time as provided in this Section 11.

          (a) Certain Adjustments.

               (i) In the event the Company  shall at any time after the date of
this  Agreement (A) declare a dividend on the Preferred  Stock payable in shares
of Preferred Stock, (B) subdivide or split the outstanding  Preferred Stock, (C)
combine the outstanding  Preferred Stock into a smaller number of shares, or (D)
issue any shares of its capital  stock in a  reclassification  of the  Preferred
Stock (including any such reclassification in connection with a consolidation or
merger in whi Company is the  continuing  or surviving  corporation),  except as
otherwise  provided in this Section 11(a) and Section 7(e)  (Exercise of Rights;
Purchase Price:  Expiration  Date of Rights - Termination of Acquiring  Person's
Rights),  the  Purchase  Price in effect at the time of the record date for such
dividend or

<PAGE>
                                       20


of  the   effective   date   of  such   subdivision,   split,   combination   or
reclassification,  and the  number  and kind of  shares  of  Preferred  Stock or
capital  stock,  as  the  case  may  be,   issuable  on  such  date,   shall  be
proportionately  adjusted so that the holder of any Right  exercised  after such
time shall be  entitled  to  receive,  upon  payment of the  aggregate  adjusted
Purchase  Price  then in  effect  necessary  to  exercise  a Right in full,  the
aggregate  number and kind of shares of Preferred Stock or capital stock, as the
case may be, which, if such Right had been exercised  immediately  prior to such
date and at a time when the Preferred Stock (or other capital stock, as the case
may be) transfer  books of the Company  were open,  such holder would have owned
upon such  exercise  and been  entitled  to receive by virtue of such  dividend,
subdivision,  split,  combination or reclassification.  If an event occurs which
would  require  an  adjustment  under both this  Section  11(a)(i)  and  Section
11(a)(ii)  the  adjustment  provided  for in this Section  11(a)(i)  shall be in
addition  to, and shall be made prior to, any  adjustment  required  pursuant to
Section 11(a)(ii).

              (ii) In the event:

                     (A) (1) any Acquiring  Person or any Associate or Affiliate
              of any  Acquiring  Person,  at any  time  after  the  date of this
              Agreement, directly or indirectly, shall merge into the Company or
              otherwise  combine  with the Company and the Company  shall be the
              continuing or surviving  corporation of such merger or combination
              and the Common Stock of the Company shall remain  outstanding  and
              unchanged,   or  (2)  subject  to  Section  23   (Redemption   and
              Termination), any Person (othe than the Company, any Subsidiary of
              the Company,  any  employee  benefit plan of the Company or of any
              Subsidiary  of the  Company,  or any  Person or entity  organized,
              appointed  or  established  by the  Company for or pursuant to the
              terms of any such plan), alone or together with its Affiliates and
              Associates,   shall,   at  any  time  after  the  Rights  Dividend
              Declaration  Date,  become an Acquiring  Person,  unless the event
              causing such Person to become an  Acquiring  Person is a Flip-over
              Event,  or is an acquisition of shares of Common Stock pursuant to
              a tender offer or an exchange offer for all outstanding  shares of
              Common  Stock at a price and on terms  determined  by the Board of
              Directors,  prior to the public  announcement of such tender offer
              or  exchange  offer,  after  receiving  advice  from  one or  more
              investment banking firms selected by the Board of Directors, to be
              (a) at a price which is fair to the


<PAGE>
                                       21


              stockholders of the Company (taking into account all factors which
              the  Board  of  Directors   deem   relevant   including,   without
              limitation,  prices  which  could  reasonably  be  achieved if the
              Company or its assets  were sold on an orderly  basis  designed to
              realize  maximum value) and (b) otherwise in the best interests of
              the  Company  and its  stockholders,  other  than  such  Acquiring
              Person, its Affiliates and its Associates; or

                     (B) during such time as there is an Acquiring Person, there
              shall be any reclassification of securities (including any reverse
              stock split), or recapitalization of the Company, or any merger or
              consolidation  of the Company with any of its  Subsidiaries or any
              other transaction or series of transactions  involving the Company
              or  any  of  its   Subsidiaries,   other  than  a  transaction  or
              transactions   to  which   the   provisions   of   Section   13(a)
              (Consolidation,  Merger or Sale o  Transfer  of Assets or  Earning
              Power  Flip-over  Event)  apply  (whether  or not  with or into or
              otherwise  involving  an Acquiring  Person)  which has the effect,
              directly  or  indirectly,  of  increasing  by  more  than  1%  the
              proportionate  share of the  outstanding  shares  of any  class of
              equity securities of the Company or any of its subsidiaries  which
              is  directly or  indirectly  beneficially  owned by any  Acquiring
              Person or any Associate or Affiliate of any Acquiring Person,

then,  promptly  following the  occurrence  of any such Flip-in  Event  (whether
described in Section  11(a)(ii)(A)  or (B)),  proper  provision shall be made so
that each  holder of a Right  (except  as  provided  below and in  Section  7(e)
(Exercise of Rights,  Purchase Price: Expiration Date of Rights - Termination of
Acquiring  Person's  Rights)) shall  thereafter have the right to receive,  upon
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement,  in lieu of the number of one  one-thousandths  of a share of
Preferred  Stock,  such number of shares of Common Stock of the Company as shall
equal the result obtained by (x) multiplying the then current  Purchase Price by
the then number of one one-thousandths of a share of Preferred Stock for which a
Right was  exercisable  immediately  prior to the first  occurrence of a Flip-in
Event,  and (y) dividing that product (which,  following such first  occurrence,
shall  thereafter be referred to as the "Purchase  Price" for each Right and for
all purposes of this  Agreement) by 50% of the Current Market Price per share of
Common Stock on the date of such first  occurrence  (such number of shares being
referred to as the "Adjustment Shares").


<PAGE>
                                       22



               (iii) In the event that the number of shares of Common Stock that
are authorized by the Company's Certificate of Incorporation but not outstanding
or reserved for issuance for purposes  other than upon exercise of the Rights is
not  sufficient to permit the exercise in full of the Rights in accordance  with
the foregoing  subparagraph  (ii) of this Section 11 (a), the Company shall: (A)
determine the excess of (1) the value of the Adjustment Shares issuable upon the
exercise  of Right (the  "Current  Value")  over (2) the  Purchase  Price  (such
excess,  the "Spread"),  and (B) with respect to each Right,  subject to Section
7(e)  (Exercise  of  Rights;   Purchase  Price;  Expiration  Date  of  Rights  -
Termination of Acquiring Person's Rights), make adequate provision to substitute
for the Adjustment  Shares,  upon payment of the applicable  Purchase Price, (1)
cash,  (2) a reduction in the Purchase  Price,  (3) Common Stock or other equity
securities of the Company (including,  without  limitation,  shares, or units of
shares,  of preferred  stock which the Board has deemed to have  essentially the
same  value or  economic  rights  as  shares of  Common  Stock  (such  shares of
preferred  stock being  referred to as "Common  Stock  Equivalents")),  (4) debt
securities  of the Company,  (5) other  assets,  or (6) any  combination  of the
foregoing, having an aggregate value equal to the Current Value (less the amount
of any reduction in the Purchase  Price),  where such  aggregate  value has been
determined  by the  Board  based  upon the  advice  of a  nationally  recognized
investment banking firm selected by the Board;  provided,  however,  that if the
Company  shall not have made  adequate  provision to deliver  value  pursuant to
clause (B) above within thirty (30) calendar days following the first occurrence
of a Flip-in Event (the date of such Flip-in  Event being  referred to herein as
the "Flip-in  Trigger  Date"),  then the Company  shall be obligated to deliver,
upon the surrender for exercise of a Right and without  requiring payment of the
Purchase  Price,  shares of Common Stock (to the extent  available) and then, if
necessary,  cash,  which shares and/or cash have an aggregate value equal to the
Spread.  If the Board  shall  determine  in good  faith  that it is likely  that
sufficient additional shares of Common Stock or other equity securities could be
authorized  for issuance  upon  exercise in full of the Rights,  the thirty (30)
calendar day period set forth above may be extended to the extent necessary, but
not more than ninety (90) calendar days after the Flip-in Trigger Date, in order
that the Company may seek  stockholder  approval for the  authorization  of such
additional shares (such period, the "Substitution  Period").  To the extent that
the Company  determines  that some  action  need be taken  pursuant to the first
and/or  second  sentences  of this  Section  11(a)(iii),  the  Company (x) shall
provide,  subject to Section 7(e), that such action shall apply uniformly to all
outstanding  Rights,  and (y) may suspend the exercisability of the Rights until
the expiration of the Substitution  Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of


<PAGE>
                                       23



distribution  to be made  pursuant to such first  sentence and to determine  the
value thereof.  In the event of any such  suspension,  the Company shall issue a
public  announcement  stating  that the  exercisability  of the  Rights has been
temporarily  suspended,  as well as a public  announcement  at such  time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii),  the
value of the Common  Stock  shall be the Current  Market  Price per share of the
Common  Stock on the  Flip-in  Trigger  Date and the value of any  Common  Stock
Equivalent  shall be deemed to have the same value as the  Common  Stock on such
date.

               (iv) If the rules of the national securities exchange, registered
as such pursuant to Section 6 of the Exchange Act, or of the national securities
association,  registered as such pursuant to Section 15A of the Exchange Act, on
which the Common  Stock is  principally  traded or quoted  would  prohibit  such
exchange or association  from listing or continuing to list, or from authorizing
for or continuing quotation and/or transaction  reporting through an interdealer
quotation syst the Common Stock or other equity securities of the Company if the
Rights  were to be  exercised  for  shares of Common  Stock in  accordance  with
subparagraph  (ii) of this Section 11(a) because such  issuance  would  nullify,
restrict or disparately  reduce the per share voting rights of holders of Common
Stock, the Company shall: (A) determine the Spread, and (B) with respect to each
Right,  make adequate  provision to substitute for the Adjustment  Shares,  upon
payment of the  applicable  Purchase  Price,  (1) cash,  (2) a reduction  in the
Purchase  Price,  (3)  equity  securities  of the  Company,  including,  without
limitation, Common Stock Equivalents, other than securities which would have the
effect of nullifying,  restricting or disparately  reducing the per share voting
rights of holders of Common Stock, (4) debt securities of the Company, (5) other
assets, or (6) any combination of the foregoing, having an aggregate value equal
to the Current  Value,  where such  aggregate  value has been  determined by the
Board based upon the advice of a recognized  investment banking firm selected by
the  Board;  provided,  however,  if the  Company  shall not have made  adequate
provision  to deliver  value  pursuant  to clause (B) above  within  thirty (30)
calendar  days  following the Flip-in  Trigger  Date,  then the Company shall be
obligated  to deliver,  upon the  surrender  for exercise of a Right and without
requiring payment of the Purchase Price, cash having an aggregate value equal to
the Spread.  To the extent that the Company  determines that some action need be
taken pursuant to the first sentence of this Section 11(a)(iv),  the Company (x)
shall  provide,  subject to Section 7(e)  (Exercise of Rights,  Purchase  Price;
Expiration Date of Rights - Termination of Acquiring Person's Rights), that such
action shall apply uniformly to all  outstanding  Rights and (y) may suspend the
exercisability  of the Rights,  but not longer than  ninety (90)  calendar  days
after the Flip-in Trigger Date, in order

<PAGE>
                                       24



to decide the appropriate form of distribution to be made pursuant to such first
sentence  and to  determine  the  value  thereof.  In  the  event  of  any  such
suspension,  the Company  shall  issue a public  announcement  stating  that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For purposes
of this  Section  11(a)(iv),  the value of the Common Stock shall be the Current
Market Price per share of the Common  Stock on the Flip-in  Trigger Date and the
value of any Common Stock  Equivalent  shall be deemed to have the same value as
the Common Stock on such date.

                    (b) Purchase Price  Adjustment - Capital Stock.  In case the
Company shall fix a record date for the issuance of rights,  options or warrants
to all holders of Preferred  Stock  entitling  them to subscribe for or purchase
(for a period  expiring  within  forty-five (45) calendar days after such record
date)  Preferred  Stock  (or  shares  having  the same  rights,  privileges  and
preferences as the shares of Preferred Stock ("Equivalent  PreferredStock"))  or
securities  convertible  into Preferred  Stock  Equivalent  Preferred Stock at a
price per share of Preferred  Stock or per share of Equivalent  Preferred  Stock
(or  having a  conversion  price  per  share,  if a  security  convertible  into
Preferred  Stock or  Equivalent  Preferred  Stock) less than the Current  Market
Price per share of Preferred Stock on such record date, the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price  in  effect  immediately  prior to such  record  date by a  fraction,  the
numerator of which shall be the number of shares of Preferred Stock  outstanding
on such  record  date,  plus the number of shares of  Preferred  Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
Equivalent  Preferred  Stock so to be  offered  (and/or  the  aggregate  initial
conversion price of the convertible  securities so to be offered) would purchase
at such Current Market Price,  and the  denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional  shares of Preferred  Stock and/or  Equivalent  Preferred Stock to be
offered for  subscription or purchase (or into which the convertible  securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration  shall be as determined in good faith
by the Board, whose  determination  shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights.  Shares  of  Preferred  Stock  owned by or held for the  account  of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
and in the event that such rights or warrants  are not so issued,  the  Purchase
Price

<PAGE>
                                       25


shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.

          (c) Purchase Price Adjustment - Cash, Assets, etc. In case the Company
     shall fix a record  date for a  distribution  to all  holders of  Preferred
     Stock  (including  any  such   distribution   made  in  connection  with  a
     consolidation or merger in which the Company is the continuing corporation)
     of evidences of  indebtedness,  cash (other than a regular  quarterly  cash
     dividend out of the earnings or retained  earnings of the Company),  assets
     (other  than a dividend  payable in  Preferred  Stock,  but  including  any
     dividend  payable in stock  other  than  Preferred  Stock) or  subscription
     rights  or  warrants   (excluding   those  referred  to  in  Section  11(b)
     (Adjustment  of  Purchase  Price,  Number  and Kind of  Shares or Number of
     Rights Purchase Price Adjustment - Capital  Stock)),  the Purchase Price to
     be in effect after such record date shall be determined by multiplying  the
     Purchase  Price  in  effect  immediately  prior  to such  record  date by a
     fraction,  the  numerator  of which shall be the Current  Market  Price per
     share of Preferred  Stock on such record  date,  less the fair market value
     (as  determined in good faith by the Board,  whose  determination  shall be
     described in a statement filed with the Rights Agent) of the portion of the
     cash,  assets or evidences of  indebtedness so to be distributed or of such
     subscription  rights or warrants  applicable to a share of Preferred  Stock
     and the  denominator  of which shall be such Current Market Price per share
     of Preferred Stock. Such adjustments  shall be made  successively  whenever
     such a record date is fixed, and in the event that such distribution is not
     so made,  the  Purchase  Price shall be adjusted to be the  Purchase  Price
     which would have been in effect if such record date had not been fixed.

          (d) Current Market Price.

                    (i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii)  (Adjustment of Purchase Price,
Number and Kind of Shares or Number of Rights - Certain Adiustments) the Current
Market  Price per share of  Common  Stock on any date  shall be deemed to be the
average  of the daily  closing  prices  per share of such  Common  Stock for the
thirty (30)  consecutive  Trading Days  immediately  prior to such date, and for
purposes of computations pursuant to Section 11(a)(iii) the Current Market Price
per share of Common  Stock on any date shall be deemed to be the  average of the
daily closing prices per share of such Common Stock for the ten (10) consecutive
Trading Days immediately  following such date;  provided,  however,  that in the
event that the Current  Market Price per share of the Common Stock is determined
during a period following the announcement by the issuer of


<PAGE>
                                       26


such Common Stock of (A) a dividend or distribution on such Common Stock payable
in shares of such Common  Stock or  securities  convertible  into shares of such
Common Stock (other than the Rights),  or (B) any  subdivision,  combination  or
reclassification of such Common Stock and the ex-dividend date for such dividend
or  distribution,  or the  record  date for  such  subdivision,  combination  or
reclassification  shall  not  have  occurred  prior to the  commencement  of the
requisite  thirty (30) Trading Day or ten (10) Trading Day period,  as set forth
above,  then,  and in each such case, the Current Market Price shall be properly
adjusted to take into account  ex-dividend  trading.  The closing price for each
Trading Day shall be the last sale price,  regular way, or, in case no such sale
takes  place on such  Trading  Day,  the  average of the  closing  bid and asked
prices,  regular way, in either case as reported in the  principal  consolidated
transaction  reporting  system with respect to securities  listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal  consolidated  transaction reporting system with respect to securities
listed on the  principal  national  securities  exchange  on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities  exchange,  the
last  quoted  price or, if not so  quoted,  the  average of the high bid and low
asked  prices  in the  over-the-counter  market,  as  reported  by the  National
Association of Securities Dealers, Inc. Automated Quotation System or such other
system then in use,  or, if on any such date the shares of Common  Stock are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional  market maker making a market in the Common Stock
selected by the Board. If on any such date no market maker is making a market in
the Common  Stock,  the fair value of such shares on such date as  determined in
good faith by the Board shall be used. The term "Trading Day'shall mean a day on
which the principal national  securities  exchange on which the shares of Common
Stock are listed or admitted to trading is open for the  transaction of business
or, if the shares of Common  Stock are not listed or  admitted to trading on any
national  securities  exchange,  a  Business  Day.  If the  Common  Stock is not
publicly held or not so listed or traded,  Current  Market Price per share shall
mean the fair value per share as  determined  in good faith by the Board,  whose
determination  shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.

                    (ii)  For the  purpose  of any  computation  hereunder,  the
Current  Market Price per share of Preferred  Stock shall be  determined  in the
same  manner  as set  forth  above for the  Common  Stock in clause  (i) of this
Section  11(d) (other than the last  sentence  thereof).  If the Current  Market
Price per share of


<PAGE>
                                       27


Preferred  Stock cannot be  determined  in the manner  provided  above or if the
Preferred  Stock is not publicly held or listed or traded in a manner  described
in  clause  (i) of th  Section  11(d),  the  Current  Market  Price per share of
Preferred Stock shall be conclusively  deemed to be an amount equal to 1,000 (as
such number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock occurring after
the date of this Agreement)  multiplied by the Current Market Price per share of
the  Common  Stock.  If  neither  the Common  Stock nor the  Preferred  Stock is
publicly  held or so listed or  traded,  Current  Market  Price per share of the
Preferred  Stock shall mean the fair value per share as determined in good faith
by the Board, whose  determination  shall be described in a statement filed with
the Rights Agent and shall be conclusive  for all purposes.  For all purposes of
this  Agreement,  the Current Market Price of one  one-thousandth  of a share of
Preferred  Stock  shall be equal to the  Current  Market  Price of one  share of
Preferred Stock divided by 1,000.

               (e) Purchase Price Adjustment  Threshold.  Anything herein to the
contrary notwithstanding,  no adjustment in the Purchase Price shall be required
unless  such  adjustment  would  require an increase or decrease of at least one
percent (1%) in the Purchase  Price;  provided,  however,  that any  adjustments
which by  reason of this  Section  11(e) are not  required  to be made  shall be
carried  forward  and taken  into  account  in any  subsequent  adjustment.  All
calculations under this Section 11 (Adjustme Purchase Price,  Number and Kind of
Shares or Number of Rights)  shall be made to the nearest cent or to the nearest
thousandth of a share of Common Stock or other share or one-millionth of a share
of Preferred  Stock, as the case may be.  Notwithstanding  the first sentence of
this Section 11(e), any adjustment  required by this Section 11 shall be made no
later than the  earlier of (i) three (3) years from the date of the  transaction
which mandates such adjustment, or (ii) the Expiration Date.

               (f) Equivalent Adjustments.  If as a result of an adjustment made
pursuant to Section 11 (a)(ii) (Adjustment of Purchase Price, Number and Kind of
Shares  or  Number  of  Rights  -  Certain   Adjustments)   or   Section   l3(a)
(Consolidation  Merger or Sale or Transfer of Assets or Earning Power  Flip-over
Event) the holder of any Right  thereafter  exercised  shall become  entitled to
receive any shares of capital stock other than Preferred  Stock,  thereafter the
number of such  other  shares so  receivab  upon  exercise  of any Right and the
Purchase  Price thereof  shall be subject to  adjustment  from time to time in a
manner and on terms as nearly  equivalent as practicable to the provisions  with
respect to the Preferred Stock contained in Sections 11(a),  (b), (c), (e), (g),
(h), (i), (j), (k) and (m), and the

<PAGE>
                                       28



provisions of Sections 7, 9, 10, 13 and 14 with respect to the  Preferred  Stock
shall apply on like terms to any such other shares.

               (g)  Post-Adjustment  Rights  Issuances.  All  Rights  originally
issued by the Company  subsequent to any  adjustment  made to the Purchase Price
hereunder shall evidence the right to purchase,  at the adjusted Purchase Price,
the number of one one-thousandths of a share of Preferred Stock purchasable from
time to time  hereunder  upon  exercise  of the  Rights,  all subject to further
adjustment as provided herein.

               (h) Preferred Stock Anti-Dilution.  Unless the Company shall have
exercised  its  election as provided in Section  11(i)  (Adjustment  of Purchase
Price;  Number and Kind of Shares or Number of Rights - Adjustment  of Number of
Rights),  upon  each  adjustment  of  the  Purchase  Price  as a  result  of the
calculations  made in Section 11(b)  (Adjustment of Purchase  Price,  Number and
Kind of Shares or Number of Rights - Purchase Price  Adjustment - Capital Stock)
and Section 11(c)  (Adjustment of Purchase  Price,  Number and Kind of Shares or
Number of Rights - Purchase Price Adjustment - Cash,  Assets,  etc.), each Right
outstanding  immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase,  at the adjusted  Purchase Price, that number of
one  one-thousandths  of a share of Preferred  Stock  (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one one-thousandths
of a share covered by a Right immediately  prior to this adjustment,  by (y) the
Purchase Price in effect  immediately  prior to such  adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.

               (i)  Adjustment of Number of Rights.  The Company may elect on or
after the date of any  adjustment of the Purchase  Price to adjust the number of
Rights,  in lieu of any  adjustment  in the number of one  one-thousandths  of a
share of Preferred Stock  purchasable upon the exercise of a Right.  Each of the
Rights  outstanding  after the  adjustment  in the  number  of  Rights  shall be
exercisable for the number of one  one-thousandths of a share of Preferred Stock
for which a Right was exercisable  immediately  prior to such  adjustment.  Each
Right held of record  prior to such  adjustment  of the  number of Rights  shall
become that  number of Rights  (calculated  to the  nearest  one-ten-thousandth)
obtained  by  dividing  the  Purchase  Price  in  effect  immediately  prior  to
adjustment  of the Purchase  Price by the Purchase  Price in effect  immediately
after  adjustment  of the  Purchase  Price.  The  Company  shall  make a  public
announcement  of its  election  to adjust the number of Rights,  indicating  the
record date for the adjustment, and,

<PAGE>
                                       29



if known at the time, the amount of the adjustment to be made.  This record date
may be the date on which the Purchase  Price is adjusted or any day  thereafter,
but, if the Rights  Certificates  have been  issued,  shall be at least ten (10)
calendar  days  later  than  the  date of the  public  announcement.  If  Rights
Certificates  have been  issued,  upon each  adjustment  of the number of Rights
pursuant to this Section 11(i),  the Company shall,  as promptly as practicable,
cause to be  distributed  to  holders of record of Rights  Certificates  on such
record date Rights  Certificates  evidencing,  subject to Section 14 (Fractional
Rights and Fractional  Shares) the additional Rights to which such holders shall
be entitled as a result of such  adjustment,  or, at the option of the  Company,
shall cause to be  distributed  to such  holders of record in  substitution  and
replacement for the Rights  Certificates  held by such holders prior to the date
of  adjustment,  and upon  surrender  thereof,  if required by the Company,  new
Rights  Certificates  evidencing  all the Rights to which such holders  shall be
entitled after such adjustment.  Rights  Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company,  the adjusted  Purchase  Price) and shall be
registered in the names of the holders of record of Rights  Certificates  on the
record date specified in the public announcement.

               (j) Rights Certificates. Irrespective of any adjustment or change
in the  Purchase  Price  or the  number  of one  one-thousandths  of a share  of
Preferred   Stock  issuable  upon  the  exercise  of  the  Rights,   the  Rights
Certificates  theretofore  and  thereafter  issued may  continue  to express the
Purchase  Price  per  one  one-thousandth  of a  share  and  the  number  of one
one-thousandths   of  a  share  which  were  expressed  in  the  initial  Rights
Certificates issued hereunder.

               (k)  Adjustment  Below Par Value.  Before  taking any action that
would cause an  adjustment  reducing  the  Purchase  Price below the then par or
stated  value,  if any,  of the  number  of one  one-thousandths  of a share  of
Preferred Stock issuable upon exercise of the Rights, the Company shall take any
corporate action which is or may, in the opinion of its counsel, be necessary in
order  that  the  Company   may  validly  and  legally   issue  fully  paid  and
nonassessable  such number of one  one-thousandths  share of Preferred  Stock at
such adjusted Purchase Price.

               (1) Adjustment Effective as of Future Date, Exercise. In any case
in which this  Section 11  (Adjustment  of  Purchase  Price,  Number and Kind of
Shares or Number of Rights)  shall  require that an  adjustment  in the Purchase
Price be made effective as of a record date for a specified  event,  the Company
may

<PAGE>
                                       30


elect to defer until the occurrence of such event the issuance to the holder
of any Right exercised after such record date the number of one  one-thousandths
of a share of  Preferred  Stock  an other  capital  stock or  securities  of the
Company,  if any,  issuable  upon such exercise over and above the number of one
one-thousandths  of a share  of  Preferred  Stock  and  other  capital  stock or
securities of the Company,  if any,  issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment;  provided,  however, that
the  Company  shall  deliver  to such  holder a due  bill or  other  appropriate
instrument  evidencing  such holder's  right to receive such  additional  shares
(fractional  or  otherwise)  or  securities  upon the  occurrence  of the  event
requiring such adjustment.

               (m) Tax  Adjustments.  Anything in this Section 11 (Adjustment of
PurchaseNumber  and  Kind  of  Shares  or  Number  of  Rights)  to the  contrary
notwithstanding,  the Company  shall be entitled to make such  reductions in the
Purchase  Price,  in addition to those  adjustments  expressly  required by this
Section 11, as and to the extent that in its good faith judgment the Board shall
determine to be advisable in order that any (i)  consolidation or subdivision of
the Preferred  Stock,  (ii) issuance wholl cash of any shares of Preferred Stock
at less than the Current Market Price,  (iii) issuance wholly for cash of shares
of Preferred Stock or securities  which by their terms are  convertible  into or
exchangeable for shares of Preferred Stock, (iv) stock dividends or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter made by
the  Company  to  holders of its  Preferred  Stock  shall not be taxable to such
stockholders.

               (n) Restriction on Certain  Transactions.  The Company shall not,
at any time after the earlier of the Stock  Acquisition Date or the Distribution
Date,  (i)  consolidate  with any other Person  (other than a Subsidiary  of the
Company in a  transaction  which  complies  with Section  11(o)  (Adjustment  of
Purchase  Price,  Number  and Kind of Shares  or Number of Rights -  Restriction
Against Diminishing Benefits of the Rights)),  (ii) merge with or into any other
Person (other than a Subsidiary of the Company in a transaction  which  complies
with  Section 11 (o)),  (iii) enter into a statutory  share  exchange or similar
transaction  with any other Person  (other than a Subsidiary of the Company in a
transaction  which  complies with Section  11(o)),  or (iv) sell or transfer (or
permit any Subsidiary to sell or transfer),  in one transaction,  or a series of
related  transactions,  assets, cash flow or earning power aggregating more than
50%  of  the  assets,  cash  flow  or  earning  power  of the  Company  and  its
Subsidiaries  (taken as a whole) to any other Person or Persons  (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section  11(o)),  if (x) at the time of or

<PAGE>
                                       31


immediately  after such  consolidation,  merger,  statutory  share  exchange  or
similar transaction, or sale there are any rights, warrants or other instruments
or securities  outstanding  or  agreements  in effect which would  substantially
diminish or  otherwise  eliminate  the  benefits  intended to be afforded by the
Rights  or  (y)  prior  to,   simultaneously  with  or  immediately  after  such
consolidation, merger, statutory share exchange or similar transaction, or sale,
the  stockholders  of the  Person  who  constitutes,  or would  constitute,  the
"Principal Party" for purposes of Section 13(a)  (Consolidation,  Merger or Sale
or Transfer of Assets or Earning Power - Flip-over  Event) shall have received a
distribution of Rights  previously owned by such Person or any of its Affiliates
and Associates.

               (o) Restriction Against  Diminishing  Benefits of the Rights. The
Company  covenants and agrees that,  after the earlier of the Stock  Acquisition
Date or the  Distribution  Date, it will not,  except as permitted by Section 23
(Redemption and Termination) or Section 27 (Supplements and Amendments) take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is  reasonably  foreseeable  that such action  will  diminish  substantially  or
otherwise eliminate the benefits intended to be afforded by the Rights.

               (p) Common Stock  Adiustments.  Anything in this Agreement to the
contrary notwithstanding,  in the event that the Company shall at any time after
the Rights  Dividend  Declaration  Date and prior to the  Distribution  Date (i)
declare a dividend on the  outstanding  shares of Common Stock payable in shares
of Common Stock, (ii) subdivide or split the outstanding shares of Common Stock,
or (iii) combine the outstanding shares of Common Stock into a smaller number of
shares,  the number of Rights  associated  with each share of Common  Stock then
outstanding,  or issued or delivered  thereafter  but prior to the  Distribution
Date, shall be proportionately  adjusted so that the number of Rights thereafter
associated  with each share of Common Stock following any such event shall equal
the result  obtained by multiplying  the number of Rights  associated  with each
share of  Common  Stock  immediately  prior to such  event  by a  fraction,  the
numerator  of which  shall  be the  total  number  of  shares  of  Common  Stock
outstanding immediately prior to the occurrence of the event and the denominator
of which  shall be the  total  number of  shares  of  Common  Stock  outstanding
immediately following the occurrence of such event. The adjustments provided for
in this Section  11(p) shall be made  successively  whenever  such a dividend is
declared or paid or such subdivision, combination or consolidation is effected.

     Section 12.  Certificate  of Adiusted  Purchase  Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 (Adjustment of

<PAGE>
                                       32


Purchase  Price:  Number and Kind of Shares or Number of Rights)  and Section 13
(Consolidation.  Merger or Sale or  Transfer  of Assets or  Earning  Power)  the
Company shall (a) promptly  prepare a certificate  setting forth such adjustment
and a brief statement of the facts accounting for such adjustment,  (b) promptly
file with the Rights Agent, and with each transfer agent for the Preferred Stock
and the  Common  Stock,  a copy of such  certificate,  and (c) mail or cause the
Rights  Agent  to mail a  brief  summary  thereof  to each  holder  of a  Rights
Certificate  (or,  if  prior  to the  Distribution  Date,  to each  holder  of a
certificate  representing  shares of Common Stock) in accordance with Section 26
(Notices).  The Rights  Agent  shall be fully  protected  in relying on any such
certificate and on any adjustment therein contained.

     Section 13. Consolidation,  Merger or Sale or Transfer of Assets or Earning
Power.

          (a)  Flip-over   Event.  In  the  event  that,   following  the  Stock
Acquisition  Date,  directly or  indirectly,  (x) the Company shall  consolidate
with,  or merge  with and into,  or enter into a  statutory  stock  exchange  or
similar  transaction  with,  any other Person  (other than a  Subsidiary  of the
Company  in a  transaction  which  complies  with  Section  11(o)(Adjustment  of
Purchase  Price:  Number  and Kind of Shares  or Number of Rights -  Restriction
Against  Diminishing  Benefits  of the  Rights)),  and the Co  shall  not be the
continuing or surviving  corporation of such consolidation,  merger or statutory
share exchange or similar  transaction,  (y) any Person (other than a Subsidiary
of the  Company  in a  transaction  which  complies  with  Section 11 (o)) shall
consolidate  with,  or merge  with or  into,  or enter  into a  statutory  stock
exchange or similar transaction with, the Company,  and the Company shall be the
continuing or surviving  corporation of such consolidation,  merger or statutory
share   exchange  or  similar   transaction   and,  in   connection   with  such
consolidation, merger or statutory share exchange or similar transaction, all or
part of the  outstanding  shares  of  Common  Stock  shall  be  changed  into or
exchanged for stock or other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer (or one or more of
its  Subsidiaries  shall sell or otherwise  transfer),  in one  transaction or a
series of related  transactions,  assets, cash flow or earning power aggregating
more than 50% of the assets,  cash flow or earning  power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any  Subsidiary  of the  Company  in one or more  transactions  each of which
complies  with  Section  11(o)),  then,  and in each such case (except as may be
contemplated  by Section  13(d)  (Consolidation,  Merger or Sale or  Transfer of
Assets or Earning Power -  Exceptions)),  (i) proper  provision shall be

<PAGE>
                                       33


made so that:  each  holder  of a Right,  except as  provided  in  Section  7(e)
(Exercise of Rights:  Purchase Price,  Expiration Date of Rights  Termination of
Acquiring Person's Rights) shall thereafter have the right to receive,  upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this  Agreement,  such number of validly  authorized and issued,  fully paid,
nonassessable  and  freely  tradeable  shares of Common  Stock of the  Principal
Party, not subject to any liens, encumbrances,  rights of first refusal or other
adverse claims,  as shall be equal to the result obtained by (A) multiplying the
then current Purchase Price by the number of one  one-thousandths  of a share of
Preferred Stock for which a Right is exercisable  immediately prior to the first
occurrence of a Flip-over  Event (or, if a Flip-in  Event has occurred  prior to
the first  occurrence of a Flip-over  Event,  multiplying the number of such one
one-thousandths  of a share for which a Right was exercisable  immediately prior
to the first  occurrence  of a  Flip-in  Event by the  Purchase  Price in effect
immediately  prior to such first  occurrence),  and (B)  dividing  that  product
(which,  following the first occurrence of a Flip-over Event,  shall be referred
to as the  "Purchase  Price"  for  each  Right  and  for  all  purposes  of this
Agreement)  by 50% of the Current  Market Price per share of the Common Stock of
such Principal Party on the date of consummation of such Flip-over  Event;  (ii)
such Principal Party shall thereafter be liable for, and shall assume, by virtue
of such Flip-over  Event, all the obligations and duties of the Company pursuant
to this Agreement;  (iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being  specifically  intended that the provisions of
Section 11 (Adjustment of Purchase Price: Number and Kind of Shares or Number of
Rights) shall apply only to such Principal Party following the first  occurrence
of a Flipover Event; (iv) such Principal Party shall take such steps (including,
but not  limited to, the  reservation  of a  sufficient  number of shares of its
Common Stock) in connection with the consummation of any such transaction as may
be  necessary  to  assure  that  the  provisions   hereof  shall  thereafter  be
applicable,  as nearly as reasonably may be, in relation to its shares of Common
Stock  thereafter  deliverable  upon the  exercise  of the  Fights;  and (v) the
provisions of Section 11(a)(ii)  (Adjustment of Purchase Price,  Number and Kind
of Shares or Number of Rights Certain  Adjustments) hereof shall be of no effect
following the first occurrence of any Flip-over Event.

          (b) Principal Party. "Principal Party" shall mean

                    (i) in the case of any  transaction  described in clause (x)
          or (y) of the first sentence of Section 13(a)  (Consolidation,  Merger
          or Sale or Transfer of Assets or Earning Power Flip-over  Event),  the
          Person  that is the  issuer of any  securities  into  which  shares of
          Common Stock of the

<PAGE>
                                       34


          Company are converted in such consolidation, merger or statutory share
          exchange or similar  transaction,  and if no securities are so issued,
          the Person  that is the other party to such  consolidation,  merger or
          statutory share exchange or similar transaction, and

                    (ii) in the case of any transaction  described in clause (z)
          of the first sentence of Section 13(a) (Consolidation,  Merger or Sale
          or Transfer of Assets or Earning Power - Flip-over Event),  the Person
          that is the party receiving the greatest  portion of the assets,  cash
          flow or earning  power  transferred  pursuant to such  transaction  or
          transactions;

provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect  Subsidiary of another  Person the Common Stock of which is
and has been so registered,  "Principal Party" shall refer to such other Person;
and (2) in case such Person is a  Subsidiary,  directly or  indirectly,  of more
than one Person,  the Common Stocks of two or more of which are and have been so
registered,  "Principal  Party"  shall refer to whichever of such Persons is the
issuer of the total  outstanding  Common  Stock  having the  greatest  aggregate
market value.

          (c)  Supplemental  Agreement.  The  Company  shall  not  consummate  a
Flip-over  Event unless the  Principal  Party shall have a sufficient  number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the  exercise in full of the Rights in  accordance  with this
Section  13  (Consolidation,  Merger or Sale or  Transfer  of Assets or  Earning
Power) and unless prior thereto the Company and such Principal  Party shall have
executed and delivered to the Rights Agent a  supplemental  agreement  providing
for the terms set forth in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable  after the date of such Flip-over  Event,
the Principal Party will

                    (i) prepare and file a registration statement under the Act,
          with  respect  to the  Rights  and  the  securities  purchasable  upon
          exercise of the Rights on an  appropriate  form, and will use its best
          efforts to cause such  registration  statement to (A) become effective
          as soon as  practicable  after such  filing  and (B) remain  effective
          (with a prospectus at all times meeting the  requirements  of the Act)
          until the  Expiration  Date and take all such  other  action as may be
          necessary  to  enable   Principal   Party  to  issue

<PAGE>
                                       35


          the securities purchasable upon exercise of the Rights,  including but
          not limited to the  registration or  qualification  of such securities
          under all requisite  securities laws or  jurisdictions  of the various
          states and the listing of such securities on such exchange and trading
          markets as may be necessary or appropriate; and

                    (ii)  will  deliver  to  holders  of the  Rights  historical
          financial   statements  for  the  Principal  Party  and  each  of  its
          Affiliates  which comply in all  respects  with the  requirements  for
          registration on Form 10 under the Exchange Act.

The provisions of this Section 13 (Consolidation,  Merger or Sale or Transfer of
Assets or Earning  Power) shall  similarly  apply to successive  consolidations,
mergers or statutory share  exchanges or similar  transactions or sales or other
transfers. In the event that a Flip-over Event shall occur at any time after the
occurrence  of a Flip-in  Event,  the  Rights  which have not  theretofore  been
exercised shall thereafter become exercisable in the manner described in Section
13(a)  (Consolidation,  Merger or Sale or Transfer of Assets or Earning  Power -
Flip-over Event).

          (d)  Exceptions.  Notwithstanding  anything in this  Agreement  to the
contrary,  Section 13  (Consolidation,  Merger or Sale or  Transfer of Assets or
Earning   Power)  shall  not  be  applicable  to  a  transaction   described  in
subparagraphs  (x) and (y) of Section  13(a)  (Consolidation,  Merger or Sale or
Transfer of Assets or Earning Power - Flip-over  Event) if (i) such  transaction
is  consummated  with a Person or Persons who  acquired  shares of Common  Stock
pursuant to a tender offer or exchange offer f all outstanding  shares of Common
Stock which complies with the provisions of Section 11(a)(ii)(A)  (Adjustment of
Purchase  Price-,  Number  and Kind of  Shares  or  Number  of  Rights - Certain
Adjustments) (or a wholly-owned  subsidiary of any such Person or Persons), (ii)
the price per share of Common Stock offered in such transaction is not less than
the  price per share of Common  Stock  paid to all  holders  of shares of Common
Stock whose shares were purchased  pursuant to such tender or exchange offer and
(iii) the form of consideration being offered in such transaction is the same as
the form of  consideration  paid to all holders of shares of Common  Stock whose
shares were  purchased  pursuant to such tender  offer or exchange  offer.  Upon
consummation of any such  transaction  contemplated  by this Section 13(d),  all
Rights hereunder shall expire.

     Section 14. Fractional Rights and Fractional Shares.
<PAGE>
                                       36


          (a)  Fractional  Rights.  The  Company  shall not be required to issue
fractions  of Rights,  except  prior to the  Distribution  Date as  provided  in
Section 11(p) (Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights Common Stock Adjustments),  or to distribute Rights Certificates which
evidence  fractional Rights. In lieu of such fractional  Rights,  there shall be
paid to the registered  holders of the Rights  Certificates with regard to which
such fractional  Rights would otherwise be issuable,  an amount in cash equal to
the same fraction of the current market value of a whole Right.  For purposes of
this  Section  14(a),  the  current  market  value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such  fractional  Rights would have been otherwise  issuable.  The closing
price of the Rights for any Trading  Day shall be the last sale  price,  regular
way,  or, in case no such sale takes place on such  Trading  Day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal  consolidated  transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock  Exchange  or, if the Rights
are not  listed or  admitted  to  trading  on the New York  Stock  Exchange,  as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national  securities exchange on which the
Rights are listed or  admitted  to  trading,  or if the Rights are not listed or
admitted to trading on any national securities  exchange,  the last quoted price
or, if not so quoted,  the  average of the high bid and low asked  prices in the
over-the-counter  market as reported by the National  Association  of Securities
Dealers, Inc. Automated Quotation System or such other system then in use or, if
on any such date the Rights are not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional  market maker
making a market in the Rights selected by the Board. If on any such date no such
market  maker is making a market in the Rights,  the fair value of the Rights on
such date as determined in good faith by the Board shall be used.

          (b)  Fractional  Shares of Preferred  Stock.  The Company shall not be
required to issue  fractions of shares of Preferred  Stock (other than fractions
which are integral multiples of one one-thousandth of a share of Preferred Stock
which may at the option of the Company,  be evidenced  by  depositary  receipts)
upon  exercise  of the  Rights  or to  distribute  certificates  which  evidence
fractional  shares of Preferred  Stock (other than fractions  which are integral
multiples  of one  one-thousandth  of share of  Preferred  Stock).  Interests in
fractions of Preferred Stock in integral  multiples of one  one-thousandth  of a
share of Preferred  Stock may, at the  election of the Company,  be evidenced by
depositary  receipts,  pursuant to an appropriate  agreement between the Company
and a depositary

<PAGE>
                                       37



selected by it;  provided,  however,  that such agreement shall provide that the
holders of such  depositary  receipts shall have all the rights,  privileges and
preferences  to which they are entitled as  beneficial  owners of the  Preferred
Stock represented by such depositary  receipts.  In lieu of fractional shares of
Preferred Stock that are not integral multiples of one one-thousandth of a share
of  Preferred  Stock,  the Company may pay to the  registered  holders of Rights
Certificates  at the time such Rights are exercised as herein provided an amount
in  cash  equal  to  the  same  fraction  of the  current  market  value  of one
one-thousandth  of a share of  Preferred  Stock.  For  purposes of this  Section
14(b),  the current market value of one  one-thousandth  of a share of Preferred
Stock shall be one  one-thousandth  of the closing price of a share of Preferred
Stock (as  determined  pursuant  to Section  11(d)(ii)  (Adjustment  of Purchase
Price, Number and Kind of Shares or Number of Rights - Current Market Price) for
the Trading Day immediately prior to the date of such exercise.

          (c) Fractional  Shares of Common Stock.  Following the occurrence of a
Triggering Event, the Company shall not be required to issue fractions of shares
of Common Stock upon exercise of the Rights or to distribute  certificates which
evidence  fractional  shares of Common Stock.  In lieu of  fractional  shares of
Common  Stock,  the  Company  may  pay  to  the  registered  holders  of  Rights
Certificates  at the time such Rights are exercised as herein provided an amount
in cash equal to the same  fractio the current  market value of one (1) share of
Common Stock.  For purposes of this Section  14(c),  the current market value of
one  share of Common  Stock  shall be the  closing  price of one share of Common
Stock (as determined pursuant to Section 11(d)(i) (Adjustment of Purchase Price,
Number  and Kind of Shares or Number of Rights - Current  Market  Price) for the
Trading Day immediately prior to the date of such exercise.

          (d) Waiver of Fractional  Rights and Shares.  The holder of a Right by
the  acceptance  of the Right  expressly  waives his or her right to receive any
fractional Rights or any fractional  shares upon exercise of a Right,  except as
permitted by this Section 14 (Fractional Rights and Fractional Shares).

     Section  15.  Rights of  Action.  All  rights of action in  respect of this
Agreement  are  vested  in the  respective  registered  holders  of  the  Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution  Date, of the Common Stock),  without the consent of the Rights
Agent  or of the  holder  of any  other  Rights  Certificate  (or,  prior to the
Distribution  Date, of the Common Stock),  may, in his or her own behalf and for
his or her own benefit, enforce, and may

<PAGE>
                                       38



institute  and maintain any suit,  action or  proceeding  against the Company to
enforce, or otherwise act in respect of, his or her right to exercise the Rights
evidenced  by such  Rights  Certificate  in the manner  provided  in such Rights
Certificate  and in  this  Agreement.  Without  limiting  the  foregoing  or any
remedies  available to the holders of Rights,  it is  specifically  acknowledged
that the  holders  of Rights  would not have an  adequate  remedy at law for any
breach of this  Agreement and shall be entitled to specific  performance  of the
obligations  hereunder  and  injunctive  relief  against  actual  or  threatened
violations of the obligations hereunder of any Person subject to this Agreement.

     Section  16.  Agreement  of  Rights  Holders.  Every  holder  of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:

          (a) prior to the  Distribution  Date, the Rights will be  transferable
only in connection with the transfer of Common Stock;

          (b)  after  the  Distribution   Date,  the  Rights   Certificates  are
transferable  only on the registry  books of the Rights Agent if  surrendered at
the  principal  office  or  offices  of the  Rights  Agent  designated  for such
purposes,  duly endorsed or accompanied  by a proper  instrument of transfer and
with the appropriate forms and certificates fully executed;

          (c)  subject to Section  6(a)  (Transfer,  Split Up,  Combination  and
Exchange of Rights  Certificates,  Mutilated,  Destroyed,  Lost or Stolen Rights
Certificates - Procedure) and Section 7(f) (Exercise of Rights;  Purchase Price,
Expiration  Date of Rights -  Surrender  of  Rights  Certificates;  Identity  of
Beneficial  Owner),  the  Company  and the  Rights  Agent may deem and treat the
person in whose name a Rights  Certificate (or, prior to the Distribution  Date,
the  associated  Common Stock  certificate)  registered  as the  absolute  owner
thereof and of the Rights evidenced  thereby  (notwithstanding  any notations of
ownership or writing on the Rights  Certificates or the associated  Common Stock
certificate  made by anyone other than the Company or the Rights  Agent) for all
purposes  whatsoever,  and neither the Company nor the Rights Agent,  subject to
the  last  sentence  of  Section  7(e)  (Exercise  of  Rights;  Purchase  Price,
Expiration Date of Rights - Termination of Acquiring Person's Rights),  shall be
required to be affected by any notice to the contrary; and

          (d)  notwithstanding  anything  in  this  Agreement  to the  contrary,
neither the Company nor the Rights Agent shall have any  liability to any holder


<PAGE>
                                       39


of a Right or other  Person as a result of its  inability  to perform any of its
obligations  under this  Agreement  by reason of any  preliminary  or  permanent
injunction  or other  order,  decree  or ruling  issued by a court of  competent
jurisdiction  or by a  governmental,  regulatory  or  administrative  agency  or
commission,  or any statute,  rule,  regulation  executive order  promulgated or
enacted by any  governmental  authority,  prohibiting  or otherwise  restraining
performance of such obligation; provided, however, the Company must use its best
efforts to have any such order, decree or ruling lifted or otherwise  overturned
as soon as possible.

     Section 17. Rights Certificate Holder Not Deemed a Stockholder.  No holder,
as such, of any Rights  Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the number of one  one-thousandths of
a share of Preferred  Stock or any other  securities of the Company which may at
any time be issuable  on the  exercise of the Rights  represented  thereby,  nor
shall  anything  contained  herein or in any Rights  Certificate be construed to
confer upon the holder of any Rights Certificate,  as such, any of the rights of
a stockholder  of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof,  or to give
or withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting  stockholders  (except as provided in Section 25 (Notice
of  Certain  Events)),  or to  receive  dividends  or  subscription  rights,  or
otherwise,  until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.

     Section 18. Concerning the Rights Agent.

          (a) Compensation. The Company shall pay to the Rights Agent reasonable
compensation  for all services  rendered by it hereunder and, from time to time,
on demand of the Rights  Agent,  its  reasonable  expenses  and counsel fees and
other  disbursements  incurred  in the  administration  and  execution  of  this
Agreement and the exercise and performance of its duties hereunder.  The Company
agrees to indemnify the Rights Agent for, and to hold it harmless  against,  any
loss, liability or expense,  inc without gross negligence,  bad faith or willful
misconduct on the part of the Rights  Agent,  for anything done or omitted to be
done by the Rights Agent in connection with the acceptance and administration of
this  Agreement,  including  the costs and  expenses  of  defending  against  or
investigating any claim of liability in the premises.

          (b)  Reliance.  The Rights Agent shall be protected and shall incur

<PAGE>
                                       40


no liability  for or in respect of any action  taken,  suffered or omitted to be
taken by it in connection with its  administration of this Agreement in reliance
upon any  Rights  Certificate  or  certificate  for  Common  Stock or for  other
securities  of the Company,  instrument  of  assignment  or  transfer,  power of
attorney,   endorsement,   affidavit,   letter,  notice,   direction,   consent,
certificate,  statement or other paper or document  believed by it to be genuine
and to be signed,  executed and, where necessary,  verified or acknowledged,  by
the proper  Person or Persons,  or  otherwise  upon the advice of counsel as set
forth in Section 20 (Duties of Rights Agent).

     Section 19. Merger or Consolidation or Change of Name of Rights Agent.

          (a)  Successor.  Any  corporation  into which the Rights  Agent or any
successor  Rights Agent may be merged or with which it may be  consolidated,  or
any corporation  resulting from any merger or  consolidation to which the Rights
Agent  or any  successor  Rights  Agent  shall be a  party,  or any  corporation
succeeding to the corporate trust or stock transfer business of the Rights Agent
or any successor Rights Agent,  shall be the successor to the Rights Agent under
this  Agreement  without the execut or filing of any paper or any further act on
the part of any of the parties hereto; provided,  however, that such corporation
would be  eligible  for  appointment  as a  successor  Rights  Agent  under  the
provisions  of Section 21  (Change  of Rights  Agent).  In case at the time such
successor  Rights Agent shall succeed to the agency  created by this  Agreement,
any of the Rights  Certificates shall have been countersigned but not delivered,
any such successor Rights Agent may adopt the  countersignature of a predecessor
Rights Agent and deliver such Rights Certificates so countersigned;  and in case
at that time any of the Rights  Certificates shall not have been  countersigned,
any successor  Rights Agent may countersign such Rights  Certificates  either in
the name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights  Certificates  shall have the full force  provided in
the Rights Certificates and in this Agreement.

          (b)  Prior  Countersignatures.  In case at any  time  the  name of the
Rights  Agent shall be changed  and at such time any of the Rights  Certificates
shall have been countersigned but not delivered,  the Rights Agent may adopt the
countersignature  under  its  prior  name and  deliver  Rights  Certificates  so
countersigned; and in case at that time any of the Rights Certificates shall not
have  been   countersigned,   the  Rights  Agent  may  countersign  such  Rights
Certificates  either in its prior name or in changed name; and in all such cases
such  Rights  Certificates  shall  have the full  force  provided  in the Rights
Certificates and in this Agreement.


<PAGE>
                                       41


     Section 20. Duties of Rights Agent.  The Rights Agent undertakes the duties
and  obligations  imposed  by  this  Agreement  upon  the  following  terms  and
conditions,  by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:

          (a) Legal  Counsel.  The Rights Agent may consult  with legal  counsel
(who may be legal  counsel for the  Company),  and the  opinion of such  counsel
shall be full and complete  authorization  and protection to the Rights Agent as
to any action taken or omitted to be taken by it in good faith and in accordance
with such opinion.

          (b)  Certification by the Company.  Whenever in the performance of its
duties  under  this  Agreement  the Rights  Agent  shall  deem it  necessary  or
desirable that any fact or matter (including,  without limitation,  the identity
of any Acquiring Person and the determination of Current Market Price) be proved
or established by the Company prior to taking or suffering any action hereunder,
such  fact or  matter  (unless  other  evidence  in  respect  thereof  be herein
specifically prescribed) may be deem be conclusively proved and established by a
certificate  signed by the President,  any Vice  President,  the Secretary,  any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company and
delivered to the Rights Agent; and such certificate shall be full  authorization
to the Rights  Agent for any action  taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.

          (c)  Liability  for Gross  Negligence,  etc. The Rights Agent shall be
liable  hereunder  only for its own  gross  negligence,  bad  faith  or  willful
misconduct.

          (d)  Statements  of Fact or  Recitals.  The Rights  Agent shall not be
liable for or by reason of any of the  statements of fact or recitals  contained
in this  Agreement  or in the Rights  Certificates  or be required to verify the
same (except as to its  countersignature on such Rights  Certificates),  but all
such  statements  and  recitals are and shall be deemed to have been made by the
Company only.

          (e)  Agreement;  Adjustments.  The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery  hereof  (except the due  execution  hereof by the Rights  Agent) or in
respect of the  validity  or  execution  of any Rights  Certificate  (except its
countersignature);  nor shall it be responsible for any breach by the Company of
any  covenant  or  condition  contained  in  this  Agreement  or in  any  Rights
Certificate;  nor  shall it be  responsibl  any  adjustment  required  under the
provisions  of Section 11

<PAGE>
                                       42


(Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights) or
Section  13  (Consolidation,  Merger or Sale or  Transfer  of Assets or  Earning
Power) or responsible for the manner, method or amount of any such adjustment or
the  ascertaining  of the  existence  of  facts  that  would  require  any  such
adjustment  (except with  respect to the exercise of Rights  evidenced by Rights
Certificates  after actual notice of any such  adjustment);  nor shall it by any
act  hereunder  be  deemed  to make any  representation  or  warranty  as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this Agreement or any Rights  Certificate or as to whether
any shares of Common Stock or Preferred Stock will,  when so issued,  be validly
authorized and issued, fully paid and nonassessable.

          (f) Further Assurances. The Company will perform, execute, acknowledge
and deliver or cause to be performed,  executed,  acknowledged and delivered all
such further and other acts,  instruments  and  assurances as may  reasonably be
required by the Rights Agent for the carrying  out or  performing  by the Rights
Agent of the provisions of this Agreement.

          (g)  Instructions.  The Rights Agent is hereby authorized and directed
to accept  instructions  with respect to the performance of its duties hereunder
from the President,  any Vice President, the Secretary, any Assistant Secretary,
the  Treasurer  or any  Assistant  Treasurer of the Company and to apply to such
persons for advice or instructions  in connection with its duties,  and it shall
not be liable for any action  taken or  suffered to be taken by it in good faith
in accordance with the instructions of any such person.

          (h) Dealing in Rights. The Rights Agent and any stockholder, director,
officer  or  employee  of the Rights  Agent may buy,  sell or deal in any of the
Rights or other  securities of the Company or become  pecuniarily  interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise  act as fully and freely as though it were not
Rights Agent under this  Agreement.  Nothing  herein  shall  preclude the Rights
Agent from  acting in any ot  capacity  for the  Company or for any other  legal
entity.

          (i) Agents, Reasonable Care. The Rights Agent may execute and exercise
any of the rights or powers  hereby  vested in it or perform any duty  hereunder
either  itself or by or through its  attorneys  or agents,  and the Rights Agent
shall  not be  answerable  or  accountable  for any  act,  default,  neglect  or
misconduct  of any such  attorneys  or  agents  or for any  loss to the  Company

<PAGE>
                                       43



resulting from any such act, default, neglect or misconduct;  provided, however,
reasonable care was exercised in the selection and continued employment thereof.

          (j) Expenses:  Repayment  Assurances.  No provision of this  Agreement
shall  require  the  Rights  Agent to expend or risk its own funds or  otherwise
incur any financial  liability in the performance of any of its duties hereunder
or in the  exercise  of its  rights if there  shall be  reasonable  grounds  for
believing that repayment of such funds or adequate  indemnification against such
risk or liability is not reasonably assured to it.

          (k) Exercise of Rights; Consultation with Company. If, with respect to
any Rights Certificate surrendered to the Rights Agent for exercise or transfer,
the  certificate  attached  to the form of  assignment  or form of  election  to
purchase,  as the case may be, has either not been  completed  or  indicates  an
affirmative  response to clause 1 and/or 2 thereof,  the Rights  Agent shall not
take any further  action  with  respect to such  requested  exercise of transfer
without first consulting with the Company.

     Section  21.  Change of Rights  Agent.  The Rights  Agent or any  successor
Rights Agent may resign and be discharged  from its duties under this  Agreement
upon thirty (30) calendar days' notice in writing mailed to the Company,  and to
each transfer  agent of the Common Stock and Preferred  Stock,  by registered or
certified  mail,  and to the holders of the Rights  Certificates  by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30)  calendar  days'  notice in writing,  mailed to the Rights  Agent or
successor  Rights Agent,  as the case may be, and to each transfer  agent of the
Common Stock and Preferred  Stock,  by registered or certified  mail, and to the
holders of the Rights  Certificates  by  first-class  mail.  If the Rights Agent
shall resign or be removed or shall otherwise  become  incapable of acting,  the
Company shall appoint a successor to the Rights Agent. If the Company shall fail
to make such  appointment  within a period of thirty  (30)  calendar  days after
giving  notice of such removal or after it has been  notified in writing of such
resignation or incapacity by the resigning or  incapacitated  Rights Agent or by
the holder of a Rights  Certificate  (who shall,  with such  notice,  submit his
Rights Certificate for inspection by the Company), then the registered holder of
any Rights Certificate may apply to any court of competent  jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the  Company or by such a court,  shall be (a) a  corporation  organized  and
doing business under the laws of the United States or of any State of the United
States, in good standing,  which is authorized under such laws to exercise stock
transfer or


<PAGE>
                                       44


corporate  trust powers,  is subject to supervision or examination by federal or
state  authority  and  has at the  time of its  appointment  as  Rights  Agent a
combined  capital and surplus of at least  $50,000,000  or (b) an Affiliate of a
corporation  described in clause (a) of this sentence.  After  appointment,  the
successor Rights Agent shall be vested with the same powers,  rights, duties and
responsibilities  as if it had been  originally  named as Rights  Agent  without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose.  Not later than the  effective  date of any such  appointment,  the
Company shall file notice thereof in writing with the  predecessor  Rights Agent
and each transfer agent of the Common Stock and the Preferred  Stock, and mail a
notice thereof in writing to the registered holders of the Rights  Certificates.
Failure to give any  notice  provided  for in this  Section 21 (Change of Rights
Agent), or any defect therein,  shall not affect the legality or validity of the
resignation  or removal of the Rights Agent or the  appointment of the successor
Rights Agent, as the case may be.

     Section 22. Issuance of New Rights Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary,  the Company may,
at its option,  issue new Rights Certificates  evidencing Rights in such form as
may be approved by the Board to reflect any adjustment or change in the Purchase
Price and the number or kind or class of shares or other  securities or property
purchasable under the Rights Certificates made in accordance with the provisions
of this  Agreement.  In  addition,  in  connection  with the issuance or sale of
shares  of  Common  Stock  following  the  Distribution  Date  and  prior to the
redemption or expiration of the Rights,  the Company (a) shall,  with respect to
shares of  Common  Stock so issued or sold  pursuant  to the  exercise  of stock
options  or under  any  employee  plan or  arrangement,  or upon  the  exercise,
conversion or exchange of securities  hereafter issued by the Company, in either
case outstanding as of the Distribution Date, and (b) may, in any other case, if
deemed  necessary  or  appropriate  by  the  Board,  issue  Rights  Certificates
representing  the appropriate  number of rights in connection with such issuance
or sale; provided,  however, that (i) no such Rights Certificate shall be issued
if, and to the extent  that,  the Company  shall be advised by counsel that such
issuance would create a significant  risk of material,  adverse tax consequences
to the  Company or the Person to whom such Rights  Certificate  would be issued,
and (ii) no such Rights  Certificate shall be issued if, and to the extent that,
appropriate  adjustment  shall  otherwise have been made in lieu of the issuance
thereof.

     Section 23. Redemption and Termination.
<PAGE>
                                       45


          (a) Redemption.  The Company may, at its option,  at any time prior to
the earlier of the Stock  Acquisition  Date, or (ii) the Final  Expiration Date,
redeem (the date of such redemption  being referred to herein as the "Redemption
Date") all but not less than all of the then outstanding  Rights at a redemption
price of $0.001  per Right,  as such  amount may be  appropriately  adjusted  to
reflect any stock split, stock dividend or similar  transaction  occurring after
the date  hereof  (such  redempt  price  being  hereinafter  referred  to as the
"Redemption  Price").  The  redemption  of the Rights by the Company may be made
effective at such time,  on such basis and with such  conditions as the Board in
its sole  discretion,  may  establish.  The Company may, at its option,  pay the
Redemption  Price in cash,  shares of Common Stock (based on the Current  Market
Price of the  Common  Stock  at the time of  redemption)  or any  other  form of
consideration deemed appropriate by Board.

          (b) Effect of Redemption;  Procedure.  Immediately  upon the action of
the Company ordering the redemption of the Rights and without any further action
and without any notice,  the right to exercise the Rights will terminate and the
only  right  thereafter  of the  holders  of  Rights  shall  be to  receive  the
Redemption Price for each Right so held. Promptly after the Redemption Date, the
Company shall (i) give notice of such redemption to the Rights Agent,  (ii) give
public notice of such redemp provided, however, that the failure to give, or any
defect in, such notice  shall not affect the  validity of such  redemption,  and
(iii) mail  notice of such  redemption  to the  holders of the then  outstanding
Rights at their last  addresses  as they appear upon the  registry  books of the
Rights Agent or, prior to the  Distribution  Date, on the registry  books of the
Transfer  Agent for the Common  Stock.  Any notice which is mailed in the manner
herein  provided shall be deemed given,  whether or not the holder  receives the
notice.  Each  such  notice of  redemption  will  state the  method by which the
payment of the Redemption  Price will be made.  Amounts payable shall be rounded
down to the nearest $0.01.

     Section 24. Exchange.

          (a) Right to Exchange. The Company may, at its option, at any time and
from time to time after the first occurrence of a Flip-in Event, exchange all or
part of the then  outstanding  and  exercisable  Rights (other than Rights which
have  become  void as provided in Section  7(e)  (Exercise  of Rights,  Purchase
Price,  Expiration Date of Rights - Termination of Acquiring  Person's  Rights))
for the Exchange Number of shares of Common Stock,  shares or units of Preferred
Stock which the Board has determined to be a Common Stock  Equivalent,  units of
other

<PAGE>
                                       46


property  or  any  combination   thereof  as  determined  by  the  Board.
Notwithstanding the foregoing, the Company shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company,  any employee benefit plan of the Company or any such Subsidiary or
any entity  holding  shares of Common  Stock for or  pursuant to any such plan),
together  with  all  Affiliates  and  Associates  of such  Person,  becomes  the
Beneficial Owner of 50% or more of the shares of Common Stock then  outstanding.
The exchange of the Rights by the Company may be made effective at such time, on
such  basis and with such  conditions  as the Board in its sole  discretion  may
establish.

          (b) Effect of Exchange; Procedure.  Immediately upon the action of the
Company  ordering the exchange of any Rights  pursuant to paragraph  (a) of this
Section 24,  evidence  of which shall have been filed with the Rights  Agent and
without any further  action and without any notice,  the right to exercise  such
Rights will  terminate and the only right  thereafter of a holder of such Rights
shall be to  receive  that  number  of  shares of  Common  Stock,  Common  Stock
Equivalents  or units of other  prope equal to the number of such Rights held by
such holder multiplied by the Exchange Number.  Promptly after the action of the
Company ordering the exchange of the Rights, the Company shall (i) file evidence
of such action with the Rights Agent,  (ii) give public notice of such exchange;
provided, however, that the failure to give, or any defect in, such notice shall
not affect the validity of such exchange, and (iii) mail notice of such exchange
to the  holders of such Rights at their last  addresses  as they appear upon the
registry  books of the Rights  Agent.  Any notice  which is mailed in the manner
herein  provided shall be deemed given,  whether or not the holder  receives the
notice. Each such notice of exchange will state the method by which the exchange
will be effected and, in the event of any partial exchange, the number of Rights
which will be exchanged.  Any partial  exchange shall be effected pro rata based
on the number of Rights (other than Rights which have become void as provided in
Section 7(e)  (Exercise of Rights;  Purchase  Price,  Expiration  Date of Rights
Termination of Acquiring Person's Rights)) held by each holder of Rights.

          (c) Common Stock Equivalents. In any exchange pursuant to this Section
24, the Company,  at its option,  may substitute  Common Stock  Equivalents  for
Common Stock exchangeable for Rights, at the initial rate of one share of Common
Stock  Equivalent for each share of Common Stock, as  appropriately  adjusted to
reflect  adjustments  in the voting  rights of the Common Stock  pursuant to the
Company's  Certificate  of  Incorporation,  so that the  share of  Common  Stock
Equivalent  delivered  in lieu of e share of Common  Stock

<PAGE>
                                       47


shall have the same voting rights as one share of Common Stock.

          (d) Insufficient  Common Stock. In the event that the number of shares
of  Common  Stock  which  are   authorized  by  the  Company's   Certificate  of
Incorporation  but not  outstanding  or reserved for issuance for purposes other
than upon  exercise of the Rights is not  sufficient  to permit any  exchange of
Rights in accordance with this Section 24, the Company may, at its option,  take
all such action as may be  necessary to  authorize  additional  shares of Common
Stock for issuance upon such exchange.

          (e)  Fractional  Shares.  Upon the action of the Company  ordering the
exchange of any Rights pursuant to paragraph (a) of this Section 24, the Company
shall not be required to issue fractions of shares or to distribute certificates
which evidence fractional shares. In lieu of such fractional shares, the Company
may pay to the  registered  holders of the Rights  Certificates  with  regard to
which such fractional shares would otherwise be issuable an amount in cash equal
to the same fraction o current  market value of one share of Common  Stock.  For
purposes of this  Section 24, the  current  market  value of one share of Common
Stock shall be the  closing  price of one share of Common  Stock (as  determined
pursuant to Section 11(d)(i)  (Adjustment of Purchase Price,  Number and Kind of
Shares  or  Number  of  Rights -  Current  Market  Price ) for the  Trading  Day
immediately  prior to the date of exchange  pursuant to this Section 24, and the
value of any Common  Stock  Equivalent  shall be deemed to have the same current
market value as the Common Stock on such date.

     Section 25. Notice of Certain Events.

          (a)  Preferred  Stock  Transactions,  etc. In case the  Company  shall
propose,  at any time  after  the  Distribution  Date,  (i) to pay any  dividend
payable in stock of any class to the holders of  Preferred  Stock or to make any
other  distribution  to the  holders of  Preferred  Stock  (other than a regular
quarterly  cash  dividend out of earnings or retained  earnings of the Company);
(ii) to offer to the holders of Preferred  Stock rights or warrants to subscribe
for or to purchase any additional  share  Preferred  Stock or shares of stock of
any  class or any  other  securities,  rights or  options;  (iii) to effect  any
reclassification of its Preferred Stock (other than a reclassification involving
only the subdivision of outstanding  shares of Preferred Stock);  (iv) to effect
any  consolidation  with,  merger into or with, or statutory  share  exchange or
similar  transaction  with,  any other Person  (other than a  Subsidiary  of the
Company in a  transaction  which  complies  with Section  11(o)  (Adjustment  of
Purchase  Price,  Number and Kind of Shares or Number of Rights -

<PAGE>
                                       48


Restriction  a Diminishing  Benefits of the  Rights)),  or to effect any sale or
other transfer (or to permit one or more of its  Subsidiaries to effect any sale
or other transfer),  in one transaction or a series of related transactions,  of
more than 50% of the assets,  cash flow or earning  power of the Company and its
Subsidiaries  (taken as a whole) to any other Person or Persons  (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section  11(o));  (v) to effect the  liquidation,  dissolution  or
winding up of the Company,  or (vi) to declare or pay any dividend on the shares
of Common Stock payable in Common Stock or to effect a subdivision,  combination
or consolidation of the shares of Common Stock (by reclassification or otherwise
than by payment of  dividends in Common  Stock),  then,  in each such case,  the
Company  shall  give to each  holder  of a  Rights  Certificate,  to the  extent
feasible and in accordance with Section 26 (Notices),  a notice of such proposed
action,  which  shall  specify  the record  date for the  purposes of such stock
dividend,  distribution  of  rights  or  warrants,  or the  date on  which  such
reclassification,  consolidation,  merger,  statutory  share exchange or similar
transaction, sale, transfer, liquidation,  dissolution, or winding up is to take
place and the date of  participation  therein  by the  holders  of the shares of
Preferred  Stock,  if any such date is to be fixed,  and such notice shall be so
given in the case of any  action  covered  by clause  (i) or (ii) above at least
twenty (20)  calendar days prior to the record date for  determining  holders of
the shares of Preferred  Stock for  purposes of such action,  and in the case of
any such other  action,  at least twenty (20) calendar days prior to the date of
the taking of such proposed action or the date of  participation  therein by the
holders of the shares of Preferred Stock, whichever shall be the earlier.

          (b) Other Transactions. In case any of the events set forth in Section
11(a)(ii)  (Adjustment of Purchase Price: Number and Kind of Shares or Number of
Rights - Certain  Adjustments)  shall  occur,  then,  in any such case,  (i) the
Company shall as soon as practicable  thereafter give to each holder of a Rights
Certificate, to the extent feasible and in accordance with Section 26 (Notices),
a notice of the occurrence of such event,  which shall specify the event and the
consequences of the eve holders of Rights under Section 11(a)(ii),  and (ii) all
references  in the  preceding  paragraph  to  Preferred  Stock  shall be  deemed
thereafter to refer to Common Stock and/or, if appropriate, other securities.

     Section 26. Notices.  Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights  Certificate to
or on the  Company  shall be  sufficiently  given or made if sent by  telecopier
(with receipt  confirmed) or by first-class  mail,  postage  prepaid,  addressed
(until another address is filed in writing with the Rights Agent) as follows:

<PAGE>
                                       49



                         Parallel Petroleum Corporation
                               110 N. Marienfeld
                                   Suite 465
                              Midland, Texas 79701
                       Attention: Chief Executive Officer
                           Telecopier: (915) 684-3905


Subject to the provisions of Section 21 (Change of Rights Agent),  any notice or
demand authorized by this Agreement to be given or made by the Company or by the
holder of any Rights Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by telecopier  (with receipt  confirmed) or by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Company as follows:

                        Computershare Trust Company, Inc.
                           12039 West Alameda Parkway
                                    Suite Z-2
                            Lakewood, Colorado 80228
                            Attention: Michelle Vigil
                           Telecopier: (303) 986-2444

Notices  or  demands  authorized  by this  Agreement  to be given or made by the
Company or the Rights  Agent to the holder of any  Rights  Certificate  (or,  if
prior to the  Distribution  Date,  to the  holder of  certificates  representing
shares  of  Common  Stock)  shall  be  sufficiently  given  or  made  if sent by
first-class  mail,  postage prepaid,  addressed to such holder at the address of
such holder as shown on the registry books of the Company.

     Section  27.  Supplements  and  Amendments.  For so long as the  Rights are
redeemable,  and subject to the  penultimate  sentence  of this  Section 27, the
Company may, and the Rights Agent shall,  if the Company so directs,  supplement
or amend any provision of this Agreement  without the approval of any holders of
certificates   representing  shares  of  Common  Stock  or,  on  and  after  the
Distribution  Date,  any  holders of Rights  Certificates.  At any time when the
Rights are no longer redeemable and subject to the penultimate  sentence of this
Section 27, the Company and the Rights Agent  shall,  if the Company so directs,
supplement or amend this Agreement without the approval of any holders of Rights
Certificates;  provided,  however,  that no such supplement or amendment may (i)
adversely affect the interests of the holders of Rights Certificates,  or, prior
to the

<PAGE>
                                       50


Distribution  Date,  the holders of the Common  Stock  (other than an  Acquiring
Person or an  Affiliate  or  Associate  of any such  Person);  (ii)  cause  this
Agreement again to become amendable other than in accordance with this sentence;
or (iii) cause the Rights  again to become  redeemable.  Upon the  delivery of a
certificate  from an  appropriate  officer of the Company  which states that the
proposed supplement or amendment is in compliance with the terms of this Section
27, the Rights Agent shall execute such supplement or amendment. Notwithstanding
anything contained in this Agreement to the contrary, no supplement or amendment
shall be made which changes the Redemption Price, the Final Expiration Date, the
Purchase  Price,  or the number of one  one-thousandths  of a share of Preferred
Stock  for which a right is  exercisable;  provided,  however,  that at any time
prior to (i) a Stock Acquisition Date or (ii) the date that a tender or exchange
offer by any Person (other than the Company,  any Subsidiary of the Company, any
employee  benefit plan of the Company or any  Subsidiary of the Company,  or any
Person or entity  organized,  appointed  or  established  by the  Company for or
pursuant  to the  terms of any such  plan) is first  published  or sent or given
within the meaning of Rule 14d-2(a) of the General Rules and  Regulations  under
the  Exchange  Act,  if upon  consummation  thereof,  such  Person  would be the
Beneficial Owner of 15% or more of the shares Of Common Stock then  outstanding,
the Board may amend this  Agreement to increase the Purchase Price or extend the
Final  Expiration  Date.  Prior to the  Distribution  Date, the interests of the
holders of Rights shall be deemed  coincident  with the interests of the holders
of Common Stock.

     Section 28. Successors.  All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.

     Section 29. Determinations and Actions by the Board of Directors,  etc. For
all  purposes  of this  Agreement,  any  calculation  of the number of shares of
Common Stock  outstanding  at any  particular  time,  including  for purposes of
determining the particular percentage of such outstanding shares of common Stock
of which any Person is the Beneficial  Owner,  shall be made in accordance  with
the last sentence of Rule 13d  3(d)(1)(i)  of the General Rules and  Regulations
under the Exchange Act. The Board shall have the  exclusive  power and authority
to administer this Agreement and to exercise all rights and powers  specifically
granted to the Board or to the  Company,  or as may be necessary or advisable in
the administration of this Agreement,  including,  without limitation, the right
and power to (i) interpret the provisions of this  Agreement,  and (ii) make all
determinations  deemed  necessary or advisable  for the  administration  of this

<PAGE>
                                       51



Agreement  (including a  determination  to redeem or not redeem the Rights or to
amend  the  Agreement).  All such  actions,  calculations,  interpretations  and
determinations  (including, for purposes of clause (y) below, all omissions with
respect to the  foregoing)  which are done or made by the Board,  in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights and all other  parties,  and (y) not  subject the Board to
any liability to the holders of the Rights.

     Section 30. Benefits of this Agreement.  Nothing in this Agreement shall be
construed to give to any Person other than the Company, the Rights Agent and the
registered  holders of the Rights  Certificates  (and, prior to the Distribution
Date,  registered  holders of the Common  Stock) any legal or  equitable  right,
remedy or claim under this  Agreement;  but this Agreement shall be for the sole
and  exclusive  benefit  of the  Company,  the Rights  Agent and the  registered
holders  of the  Rights  Certificates  (and,  prior  to the  Distribution  Date,
registered holders of the Common Stock).

     Section 31. Severability.  If any term, provision,  covenant or restriction
of this  Agreement  is  held  by a court  of  competent  jurisdiction  or  other
authority  to be invalid,  void or  unenforceable,  the  remainder of the terms,
provisions,  covenants and  restrictions  of this Agreement shall remain in full
force and  effect  and shall in no way be  affected,  impaired  or  invalidated;
provided,  however,  that  notwithstanding  anything  in this  Agreement  to the
contrary, if any such term,  provision,  covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board determines
in its good  faith  judgment  that  severing  the  invalid  language  from  this
Agreement  would adversely  affect the purpose or effect of this Agreement,  the
right of redemption set forth in Section 23 (Redemption and  Termination)  shall
be  reinstated  and shall not expire  until the Close of  Business  on the tenth
Business Day following the date of such determination by the Board.

     Section  32.  Governing  Law.  This  Agreement,  each Right and each Rights
Certificate  issued  hereunder  shall be deemed to be a contract  made under the
laws of the State of  Delaware  and for all  purposes  shall be  governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.

     Section 33.  Counterparts.  This Agreement may be executed in any number of
counterparts and each of such  counterparts  shall for all purposes be deemed to
be an original,  and all such counterparts shall together constitute but one and

<PAGE>
                                       52



the same instrument.

     Section  34.  Descriptive  Headings.  Descriptive  headings  of the several
Sections of this  Agreement  are  inserted  for  convenience  only and shall not
control or affect the meaning or construction of any of the provisions hereof.

IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be duly
executed as of the day and year first above written.


Attest:                                       PARALLEL PETROLEUM CORPORATION



By: /s/ Thomas W. Ortloff                     By: /s/ Larry C. Oldham
    -----------------------------                 --------------------------
    Thomas W. Ortloff, Secretary                  Larry C. Oldham, President


                                              COMPUTERSHARE TRUST COMPANY, INC.,
                                              as Rights Agent




By:/s/ Kellie Gwinn                           By: /s/ Laura Sisneros
   ------------------------------                 --------------------------
Name: Kellie Gwinn                            Name:  Laura Sisneros
Title: Vice President                         Title:  Vice President

<PAGE>
                                       B-2



                                                         Exhibit B


                          [Form of Rights Certificate]


Certificate No. R______       ______ Rights


NOT EXERCISABLE AFTER THE EARLIER OF OCTOBER 5, 2010, OR SUCH DATE AS THE RIGHTS
REPRESENTED  HEREBY  ARE  REDEEMED  BY  PARALLEL   PETROLEUM   CORPORATION  (THE
"CORPORATION"). THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE SUBJECT TO
REDEMPTION,  AT THE OPTION OF THE CORPORATION,  AT $0.001 PER RIGHT ON THE TERMS
SET FORTH IN THE RIGHTS  AGREEMENT  DATED AS OF OCTOBER 5, 2000,  BY AND BETWEEN
THE  CORPORATION  AND  COMPUTERSHARE  TRUST COMPANY,  INC., AS RIGHTS AGENT (THE
"RIGHTS AGREEMENT").  UNDER CERTAIN CIRCUMSTANCES,  RIGHTS BENEFICIALLY OWNED BY
AN ACQUIRING  PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS  AGREEMENT)  AND ANY
SUBSEQUENT  HOLDER  OF SUCH  RIGHTS  MAY  BECOME  NULL  AND  VOID.  [THE  RIGHTS
REPRESENTED  BY THIS  RIGHTS  CERTIFICATE  ARE OR WERE  BENEFICIALLY  OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING  PERSON OR AN AFFILIATE OR ASSOCIATE OF AN
ACQUIRING  PERSON  (AS  SUCH  TERMS  ARE  DEFINED  IN  THE  RIGHTS   AGREEMENT).
ACCORDINGLY,  THIS  RIGHTS  CERTIFICATE  AND THE RIGHTS  REPRESENTED  HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) (EXERCISE OF
RIGHTS,  PURCHASE  PRICE:  EXPIRATION  DATE OF RIGHTS  TERMINATION  OF ACQUIRING
PERSON'S RIGHTS) OF SUCH AGREEMENT.]1

                               Rights Certificate
                         PARALLEL PETROLEUM CORPORATION

This  certifies  that  ___________________________________or  its,  his  or  her
registered  assigns,  is the registered  owner of the number of rights set forth
above,  each  of  which  entitles  the  owner  thereof,  subject  to the  terms,
provisions and conditions of the Rights  Agreement,  dated as of October 5, 2000
(the "Rights

_______________________

     1 The  portion  of the  legend  in  brackets  shall  be  inserted  only  if
applicable and shall replace the prededing sentence.

<PAGE>
                                       B-3


Agreement"), between Parallel Petroleum Corporation, a Delaware corporation (the
"Corporation"),  and Computershare Trust Company,  Inc., a Colorado corporation,
as Rights Agent (the "Rights  Agent"),  to purchase from the  Corporation at any
time  prior to 5:00 P.M.  (New  York,  New York  time) on October 5, 2010 at the
office or  offices of the  Rights  Agent  designated  for such  purpose,  or its
successors  as Rights  Agent,  one  one-thousandth  (1/1,000)  of a fully  paid,
nonassessable  share of Series A Preferred Stock (the "Preferred  Stock") of the
Corporation,  at a purchase price of $_________ per one one-thousandth (1/1,000)
of a share (the  "Purchase  Price"),  upon  presentation  and  surrender of this
Rights Certificate with the Form of Election to Purchase and related Certificate
duly executed.  The number of Rights  evidenced by this Rights  Certificate (and
the number of shares which may be  purchased  upon  exercise  thereof) set forth
above, and the Purchase Price set forth above, are the number and Purchase Price
as of _________________, _______, based on the Preferred Stock as constituted at
such date. The Corporation reserves the right to require prior to the occurrence
of a  Triggering  Event (as such term is defined in the Rights  Agreement)  that
upon any exercise of Rights,  a number of Rights be exercised so that only whole
shares of Preferred Stock would be issued.

     Upon the  occurrence  of a Flip-in  Event (as such term is  defined  in the
Rights  Agreement),  if the Rights  evidenced  by this  Rights  Certificate  are
beneficially  owned by (i) an  Acquiring  Person or an Associate or Affiliate or
any such  Person (as such terms are  defined  in the Rights  Agreement),  (ii) a
transferee  of an Acquiring  Person or its  Associate or Affiliate who becomes a
transferee  after such  Acquiring  Person or its Associate or Affiliate  becomes
such, or (iii) under certain circumstances  specified in the Rights Agreement, a
transferee  of an Acquiring  Person or its  Associate or Affiliate who becomes a
transferee  prior to or  concurrently  with the Acquiring  Person becoming such,
such Rights shall become null and void and no holder hereof shall have any right
with respect to such Rights from and after the occurrence of such Flip-in Event.

     As provided in the Rights Agreement,  the Purchase Price and the number and
kind of shares of Preferred  Stock or other  securities,  which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are subject
to modification  and adjustment upon the happening of certain events,  including
Triggering Events (as such term is defined in the Rights Agreement).

     This  Rights  Certificate  is subject to all of the terms,  provisions  and
conditions of the Rights Agreement,  which terms,  provisions and conditions are
hereby  incorporated  herein by  reference  and made a part  hereof and to which

<PAGE>
                                       B-4

Rights Agreement  reference is hereby made for a full description of the rights,
limitations  of rights,  obligations,  duties and  immunities  hereunder  of the
Rights Agent, the Corporation and the holders of the Rights Certificates,  which
limitations of rights include the temporary  suspension of the exercisability of
such Rights under the specific  circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned  office of the
Rights Agent and are also available upon written request to the Rights Agent.

     This Rights Certificate,  with or without other Rights  Certificates,  upon
surrender at the principal  office or offices of the Rights Agent designated for
such  purpose,  may be  exchanged  for  another  Rights  Certificate  or  Rights
Certificates  of like tenor and date evidencing  Rights  entitling the holder to
purchase a like aggregate number of one  one-thousandths of a share of Preferred
Stock as the Rights evidenced by the Rights  Certificate or Rights  Certificates
surrendered  shall  have  entitled  such  holder  to  purchase.  If this  Rights
Certificate  shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights  Certificates for the
number of whole Rights for which this Rights Certificate is not exercised.

     Subject to the provisions of the Rights Agreement,  the Rights evidenced by
this  Certificate  (i) may be  redeemed  by the  Corporation  at its option at a
redemption price of $0.001 per Right at any time prior to the earlier of (a) the
Stock  Acquisition Date (as such term is defined in the Rights Agreement) or (b)
the Final Expiration Date (as such term is defined in the Rights  Agreement) and
(ii) may be exchanged  in whole or in part for  Preferred  Stock,  shares of the
Corporation's  Common Stock,  par value $0.01 per share,  other  property or any
combination thereof.

     In addition,  the Rights may be exchanged,  in whole or in part, for shares
of Common Stock, or shares of common stock equivalents of the Corporation having
essentially the same value or economic rights as such shares.  Immediately  upon
the action of the Board of Directors  of the  Corporation  authorizing  any such
exchange,  and without any further action or any notice,  the Rights (other than
Rights which are not subject to such  exchange)  will  terminate  and the Rights
will only enable holders to receive the shares issuable upon such exchange.

     No fractional shares of Preferred Stock will be issued upon the exercise of
any Right or Rights  evidenced  hereby (other than fractions  which are integral
multiples of one  one-thousandth  (1/1,000) of a share of Preferred Stock, which
may, at the election of the Corporation,  be evidenced by depositary  receipts),
but

<PAGE>
                                       B-5



a cash  payment  will be  made  in  lieu  thereof,  as  provided  in the  Rights
Agreement.

     No holder of this Rights  Certificate  shall be  entitled to vote,  receive
dividends or be deemed for any purpose the holder of shares of  Preferred  Stock
or of any other securities of the Corporation  which may at any time be issuable
on the exercise hereof,  nor shall anything contained in the Rights Agreement or
herein be construed to confer upon the holder hereof, as such, any of the rights
of a  stockholder  of the  Corporation  or any right to vote for the election of
directors or upon any matter submitted to stockholders of the Corporation at any
meeting  thereof,  or to give or withhold  consent to any corporate action or to
receive  notice of  meetings  or other  actions  affecting  stockholders  of the
Corporation  (except  as  provided  in  the  Rights  Agreement),  or to  receive
dividends  or  subscription  rights,  or  otherwise,  until  the Right or Rights
evidenced by this Rights  Certificate  shall have been  exercised as provided in
the Rights Agreement.

     This Rights  Certificate  shall not be valid or obligatory  for any purpose
until it shall have been countersigned by the Rights Agent.

     WITNESS the facsimile  signature of the proper  officers of the Corporation
and its corporate seal.



Dated as of ______________________

ATTEST:                                     PARALLEL PETROLEUM CORPORATION


_________________________________           By:___________________________
Secretary                                   Title: _______________________

Countersigned:

RIGHTS AGENT

By:______________________________
   Authorized Signature

<PAGE>



                  Form of Reverse Side of Rights Certificate]

                               FORM OF ASSIGNMENT
                (To be executed by the registered holder if such
              holder desires to transfer the Rights Certificate.)

FOR VALUE RECEIVED,_______________________________________ hereby sells, assigns
and             transfers              unto_____________________________________
________________________________________________________________________________
(Please print name and address of transferee) this Rights Certificate,  together
with  all  right,  title  and  interest  therein,  and does  hereby  irrevocably
constitute and appoint  Attorney,  to transfer the within Rights  Certificate on
the books of the within-named Corporation, with full power of substitution.

Dated:___________________________        _____________________________________
                                               Signature
Signature Guaranteed:

                                  CERTIFICATE

     The undersigned hereby certifies by checking the appropriate boxes that:

     (1) this  Rights  Certificate  [ ] is [ ] is not being sold,  assigned  and
transferred by or on behalf of a Person who is or was an Acquiring  Person or an
Affiliate or Associate of an Acquiring  Person (as such terms are defined in the
Rights Agreement); and

     (2) after due inquiry and to the best knowledge of the undersigned,  it did
not acquire the Rights evidenced by this Rights  Certificate from any Person who
is, was or subsequently  became an Acquiring Person or an Affiliate or Associate
of an Acquiring Person.


Dated:___________________________        ____________________________________
                                               Signature

Signature Guaranteed:

<PAGE>



                                     NOTICE

     The signature to the foregoing  Assignment and Certificate  must correspond
to the  name as  written  upon  the  face of this  Rights  Certificate  in every
particular, without alteration or enlargement or any change whatsoever.

                          FORM OF ELECTION TO PURCHASE
                      (To be executed if holder desires to
                       exercise Rights represented by the
                              Rights Certificate.)

To:  PARALLEL PETROLEUM CORPORATION

     The undersigned hereby irrevocably elects to exercise  ____________  Rights
represented by this Rights Certificate to purchase the shares of Preferred Stock
issuable  upon the  exercise  of the  Rights (or such  other  securities  of the
Corporation  or of any other person  which may be issuable  upon the exercise of
the Rights) and requests that certificates for such shares be issued in the name
of and delivered to:

Please insert social security or
other identifying number


______________________________________________________________________________
                        (Please print name and address)

______________________________________________________________________________


     If such  number of Rights  shall not be all the  Rights  evidenced  by this
Rights  Certificate,  a new Rights  Certificate  for the  balance of such Rights
shall be registered in the name of and delivered to:

Please insert social security or
other identifying number

______________________________________________________________________________
                        (Please print name and address)

______________________________________________________________________________


Dated:_________________________          _____________________________________

Signature Guaranteed:
                                  CERTIFICATE
<PAGE>



     The undersigned hereby certifies by checking the appropriate boxes that:

     (1) the Rights  evidenced  by this Rights  Certificate  [ ] are [ ] are not
being  acquired  or  exercised  by or on  behalf  of a  Person  who is or was an
Acquiring  Person or an Affiliate  or Associate of an Acquiring  Person (as such
terms are defined in the Rights Agreement); and

     (2) after due inquiry and to the best knowledge of the undersigned,  it [ ]
did [ ] did not acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person.


Dated:_________________________          ____________________________________
                                            Signature

Signature Guaranteed:

                                     NOTICE

     The signature to the foregoing  Election to Purchase and  Certificate  must
correspond  to the name as written upon the face of this Rights  Certificate  in
every particular, without alteration or enlargement or any change whatsoever.

<PAGE>


                                     ANNEX I

                            Social Security
                             or Taxpayer         Number of       Total
Name and Address            Identification        Shares        Purchase
    of Buyer                    Number           Purchased       Price
----------------            ---------------      ----------     --------












[This Annex I is attached to and made a part of that certain Stock
Purchase Agreement between Parallel Petroleum Corporation and the
Buyer named above.]

<PAGE>                             C-1



[Letter to Stockholders]                                         Exhibit C







                                        October 16, 2000




Dear Parallel Petroleum Corporation Stockholder:

     On October 5, 2000,  your Board of Directors  adopted a Stockholder  Rights
Plan  designed  to prevent a  potential  acquiror  from  gaining  control of the
Company without fairly compensating all of the Company's stockholders.

     The Rights will initially  trade with shares of the Company's  Common Stock
and will have no impact on the way in which the  Company's  shares  are  traded.
There are no separate certificates or market for the Rights.

     The Rights will not become exercisable and trade separately from the Common
Stock until the  earlier of (1) ten  business  days after a public  announcement
that a person has acquired 15% or more of the Common Stock of the Company or (2)
ten  business  days (or any later  date  determined  by the  Company's  Board of
Directors)  after a person  makes a tender or exchange  offer for 15% or more of
the Company's Common Stock.

     Many  other  public  companies  have  adopted  similar  plans,   indicating
widespread  agreement  that such plans can help Directors  deflect  coercive and
inadequate offers.

     A summary of the terms of the Rights is included with this letter.

                                                        Sincerely,



                                                        Larry C. Oldham,
                                                        President

<PAGE>                            C-2

                         SUMMARY OF RIGHTS TO PURCHASE
                                PREFERRED STOCK

     On  October  5,  2000,  the  Board  of  Directors  of  Parallel   Petroleum
Corporation (the "Company"),  declared a dividend  distribution of one Right for
each  outstanding  share of the  Company's  common  stock,  $0.01 par value (the
"Common  Stock"),  to stockholders of record at the close of business on October
16, 2000. Each Right entitles the registered holder to purchase from the Company
one  one-thousandth(1/1,000)  of a share of Series A Preferred  Stock, par value
$0.10 per share (the "Preferred  Stock"),  at a Purchase Price of $26.00 per one
one-thousandth (1/1,000) of a share, subject to adjustment.  The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and Computershare Trust Company,  Inc., as Rights Agent (the
"Rights Agent").

     Initially,  the Rights will be attached  to all Common  Stock  certificates
representing  shares then outstanding,  and no separate Rights Certificates will
be distributed.  The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public  announcement  that a person or
group of affiliated or associated persons (an "Acquiring  Person") has acquired,
or obtained the right to acquire,  beneficial ownership of fifteen percent (15%)
or more of the  outstanding  shares  of Common  Stock  (the  "Stock  Acquisition
Date"),  or (ii) ten (10)  business  days (or such  later  date as the  Board of
Directors shall  determine)  following the  commencement of a tender or exchange
offer that would result in a person or group beneficially owning fifteen percent
(15%) or more of such  outstanding  shares of Common Stock.  The date the Rights
separate is referred to as the "Distribution Date."

     Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock  certificates and will be transferred with and only with such Common Stock
certificates,  (ii) new Common Stock certificates  issued after October 16, 2000
will contain a notation  incorporating  the Rights  Agreement by reference,  and
(iii)  the  surrender  for  transfer  of  any   certificates  for  Common  Stock
outstanding will also constitute the transfer of the Rights  associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
the  Company  reserves  the  right  to  require  prior  to the  occurrence  of a
Triggering  Event (as defined below) that, upon any exercise of Rights, a number
of Rights be  exercised  so that only whole  shares of  Preferred  Stock will be
issued.

     The Rights are not exercisable  until the Distribution Date and will expire
at the close of  business  on October 5, 2010,  unless  earlier  redeemed by the
Company as described below.

     As soon as practicable  after the Distribution  Date,  Rights  Certificates
will

<PAGE>
                                       C-3


be mailed to  holders  of  record  of the  Common  Stock as of the close of
business  on  the  Distribution  Date  and,  thereafter,   the  separate  Rights
Certificates  will  represent the Rights.  Except in  connection  with shares of
Common Stock issued or sold  pursuant to the exercise of stock options under any
employee plan or arrangements,  or upon the exercise,  conversion or exchange of
securities  hereafter issued by the Company,  or as otherwise  determined by the
Board of Directors, only shares of Common Stock issued prior to the Distribution
Date will be issued with Rights.

     In the event that (i) the Company is the surviving  corporation in a merger
or other  business  combination  with an Acquiring  Person (or any  associate or
affiliate thereof) and its Common Stock remains outstanding and unchanged,  (ii)
any person shall acquire beneficial ownership of more than fifteen percent (15%)
of the  outstanding  shares of Common  Stock  (except  pursuant  to (A)  certain
consolidations  or mergers  involving  the Company or sales or  transfers of the
combined assets,  cash flow or earning power of the Company and its subsidiaries
or (B) an offer for all  outstanding  shares of Common Stock at a price and upon
terms and conditions  which the Board of Directors  determines to be in the best
interests  of the  Company  and its  stockholders),  or  (iii)  there  occurs  a
reclassification  of  securities,  a  recapitalization  of the Company or any of
certain  business   combinations  or  other  transactions  (other  than  certain
consolidations  and mergers  involving the Company and sales or transfers of the
combined assets, cash flow or earning power of the Company and its subsidiaries)
involving  the  Company  or any of its  subsidiaries  which  has the  effect  of
increasing by more than one percent (1%) the proportionate share of any class of
the  outstanding  equity  securities  of the Company or any of its  subsidiaries
beneficially  owned  by an  Acquiring  Person  (or any  associate  or  affiliate
thereof),  each holder of a Right (other than the  Acquiring  Person and certain
related  parties)  will  thereafter  have the right to receive,  upon  exercise,
Common Stock (or, in certain  circumstances,  cash, property or other securities
of the  Company)  having a value  equal to two times the  Purchase  Price of the
Right. Notwithstanding any of the foregoing,  following the occurrence of any of
the events  described in this paragraph,  all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring  Person will be null and void. The events  described in this paragraph
are referred to as "Flip-in Events."

     For example,  at a Purchase Price of $26.00 per Right, each Right not owned
by an Acquiring Person (or by certain related parties or transferees)  following
an event  set forth in the  preceding  paragraph  would  entitle  its  holder to
purchase $52.00 worth of Common Stock (or other  consideration,  as noted above)
for $26.00. Assuming that the Common Stock had a per share market price of $5.20
at such time,  the holder of each valid  Right  would be entitled to purchase 10
shares of Common Stock for $26.00.

<PAGE>
                                       C-4


     In the event that, at any time  following the Stock  Acquisition  Date, (i)
the Company shall enter into a merger or other business combination  transaction
in which the Company is not the surviving  corporation,  (ii) the Company is the
surviving corporation in a consolidation, merger or similar transaction pursuant
to which all or part of the outstanding  shares of Common Stock are changed into
or exchanged  for stock or other  securities  of any other person or cash or any
other  property  or (iii)  more than 50% of the  combined  assets,  cash flow or
earning power of the Company and its  subsidiaries  is sold or  transferred  (in
each case other than certain  consolidations  with,  mergers  with and into,  or
sales of assets, cash flow or earning power by or to subsidiaries of the Company
as specified in the Rights  Agreement),  each holder of a Right  (except  Rights
which  previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise,  common stock of the acquiring company having a
value equal to two times the Purchase Price of the Right.  The events  described
in this  paragraph are referred to as  "Flip-over  Events."  Flip-in  Events and
Flip-over Events are referred to collectively as "Triggering Events."

     The Purchase Price  payable,  the number and kind of shares covered by each
Right and the number of Rights  outstanding  are subject to adjustment from time
to time to  prevent  dilution  (i) in the  event of a stock  dividend  on,  or a
subdivision,  combination or  reclassification  of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted  certain rights,  options or warrants
to subscribe for Preferred Stock or securities  convertible into Preferred Stock
at less than the current market price of the Preferred  Stock, or (iii) upon the
distribution  to holders of the  Preferred  Stock of evidences of  indebtedness,
cash (excluding regular quarterly cash dividends),  assets (other than dividends
payable in Preferred Stock) or subscription rights or warrants (other than those
referred to in (ii) immediately above).

     With  certain  exceptions,  no  adjustment  in the  Purchase  Price will be
required until cumulative adjustments amount to at least one percent (1%) of the
Purchase  Price.  No  fractional  shares of  Preferred  Stock are required to be
issued (other than fractions which are integral  multiples of one one-thousandth
(1/1,000) of a share of Preferred  Stock) and, in lieu thereof,  the Company may
make an adjustment  in cash based on the market price of the Preferred  Stock on
the trading date immediately prior to the date of exercise.

     At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of fifty percent (50%) or more of the
outstanding  shares of Common Stock,  the Board of Directors of the Company may,
without payment of the Purchase Price by the holder,  exchange the Rights (other
than Rights owned by such person or group,  which will become void), in whole or
in part,  for shares of Common Stock at an exchange  ratio of one-half (1/2) the
number of shares of Common Stock (or in certain circumstances Preferred

<PAGE>
                                       C-5


Stock)  for which a Right is  exercisable  immediately  prior to the time of the
Company's decision to exchange the Rights (subject to adjustment).

     At any time until the Stock  Acquisition  Date,  the Company may redeem the
Rights in whole,  but not in part,  at a price of $0.001 per Right  (payable  in
cash, shares of Common Stock or other  consideration  deemed  appropriate by the
Board of  Directors).  Immediately  upon the  action of the  Board of  Directors
ordering  redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.

     Until a Right is  exercised,  the  holder  thereof,  as such,  will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive  dividends.  While the distribution of the Rights will not
be taxable to stockholders or to the Company,  stockholders may,  depending upon
the circumstances,  recognize taxable income in the event that the Rights become
exercisable  for Common  Stock (or other  consideration)  of the  Company or for
common stock of an acquiring company as set forth above or in the event that the
Rights are redeemed.

     Other than those provisions relating to the principal economic terms of the
Rights,  any of the  provisions  of the Rights  Agreement  may be amended by the
Board of  Directors  of the  Company at any time  during the period in which the
Rights are redeemable. At any time when the Rights are no longer redeemable, the
provisions  of the  Rights  Agreement  may be  amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided,  however, that no amendment may
cause the Rights again to become redeemable.

     A copy of the  Rights  Agreement  has been filed  with the  Securities  and
Exchange Commission as an Exhibit to a Registration  Statement on Form 8-A filed
on October 9, 2000. A copy of the Rights  Agreement is available  free of charge
from the Rights Agent.  This summary  description of the Rights does not purport
to be complete  and is  qualified  in its  entirety by  reference  to the Rights
Agreement, which is incorporated herein by reference.


<PAGE>




                                    Exhibit D

Parallel Petroleum Corporation (ticker:  PLLL, exchange:  NASDAQ) News Release -
5-Oct-2000

================================================================================


         Parallel Petroleum Announces Successful Natural Gas Discovery;
                Adopts Stockholder Rights Plan and Amends Bylaws

Parallel  Petroleum  Corporation  (Nasdaq NMS: PLLL) today announced the current
production  rate of a  natural  gas  discovery  in the  Yegua/Frio  Gas Trend in
Jackson County,  Texas.  The  Weaver-Dugger A No. 1, Jackson County,  Texas, was
drilled to a total depth of 9,440 feet. The well was perforated in two intervals
from 9,310 to 9,321 feet and 9,323 to 9,326  feet in the Frio  formation  and is
currently flowing at a rate of 1,871 mcf of gas and 57 barrels of oil per day on
a  9.75/64-inch  choke with flowing  tubing  pressure of 4,750 psi. Based on the
operator's current  assessment,  the production rate is expected to be increased
to 5,000 mcf per day plus condensate during the next 30 days. Four new prospects
have been identified on this project and are waiting on rigs. The Company owns a
27.63% working interest (20.72% net revenue interest) in the well. The operator,
privately  held Allegro  Investments,  and industry  partners own the  remaining
interests.

In addition, the Company today announced that its Board of Directors has adopted
a  Stockholder  Rights  Plan.  The Plan is designed to protect the Company  from
unfair or coercive  takeover  attempts and to prevent a potential  acquiror from
gaining control of the Company without fairly  compensating all of the Company's
stockholders.

The Plan  creates a  dividend  of one right  for each  outstanding  share of the
Company's  Common  Stock.  The rights  are  represented  by and traded  with the
Company's  Common Stock.  There are no separate  certificates  or market for the
rights.

The rights do not become  exercisable or trade  separately from the Common Stock
unless one or both of the following  conditions  are met: a public  announcement
that a person has acquired 15% or more of the Common Stock of the Company,  or a
tender  or  exchange  offer is made for 15% or more of the  Common  Stock of the
Company.

Should  either of the  aforementioned  conditions  be met and the rights  become
exercisable,  each right will entitle the holder  thereof to buy  1/1,000th of a
share of the Company's  Series A Preferred Stock at an exercise price of $26.00.
Each 1/1,000th of a share of the Series A Preferred Stock will essentially be

<PAGE>




the economic equivalent of one share of Common Stock.

Under certain  circumstances the rights entitle the holders to buy the Company's
stock at a 50%  discount.  In the event that (1) the  Company  is the  surviving
corporation in a merger or other business  combination  with an entity that owns
15% or more of the  Company's  outstanding  stock;  (2) any person shall acquire
beneficial ownership of 15% of the Company's  outstanding stock; or (3) there is
any type of  recapitalization of the Company that results in an increase by more
than 1% the  proportionate  share of equity securities of the Company owned by a
person  who owns 15% or more of the  Company's  outstanding  stock,  each  right
holder will have the option to buy for the  purchase  price  Common Stock of the
Company having a value equal to two times the purchase price of the right.

Under certain  circumstances the rights entitle the holders to buy shares of the
acquiror's Common Stock at a 50% discount. In the event that at any time after a
person has acquired 15% or more of the Company's Common Stock,

(1) the Company enters into a merger or other business  combination  transaction
in which the Company is not the  surviving  corporation;  (2) the Company is the
surviving  corporation in a transaction in which all or part of the Common Stock
is exchanged for cash,  property or securities of any other person;  or (3) more
than 50% of the assets,  cash flow or earning power of the Company is sold, each
right  holder  will have the option to buy for the  purchase  price stock of the
acquiring  company  having a value equal to two times the purchase  price of the
right.

The rights may be redeemed by the Company for $0.001 per right at any time until
the first public announcement of the acquisition of beneficial  ownership of 15%
of the Company's Common Stock.

The  distribution  of the rights  will be made to  stockholders  of record as of
October  16,  2000.  Stockholders  of record  will  receive a  separate  mailing
describing the Plan and a copy of the Plan  containing all the provisions of the
new rights  will be filed  with the  Securities  and  Exchange  Commission.  The
Company's Plan is similar to those adopted by many other companies.

Also on October 5, 2000, the Board of Directors  adopted  certain  amendments to
the  Company's  Bylaws.  These  amendments  modify,   clarify  and  add  certain
provisions  regarding the advance notice requirements for stockholder  proposals
before an annual  meeting of  stockholders,  the calling of special  meetings of
stockholders,  stockholder  written consents,  and the procedures for nominating
directors.

Parallel  Petroleum  Corporation is an independent energy company engaged in the
exploration for and the  acquisition,  development and production of oil and gas
using 3-D seismic technology.

<PAGE>



In  addition to  historical  information  contained  herein,  this news  release
contains  forward-looking  statements subject to various risks and uncertainties
that could cause the Company's actual results to differ materially from those in
the forward-looking statements.  Forward-looking statements can be identified by
the use of forward looking terminology such as "may," "will," "expect","intend,"
"anticipated,"  "estimate,"  "continue," "present value," "future" "reserves" or
other variations thereof or comparable terminology.  Factors that could cause or
contribute  to such  differences  could  include,  but are not limited to, those
relating to the Company's growth strategy, outstanding indebtedness,  dependence
on  weather   conditions,   seasonality,   expansion  and  other  activities  of
competitors, prices of oil and gas, and the general condition of the economy and
its  effect  on  the  securities   market.   While  the  Company   believes  its
forward-looking  statements  are based upon  reasonable  assumptions,  there are
factors that are  difficult to predict and that are  influenced  by economic and
other,  conditions  beyond the  Company's  control.  Investors  are  directed to
consider such risks and other uncertainties  discussed in documents filed by the
Company with the Securities and Exchange Commission.

Parallel Petroleum Corporation
I IO N. Marienfeld, Suite 465
Midland, TX 79701
915.684.3727
www.parallel-petro.com
Contact: Rhonda L. Keller
Manager Investor Relations
e-mail:rho@parallel-petro.com
MIDLAND, Texas, September 22, 2000

================================================================================

Parallel Petroleum Corporation - 110 North Marienfeld Suite 465 - Midland, Texas
79701 - phone 915.684.3727 fax 915.684.3905


<PAGE>

                                                          EXHIBIT 10.9




                                 LOAN AGREEMENT



                            DATED DECEMBER 18, 2000



                                 by and between



                        PARALLEL PETROLEUM CORPORATION,
                                  as Borrower,




                                      AND



                                  BANK UNITED,
                                   as Lender


<PAGE>
                                       i



                                TABLE OF CONTENTS

                                                                        Page No.


ARTICLE I..............................................................     1
Definitions............................................................     1
                1.1     Certain Defined Terms..........................     1
                1.2     Other Definitional Provisions..................     8

ARTICLE II.............................................................     8
Revolving Loan.........................................................     8
                2.1     Revolving Commitment...........................     8
                2.2     Manner of Borrowing............................     9
                2.3     Commitment Fee.................................     9
                2.4     Note...........................................    10
                2.5     Principal Payments.............................    10
                2.6     Interest Rate; Interest Payments...............    10
                2.7     Capital Adequacy...............................    11
                2.8     Prepayments....................................    11
                2.9     Manner and Application of Payments.............    12
                2.10    Rate Elections.................................    12
                2.11    Increased Cost of Eurodollar Portion...........    13
                2.12    Availability...................................    13
                2.13    Funding Losses.................................    14
                2.14    Taxes..........................................    14

ARTICLE III............................................................    15
Borrowing Base and Required Prepayments Under Note.....................    15
                3.1     Borrowing Base.................................    15
                3.2     Redeterminations of Borrowing Base and Monthly
                        Automatic Borrowing Base Reduction.............    15
                3.3     Standards for Redetermination..................    16
                3.4     Borrowing Base Redetermination Fee.............    16
                3.5     Mandatory Increase in Collateral or Prepayment
                        of Principal of the Note.......................    16
                3.6     Monthly Automatic Borrowing Base Reduction
                        and Prepayment of Principal of the Note........    16

ARTICLE IV.............................................................    17
Security and Assignment................................................    17

ARTICLE V..............................................................    17
Conditions Precedent...................................................    17
                5.1     Renewal and Extension..........................    17
                5.2     All Advances...................................    18

ARTICLE VI.............................................................    19
Representations and Warranties.........................................    19
                6.1     Existence and Authority........................    19
                6.2     Powers.........................................    19
                6.3     Financial Statements...........................    19
                6.4     Liabilities....................................    19
                6.5     Litigation.....................................    19


 <PAGE>
                                       ii

                6.6     Taxes.........................................     20
                6.7     Purpose of Loan...............................     20
                6.8     Properties; Liens.............................     20
                6.9     Material Agreements...........................     20
                6.10    ERISA.........................................     21
                6.11    Location of Records...........................     21
                6.12    Permits and Franchises, Etc...................     21
                6.13    Subsidiaries..................................     21
                6.14    Hazardous Wastes and Substances...............     21
                6.15    Public Utility Holding Company Act............     22
                6.16    General.......................................     22

ARTICLE VII...........................................................     22
Affirmative Covenants.................................................     22
                7.1     Financial Statements and Other Information....     22
                7.2     Taxes.........................................     24
                7.3     Discharge of Contractual Obligations..........     24
                7.4     Legal Status..................................     24
                7.5     Maintenance and Evidence of Priority of Bank
                        Liens.........................................     24
                7.6     Insurance.....................................     25
                7.7     Reimbursement of Fees and Expenses............     25
                7.8     Indemnification...............................     25
                7.9     Curing of Defects.............................     26
                7.10    Inspection and Visitation.....................     26
                7.11    Notices.......................................     26
                7.12    Bank Lien on Other Assets.....................     26
                7.13    Compliance....................................     26
                7.14    Compliance with Environmental Laws............     27
                7.15    Use of Proceeds...............................     27
                7.16    Deposit Accounts..............................     27
                7.17    Title Curative................................     27

ARTICLE VIII..........................................................     27
Negative Covenants....................................................     27
                8.1     Liens.........................................     28
                8.2     Indebtedness..................................     29
                8.3     ERISA Compliance..............................     29
                8.4     Investments...................................     29
                8.5     Mergers, Consolidations.......................     30
                8.6     Dividends and Distributions...................     30
                8.7     Transactions with Affiliates..................     30
                8.8     Accounting Method and Fiscal Year.............     30
                8.9     Nature of Business............................     30
                8.10    Disposition of Assets.........................     30
                8.11    Current Ratio.................................     30
                8.12    Leases........................................     31
                8.13    Net Worth.....................................     31
                8.14    Debt Service Ratio............................     31
                8.15    Derivatives...................................     31


<PAGE>
                                      iii

ARTICLE IX............................................................     31
Default and Remedies..................................................     31
                9.1     Events of Default.............................     31
                9.2     Remedies......................................     33

ARTICLE X.............................................................     33
Miscellaneous.........................................................     33
                10.1    Survival of Representations and Warranties....     33
                10.2    Communications................................     33
                10.3    Non-Waiver....................................     34
                10.4    Strict Compliance.............................     34
                10.5    Cumulative Rights.............................     34
                10.6    GOVERNING LAW.................................     35
                10.7    CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS;
                        JURISDICTION; AND WAIVER OF JURY TRIAL........     35
                10.8    ARBITRATION...................................     35
                10.9    Usury Savings Clause..........................     37
                10.10   Enforceability................................     37
                10.11   Binding Effect................................     37
                10.12   No Third Party Beneficiary....................     38
                10.13   Delegation by Lender..........................     38
                10.14   Setoff........................................     38
                10.15   Additional Documents..........................     38
                10.16   Counterparts..................................     39
                10.17   Amendments....................................     39
                10.18   Headings......................................     39
                10.19   Conflicts.....................................     39
                10.20   Entirety......................................     39
                10.21   Participations................................     39
                10.22   Notice of Final Agreement.....................     39

                        Exhibit 2.2     -    Request for Advance
                        Exhibit 2.4     -    Promissory Note
                        Exhibit 2.10    -    Form of Rate Election
                        Schedule 5.1    -    Closing Documents
                        Schedule 6.5    -    Litigation
                        Schedule 6.9    -    Material Agreements
                        Exhibit 7.1     -    Compliance Certificate
                        Schedule 7.17   -    Title Curative Matters


<PAGE>
                                       1


                                 LOAN AGREEMENT

     THIS LOAN  AGREEMENT  (this  "Agreement")  is entered into this 18th day of
December,  2000  by and  between  PARALLEL  PETROLEUM  CORPORATION,  a  Delaware
corporation ("Borrower"); and BANK UNITED, a federal savings bank ("Lender").


                                    RECITALS

     A. Borrower and Bank One, Texas,  N.A.  ("Prior  Lender") entered into that
certain  Restated  Loan  Agreement  dated  December  27,  1999 (the  "Prior Loan
Agreement").

     B.  Contemporaneously  with the  execution  hereof,  the Prior  Lender  has
assigned to Lender all of the Prior  Lender's  interests  in and under the Prior
Loan  Agreement,  the Prior  Note  (defined  below)  and all liens and  security
interests securing  Borrower's  obligations to Prior Lender under the Prior Loan
Agreement and the Prior Note.

     C.  Borrower has  requested  that Lender  provide  Borrower with a reducing
revolving line of credit facility in an amount up to $30,000,000,  and Lender is
willing to make such  facility  available to Borrower,  subject to the terms and
conditions  contained  herein.  The  parties  hereto  agree that this  Agreement
replaces the Prior Loan  Agreement  and that this  Agreement  and the other Loan
Papers executed in connection  herewith shall govern the terms of the loans made
hereunder in their entirety and shall control over the Prior Loan Agreement.

                                    AGREEMENT

     NOW THEREFORE,  in  consideration  of the premises and the mutual covenants
herein contained and other good and valuable consideration,  it is hereby agreed
between the parties as follows:


                                    ARTICLE I
                                   Definitions

     1.1  Certain  Defined  Terms.  For  the  purposes  of this  Agreement,  the
following  terms  shall have the  respective  meanings  assigned to them in this
section or in the section or recital referred to below:

     "Adjusted   Eurodollar  Rate"  means,   with  respect  to  each  particular
Eurodollar  Portion and the associated  Eurodollar Rate and Reserve  Percentage,
the rate per annum calculated by Lender



<PAGE>
                                       2

(rounded upwards, if necessary,  to the next higher 1/100th of 1%) determined on
a daily basis pursuant to the following formula:

                        AER     =          ER     +  EM
                                        ---------
                                        1.00 - RP

                        AER     =       Adjusted Eurodollar Rate
                        ER      =       Eurodollar Rate
                        RP      =       Reserve Percentage
                        EM      =       Eurodollar Margin

The Adjusted  Eurodollar Rate shall change as the associated  Reserve Percentage
changes.

     "Advance"  means any  disbursement to or on behalf of Borrower under any of
the Loan Papers, including,  without limitation,  all amounts advanced under the
Prior Note or the Note.

     "Agreement": the preamble.

     "Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation,  including, without limitation,  Rights in any of the Collateral
created  in  favor  of  Lender,  whether  by  mortgage,  pledge,  hypothecation,
assignment, transfer or other granting or creation of Liens.

     "Base Rate" means,  as of any date,  the  fluctuating  rate of interest per
annum  published  in the Money Rates  section of The Wall Street  Journal as the
U.S.  "prime  rate." If the  Money  Rates  section  of The Wall  Street  Journal
contains more than one U.S.  "prime rate," then the "prime rate" for purposes of
this definition shall be the higher of said rates. If the Money Rates section of
The Wall  Street  Journal  does not have a rate  designated  by it as its "prime
rate,"  then the  "prime  rate"  shall be deemed to be the  fluctuating  rate of
interest per annum which is the general  reference rate  designated by Lender as
its "reference  rate," "base rate" or other similar rate and which is comparable
to the "prime  rate" as  described  above.  The Base Rate is used by Lender as a
general  reference rate of interest,  taking into account such factors as Lender
may deem appropriate,  it being understood that it is not necessarily the lowest
or best rate  actually  charged to any customer and that Lender may make various
commercial or other loans at rates of interest  having no  relationship  to such
rate. Each change in the Base Rate shall become  effective  without prior notice
to  Borrower  automatically  as of the  opening of  business on the date of such
change in the Base Rate.

     "Base Rate Portion" means that portion of the unpaid  principal  balance of
the Revolving Loan which is not made up of Eurodollar Portions.

     "Borrower": the preamble.

     "Borrowing Base": Section 3.1.

<PAGE>
                                       3

     "Borrowing Base Redetermination Fee": Section 3.4.

     "Business Day" means a day on which  commercial banks are open for business
with the public in the State of Texas.  Any  Business Day in any way relating to
Eurodollar  Portions  (such as the day on  which a  Eurodollar  Interest  Period
begins  or  ends)  must  also be a day on  which,  in the  judgment  of  Lender,
significant  transactions  in Dollars are  carried  out in the London  interbank
market.

     "Cash  Flow"  means  Borrower's  Net  Income  for each  fiscal  quarter  of
Borrower,  less  preferred  dividends  paid by Borrower  during each such fiscal
quarter,  plus  depreciation,  depletion and other non-cash  charges of Borrower
during each such fiscal quarter determined on an unconsolidated basis.

     "Claims": Section 7.8.

     "Collateral": Article IV.

     "Commitment Fee": Section 2.3.

     "Current  Assets" of any person  shall  mean,  as of any date,  the current
assets that would be reflected on an unconsolidated balance sheet of such person
prepared as of such date in conformity with GAAP.

     "Current Liabilities" of any person shall mean, as of any date, the current
liabilities that would be reflected on an  unconsolidated  balance sheet of such
person prepared as of such date in conformity with GAAP.

     "Current  Ratio" means,  as of any date,  the ratio of  Borrower's  Current
Assets (including,  for purposes of this calculation,  unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note).

     "Debt  Service  Ratio"  means,  as of the end of  each  fiscal  quarter  of
Borrower,  the ratio of Borrower's  Cash Flow during such fiscal  quarter to the
Total Monthly Automatic Borrowing Base Reductions during such fiscal quarter.

     "Deed of Trust" means one or more mortgages, deeds of trust, assignments of
production and security  agreements and financing  statements in favor of Lender
encumbering  every  interest of Borrower in every oil and gas property  owned by
Borrower and selected by Lender to be encumbered as security for the Obligation,
including,   without  limitation,   any  such  property  consisting  of  royalty
interests,  overriding royalty interests and/or  reversionary rights relating to
either  developed  or  undeveloped  leasehold  acreage,  it  being  specifically
recognized  that if any such  interest  selected is in a state where a mortgage,
deed of trust,  assignment  of  production  and security  agreement or financing
statement is, or may be,  ineffective,  a document  appropriate  for use in that
state shall be required.

<PAGE>
                                       4

     "Derivatives" means, foreign exchange transactions and commodity,  currency
and interest rate swaps, floors, caps, collars,  forward sales,  options,  other
similar  transactions  and  combinations  of the  foregoing,  including  without
limitation, Rate Management Transactions.

     "Dollars" and "$" mean lawful money of the United States of America.

     "ERISA": Section 6.10.

     "Eurodollar  Interest  Period"  means,  with  respect  to  each  particular
Eurodollar  Portion, a period of thirty (30), sixty (60) or ninety (90) days, as
specified in the Rate Election  applicable  thereto,  beginning on and including
the date  specified in such Rate Election  (which must be a Business  Day),  and
ending  thirty (30),  sixty (60) or ninety (90) days  thereafter,  provided that
each Eurodollar  Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next  succeeding  Business Day (unless such next
succeeding  Business  Day is in the next  calendar  month,  in which  case  such
Eurodollar Interest Period shall end on the immediately preceding Business Day).
No Eurodollar  Interest  Period may be elected for any Eurodollar  Portion which
would extend past the Revolving Maturity Date.

     "Eurodollar  Margin" means, with respect to each Eurodollar  Portion of the
Revolving Loan, two and three-fourths percent (2.75%).

     "Eurodollar  Portion" means any portion of the unpaid principal  balance of
the Revolving Loan which Borrower designates as such in a Rate Election.

     "Eurodollar Rate" means, with respect to each particular Eurodollar Portion
for any  Interest  Period  therefor,  the rate of  interest  per  annum at which
deposits in immediately  available and freely transferrable funds in Dollars are
offered to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business
Days prior to the first day of each  Interest  Period)  in the London  interbank
market for delivery on the first day of such Interest  Period in an amount equal
to or comparable to the principal amount of the Eurodollar Portion to which such
Interest Period  relates.  Each  determination  of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding.

     "Event of Default": Section 9.1.

     "GAAP"  shall mean  those  generally  accepted  accounting  principles  and
practices  that are  recognized  as such by the American  Institute of Certified
Public  Accountants  acting  through its Accounting  Principles  Board or by the
Financial  Accounting  Standards  Board  (or  any  other  appropriate  board  or
committee thereof),  applied on a basis consistent with that of prior periods so
as to properly reflect the financial  condition,  results of operations and cash
flows of a person,  except that any accounting principle or practice required to
be changed  by the said  Accounting  Principles  Board or  Financial  Accounting
Standards  Board (or any other board or committee  thereof) in order to continue
as a generally accepted  accounting  principle or practice may so be changed and
when so

<PAGE>
                                       5

changed shall constitute generally accepted accounting  principles in accordance
with the terms hereof.

     "Highest Lawful Rate" means the maximum  nonusurious  rate of interest (or,
if the context so requires,  an amount  calculated  at such rate) that Lender is
allowed to contract for, charge,  take,  reserve or receive under applicable law
after taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Papers.

     "Interest  Period"  means,  with  respect to any  Eurodollar  Portion,  the
related Eurodollar Interest Period.

     "Investments": Section 8.4.

     "Lender": the preamble.

     "Lien" means any lien, mortgage,  security interest, charge, or encumbrance
of any kind, including,  without limitation,  the Rights of a vendor, lessor, or
similar party under any  conditional  sales  agreement or other title  retention
agreement or lease substantially equivalent thereto, any production payment, and
any  other  Right  of,  or  arrangement  with,  any  creditor  to have his claim
satisfied out of any property or assets, or the proceeds therefrom, prior to the
general creditors of the owner thereof.

     "Loan Papers" means (i) this Agreement,  (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and other
agreements, documents,  certificates,  letters and instruments ever delivered or
executed pursuant to, or in connection with, this Agreement,  as any of the same
may  hereafter  be  amended,   supplemented  or  restated  (including,   without
limitation,  the Note  and the Deed of  Trust),  (iii)  any and all  agreements,
documents  and  instruments  ever  delivered  or  executed  pursuant  to,  or in
connection  with,  Rate  Management  Transactions,  and (iv) any and all  future
renewals and extensions or restatements of, or amendments or supplements to, all
or any part of the foregoing.

     "Margin  Regulations"  means, as applicable,  Regulations G, U and X of the
Board of  Governors  of the  Federal  Reserve  System,  as from  time to time in
effect.

     "Material Adverse Change" means any set of circumstances or events that (i)
will or could  reasonably  be  expected  to have  any  adverse  effect  upon the
validity,  performance,  or  enforceability  of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial  condition or
business  operations of Borrower,  (iii) will or could reasonably be expected to
impair the ability of Borrower  to fulfill its  obligations  under the terms and
conditions of the Loan Papers,  or (iv) will or could  reasonably be expected to
cause an Event of Default.

     "Material  Agreement"  of any  person  means any  material  written or oral
agreement,  contract,  commitment,  or  understanding  to which such person is a
party,  by which such person is directly or


<PAGE>
                                       6

indirectly bound, or to which any asset of such person may be subject,  which is
not cancelable by such person upon 30 days or less notice without  liability for
further payment other than nominal penalty.

     "Mineral Interests" means Rights, estates,  titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and all
extensions, amendments,  ratifications, and subleases thereof or thereunder) and
any mineral  interests,  royalty and overriding  royalty  interests,  production
payment and net profits  interests,  mineral fee interests,  and rights therein,
including, without limitation, any reversionary or carried interests relating to
the foregoing, together with Rights, titles, and interests created by or arising
under the terms of any unitization,  communitization,  and pooling agreements or
arrangements, and all properties, rights, and interests covered thereby, whether
arising by contract,  by order,  or by operation of law,  which now or hereafter
include all or any part of the foregoing.

     "Monthly Automatic Borrowing Base Reduction": Section 3.6.

     "Net Income"  means  Borrower's  unconsolidated  net income,  determined in
accordance with GAAP.

     "Net  Worth"  means,  as  of  any  date,  an  amount  equal  to  Borrower's
unconsolidated stockholders' equity, as determined in accordance with GAAP.

     "Note": Section 2.4(a).

     "Obligation"  means all present and future  indebtedness,  obligations  and
liabilities,  and all renewals and extensions thereof, or any part thereof,  now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper  (including,  without  limitation,  amounts  owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower  and any and all  obligations,  contingent  or  otherwise,  whether now
existing  or  hereafter  arising,  of  Borrower  to Lender  arising  under or in
connection with Rate Management Transactions),  or otherwise,  together with all
interest  accruing thereon and reasonable costs,  expenses,  and attorneys' fees
incurred in the enforcement or collection  thereof,  whether such  indebtedness,
obligations,   and  liabilities  are  direct,   indirect,   fixed,   contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.

     "Plan"  means  any plan  subject  to Title IV of ERISA  and  maintained  by
Borrower, or any such plan to which Borrower is required to contribute on behalf
of its employees.

     "Prior Lender": Recital A.

     "Prior Loan Agreement": Recital A.

<PAGE>
                                       7

     "Prior Note" means that certain promissory note dated December 27, 1999, in
the original principal amount of $30,000,000 executed by Borrower and payable to
the order of Prior Lender.

     "Rate Election" has the meaning given it in Section 2.10.

     "Rate Management Transaction" means any transaction (including an agreement
with respect  thereto) now existing or hereafter  entered into between  Borrower
and Lender which is a rate swap, basis swap, forward rate transaction, commodity
swap,  commodity  option,  equity or equity  index swap,  equity or equity index
option, bond option,  interest rate option,  foreign exchange  transaction,  cap
transaction,  floor  transaction,   collar  transaction,   forward  transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar  transaction  (including  any option with respect to any of
these  transaction)  or any combination  thereof,  whether linked to one or more
interest rates,  foreign  currencies,  commodity prices,  equity prices or other
financial measures.

     "Regulation D" means  Regulation D of the Board of Governors of the Federal
Reserve System, as from time to time in effect.

     "Reserve  Percentage"  means,  on any day with  respect to each  particular
Eurodollar Portion in a Tranche, the maximum reserve requirement,  as determined
by Lender  (including  without  limitation  any basic,  supplemental,  marginal,
emergency or similar  reserves),  expressed as a decimal and rounded to the next
higher  .01 of 1%,  which  would  then  apply to Lender  under  Regulation  D or
successor  regulations issued from time to time by the Board of Governors of the
Federal Reserve System with respect to "Eurocurrency  liabilities" (as such term
is defined in  Regulation D) equal in amount to Lender's  Eurodollar  Portion in
such Tranche, were Lender to have any such "Eurocurrency  liabilities".  If such
reserve  requirement shall change after the date hereof,  the Reserve Percentage
shall be automatically  increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.

     "Revolving Commitment": Section 2.1(a).

     "Revolving Loan" means a loan or loans made under the Revolving  Commitment
pursuant to Section 2.1(a).

     "Revolving Maturity Date" means October 1, 2003.

     "Rights" means rights, remedies, powers, privileges and benefits.

     "Subsidiary"  means  any  corporation  fifty  percent  (50%) or more of the
Voting Shares of which is owned, directly or indirectly, by Borrower.

     "Taxes" has the meaning given it in Section 2.14.

<PAGE>
                                       8


     "Total Monthly  Automatic  Borrowing Base Reductions"  means the sum of the
Monthly  Automatic  Borrowing  Base  Reductions  during each  fiscal  quarter of
Borrower.

     "Tranche" has the meaning given it in Section 2.10.

     "Voting Shares" of any  corporation or other entity shall mean  outstanding
shares of capital  stock or other  ownership  interests  of any class or classes
(however designated) having ordinary voting power for the election of at least a
majority of the members of the Board of Directors (or other  governing  body) of
such  corporation  or other entity,  other than shares having such power only by
reason of the happening of a contingency.

     1.2 Other Definitional Provisions.

          (a) All terms defined in this Agreement shall have the above described
     meanings when used in any other Loan Paper or in any certificate, report or
     other document made or delivered  pursuant to this  Agreement,  unless same
     shall otherwise expressly require.

          (b) Terms used herein in the singular shall import the plural and vice
     versa.

          (c) Terms not  specifically  defined  herein  shall have the  meanings
     accorded them under GAAP,  customary oil and gas industry  practices or the
     Texas Uniform Commercial Code, as appropriate.

          (d) The words "hereof,"  "herein,"  "hereto,"  "hereunder" and similar
     terms when used in this Agreement  shall refer to this Agreement as a whole
     and not to any particular provision of this Agreement.


                                   ARTICLE II

     2.1 Revolving Commitment.

          (a)  Subject  to the terms and  conditions  hereof,  during the period
     beginning  on the date hereof and ending on the  Revolving  Maturity  Date,
     Lender agrees to extend to Borrower a revolving  line of credit which shall
     not exceed at any time outstanding the lesser of (i)  $30,000,000,  or (ii)
     the  Borrowing  Base from time to time in effect (such lesser  amount being
     referred to herein as the "Revolving Commitment"). Subject to the foregoing
     limitations and the  requirements  set forth herein and the Note,  Borrower
     may borrow,  repay,  and reborrow  hereunder during the period beginning on
     the date hereof and ending on the Revolving Maturity Date.  Notwithstanding
     any other provisions of this Agreement,  no Advance shall be required to be
     made hereunder if any Event of Default has occurred and is continuing.

<PAGE>
                                       9

          (b) Borrower may at any time prior to the Revolving Maturity Date upon
     at least one (1)  Business  Day's  notice in writing  to Lender  reduce (in
     $100,000 integer multiples) or terminate the Revolving  Commitment.  If the
     Revolving Commitment is reduced, Lender shall thereafter have no obligation
     to make any Advance that would result in the Revolving  Loan  exceeding the
     Revolving  Commitment  as  so  reduced;  if  the  Revolving  Commitment  is
     terminated,  no  further  Advance  shall  be made  pursuant  to  Agreement.
     Notwithstanding anything to the contrary contained herein, (i) once reduced
     or terminated,  the Revolving Commitment may not be increased or reinstated
     except upon the mutual written  agreement of Borrower and Lender;  and (ii)
     Borrower  shall not reduce the  Revolving  Commitment  to an amount that is
     less than the  outstanding  balance of the Revolving  Loan on the effective
     date of such reduction.

     2.2 Manner of Borrowing.

          (a) Each request by Borrower to Lender for an Advance  shall be in the
     form of Exhibit 2.2 hereto and shall specify the  aggregate  amount of such
     requested  Advance and the requested  date of such Advance.  Borrower shall
     furnish  to Lender  each  request  for  Advance  not later  than 10:00 a.m.
     Midland,  Texas  time,  (i) one (1)  Business  Day  prior to the  requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Base Rate Portions,  and (ii) three (3) days prior to the requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Eurodollar  Portions;  provided  that,  any Advance to be made as a
     Eurodollar Portion shall require, in addition, a Rate Election as set forth
     in Section  2.10.  Subject to Section  2.10,  each Advance  shall be in the
     minimum  amount of  $50,000  or the  unadvanced  portion  of the  Revolving
     Commitment, whichever is less.

          (b) Upon fulfillment of all applicable conditions set forth in Section
     5.2 hereof (and assuming the prior satisfaction of all conditions  pursuant
     to Section 5.1 hereof),  Lender  shall  before 2:00 o'clock p.m.  (Midland,
     Texas time) on the requested borrowing date, pay or deliver each Advance to
     or upon the order of Borrower at the principal  banking office of Lender in
     Midland, Texas in immediately available funds.

     2.3 Commitment  Fee. In addition to the payments  provided for in the Note,
Borrower shall pay to Lender a revolving  credit loan commitment fee at the rate
of one-quarter  percent (1/4%) per annum on the difference between the Revolving
Commitment  and the average daily amount of the Revolving Loan for each calendar
quarter (or portion thereof) during which the Revolving Commitment is in effect.
Such fee shall be payable on the first (1st) day of the second  month  following
each such calendar quarter,  beginning February 1, 2001. The parties acknowledge
and agree that the commitment  fees payable  hereunder are bona fide  commitment
fees and are intended as  reasonable  compensation  to Lender for  committing to
make funds available to Borrower as described herein and for no other purpose.

     Upon the effective  date of a change in the Revolving  Commitment  (whether
due to a reduction of the Revolving  Commitment pursuant to Section 2.1(b), or a
change in the  Borrowing  Base  pursuant  to Section  3.2 or Section  3.6),  the
commitment  fee payable  pursuant to this Section

<PAGE>
                                       10

2.3 shall be calculated on the basis of the amount of the Revolving  Commitment,
as so changed.  Upon the  effective  date of a  termination  or reduction of the
Revolving  Commitment  (pursuant  to  Section  2.1(b)),  Borrower  shall have no
further  liability  for such  commitment  fee  (except  for that  portion of the
quarter prior to termination of the Revolving Commitment).

     2.4 Note.

          (a) The  Advances  made by Lender  under the  Revolving  Loan shall be
     evidenced by a promissory note (the "Note"), which shall be (i) dated as of
     the date hereof, (ii) in the principal amount of $30,000,000,  and (iii) in
     the form of Exhibit  2.4 hereto  with  blanks  appropriately  completed  in
     conformity  herewith.  Notwithstanding  the principal amount of the Note as
     stated on the face thereof,  the amount of principal  actually owing on the
     Note at any given time shall be the  aggregate of all Advances  theretofore
     made to Borrower under the Revolving  Loan,  less all payments of principal
     theretofore actually received by Lender and applied to the Note.

          (b) It is  expressly  agreed that the Note is given,  to the extent of
     $12,365,889.22,  in  renewal,  extension  and  rearrangement,  but  not  in
     extinguishment  or novation,  of the unpaid principal  balance of the Prior
     Note.

     2.5 Principal Payments.  The principal of the Note shall be due and payable
on the Revolving  Maturity Date, unless earlier due in whole or in part pursuant
to the  mandatory  prepayment  requirements  of Section 3.5,  Section 3.6 or the
other terms hereof.

     2.6 Interest Rate;  Interest Payments.  The unpaid principal balance of the
Note shall bear  interest  from time to time and  interest  on the Note shall be
payable, as follows:

          (a)  Borrower  agrees to pay  interest on the Note  calculated  on the
     basis  of the  actual  days  elapsed  in a year  consisting  of 365 or,  if
     appropriate,  366 days with respect to the unpaid  principal amount of each
     Base Rate Portion  during the term of the Note until  maturity  (whether by
     acceleration or otherwise), at a varying rate per annum equal to the lesser
     of (i) the  Highest  Lawful  Rate,  or (ii) the Base  Rate.  Subject to the
     provisions of this Agreement and to  prepayment,  the principal of the Note
     representing  Base Rate  Portions  shall be due and payable as specified in
     Section 2.5 hereof and the  interest  in respect of each Base Rate  Portion
     shall be due and payable  monthly on the 1st day of each month,  commencing
     January 1, 2001.  Past due principal  and, to the extent  permitted by law,
     past due  interest  in  respect  to each  Base  Rate  Portion,  shall  bear
     interest,  payable  on  demand,  at a rate per annum  equal to the  Highest
     Lawful Rate.

     (b)  Borrower  agrees  to pay  interest  calculated  on the basis of a year
consisting  of 360 days with  respect  to the  unpaid  principal  amount of each
Eurodollar  Portion  during  the term of the Note  until  maturity  (whether  by
acceleration  or otherwise),  at a varying rate per annum equal to the lesser of
(i) the Highest Lawful Rate, or (ii) the  applicable  Adjusted  Eurodollar  Rate
during the related Eurodollar Interest Period. Subject to the provisions of this
Agreement  with respect to  prepayment,  the principal of the Note  representing
Eurodollar  Portions shall be payable as specified

<PAGE>
                                       11

in Section 2.5 hereof and the interest with respect to each  Eurodollar  Portion
shall be due and payable on the day which the related Eurodollar Interest Period
ends. Past due principal and, to the extent  permitted by law, past due interest
in respect to each Eurodollar Portion,  shall bear interest,  payable on demand,
at a rate per annum equal to the Highest Lawful Rate.

     2.7 Capital Adequacy.  If at any time after the date hereof,  and from time
to  time,  any law,  rule,  regulation  or  treaty  now  existing  or  hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation  thereof now existing or hereafter made by any
governmental  authority,  central bank or comparable  agency  regarding  capital
adequacy,  or compliance by Lender with any request,  directive,  or requirement
now existing or hereafter imposed by any governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law),  shall  result in Lender  incurring a  reduction  in the rate of return on
Lender's capital as a consequence of Lender's  obligations  hereunder to a level
below that which Lender  otherwise  could have  achieved in an amount  deemed by
Lender to be material (and Lender may, in determining such amount,  utilize such
assumptions  and  allocations  of  costs  and  expenses  as  Lender  shall  deem
reasonable and may use any reasonable  averaging or attribution  method),  then,
Lender  may,  from time to time,  notify  Borrower  and  deliver  to  Borrower a
certificate  setting forth in reasonable  detail the  calculation  of the amount
necessary  to  compensate  Lender for the  reductions  incurred.  In such event,
Borrower  agrees that it shall,  within  thirty  (30) days,  either (i) pay such
amount to Lender,  or (ii)  renegotiate  the interest rate on the Note to a rate
mutually  acceptable to Borrower and Lender.  Failing Borrower's payment of such
amount  pursuant to clause (i) above or the  renegotiation  of the interest rate
pursuant to clause (ii) above, Borrower agrees that it shall, within ninety (90)
days thereafter, pay the Obligation in full and terminate this Agreement.

     2.8 Prepayments.  Borrower may prepay any Base Rate Portion, in whole or in
part,  without  penalty  or  premium,  provided,  however,  that  the  Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is at
any time reduced to less than $1,000. No prepayment of any Eurodollar Portion or
any part  thereof  shall  be  permitted  prior  to the  last day of the  current
Interest Period therefor without the prior consent of Lender;  provided, that if
Lender determines that it may not lawfully maintain a Eurodollar  Portion to the
last day of the current  Interest  Period  therefor,  Borrower shall prepay such
Eurodollar  Portion  on the date  required  by Lender.  If there is a  permitted
prepayment  of any  Eurodollar  Portion  prior to the  last  day of the  current
Interest Period therefor, whether by consent or requirement of Lender (including
without limitation  pursuant to Section 3.5 or Section 3.6 hereof) or because of
acceleration  or  otherwise,  Borrower  shall,  within  fifteen (15) days of any
request by Lender,  pay to Lender any loss or expense  which Lender may incur or
sustain as a result of any such prepayment. A statement as to the amount of such
loss or expense,  prepared in good faith and in reasonable  detail by Lender and
submitted by Lender to Borrower, shall be conclusive and binding absent manifest
error in  computation.  Calculation of all amounts  payable to Lender under this
Section  2.8  shall be made as  though  Lender  shall  have  actually  funded or
committed to fund the  relevant  Eurodollar  Portion  through the purchase of an
underlying deposit in an amount equal to the amount of such portion and having a
maturity  comparable to the current Interest Period for such Eurodollar Portion;
provided,  however, that Lender may fund any

<PAGE>
                                       12


Eurodollar Portion in any manner it sees fit and the foregoing  assumption shall
be utilized only for the purpose of  calculation  of amounts  payable under this
Section 2.8.

     2.9 Manner and  Application  of Payments.  All  payments of  principal  and
interest  on the Note shall be made by Borrower  to Lender  before 1:30  o'clock
p.m. (Midland,  Texas time), in lawful money of the United States of America and
in immediately  available funds at Lender's principal banking office in Midland,
Texas.  In any case where a payment of principal or interest on the Note, or any
commitment or other fee, is due on a day other than a Business Day, the maturity
thereof  shall be extended to the next  succeeding  Business  Day,  but interest
shall  continue to accrue  until the payment is in fact made.  All  payments and
prepayments  on the  Obligation,  including  proceeds  from the  exercise of any
Rights  under the Loan  Papers or proceeds  of any of the  Collateral,  shall be
applied to the Obligation in the order deemed  appropriate by Lender, but Lender
shall  always  retain the right to apply  same in the  following  order:  (i) to
expenses for which Lender shall not have been  reimbursed  under the Loan Papers
and then to all  indemnified  amounts  due  Lender  under  the terms of the Loan
Papers;  (ii) to accrued  and unpaid  interest  on the Note;  (iii) to Base Rate
Portions of the Loan;  (iv) to Eurodollar  Portions of the Loan;  and (v) to the
remaining  Obligation.  Subject to the  foregoing,  payments of principal of the
Note shall be applied to the  Eurodollar  Portions  as  Borrower  shall  select;
provided,  however,  that Borrower shall select Eurodollar Portions to be repaid
subject to the terms of Section 2.8 hereof, and in a manner designed to minimize
the  consequential  loss to Lender,  if any,  resulting from such payments;  and
provided further that, if Borrower shall fail to select the Eurodollar  Portions
to which such payments are to be applied, or if an Event of Default has occurred
and is continuing at the time of such payment,  then Lender shall be entitled to
apply the  payment  to such  Eurodollar  Portions  in the  manner it shall  deem
appropriate.

     2.10 Rate  Elections.  Borrower may from time to time  designate all or any
portions of the Revolving Loan  (including any yet to be made Advances which are
to be made prior to or at the beginning of the  designated  Interest  Period but
excluding  any  portions of the  Revolving  Loan which are required to be repaid
prior to the end of the designated  Interest Period) as a "Tranche",  which term
refers to a set of Eurodollar  Portions with identical Interest Periods.  Lender
shall not be required to give effect to such election  during the continuance of
an Event of Default,  and  Borrower  may make such an election  with  respect to
already existing  Eurodollar  Portions only if such election will take effect at
or after  the  termination  of the  Interest  Period  applicable  thereto.  Each
election by Borrower of a Tranche shall:

          (a) Be made in  writing  in the form and  substance  of  Exhibit  2.10
     attached hereto, duly completed, herein called a "Rate Election";

          (b) Specify the aggregate  amount of the Revolving Loan which Borrower
     desires to designate as such Tranche,  the first day of the Interest Period
     which is to apply thereto, and the length of such Interest Period; and

          (c) Be  received  by Lender not later than 10:00 a.m.  Midland,  Texas
     time,  on the third  Business Day  preceding the first day of the specified
     Interest Period.

<PAGE>
                                       13


     Each Rate Election shall be irrevocable. Borrower may make no Rate Election
which does not specify an  Interest  Period  complying  with the  definition  of
"Eurodollar  Interest  Period" in Section 1.1, and the  aggregate  amount of the
Tranche  elected in any Rate Election  must be  $1,000,000 or a higher  integral
multiple of $100,000.  Upon the  termination of each Interest Period the portion
of the Revolving Loan within the related Tranche shall,  unless the subject of a
new Rate Election then taking  effect,  automatically  become a part of the Base
Rate Portion of the Revolving  Loan and become  subject to all provisions of the
Loan Papers  governing such Base Rate Portion.  Borrower shall have no more than
four (4) Tranches in effect at any time.

     2.11 Increased Cost of Eurodollar  Portion.  If any applicable  domestic or
foreign law,  treaty,  rule,  directive or regulation  (whether now in effect or
hereinafter   enacted   or   promulgated,   including   Regulation   D)  or  any
interpretation or administration  thereof by any governmental  authority charged
with the  interpretation  or  administration  thereof (whether or not having the
force of law):

          (a) shall  change the basis of  taxation  of payments to Lender of any
     principal,  interest,  or  other  amounts  attributable  to any  Eurodollar
     Portion of the Revolving  Loan,  or otherwise  due under this  Agreement in
     respect of any  Eurodollar  Portion of the Revolving Loan (other than taxes
     imposed on the overall net income of Lender or any lending office of Lender
     by any jurisdiction in which Lender or any such lending office is located);

          (b)  shall  change,  impose,  modify,  apply  or deem  applicable  any
     reserve,  special  deposit  or  similar  requirements  in  respect  of  any
     Eurodollar  Portion  (excluding those for which Lender is fully compensated
     pursuant to adjustments made in the definition of Adjusted Eurodollar Rate)
     or  against  assets  of,  deposits  with or for the  account  of, or credit
     extended by, Lender; or

          (c) shall  impose on Lender or the London  interbank  market any other
     condition affecting any Eurodollar Portion;

     and the result of any of the  foregoing  (a) through (c) is to (1) increase
     the cost to Lender of funding or maintaining any Eurodollar Portion, or (2)
     to reduce  the  amount of any sum  receivable  by Lender in  respect of any
     Eurodollar Portion by an amount reasonably deemed by Lender to be material;
     then (i) Lender shall promptly  notify Borrower in writing of the happening
     of such event,  (ii) Borrower  shall  thereafter  upon demand pay to Lender
     such  additional  amount or  amounts  as will  compensate  Lender  for such
     additional  cost or reduction,  subject to the  provisions of Section 2.13,
     and (iii)  Borrower may elect,  by giving to Lender not less than three (3)
     Business  Days' notice,  to convert all (but not less than all) of any such
     Eurodollar  Portion  into a part of the Base Rate  Portion,  subject to the
     provisions of Section 2.13.

     2.12 Availability. If (a) any change in applicable laws, treaties, rules or
regulations  or  in  the   interpretation  or  administration   thereof  in  any
jurisdiction  whatsoever,  domestic  or  foreign,  shall  make  it  unlawful  or
impracticable  for  Lender to fund or  maintain  Eurodollar  Portions,  or shall
materially  restrict  the  authority  of Lender  to  purchase  or take  offshore
deposits  of  dollars  (i.e.,

<PAGE>
                                       14


"eurodollars"),  or (b) Lender determines that matching deposits  appropriate to
fund or maintain any  Eurodollar  Portion are not available to it, or (c) Lender
determines that the formula for  calculating  the Adjusted  Eurodollar Rate does
not fairly  reflect the cost to Lender of making or  maintaining  loans based on
such rate,  then, upon notice by Lender to Borrower,  Borrower's  right to elect
Eurodollar  Portions  shall be  suspended  to the extent and for the duration of
such illegality, impracticability,  restriction or condition, and all Eurodollar
Portions  (or  portions  thereof)  which  are then  outstanding  or are then the
subject  of any Rate  Election  and which  cannot  lawfully  or  practicably  be
maintained  or funded shall  immediately  become or remain part of the Base Rate
Portions of the Loan, subject to the provisions of Section 2.13. Borrower agrees
to indemnify  Lender and hold it harmless against all costs,  expenses,  claims,
penalties, liabilities and damages which may result from any such change in law,
treaty, rule, regulation, interpretation or administration.

     2.13  Funding  Losses.  In  addition  to its other  obligations  hereunder,
Borrower will indemnify Lender against,  and reimburse Lender on demand for, any
loss or expense incurred or sustained by Lender,  as a result of (a) any payment
or prepayment  (whether authorized or required hereunder or otherwise) of all or
a portion  of a  Eurodollar  Portion  on a day  other  than the day on which the
applicable Interest Period ends, (b) any payment or prepayment (whether required
hereunder or  otherwise)  of the  Revolving  Loan made after the  delivery,  but
before the  effective  date, of a Rate  Election,  if such payment or prepayment
prevents such Rate Election from becoming  fully  effective,  (c) the failure of
any Advance to be made or of any Rate  Election to become  effective  due to any
condition  precedent to an Advance not being satisfied,  due to the inability of
Lender (acting  reasonably and in accordance with Section 2.12) to determine the
Adjusted Eurodollar Rate for a Eurodollar Portion, or due to any other action or
inaction of Borrower,  or (d) any  conversion  (whether  authorized  or required
hereunder or otherwise) of all or any portion of any  Eurodollar  Portion into a
Base Rate Portion on a day other than the day on which the  applicable  Interest
Period ends.

     2.14 Taxes.  All payments by Borrower of principal of, and interest on, the
Revolving Loan, and all other amounts  payable  hereunder shall be made free and
clear of and without deduction for any present or future income,  excise,  stamp
or franchise taxes and other taxes, fees, duties,  withholdings or other charges
of  any  nature  whatsoever  imposed  by any  taxing  authority,  but  excluding
franchise  taxes and taxes  imposed on or  measured  by  Lender's  net income or
receipts (such non-excluded  items being called "Taxes").  In the event that any
withholding  or deduction  from any payment to be made by Borrower  hereunder is
required  in  respect  of any Taxes  pursuant  to any  applicable  law,  rule or
regulation, then, Borrower will:

          (a) pay directly to the relevant authority the full amount required to
     be so withheld or deducted;

          (b)  promptly   forward  to  Lender  an  official   receipt  or  other
     documentation  satisfactory  to  Lender  evidencing  such  payment  to such
     authority; and

<PAGE>
                                       15


          (c) pay to Lender such additional  amount(s) as is necessary to ensure
     that the net amount actually  received by Lender will equal the full amount
     such Lender would have received had no such  withholding  or deduction been
     required.

If any Taxes are directly  asserted  against  Lender with respect to any payment
received  by Lender  hereunder,  Lender  may pay such  Taxes and  Borrower  will
promptly  pay such  additional  amounts  to  Lender  (including  any  penalties,
interest or expenses)  as is necessary in order that the net amount  received by
such  person  after  the  payment  of such  Taxes  (including  any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been  asserted.  If  Borrower  fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required  documentary  evidence,  Borrower shall indemnify  Lender for any
Taxes,  interest or penalties  that may become  payable by Lender as a result of
any such failure.


                                   ARTICLE III
               Borrowing Base and Required Prepayments Under Note

     3.1 Borrowing  Base.  The  "Borrowing  Base" is initially set at the sum of
$15,500,000.00  but shall be subject to  redetermination  as further provided in
this Article.

     3.2 Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction.  Lender shall  redetermine  the Borrowing Base and Monthly  Automatic
Borrowing Base Reduction semi-annually, on or about May 1 and November 1 of each
year,  beginning  May 1,  2001.  Lender  may  require a  redetermination  of the
Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time in its
sole discretion.  In addition,  Borrower may request that Lender redetermine the
Borrowing Base and Monthly  Automatic  Borrowing Base Reduction at any time, and
Lender  agrees to respond to each such  request  within  thirty  (30) days after
Lender  has  received  from  Borrower  the   requisite   information   for  such
redetermination;  provided,  however, that Borrower may request no more than one
Borrowing Base and Monthly  Automatic  Borrowing Base Reduction  redetermination
during  the   six-month   period   between   each   scheduled   Borrowing   Base
redetermination.  Promptly following each  redetermination of the Borrowing Base
or the Monthly Automatic Borrowing Base Reduction,  Lender shall notify Borrower
of any  change in the  amount of the  Borrowing  Base or the  Monthly  Automatic
Borrowing  Base  Reduction.  Until such time as Lender has notified  Borrower in
writing of a change in the amount of the Borrowing Base or the Monthly Automatic
Borrowing Base  Reduction,  the Borrowing Base and Monthly  Automatic  Borrowing
Base Reduction will remain unchanged.

     Borrower  shall furnish to Lender,  no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt of
notice from Lender that it has elected to make a  non-scheduled  Borrowing  Base
and Monthly Automatic Borrowing Base Reduction redetermination),  as directed by
Lender, such information as Lender may request, in form and

<PAGE>
                                       16


substance  acceptable to Lender,  requisite to Lender's  redetermination  of the
Borrowing Base and Monthly Automatic Borrowing Base Reduction.

     3.3 Standards for Redetermination. All Borrowing Base and Monthly Automatic
Borrowing  Base  Reduction  redeterminations  shall  be  made by  Lender  in the
exercise of its sole discretion in accordance  with its customary  practices and
standards for loans in similar amounts to borrowers similarly  situated,  at the
time and under the circumstances then prevailing.

     3.4  Borrowing  Base  Redetermination  Fee.  In  addition  to the  payments
provided  for in the Note,  Borrower  shall pay to  Lender as a  Borrowing  Base
redetermination  fee the sum of $750 at the  time  Lender  provides  the  notice
required by Section 3.2 and at any time that Borrower  requests a  non-scheduled
Borrowing Base redetermination pursuant to Section 3.2; provided,  however, that
Borrowing  Base  redetermination  fees payable by Borrower  hereunder  shall not
exceed $3000 during any calendar  year. The parties  acknowledge  and agree that
the  Borrowing  Base  redetermination  fees  payable  hereunder  are intended as
reasonable compensation to Lender for its efforts in redetermining the Borrowing
Base during the term of the Revolving Loan and for no other purpose.

     3.5  Mandatory  Increase in  Collateral  or  Prepayment of Principal of the
Note. In the event that the Obligation shall, at the time of notification of the
Borrowing  Base by Lender to Borrower  pursuant to Section  3.2, be in excess of
the Revolving  Commitment,  Borrower  shall,  at Borrower's  option,  either (i)
within thirty (30) days  thereafter,  by  instruments  satisfactory  in form and
substance to Lender,  provide Lender with  additional  collateral  with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, or (ii) within thirty
(30) days  thereafter,  prepay the principal of the Note  (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess.

     3.6 Monthly Automatic  Borrowing Base Reduction and Prepayment of Principal
of the Note.  The  Borrowing  Base shall  automatically  reduce by  $323,000  on
January 1, 2001, and on the first day of each month  thereafter  during the term
of  the  Revolving   Commitment  (each  a  "Monthly  Automatic   Borrowing  Base
Reduction"),  subject to Lender's right, in its sole discretion,  to redetermine
the Monthly  Automatic  Borrowing Base Reduction in conjunction with a Borrowing
Base  redetermination  pursuant  to  Section  3.2  above.  In the event that the
Obligation  shall be in excess of the Borrowing  Base on the date of any Monthly
Automatic Borrowing Base Reduction,  then on said date Borrower shall prepay the
principal  of the Note in an amount  equal to such  excess,  in  addition to the
payment  of  accrued  interest  on the Note  that may be due on such  date.  The
provisions   of  Section  3.5  above  shall  be   applicable  to  scheduled  and
non-scheduled  redeterminations  of the Borrowing  Base but shall not apply to a
Monthly Automatic Borrowing Base Reduction.

<PAGE>
                                       17

                                   ARTICLE IV
                             Security and Assignment

     To secure full and  complete  payment and  performance  of the  Obligation,
Borrower  hereby grants and conveys to and creates in favor of Lender Bank Liens
in, to and on all of the  following  items and types of  property  (referred  to
collectively herein as the "Collateral"),  all as more particularly described in
the Loan Papers:

          (a) all present and future interest now owned or hereafter acquired by
     Borrower in the Mineral Interests identified in the Deed of Trust, together
     with all proceeds of production therefrom;

          (b)  all  present  and  future   increases,   profits,   combinations,
     reclassifications,  improvements and products of, accessions,  attachments,
     and other additions to, tools, parts and equipment used in connection with,
     and substitutes and replacements for, any of the Collateral;

          (c) all cash and noncash  proceeds and other Rights arising from or by
     virtue  of,  or from the  voluntary  or  involuntary  sale,  lease or other
     disposition  of, or  collections  with  respect to, or  insurance  proceeds
     payable with respect to, or proceeds payable by virtue of warranty or other
     claims  against  manufacturers  of, or claims against any other person with
     respect to, any of the Collateral;

          (d) all present and future  security  for the payment to Borrower  for
     any of the Collateral;

          (e) all goods which gave or will give rise to any of the Collateral or
     are evidenced, identified or represented therein or thereby; and

          (f) all certificates of title, manufacturer's statements of origin, or
     other documents,  accounts and chattel paper arising from or related to any
     of the Collateral.

     All Bank Liens created in favor of Prior Lender  pursuant to the Prior Loan
Agreement are hereby ratified,  renewed and extended in favor of Lender, without
lapse or interruption of perfection or priority.


                                    ARTICLE V
                              Conditions Precedent

     5.1 Renewal and  Extension.  The obligation of Lender to accept the Note in
renewal,  extension  and  rearrangement  of the Prior  Note  shall be subject to
satisfaction of each of the following conditions precedent:

<PAGE>
                                       18

          (a) There shall have been executed,  where appropriate,  and delivered
     by Borrower  (and/or any other  requisite  party thereto) (i) the documents
     listed on Schedule 5.1 hereto,  all of which shall be in form and substance
     satisfactory  to Lender and its counsel,  and (ii) such other  documents or
     instruments as Lender may reasonably require.

          (b) All  requirements  of notice  necessary  to perfect each Bank Lien
     shall  have  been   accomplished  or  arrangements  made  therefor  to  the
     satisfaction of Lender and its counsel.

          (c)  Lender  shall  have  received  from  Borrower's  legal  counsel a
     favorable  legal opinion in form and substance  satisfactory  to Lender and
     its counsel  respecting  the matters set forth in Section 6.1, 6.2, 6.5 and
     6.15 hereof.

          (d) No Material  Adverse  Change shall have  occurred in the financial
     condition,  assets or business  prospects of Borrower  since  September 30,
     2000.

          (e) All fees due and  payable  to Prior  Lender  and all  accrued  and
     unpaid  interest  on the  Prior  Note  shall  have been paid up to the date
     hereof.

          (f) Lender  shall have  received  an  assignment  of notes,  liens and
     security  interests  and the original of the Prior Note,  with  appropriate
     endorsement,  from the Prior Lender, all in form and substance satisfactory
     to Lender.

          (g)  Lender  shall  have  received  from  Borrower   acceptable  title
     information  covering not less than ninety  percent (90%) of the engineered
     value of Borrower's Mineral Interests.

          (h) Borrower shall have paid to Lender a facility fee in the amount of
     $38,750.

     5.2 All Advances.  The  obligation of Lender to make any Advance  hereunder
shall be subject to satisfaction of each of the following conditions precedent:

          (a) An  authorized  individual  shall have  requested  such Advance in
     accordance with the requirements of Section 2.2(a) hereof.

          (b) No Event of Default  shall have  occurred that has not been waived
     in writing by Lender,  and there  shall exist no  condition  or event that,
     with the  giving of notice or lapse of time or both,  would  constitute  an
     Event of Default.

          (c) Borrower  shall have  observed,  performed  and complied  with all
     covenants, agreements, duties and obligations contained in the Loan Papers.

<PAGE>
                                       19


                                   ARTICLE VI
                         Representations and Warranties

     In order to induce Lender to enter into this Agreement, Borrower represents
and  warrants  to  Lender  as of the  date  hereof,  which  representations  and
warranties shall survive the delivery of the Note, as follows:

     6.1 Existence and Authority.  Borrower is (i) a corporation duly organized,
legally  existing and in good standing  under the laws of the State of Delaware,
and (ii) duly  qualified as a foreign  corporation  and in good  standing in the
State of Texas. Except to the extent that the failure to qualify would not cause
or  result  in  a  Material  Adverse  Change,  there  are  no  other  states  or
jurisdictions  wherein  Borrower's   operations,   transaction  of  business  or
ownership of property makes such qualification necessary.

     6.2 Powers.  Borrower is duly  authorized and empowered to create and issue
the Note and to execute and deliver  this  Agreement,  the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's  part  requisite for the due creation,  issuance and
delivery of the Note and the due  execution  and delivery of this  Agreement and
the other Loan Papers has been duly and  effectively  taken.  This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal, valid
and binding  obligations of Borrower  enforceable in accordance with their terms
(subject  to any  applicable  bankruptcy,  insolvency  or other  laws  generally
affecting the enforcement of creditors' rights).  The Loan Papers do not violate
any  provisions  of  Borrower's  articles of  incorporation  or bylaws or of any
contract, partnership or other agreement, law or regulation to which Borrower is
subject, and the same do not require the consent or approval of any other person
or  entity,   including  without   limitation,   any  regulatory   authority  or
governmental  body  of the  United  States,  of any  state  or of any  political
subdivision of the United States or of any State.

     6.3  Financial  Statements.  The  unconsolidated  financial  statements  of
Borrower for the three (3) months  ended  September  30,  2000,  which have been
delivered to Lender, are complete and correct,  have been prepared in conformity
with GAAP, and fairly present the financial  condition and results of operations
of  Borrower  as of the dates and for the periods  stated.  No Material  Adverse
Change in the financial  condition of Borrower has occurred since  September 30,
2000.

     6.4  Liabilities.   As  of  the  date  hereof,  Borrower  has  no  material
liabilities,  direct or contingent,  other than those set forth in the financial
statements of Borrower  referred to in Section 6.3 hereof.  Borrower knows of no
fact,  circumstance,  act,  condition or development  that will or could cause a
Material Adverse Change.

     6.5  Litigation.  Except as  provided  in  Schedule  6.5  attached  hereto,
Borrower  is not  involved  in,  nor is aware of the  threat  of,  any  material
litigation, nor are there any outstanding or unpaid judgments against Borrower.

<PAGE>
                                       20

     6.6  Taxes.  All tax  returns  required  to be  filed  by  Borrower  in all
jurisdictions  have  been  filed,  and all  taxes,  assessments,  fees and other
governmental  charges  upon  Borrower  or upon any of its  property,  income  or
franchises,  which are due and  payable,  have been paid,  or adequate  reserves
determined in conformity with GAAP have been provided for payment thereof.

     6.7 Purpose of Loan.  The proceeds of any Advances (a) are not and will not
be used directly or indirectly for the purpose of purchasing or carrying, or for
the  purpose of  extending  credit to others for the  purpose of  purchasing  or
carrying,  any  "margin  stock" as that term is defined in  Regulation  U of the
Board of Governors of the Federal  Reserve System,  as amended;  and (b) will be
otherwise used for lawful purposes.

     6.8 Properties; Liens.

          (a) With  regard  to the  Mineral  Interests  included  in the Deed of
     Trust,  (i)  Borrower  has good and  marketable  title to all such  Mineral
     Interests, free and clear of all Liens except Liens permitted under Section
     8.1 hereof,  and has full authority to create Bank Liens thereon;  and (ii)
     all such  Mineral  Interests  are valid,  subsisting  and in full force and
     effect,  and all rentals,  royalties  and other  amounts due and payable in
     respect thereof have been duly paid.

          (b)  Borrower  has  good  and  marketable  title  to all of its  other
     respective  properties reflected on the financial statements referred to in
     Section 6.3 hereof,  and, except for the Liens permitted under Section 8.1,
     there is no Lien on any asset of Borrower.

          (c) Subject to the Liens  permitted  under  Section 8.1 and Liens that
     neither  materially  detract  from the  marketability  of the  property nor
     impair the use of the  property,  and except as may be limited or otherwise
     affected  by  bankruptcy,   insolvency,   reorganization  or  similar  laws
     affecting  creditors'  rights  generally,  upon  execution,   delivery  and
     recording, or filing, as appropriate,  the Loan Papers will be effective to
     create  in favor of  Lender a legal,  valid and  continuing  first  Lien on
     property (real and personal,  tangible and intangible)  described  therein,
     prior and superior to all other  existing or future  Liens,  and,  upon the
     filing of the  appropriate  notice  documents,  will be enforceable as such
     against  creditors and  purchasers  from  Borrower,  and no other  filings,
     recordings  or  other  actions  are  necessary  or  desirable  in  order to
     establish,  preserve, protect and perfect such Lien in favor of Lender as a
     valid a  perfected  first  Lien on such  property,  except  a  continuation
     statement may be required under the Uniform Commercial Code.

          (d) None of the  Collateral  is or will be subject to a gas  balancing
     arrangement  under which a material  imbalance exists with respect to which
     imbalance  Borrower  is in an  overproduced  status and is  required to (i)
     permit  one or more  third  parties  to take a  portion  of the  production
     attributable to such  Collateral  without payment (or without full payment)
     therefor,  and/or  (ii)  make  payment  in cash in  order to  correct  such
     imbalance.

     6.9  Material  Agreements.   Except  for  the  Loan  Papers,  the  Material
Agreements  described on Schedule 6.9,  agreements,  documents  and  instruments
giving  rise  to  Mineral  Interests,  farmout

<PAGE>
                                       21


agreements,  gas contracts and operating and joint operating  agreements related
to any Mineral  Interests,  there are no Material  Agreements  of Borrower.  The
performance by Borrower  under any Material  Agreement will not cause a Material
Adverse  Change.  Borrower  is  not,  nor  will  the  execution,   delivery  and
performance of and  compliance  with the terms of the Loan Papers cause Borrower
to be, in default (nor has any potential  default  occurred)  under any Material
Agreement,  any  agreement,  document  or  instrument  giving  rise  to  Mineral
Interests,   farmout  agreements,  gas  contracts  or  any  operating  or  joint
operating, or unitization agreements related to Mineral Interests, other than in
each case such defaults or potential  defaults which could not,  individually or
collectively,  cause a Material  Adverse Change. A default by Borrower under any
operating or joint operating  agreement related to any Mineral Interests it owns
will not result in any loss or  diminution  of any other  Mineral  Interests  it
owns.

     6.10 ERISA.  All Plans  maintained by Borrower are in  compliance  with all
funding and other requirements of the Employee Retirement Income Security Act of
1974, as amended  ("ERISA"),  and none have been  terminated or have accrued any
funding deficiency for which Borrower would be liable under said statute.

     6.11 Location of Records. The records of Borrower concerning the Collateral
are kept at the following  location:  110 North Marienfeld,  Suite 465, Midland,
Texas 79701.

     6.12  Permits and  Franchises,  Etc.  Borrower  has all  rights,  licenses,
permits,  franchises,  patents, patent rights, trademarks,  trademark rights and
copyrights  that are  required  in order for it to conduct  its  business as now
conducted  without  known  conflict  with the rights of others.  Borrower is not
aware of any fact or  condition  that might  cause any of such  rights not to be
renewed in due course.

     6.13  Subsidiaries.  Borrower presently has no Subsidiary and owns no stock
or other ownership interest in any other corporation,  limited liability company
or association  other than First Permian,  LLC.  Borrower is not a member of any
general  or  limited  partnership,  joint  venture  or  association  of any type
whatsoever except  associations,  joint ventures or other relationships (a) that
are  established  pursuant to a standard  form  operating  agreement  or similar
agreement or that are partnerships for purposes of federal income taxation only,
(b) that  are not  corporations  or  partnerships  (or  subject  to the  Uniform
Partnership  Act) under  applicable  state  law,  and (c) whose  businesses  are
limited to the  exploration,  development  and  operation of oil, gas or mineral
properties  and interests  owned  directly by the parties in such  associations,
joint ventures or relationships.

     6.14 Hazardous  Wastes and  Substances.  Borrower and its properties are in
compliance with applicable state and federal  environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal  environmental  law or regulation and, except as
previously  disclosed in writing to Lender,  there has not heretofore been filed
any complaint, nor commenced any administrative  procedure,  against Borrower or
any of its  predecessors,  alleging  a  violation  of any  environmental  law or
regulation.  Except in substantial  compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored

<PAGE>
                                       22

or  disposed  of any  hazardous  waste,  toxic  substance,  asbestos  or related
material  ("Hazardous  Materials") on its  properties.  For the purposes of this
Agreement,  Hazardous  Materials  shall  include,  but shall not be limited  to,
substances  defined  as  "hazardous  substances"  or "toxic  substances"  in the
Comprehensive  Environmental Response Compensation and Liability Act of 1980, as
amended,  42 U.S.C. 9061, et seq.,  Hazardous  Materials  Transportation Act, 49
U.S.C. 1802, et seq., and the Resource  Conservation and Recovery Act, 42 U.S.C.
6901, et seq., or as "hazardous  substances," "hazardous waste" or "pollutant or
contaminant" in any other applicable  federal,  state or local environmental law
or  regulation.  There do not exist  upon any  property  owned by  Borrower  any
underground storage tanks or facilities,  and to the knowledge of Borrower, none
of such property has ever been used for the treatment,  storage,  recycling,  or
disposal of any Hazardous Materials.

     6.15  Public  Utility  Holding  Company  Act.  Borrower  is not a  "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding  company"  or of a  "subsidiary  company"  of a "holding  company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.

     6.16  General.  There  are no  significant  material  facts  or  conditions
relating to the Loan Papers, any of the Collateral,  or the financial  condition
or business  of  Borrower  that could,  collectively  or  individually,  cause a
Material Adverse Change and that have not been related, in writing, to Lender as
an  attachment  to this  Agreement;  and all  writings  heretofore  or hereafter
exhibited  or  delivered  to Lender by or on behalf of Borrower  are and will be
genuine and in all respects what they purport and appear to be.



                                   ARTICLE VII
                              Affirmative Covenants

     As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that,  from the date hereof and until  termination  of this Agreement
and  payment in full of the  Obligation  (except as  otherwise  provided in this
Article), unless otherwise agreed to by Lender in writing:

     7.1  Financial  Statements  and Other  Information.  Borrower will promptly
furnish to Lender  copies of (i) such  information  regarding  its  business and
affairs and  financial  condition  as Lender may  reasonably  request,  and (ii)
without request, the following:

          (a) as soon as  available  and in any event  within  ninety  (90) days
     after  the end of each  fiscal  year of  Borrower,  a  consolidated  and an
     unconsolidated  balance  sheet of  Borrower  as of the close of such fiscal
     year and the related consolidated and unconsolidated  statements of income,
     cash flows and stockholders'  equity of Borrower for such year, which shall
     be audited and  accompanied by the  unqualified  opinion and report thereon
     issued by Borrower's independent public accountants;


<PAGE>
                                       23

          (b) as soon as available and in any event within  forty-five (45) days
     after the end of each fiscal quarter of Borrower, an unaudited consolidated
     and unconsolidated balance sheet of Borrower as of the close of such fiscal
     quarter  and  the  related   unaudited   consolidated  and   unconsolidated
     statements of income,  cash flows and stockholders'  equity of Borrower for
     such fiscal quarter;

          (c) as soon as available and in any event within  forty-five (45) days
     after the end of each  fiscal  quarter of  Borrower,  a report  summarizing
     production,  gross  revenues,  expenses,  and  net  revenues  from  all  of
     Borrower's  Mineral  Interests  for such  quarter on a field by field basis
     and, if requested by Lender, on a lease by lease basis;

          (d) on or before March 31 and  September  30 of each year,  an oil and
     gas reserve evaluation  effective as of the immediately  preceding December
     31 and June 30, respectively,  covering all of Borrower's Mineral Interests
     under  the  defined  categories  of  proved  developed  producing,   proved
     developed  nonproducing,  and proved  undeveloped,  prepared by independent
     petroleum engineers selected by Borrower and satisfactory to Lender;

          (e) within  forty-five  (45) days after the end of each fiscal quarter
     of Borrower,  the Compliance  Certificate in the form of Exhibit 7.1 hereto
     signed by the President or Chief Financial Officer of Borrower;

          (f) as soon as  available,  copies of all filings by Borrower with the
     Securities and Exchange Commission;

          (g)  immediately  upon  becoming  aware of the  existence  of,  or any
     material  change in the status  of, any  litigation  which  could  create a
     Material Adverse Change if determined adversely against Borrower, a written
     communication to Lender of such matter;

          (h)  immediately  upon  becoming  aware of an Event of  Default or the
     existence  of any  condition or event that  constitutes,  or with notice or
     lapse of time,  or both,  would  constitute  an Event of Default,  a verbal
     notification  to Lender  specifying  the  nature  and  period of  existence
     thereof and what action Borrower is taking or proposes to take with respect
     thereto and,  immediately  thereafter,  a written confirmation to Lender of
     such matters;

          (i)  immediately  upon becoming aware that any person has given notice
     or taken any other  action  with  respect  to a claimed  default  under any
     material  indenture,   mortgage,  deed  of  trust,  promissory  note,  loan
     agreement,  note agreement,  drilling contract,  operating or joint venture
     agreement or any other Material  Agreement or undertaking to which Borrower
     is a party, a verbal  notification to Lender specifying the notice given or
     action taken by such person and the nature of the claimed  default and what
     action  Borrower is taking or proposes to take with  respect  thereto  and,
     immediately thereafter,  a written communication to Lender of such matters;
     and

<PAGE>
                                       24

          (j)  immediately  upon  becoming  aware  of  the  commencement  of any
     material  action or  material  proceeding  against  Borrower  or any of its
     properties by any governmental agency, including,  without limitation,  the
     Internal Revenue Service,  the Environmental  Protection  Agency,  the U.S.
     Department of Energy or the Federal Energy Regulatory Commission, a written
     communication to Lender of such matter.

All financial  statements,  schedules and other financial  information delivered
hereunder  shall be prepared in  conformity  with GAAP and shall be certified as
true and  correct by the  President  or Chief  Financial  Officer of Borrower by
signature and date thereon.

     7.2  Taxes.  Borrower  will  pay and  discharge  or  cause  to be paid  and
discharged all taxes,  assessments  and  governmental  charges or levies imposed
upon it or upon  its  income  and  profits  or upon any of its  property,  real,
personal or mixed,  or upon any part  thereof,  before the same shall  become in
default,  as well as all lawful  claims for labor,  materials  and  supplies  or
otherwise,  which, if not paid,  might become a Lien upon such properties or any
part thereof;  provided that Borrower shall not be required to pay and discharge
or cause to be paid or  discharged  any such tax,  assessment,  charge,  levy or
claim contested by it in good faith by appropriate proceedings if Borrower shall
have set up adequate reserves therefor,  if required,  under GAAP; and provided,
further,  that the immediately  preceding  provision shall not apply to any Lien
imposed by the U.S.  Government  for  failure to pay  income,  payroll,  FICA or
similar  taxes,  and payment with respect to any such tax,  assessment,  charge,
levy or claim shall be made before any property of Borrower  shall be seized and
sold in satisfaction thereof.

     7.3  Discharge of  Contractual  Obligations.  Borrower  will do and perform
every act and  discharge  all of the  obligations  provided to be performed  and
discharged  under  the  Loan  Papers,  and  any and  all of the  instruments  or
documents referred to or mentioned herein at the time or times and in the manner
required.

     7.4 Legal Status. Borrower will do or cause to be done all things necessary
to  preserve,  renew and keep in full force and effect  its  existence,  rights,
licenses,  permits  and  franchises  and  comply  with all laws and  regulations
applicable to it, and, further, comply with all applicable laws and regulations,
whether now in effect or hereafter  enacted or promulgated  by any  governmental
authority   having   jurisdiction   over  any  of  its  assets  or   properties,
noncompliance with which would cause a Material Adverse Change.

     7.5  Maintenance  and  Evidence of Priority of Bank Liens.  Borrower  shall
perform such acts and duly authorize, execute,  acknowledge,  deliver, file, and
record (or cause to be filed and recorded) such additional assignments, security
agreements,   deeds  of  trust,  mortgages  and  other  agreements,   documents,
instruments  and  certificates  as  Lender  may  reasonably  deem  necessary  or
appropriate  in order to perfect and  maintain  the Bank Liens and  preserve and
protect the Rights of Lender in respect of all  present  and future  Collateral,
and cause to be  furnished  to Lender  such  opinions  of  counsel as Lender may
request  regarding the priority of Borrower's title to, and the Bank

<PAGE>
                                       25


Liens upon,  the assets of Borrower,  all of which opinions shall be prepared by
such law firm or firms as may be acceptable to Lender.

     7.6 Insurance.  Borrower presently  maintains and will continue to maintain
such policies of liability,  hazard, damage, business interruption and workmen's
compensation  insurance  as  are  customarily  carried  by  companies  similarly
situated.  If requested  by Lender,  any such  policies of insurance  shall show
Lender  therein as loss payee.  Upon  request by Lender,  Borrower  will furnish
Lender with  certificates  and  policies  necessary  to give  Lender  reasonable
assurance of the existence of such coverage.  Borrower agrees to notify promptly
Lender of any  termination  or other  material  change in  Borrower's  insurance
coverage,  and to provide Lender,  upon request,  with all information about the
renewal of each policy at least 15 days prior to the expiration thereof.

     7.7 Reimbursement of Fees and Expenses.  Borrower agrees to pay, on demand,
all  reasonable  out-of-pocket  fees and  expenses  incurred  by  Lender  or its
designated  representatives in connection with the negotiation,  preparation and
execution of this Agreement, all renewals hereof, the other Loan Papers or other
transactions  pursuant  hereto  or to the Loan  Papers,  as well as all costs of
filing and  recordation,  all legal and accounting  fees,  costs associated with
Borrowing  Base  redeterminations  as provided in Section 3.4,  all  inspection,
environmental  audit  and  similar  costs  related  to  the  evaluation  of  the
Collateral, all costs associated with enforcing any of Lender's Rights under the
Loan Papers  (including,  without  limitation,  costs of repossessing,  storing,
transporting,  preserving and insuring any of the  Collateral),  all court costs
associated with enforcing or defending any Rights against  Borrower or any third
party  challenging  said Rights and any other cost or expense incurred by Lender
or its designated  representatives in connection herewith or with the other Loan
Papers, together with interest at the Highest Lawful Rate per annum on each such
amount  commencing 10 days after the date notice of such expenditure is given to
Borrower by Lender until the date it is repaid to Lender.

     7.8  Indemnification.  Borrower agrees to indemnify  Lender,  its officers,
directors, shareholders,  employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities,  obligations, claims, losses, damages,
penalties,  actions,  judgments,  suits,  remedial actions,  costs,  expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that may
be imposed on,  incurred by, or asserted  against  Indemnitee  growing out of or
resulting from (i) the Loan Papers and the  transactions  and events at any time
associated therewith (including, without limitation, the enforcement of the Loan
Papers and the defense of Indemnitee's  actions and inactions in connection with
the Loan),  except to the limited extent such Claims are  proximately  caused by
Indemnitee's  gross negligence or willful  misconduct;  (ii) the presence of any
Hazardous  Materials on or under the properties covered by the Deed of Trust; or
(iii) any activity carried on or undertaken on or off the properties  covered by
the Deed of Trust,  whether  prior to or during the term  hereof and  whether by
Borrower or by any third person,  in  connection  with the  treatment,  storage,
recycling,  removal,  handling or disposal of  Hazardous  Materials  at any time
located  on or under the  properties  covered  by the Deed of Trust.  Indemnitee
shall  have the  right  to  defend  any such  Claims,  employing  its  attorneys
therefor.  While Borrower shall also be entitled to employ its own attorneys and
to  participate  in the defense of any such  Claims,  Indemnitee  shall,  if not
furnished with reasonable

<PAGE>
                                       26

indemnity,  have the  right to  compromise  and  adjust  all  such  Claims.  The
covenants  and  conditions of this section shall at all times be construed to be
personal  covenants  in favor of  Indemnitee  and shall not run with the  lands;
provided,  however, that such covenants and indemnity shall remain in full force
and  effect  notwithstanding  the  payment  in  full of the  Obligation  and the
release,  either  partially  or  wholly,  of the Bank  Liens or any  foreclosure
thereunder.  All such Claims as may be paid by Indemnitee shall bear interest at
the Highest  Lawful  Rate per annum until paid by Borrower  and shall be part of
the  Obligation  secured by the Bank Liens.  THE PARTIES  HERETO  INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY  IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE),  WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE,  CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.

     7.9 Curing of Defects.  Borrower will promptly cure any material defects in
the  execution  and  delivery  of any  of  the  Loan  Papers,  and in any  other
instrument  or  document  referred  to  or  mentioned   herein.   Borrower  will
immediately  execute and  deliver to Lender,  upon  request,  all such other and
further instruments as may be reasonably required or desired by Lender from time
to time in compliance with or  accomplishment of the covenants and agreements of
Borrower made in the Loan Papers.

     7.10 Inspection and Visitation. Borrower will grant Lender access to all of
its books and records, as well as to all of the Collateral, and allow inspection
and  copying  of same by Lender or its  designated  representatives  at any time
during  normal  business  hours or such  other  time as  Lender  may  reasonably
request.

     7.11  Notices.  Borrower will give prompt  written  notice to Lender of any
proceedings  instituted against it by or in any federal or state court or before
any commission or other  regulatory  body,  federal,  state or local,  which, if
adversely determined, would cause a Material Adverse Change.

     7.12 Bank Lien on Other  Assets.  If  requested by Lender,  Borrower  shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements,  financing statements, pledge agreements, or
other  security  documents in favor of Lender  covering  every interest in every
asset or property  (including,  without limitation,  Mineral Interests) owned by
Borrower,  whether now owned or hereafter  acquired,  which shall become part of
the Collateral.

     7.13 Compliance. Borrower will observe and comply with:

          (a) all laws, statutes,  codes, acts, ordinances,  rules, regulations,
     directions and requirements of all federal,  state,  county,  municipal and
     other governments,  departments,

<PAGE>
                                       27

     commissions, boards, courts, authorities,  officials and officers, domestic
     and foreign,  where the failure to observe or comply would cause a Material
     Adverse Change; and

          (b)  all  orders,  judgments,  decrees,   injunctions,   certificates,
     franchises,  permits,  licenses and  authorizations of all federal,  state,
     county, municipal and other governments,  departments, commissions, boards,
     courts,  authorities,  officials and officers,  domestic and foreign, where
     the failure to observe or comply would cause a Material  Adverse Change and
     against  which it shall  maintain such  reserves as are  appropriate  under
     GAAP.

     7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial  compliance  with  all  state  and  federal  environmental  laws and
regulations  and Borrower  will not place nor permit to be placed any  Hazardous
Materials on any of its properties in violation of applicable  state and federal
environmental  laws.  In  the  event  Borrower  should  discover  any  Hazardous
Materials  on any of its  properties  which  could  result  in a  breach  of the
foregoing  covenant,  Borrower  shall notify  Lender within three (3) days after
such  discovery.  Borrower  shall  dispose of all material  amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C.  6901.  In the event of any notice or filing of any  complaint or
commencement  of any  administrative  hearing or procedure  against the Borrower
alleging a violation of any environmental law or regulation, Borrower shall give
notice to Lender within five (5) days after Borrower has received notice of such
notice or filing.

     7.15 Use of Proceeds.  Borrower will use the proceeds of the Revolving Loan
for  refinancing the Prior Note,  financing oil and gas  acquisitions or capital
expenditures, or working capital in Borrower's oil and gas business.

     7.16 Deposit  Accounts.  Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.

     7.17 Title Curative. Not later than ninety (90) days after the date of this
Agreement  Borrower shall provide to Lender the title curative  information  set
forth on Schedule 7.17 attached hereto.  As soon as practicable but in any event
within  ninety (90) days after receipt by Borrower from Lender or its counsel of
written notice of additional  material title defects Lender reasonably  requires
to be cured,  Borrower  shall use its best  efforts  to  provide  such  curative
information, in form and substance satisfactory to Lender.


                                  ARTICLE VIII
                               Negative Covenants

     As an inducement to Lender to enter into this  Agreement,  Borrower  hereby
covenants and agrees that,  from the date hereof and until  termination  of this
Agreement and payment in full of the

<PAGE>
                                       28

Obligation  (except as otherwise  provided in this  Article),  unless  otherwise
agreed to by Lender in writing:

     8.1 Liens.  Borrower  will not  create,  assume or suffer to exist any Lien
upon any of its  properties or assets now owned or hereafter  acquired  securing
any  indebtedness  other than the  Obligation or acquire or agree to acquire any
property  under  any  conditional   sale  agreement  or  other  title  retention
agreement, excluding, however, from the operation of this section:

          (a) deposits or pledges to secure payments of workmen's  compensation,
     unemployment insurance, old age pensions or other social security;

          (b)  deposits  or  pledges  to secure  performance  of bids,  tenders,
     contracts (other than contracts for the payment of money),  leases,  public
     or statutory  obligations,  surety or appeal  bonds,  or other  deposits or
     pledges  for  purposes of like  general  nature in the  ordinary  course of
     business;

          (c) Liens for  taxes,  assessments  or other  governmental  charges or
     levies that are not delinquent or that are in good faith being contested or
     litigated,  if such  reserve as shall be  required  by GAAP shall have been
     made  therefor,  provided,  that  this  exception  shall not allow any Lien
     imposed by the U.S. Government for failure to pay income,  payroll, FICA or
     similar taxes;

          (d) mechanics',  carriers', workmen's, repairman's or other like Liens
     arising in the ordinary course of business  securing  obligations less than
     ninety  (90)  days  from  the  date of  invoice,  and on  which  no suit to
     foreclose  has been filed,  or which are in good faith being  contested  or
     litigated,  if such  reserve as shall be  required  by GAAP shall have been
     made therefor;

          (e)  Liens  created  by or  resulting  from  any  litigation  or legal
     proceeding  that is currently  being contested in good faith by appropriate
     proceedings,  if such  reserve as shall be required by GAAP shall have been
     made therefor;

          (f) Liens,  charges and encumbrances  incidental to the conduct of its
     business  or the  ownership  of its  properties  or assets,  which were not
     incurred in  connection  with the  borrowing  of money or the  obtaining of
     advances  or credit and that do not  materially  detract  from the value of
     such  property  or assets  or  materially  impair  the use  thereof  in the
     operation of its business;

          (g) landlords'  Liens for rental not yet due and payable and which, to
     the extent the same encumbers any of the Collateral, are subordinate to the
     Bank Liens;

          (h) Liens  arising in the normal  course of business  under  operating
     agreements covering oil and gas properties and interests therein, including
     such Liens as may arise thereunder  because of the default of other parties
     to the operating agreement; or

          (i) the Bank Liens.

<PAGE>
                                       29


     8.2  Indebtedness.   Borrower  will  not  create,  assume,  incur  or  have
outstanding,  or in any  manner  become  or be  liable  directly  or  indirectly
(whether by way of guaranty or  otherwise) in respect of, any  indebtedness  for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:

          (a) the Note;

          (b) accounts payable for services furnished and for the purchase price
     of materials and supplies  acquired in the ordinary course of its business,
     not more than ninety (90) days from the date of invoice;

          (c)  indebtedness of Borrower in respect of any Derivatives  permitted
     by Section 8.15; and

          (d) other  indebtedness  not to exceed an aggregate amount of $100,000
     at any time outstanding.

     8.3 ERISA Compliance. Borrower will not at any time permit any Plan subject
to ERISA maintained by it to (i) engage in any "prohibited  transaction" as such
term is  defined  in  Section  4975 of the  Internal  Revenue  Code of 1986,  as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA;  or (iii)  terminate  in a manner which could result in
the imposition of a lien on its property pursuant to Section 4068 of ERISA.

     8.4  Investments.  Borrower  will not make or commit to make,  any advance,
loan,  extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment in
any  person,  or accept any item in  satisfaction  of  indebtedness  (all of the
aforesaid transactions being herein called "Investments"), except:

          (a)  Investments  in accounts,  contract  rights and chattel paper (as
     defined in the Uniform  Commercial Code), and notes receivable,  arising or
     acquired in the ordinary course of business;

          (b)  Investments  with  maturities of not more than 180 days in direct
     obligations of the United States of America, or obligations,  the principal
     and interest of which are  unconditionally  guaranteed by the United States
     of America;

          (c) certificates of deposit maintained with Lender;

          (d) Borrower's existing Investment in First Permian, L.L.C.; and

          (e) other  Investments  not to exceed  $50,000 in the aggregate at any
     time outstanding.

<PAGE>
                                       30

     8.5  Mergers,  Consolidations.  Borrower  will not (i)  amend or  otherwise
modify its  corporate  charter or otherwise  change its  structure in any manner
that  would  cause a  Material  Adverse  Change;  (ii)  form any new  subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or permit
any party to consolidate with or merge into, or acquire it.

     8.6 Dividends and  Distributions.  Neither Borrower nor any Subsidiary will
declare,  pay or make any loans,  advances,  dividends or distributions,  of any
kind, to its stockholders or other equity owners, or make any other distribution
on  account  of, or  purchase,  acquire  or redeem or retire  any stock or other
security  issued by it,  except  that  Borrower  may pay cash  dividends  on its
outstanding  shares of 6%  Convertible  Preferred  Stock in accordance  with the
provisions of Borrower's Certificate of Designations,  Preferences and Rights of
Serial  Preferred  Stock 6% Convertible  Preferred Stock dated October 19, 1998,
provided that no Event of Default  exists at the time of  declaration or payment
of such dividends and the payment of such dividends  would not cause an Event of
Default.

     8.7  Transactions   with  Affiliates.   Borrower  will  not,   directly  or
indirectly,  enter into any transaction (including, but not limited to, the sale
or  exchange  of  property  or  the  rendering  of  services)  with  any  of its
affiliates,  other than in the  ordinary  course of  business  and upon fair and
reasonable  terms no less  favorable  than Borrower could obtain or could become
entitled  to in an  arm's  length  transaction  with a  person  that  was not an
affiliate.

     8.8 Accounting Method and Fiscal Year. Borrower will not make any change in
its present  accounting  method unless such changes are required for  conformity
with GAAP.

     8.9 Nature of Business.  Borrower will not make any  substantial  change in
the nature of its businesses as now conducted.

     8.10  Disposition  of  Assets.  Borrower  will not sell,  transfer,  lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:

          (a)  equipment  that is  worthless or obsolete or which is replaced by
     equipment of equal suitability and value;

          (b) inventory that is sold in the ordinary course of business; and

          (c) interests in oil and gas leases, or portions  thereof,  so long as
     no well situated on any such lease or located on any unit containing all or
     any part thereof,  is capable (or is subject to being made capable  through
     commercially   feasible   operations)   of  producing  oil,  gas  or  other
     hydrocarbons or minerals in commercial quantities.

     8.11 Current Ratio. At all times during the term hereof, Borrower's Current
Ratio shall not be less than 1.00 to 1.

<PAGE>
                                       31

     8.12  Leases.  Borrower  shall not pay or become  liable to pay  rentals or
lease payments on any lease (excluding oil and gas leases),  sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal year.

     8.13 Net Worth.  At all times during the term hereof,  Borrower's Net Worth
shall not be less than (a) $25,000,000,  plus (b) seventy-five  percent (75%) of
the net proceeds of any equity  offering by the Borrower on or after the date of
this Agreement,  plus (c) fifty percent (50%) of Borrower's  Adjusted Net Income
for each  fiscal  quarter,  if  positive,  and zero  percent  (0%) if  negative,
determined on a cumulative  basis, for the period beginning October 1, 2000, and
ending  on the last  day of the most  recent  fiscal  quarter  as of the time in
question. As used in this Section 8.13, Borrower's Adjusted Net Income means for
any  period,  Borrower's  Net Income for such  period,  provided  there shall be
excluded  from such Net Income (to the extent  otherwise  included  therein) the
cumulative  effect of a change in  accounting  principles  and the after-tax net
effect of any non-recurring non-cash charges, including, without limitation, any
charges under Financial Accounting Standard Board Statement No. 121, as amended,
supplemented or modified from time to time.

     8.14 Debt Service  Ratio.  At all times during the term hereof,  Borrower's
Debt Service Ratio shall not be less than 1.1 to 1.

     8.15 Derivatives. Borrower shall not enter into any Derivatives, other than
oil  and/or  gas price  Derivatives  which  are  related  to bona  fide  hedging
activities  and  as  to  which  (i)  the  aggregate  notional  amounts  of  such
Derivatives  during any calculation  period do not exceed  seventy-five  percent
(75%) of Borrower's estimated production from proved producing reserves existing
as of the date of the execution thereof based upon the then most current reserve
evaluation  required  pursuant to Section 7.1(d) above, (ii) such Derivatives do
not contain terms or  provisions  which could  require  margin calls,  (iii) the
counterparty to any such Derivatives have a minimum rating of "A-" by Standard &
Poors'  Corporation  or "A3" by  Moody's  Investors  Service,  Inc.,  (iv)  such
Derivatives  are for a term of  eighteen  (18)  months  or  less,  and (v)  such
Derivatives  have the  economic  effect of assuring the receipt by Borrower of a
price equal to or greater than that under Lender's then current pricing policy.


                                   ARTICLE IX
                              Default and Remedies

     9.1 Events of Default.  If any one or more of the following shall occur and
shall not have been  remedied  in the  period,  if any,  provided,  an "Event of
Default"  shall be deemed to have occurred  hereunder and with respect to all of
the Obligation, unless waived in writing by Lender:

          (a)  default  shall occur in the  payment  when due of the  Obligation
     including, without limitation, any principal or interest due on the Note or
     any commitment or other fee due hereunder;

<PAGE>
                                       32

          (b) any representation, warranty or statement made by Borrower herein,
     in any of the other Loan Papers or in any  certificate  furnished to Lender
     hereunder  shall be breached or shall prove to be untrue or  misleading  in
     any material respect at the time when made;

          (c)  default  shall  occur in the  performance  or  observance  of any
     covenant,  agreement, duty or obligation of Borrower contained herein or in
     any of the  other  Loan  Papers;  provided,  that  breach  of the  covenant
     contained in Sections  8.11,  8.13 or 8.14 hereof shall not  constitute  an
     Event of Default unless the same shall continue for a period of thirty (30)
     days;

          (d) Borrower  shall (i) apply for or consent to the  appointment  of a
     receiver,  trustee or liquidator  of it or of all or a substantial  part of
     its assets;  (ii) be unable, or admit in writing its inability,  to pay its
     debts as they become due;  (iii) make a general  assignment for the benefit
     of  creditors;  (iv) be  adjudicated  a  bankrupt  or  insolvent  or file a
     voluntary petition in bankruptcy;  (v) file a petition or an answer seeking
     reorganization or an arrangement with creditors or to take advantage of any
     bankruptcy  or insolvency  law; (vi) file an answer  admitting the material
     allegations  of, or consent to, or default in answering,  a petition  filed
     against it in any bankruptcy,  reorganization or insolvency proceedings; or
     (vii) take any action (corporate or otherwise) for the purpose of effecting
     any of the foregoing;

          (e) an order,  judgment  or decree  shall be  entered  by any court of
     competent  jurisdiction  approving  a petition  seeking  reorganization  of
     Borrower or appointing a receiver,  trustee or liquidator of Borrower or of
     all or a substantial part of its assets, and such order, judgment or decree
     shall continue unstayed in effect for any period of thirty (30) consecutive
     days;

          (f) any Lien for failure to pay income, payroll, FICA or similar taxes
     shall  be  filed by the U.S.  Government  or any  agent or  instrumentality
     thereof against Borrower or any of its assets;

          (g) there shall occur any acceleration,  notice of default,  filing of
     suit or notice of breach by any other party to any  Material  Agreement  to
     which  Borrower is a party wherein the amount  involved or claimed  exceeds
     $100,000,   following  the  passage  of  any  grace  period   provided  for
     thereunder;

          (h) default shall occur in the payment of any indebtedness of Borrower
     aggregating  $100,000  or more  under any note,  loan  agreement  or credit
     agreement  and such  default  shall  continue  for more than the  period of
     grace, if any, specified therein, or any such indebtedness shall become due
     before its stated maturity by acceleration of the maturity thereof or shall
     become due by its terms and shall not be promptly paid or extended;

          (i) any final  judgment or  judgments  for the payment of money in the
     amount of $100,000 or more,  in the  aggregate,  shall be rendered  against
     Borrower and shall not be satisfied or discharged at least thirty (30) days
     prior to the date on which  any of its  assets  could be  lawfully  sold to
     satisfy such judgment or judgments;

<PAGE>
                                       33


          (j) the good faith  belief by Lender  that the  prospect of payment or
     performance of the Obligation is materially impaired,  or that the value of
     the Collateral has, or will be, materially decreased;

          (k) a Material Adverse Change has occurred with respect to Borrower;

          (l) a majority of the  individuals  comprising  the  current  Board of
     Directors of Borrower shall resign, be declared incompetent or otherwise be
     removed  (voluntarily or involuntarily) or cease to serve as members of the
     Board of Directors of Borrower; or

          (m) the  occurrence  or existence of any default,  event of default or
     other similar  condition or event (however  described)  with respect to any
     Rate Management Transaction.

     9.2 Remedies.  Upon the  occurrence  of any Event of Default,  Lender shall
have no further  obligation  to advance funds  hereunder or under the Note,  and
Lender may  declare  all of the  Obligation  to be  forthwith  due and  payable,
whereupon  the same shall  forthwith  become  due and  payable  without  further
presentment,   demand,   protest,  notice  of  acceleration  or  the  intent  to
accelerate,  or other notice of any kind, all of which Borrower hereby expressly
waives,  anything  contained  herein,  in the Note or in any of the  other  Loan
Papers  to  the  contrary  notwithstanding;  provided  that  any  default  under
subsections  (d) or (e) of  Section  9.1 shall  result in all of the  Obligation
becoming immediately due and payable in full without the necessity of any act by
Lender.  Further,  Lender may, in its discretion,  but shall not be required to,
exercise  such Rights as are  provided it in any of the Loan Papers or at law or
in equity.  Nothing  contained  in this  Article  shall be construed to limit or
amend in any way the  Events of  Default  enumerated  in the Loan  Papers or any
other document executed in connection with the transactions contemplated herein.
Further,  in such event,  Lender shall have all other Rights afforded to it with
respect to  Borrower  or any of the  Collateral  under any of the Loan Papers or
under any applicable law or in equity.


                                    ARTICLE X
                                  Miscellaneous

     10.1 Survival of Representations  and Warranties.  All  representations and
warranties  of  Borrower  herein,  and all  covenants,  agreements,  duties  and
obligations of Borrower herein not fully performed on or before the date of this
Agreement, shall survive such date.

     10.2 Communications.  Unless specifically provided otherwise,  whenever any
Loan Paper requires or permits any consent, approval, notice, request, or demand
from one party to another, such communication must be in writing to be effective
and  shall be deemed to have been  given on the day  actually  delivered  or, if
mailed,  on the third day (or if such third day is not a Business  Day,  then on
the next succeeding Business Day) after it is enclosed in an envelope, addressed
to the party to be notified  at the  address  stated  below,  properly  stamped,
sealed, and deposited in the appropriate

<PAGE>
                                       34


official postal service.  Until changed by notice pursuant  hereto,  the address
for each party for purposes hereof is as follows:

                BORROWER:       PARALLEL PETROLEUM CORPORATION
                                110 North Marienfeld, Suite 465
                                Midland, Texas  79701

                LENDER:         BANK UNITED
                                401 West Texas
                                Midland County
                                Midland, Texas 79701
                                        Attention:  Michael J. Davis

     10.3 Non-Waiver.

          (a) The acceptance by Lender at any time and from time to time of part
     payment  on the  Obligation  shall not  operate as a waiver of any Event of
     Default then existing.

          (b) No waiver by Lender of any Event of  Default  shall  operate  as a
     waiver of any other then existing or subsequent Event of Default.

          (c) No delay or  omission  by Lender  in  exercising  any Right  shall
     impair such Right or operate as a waiver  thereof,  nor shall any single or
     partial  exercise  of any such Right  preclude  other or  further  exercise
     thereof,  or the  exercise  of any other  Right  under  the Loan  Papers or
     otherwise.

          (d) No notice or demand given by Lender in any case shall operate as a
     waiver of Lender's right to take other action in the same, similar or other
     instances without such notice or demand.

          (e) No Advance  hereunder  shall  operate as a waiver by Lender of (i)
     the  representations,  warranties  and covenants of Borrower under the Loan
     Papers;  (ii) any  Event of  Default;  or (iii)  any of the  conditions  to
     Lender's obligation, if any, to make further Advances.

     10.4  Strict  Compliance.  If any  action  or  failure  to act by  Borrower
violates any covenant of Borrower  contained  herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or failure
to act would  otherwise  be  permitted  by any  covenant  (or  exception  to any
covenant) other than the covenant violated.

     10.5 Cumulative  Rights.  The Rights of Lender under the Loan Papers are in
addition to all other Rights  provided by law,  whether or not the Obligation is
due and payable and whether or not Lender has instituted any suit for collection
or other action in connection with the Loan Papers.

<PAGE>
                                       35


     10.6 GOVERNING LAW. THIS AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND
DELIVERED,  AND  IS  INTENDED  TO BE  PERFORMED,  IN THE  STATE  OF  TEXAS.  THE
SUBSTANTIVE  LAWS OF SUCH STATE AND THE  APPLICABLE  FEDERAL  LAWS OF THE UNITED
STATES OF AMERICA  SHALL  GOVERN THE  VALIDITY,  CONSTRUCTION,  ENFORCEMENT  AND
INTERPRETATION  OF THIS  AGREEMENT AND THE OTHER LOAN PAPERS,  WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW, PROVIDED,  HOWEVER,  THAT THE RIGHTS PROVIDED IN
THE LOAN PAPERS WITH  REFERENCE  TO  PROPERTIES  SITUATED IN OTHER STATES MAY BE
GOVERNED BY THE LAWS OF SUCH OTHER STATES.

     10.7  CHOICE OF FORUM;  CONSENT TO SERVICE OF  PROCESS;  JURISDICTION;  AND
WAIVER OF JURY TRIAL.  ANY SUIT,  ACTION OR PROCEEDING  AGAINST BORROWER ARISING
OUT OF OR  RELATING  TO ANY OF THE LOAN  PAPERS OR ANY  JUDGMENT  ENTERED BY ANY
COURT IN RESPECT THEREOF,  MAY BE BROUGHT OR ENFORCED IN THE COURTS OF THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES COURTS LOCATED IN THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES COURTS LOCATED IN THE STATE
OF TEXAS,  AS LENDER IN ITS SOLE  DISCRETION  MAY  ELECT,  AND  BORROWER  HEREBY
SUBMITS TO THE  NONEXCLUSIVE  JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY
SUCH SUIT, ACTION OR PROCEEDING. BORROWER HEREBY IRREVOCABLY CONSENTS TO SERVICE
OF  PROCESS  IN ANY SUIT,  ACTION  OR  PROCEEDING  IN ANY OF SAID  COURTS BY THE
MAILING THEREOF BY LENDER BY REGISTERED OR CERTIFIED MAIL,  POSTAGE PREPAID,  TO
BORROWER,  AT ITS ADDRESS SET FORTH HEREIN.  BORROWER HEREBY  IRREVOCABLY WAIVES
ANY  OBJECTIONS  THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY
SUIT,  ACTION OR PROCEEDING  ARISING OUT OF OR RELATING TO ANY OF THE OTHER LOAN
PAPERS BROUGHT IN ANY OF SAID COURTS AND HEREBY FURTHER  IRREVOCABLY  WAIVES ANY
CLAIM THAT ANY SUCH  SUIT,  ACTION OR  PROCEEDING  BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN  INCONVENIENT  FORUM.  THE  BORROWER  HEREBY  WAIVES,  TO THE
FULLEST EXTENT  PERMITTED BY APPLICABLE  LAW, ANY AND ALL RIGHT TO TRIAL BY JURY
IN ANY LEGAL  PROCEEDING  ARISING  OUT OF OR  RELATED TO THIS  AGREEMENT  OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

     10.8  ARBITRATION.  TO THE  MAXIMUM  EXTENT  NOT  PROHIBITED  BY  LAW,  ANY
CONTROVERSY, DISPUTE OR CLAIM ARISING OUT OF, IN CONNECTION WITH, OR RELATING TO
THIS AGREEMENT OR ANY OF THE OTHER LOAN PAPERS OR ANY  TRANSACTION  PROVIDED FOR
THEREIN,  INCLUDING  BUT NOT  LIMITED TO ANY CLAIM  BASED ON OR ARISING  FROM AN
ALLEGED TORT OR AN ALLEGED BREACH OF ANY AGREEMENT  CONTAINED IN ANY OF THE LOAN
PAPERS,  SHALL, AT THE REQUEST OF ANY PARTY TO THE LOAN PAPERS (EITHER BEFORE OR
AFTER THE  COMMENCEMENT  OF  JUDICIAL  PROCEEDINGS),  BE SETTLED BY  ARBITRATION
PURSUANT  TO  TITLE 9 OF THE  UNITED  STATES  CODE,  WHICH  THE  PARTIES  HERETO

<PAGE>
                                       36


ACKNOWLEDGE  AND  AGREE  APPLIES  TO THE  TRANSACTION  INVOLVED  HEREIN,  AND IN
ACCORDANCE  WITH THE COMMERCIAL  ARBITRATION  RULES OF THE AMERICAN  ARBITRATION
ASSOCIATION (THE "AAA"). IN ANY SUCH ARBITRATION PROCEEDING: (i) ALL STATUTES OF
LIMITATION  WHICH  WOULD  OTHERWISE  BE  APPLICABLE  SHALL  APPLY;  AND (ii) THE
PROCEEDING SHALL BE CONDUCTED IN HOUSTON, TEXAS, BY A SINGLE ARBITRATOR,  IF THE
AMOUNT IN CONTROVERSY IS $1 MILLION OR LESS, OR BY A PANEL OF THREE  ARBITRATORS
IF THE  AMOUNT IN  CONTROVERSY  IS OVER $1  MILLION.  ALL  ARBITRATORS  SHALL BE
SELECTED BY THE PROCESS OF  APPOINTMENT  FROM A PANEL  PURSUANT TO SECTION 13 OF
THE  AAA   COMMERCIAL   ARBITRATION   RULES  AND  EACH   ARBITRATOR   WILL  HAVE
AAA-ACKNOWLEDGED EXPERTISE IN THE APPROPRIATE SUBJECT MATTER. ANY AWARD RENDERED
IN ANY SUCH ARBITRATION PROCEEDING SHALL BE FINAL AND BINDING, AND JUDGMENT UPON
ANY SUCH AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION.

     IF ANY PARTY TO THIS  AGREEMENT OR THE OTHER LOAN PAPERS FILES A PROCEEDING
IN ANY COURT TO RESOLVE  ANY SUCH  CONTROVERSY,  DISPUTE OR CLAIM,  SUCH  ACTION
SHALL NOT  CONSTITUTE  A WAIVER OF THE RIGHT OF SUCH PARTY OR A BAR TO THE RIGHT
OF ANY OTHER PARTY TO SEEK  ARBITRATION  UNDER THE PROVISIONS OF THIS SECTION OF
THAT OR ANY OTHER  CLAIM,  DISPUTE OR  CONTROVERSY,  AND THE COURT  SHALL,  UPON
MOTION OF ANY PARTY TO THE PROCEEDING, DIRECT THAT SUCH CONTROVERSY,  DISPUTE OR
CLAIM BE ARBITRATED IN ACCORDANCE WITH THIS SECTION.

     NOTWITHSTANDING  ANY OF THE  FOREGOING,  THE PARTIES  HERETO  AGREE THAT NO
ARBITRATOR OR PANEL OF ARBITRATORS SHALL POSSESS OR HAVE THE POWER TO (i) ASSESS
PUNITIVE DAMAGES,  (ii) DISSOLVE,  RESCIND OR REFORM (EXCEPT THAT THE ARBITRATOR
MAY CONSTRUE  AMBIGUOUS  TERMS) THIS  AGREEMENT OR ANY OTHER LOAN PAPERS,  (iii)
ENTER JUDGMENT ON THE DEBT, (iv) EXERCISE EQUITABLE POWERS OR ISSUE OR ENTER ANY
EQUITABLE  REMEDIES  OR  (v)  ALLOW  DISCOVERY  OF  ATTORNEY/CLIENT   PRIVILEGED
INFORMATION,  AND THE PARTIES  HEREBY  WAIVE THE  AFOREMENTIONED  REMEDIES.  THE
COMMERCIAL  ARBITRATION  RULES OF THE AAA ARE HEREBY MODIFIED TO THIS EXTENT FOR
THE PURPOSE OF ARBITRATION OF ANY DISPUTE,  CONTROVERSY OR CLAIM ARISING OUT OF,
IN CONNECTION  WITH, OR RELATING TO ANY LOAN PAPER.  THE PARTIES  HERETO FURTHER
AGREE TO WAIVE, EACH TO EACH OTHER, ANY CLAIMS FOR PUNITIVE  DAMAGES,  AND AGREE
THAT NEITHER AN ARBITRATOR NOR ANY COURT SHALL HAVE THE POWER TO ASSESS PUNITIVE
DAMAGES.

     NO PROVISION  OF, OR THE EXERCISE OF ANY RIGHTS  UNDER,  THIS SECTION SHALL
LIMIT OR  IMPAIR  THE RIGHT OF ANY PARTY TO THE LOAN  PAPERS  BEFORE,  DURING OR
AFTER ANY ARBITRATION PROCEEDING TO: (i) EXERCISE SELF-HELP REMEDIES SUCH AS SET
OFF OR  REPOSSESSION;  (ii)  FORECLOSE  (JUDICIALLY OR

<PAGE>
                                       37


OTHERWISE)  ANY LIEN ON OR SECURITY  INTEREST  IN ANY REAL OR PERSONAL  PROPERTY
COLLATERAL;  OR  (iii)  OBTAIN  EMERGENCY  RELIEF  FROM  A  COURT  OF  COMPETENT
JURISDICTION  TO  PREVENT  THE  DISSIPATION,   DAMAGE,  DESTRUCTION,   TRANSFER,
HYPOTHECATION,  PLEDGING OR CONCEALMENT OF ASSETS OR OF COLLATERAL  SECURING ANY
INDEBTEDNESS,  OBLIGATION  OR  GUARANTY  REFERENCED  IN THE  LOAN  PAPERS.  SUCH
EMERGENCY  RELIEF MAY BE IN THE NATURE OF, BUT IS NOT LIMITED  TO:  PRE-JUDGMENT
ATTACHMENTS, GARNISHMENTS,  SEQUESTRATIONS,  APPOINTMENTS OF RECEIVERS, OR OTHER
EMERGENCY  INJUNCTIVE  RELIEF TO  PRESERVE  THE STATUS QUO,  INCLUDING,  WITHOUT
LIMITATION,   THE  RIGHT  TO  OBTAIN  A  PRELIMINARY  INJUNCTION  TO  PREVENT  A
FORECLOSURE OF THE LIENS EVIDENCED BY THE DEED OF TRUST.

     10.9 Usury Savings Clause.  Nothing contained in this Agreement,  the Note,
any other Loan Paper or in any other Agreement or undertaking relating hereto or
to  the  Obligation  shall  be  construed  to  obligate   Borrower,   under  any
circumstances  whatsoever,  to pay  interest  at a rate in excess of the Highest
Lawful  Rate.  All sums paid  hereunder  or under the Note that are deemed to be
interest  shall be spread and prorated over the entire period for which the Note
is outstanding.  In the event that any sums received hereunder from Borrower are
at any time under applicable law deemed or held to provide a rate of interest in
excess of the  Highest  Lawful  Rate,  the  effective  rate of  interest  on the
Obligation  shall be deemed reduced to and shall be the Highest Lawful Rate, and
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances  either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the  application of these sums
as a credit against the unpaid  principal  amount of the Note,  whichever remedy
may be elected by Lender.  In  addition,  in the event that the  maturity of the
Note is accelerated by reason of the election by Lender  hereunder,  then earned
interest  may never  include  more than the amount  calculated  pursuant  to the
Highest Lawful Rate, and if unearned interest is provided for in the Note or the
other Loan  Papers,  Borrower  and any other  parties  liable on said  documents
hereby agree to accept as their sole remedy under such circumstances  either (a)
the cancellation of said unearned  interest,  or (b) if theretofore paid, either
the  return to  Borrower  or the  crediting  of said  unearned  interest  on the
principal amount due under the Note or other documents,  whichever action may be
elected  by Lender.  To the extent the  Highest  Lawful  Rate is  determined  by
reference  to the laws of the State of Texas,  same shall be the weekly  ceiling
provided for in Chapter 303 of the Texas Finance Code and in Article 5069-1D.002
of the Revised Civil Statutes of Texas,  in each case as amended,  provided that
Lender may, by notice to Borrower,  elect such other  reference as is allowed by
said statutes.

     10.10  Enforceability.  If one or more of the  provisions  contained in the
Loan  Papers  shall,  for  any  reason,  be  held  to  be  invalid,  illegal  or
unenforceable in any respect, such in validity,  illegality, or unenforceability
shall not affect any other provision of the Loan Papers or any other  instrument
referred to herein.

     10.11  Binding  Effect.  The Loan Papers shall be binding upon and inure to
the benefit of Borrower and Lender and their respective  successors and assigns;
provided,  however,  that  Borrower

<PAGE>
                                       38

shall not assign any Rights, duties or obligations under the Loan Papers without
the prior written consent of Lender.

     10.12 No Third Party Beneficiary.

          (a) The parties do not intend the benefits of the Loan Papers to inure
     to any  third  party,  nor shall the Loan  Papers be  construed  to make or
     render Lender liable to any third party, including, without limitation, any
     materialman,  supplier,  contractor,  subcontractor,  purchaser,  lessor or
     lessee having a claim against Borrower.  Notwithstanding anything contained
     in the Loan  Papers,  or any  conduct or course of conduct by any or all of
     the parties  hereto,  whether  before or after signing the Agreement or any
     other Loan Paper,  no Loan Paper shall be  construed as creating any right,
     claim  or cause of  action  against  Lender  in favor of any  third  party,
     including,  without  limitation,  any  materialman,  supplier,  contractor,
     subcontractor, purchaser, lessor or lessee having a claim against Borrower.

          (b) All  conditions  to the  obligation  of  Lender  to make  Advances
     hereunder are imposed solely and exclusively for the benefit of Lender, and
     no other  person  shall  have  standing  to  require  satisfaction  of such
     conditions  in  accordance  with their  terms or be entitled to assume that
     Lender  will make or  refuse  to make  Advances  in the  absence  of strict
     compliance  therewith,  and any or all of  such  conditions  may be  freely
     waived  in whole or in part by Lender  at any time if  Lender,  in its sole
     absolute discretion, deems it advisable to do so.

     10.13  Delegation  by  Lender.  Lender  may  perform  any of its  duties or
exercise  any of its Rights by or through its  officers,  directors,  employees,
attorneys, agents or other representatives.

     10.14 Setoff.  Borrower hereby grants to Lender (and to each participant to
whom Lender has conveyed or may hereafter  convey a  participation  in the Note)
the right of setoff to secure payment of the Obligation upon any and all moneys,
securities  or other  property of Borrower  and the proceeds  therefrom,  now or
hereafter  held or received by or in transit to, Lender or any such  participant
or any agent of Lender or such participant, from or for the account of Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposits (general or specific) and credits of Borrower
and any and all claims of Borrower against Lender or any such participant at any
time existing.  Notwithstanding  the foregoing,  nothing  contained herein shall
grant to Lender  the right of setoff  against  an  account  if Lender has actual
knowledge  that any person other than Borrower or any Subsidiary of Borrower has
an ownership interest in such account.

     10.15 Additional  Documents.  It is contemplated  that there may be certain
supplementary and/or corrective  mortgages,  deeds of trust, security agreements
and similar  items  prepared  by Lender to be  executed  by Borrower  subsequent
hereto,  as well as certain other  corrective and additional  documentation  not
executed  concurrently  with this  Agreement  because of the  unavailability  of
information  such as property  and  collateral  descriptions  at the time of the
execution  hereof.  Borrower  hereby agrees to cooperate with Lender and provide
such information in

<PAGE>
                                       39


connection  therewith  as Lender may  reasonably  request,  and to  execute  and
deliver such other and further  documentation as Lender shall reasonably request
so as to provide Lender with a Bank Lien on the Collateral.

     10.16  Counterparts.  This  Agreement  may be  executed  in any  number  of
counterparts,  each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.

     10.17  Amendments.  Neither this Agreement nor any provision  hereof may be
changed,  waived,  discharged or terminated  orally but only by an instrument in
writing signed by Borrower and Lender.

     10.18 Headings.  All headings used herein are for convenience and reference
purposes only and shall not affect the substance of this Agreement.

     10.19   Conflicts.   In  the  event  that  there  exists  any  conflict  or
inconsistency  between  the terms  hereof and the terms of any other Loan Paper,
the terms  hereof  shall  govern and  control,  provided  that the fact that any
representation,  warranty or covenant  contained  in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.

     10.20 Entirety.  This Agreement and the other Loan Papers embody the entire
agreement among the parties and supersede and supplant all prior  agreements and
understandings with respect to the matters contained herein.

     10.21 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation,  in which event each such other participant shall be entitled to
the rights and benefits  under this  Agreement and the other Loan Papers.  It is
understood and agreed that Lender may provide to  participants  and  prospective
participants  financial information and reports and data concerning Borrower and
Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement.

     10.22 Notice of Final Agreement.  THIS WRITTEN AGREEMENT AND THE OTHER LOAN
PAPERS  REPRESENT  THE  FINAL  AGREEMENT  BETWEEN  THE  PARTIES  AND  MAY NOT BE
CONTRADICTED  BY  EVIDENCE  OF  PRIOR,   CONTEMPORANEOUS,   OR  SUBSEQUENT  ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL  AGREEMENTS  BETWEEN THE
PARTIES.

<PAGE>
                                       40

        EXECUTED as of the date first above written.

                                      PARALLEL PETROLEUM CORPORATION,
                                       a Delaware corporation


                                      By:___________________________
                                         Larry C. Oldham
                                         President

                                      BANK UNITED


                                      By:___________________________
                                         Michael J. Davis
                                         President




<PAGE>
                                       1


                                  Exhibit 2.4


                                 PROMISSORY NOTE

$30,000,000.00            Midland, Texas        December 18, 2000

     FOR VALUE  RECEIVED,  the undersigned  PARALLEL  PETROLEUM  CORPORATION,  a
Delaware corporation (referred to herein as "Borrower"),  hereby unconditionally
promises to pay to the order of BANK UNITED,  a federal savings bank ("Lender"),
at 401 West Texas, Midland County,  Midland,  Texas 79701, or such other address
as Lender shall  designate in writing to Borrower,  the  principal sum of THIRTY
MILLION AND NO/100 DOLLARS ($30,000,000.00),  or if less, so much thereof as may
be advanced pursuant to the Loan Agreement (as hereinafter  defined),  in lawful
money of the United  States of America,  together  with  interest  from the date
hereof until paid at the rates specified in the Loan Agreement.

     The  principal  and all  accrued  interest  on this  Note  shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.

     This Note is executed pursuant to that certain Loan Agreement dated of even
date herewith between Borrower and Lender (herein, as from time to time amended,
modified or restated, called the "Loan Agreement"),  and is the Note referred to
therein.  All capitalized  terms used but not specifically  defined herein shall
have the meanings  ascribed thereto in the Loan Agreement.  Reference is made to
the Loan  Agreement and the other Loan Papers for a statement of the  prepayment
rights and  obligations of Borrower,  a description of the properties  mortgaged
and assigned as security,  the nature and extent of such security and the rights
of the  parties  under  the Loan  Papers  in  respect  to such  security,  for a
statement of the terms and conditions  under which the due date of this Note may
be accelerated and for statements  regarding  other matters  affecting this Note
(including  without  limitation the  obligations of the holder hereof to advance
funds  hereunder,  principal  and  interest  payment  due dates,  voluntary  and
mandatory  prepayments,  exercise of rights and remedies,  payment of attorneys'
fees,  court costs and other costs of collection and certain waivers by Borrower
and others now or hereafter  obligated  for payment of any sums due  hereunder).
Upon the occurrence of an Event of Default,  as that term is defined in the Loan
Agreement or the other Loan Papers,  the holder hereof shall have all rights and
remedies of the Lender under the Loan Agreement and the other Loan Papers.

     Nothing contained in this Note, the Loan Agreement, any other Loan Paper or
in any other agreement or undertaking relating hereto or to the Obligation shall
be construed to obligate Borrower,  under any circumstances  whatsoever,  to pay
interest at a rate in excess of the Highest Lawful Rate. All sums paid under the
Loan Agreement or under this Note that are deemed to be interest shall be spread
and prorated over the entire period for which this Note is  outstanding.  In the
event that any sums received hereunder or under the Loan Agreement from Borrower
are at any  time  under  applicable  law  deemed  or held to  provide  a rate of
interest in excess of the Highest Lawful Rate, the effective rate of interest on
the Obligation  shall be deemed reduced to and shall be the Highest Lawful Rate,
and

<PAGE>
                                       2

Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances  either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the  application of these sums
as a credit against the unpaid principal  amount of this Note,  whichever remedy
may be elected by Lender.  In  addition,  in the event that the maturity of this
Note is accelerated  by reason of the election by Lender  hereunder or under the
Loan  Agreement,  then earned  interest  may never  include more than the amount
calculated  pursuant to the Highest  Lawful  Rate,  and if unearned  interest is
provided  for in this  Note or the other  Loan  Papers,  Borrower  and any other
parties  liable on said  documents  hereby  agree to accept as their sole remedy
under such circumstances  either (a) the cancellation of said unearned interest,
or (b) if  theretofore  paid,  either the return to Borrower or the crediting of
said  unearned  interest  on the  principal  amount due under this Note or other
documents,  whichever action may be elected by Lender. To the extent the Highest
Lawful Rate is determined  by reference to the laws of the State of Texas,  same
shall be the weekly  ceiling  provided  for in Chapter 303 of the Texas  Finance
Code and in Article  5069-1D.001 of the Revised Civil Statutes of Texas, in each
case as amended,  provided  that Lender may, by notice to  Borrower,  elect such
other reference as is allowed by said statutes.

     If any payment of  principal or interest on this Note shall become due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business  Day and such  extension  of time  shall in such  case be  included  in
computing interest in connection with such payment.

     If this Note is placed in the hands of an attorney for collection, or if it
is collected  through any legal proceeding at law or in equity or in bankruptcy,
receivership  or other court  proceedings,  Borrower  agrees to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.

     Borrower and each surety,  endorser,  guarantor and other party ever liable
for payment of any sums of money  payable on this Note,  jointly  and  severally
waive  presentment  and  demand  for  payment,  notice  of  acceleration  or the
intention to accelerate the maturity, protest, notice of protest and nonpayment,
as to this Note and as to each and all installments hereof, and agree that their
liability  under this Note shall not be affected by any renewal or  extension in
the time of payment hereof,  or in any indulgences,  or by any release or change
in any security for the payment of this Note,  and hereby consent to any and all
renewals, extensions, indulgences, releases or changes.

     This  Note  shall be  governed  by and  construed  in  accordance  with the
applicable  laws of the United  States of  America  and the laws of the State of
Texas,  except that  Chapter  346 of the Texas  Finance  Code  (which  regulates
certain revolving credit loan accounts and revolving  tri-party  accounts) shall
not apply to this Note.

     This Note is given, to the extent of $12,365,889.22,  in renewal, extension
and  rearrangement,  but  not in  extinguishment  or  novation,  of  the  unpaid
principal balance of the certain promissory note dated December 27, 1999, in the
original  principal  amount of $30,000,000,  executed by Borrower and payable to
the order of Bank One, Texas, N.A.

<PAGE>
                                       3


     TO THE MAXIMUM  EXTENT NOT PROHIBITED BY LAW, ANY  CONTROVERSY,  DISPUTE OR
CLAIM ARISING OUT OF, IN CONNECTION WITH, OR RELATING TO THIS NOTE OR ANY OF THE
OTHER LOAN PAPERS OR ANY  TRANSACTION  PROVIDED FOR THEREIN,  INCLUDING  BUT NOT
LIMITED  TO ANY CLAIM  BASED ON OR ARISING  FROM AN  ALLEGED  TORT OR AN ALLEGED
BREACH OF ANY  AGREEMENT  CONTAINED  IN ANY OF THE LOAN  PAPERS,  SHALL,  AT THE
REQUEST OF ANY PARTY TO THE LOAN PAPERS (EITHER BEFORE OR AFTER THE COMMENCEMENT
OF JUDICIAL  PROCEEDINGS),  BE SETTLED BY ARBITRATION PURSUANT TO TITLE 9 OF THE
UNITED STATES CODE,  WHICH THE PARTIES HERETO  ACKNOWLEDGE  AND AGREE APPLIES TO
THE  TRANSACTION   INVOLVED  HEREIN,  AND  IN  ACCORDANCE  WITH  THE  COMMERCIAL
ARBITRATION  RULES OF THE AMERICAN  ARBITRATION  ASSOCIATION (THE "AAA"). IN ANY
SUCH  ARBITRATION  PROCEEDING:  (i)  ALL  STATUTES  OF  LIMITATION  WHICH  WOULD
OTHERWISE BE APPLICABLE  SHALL APPLY; AND (ii) THE PROCEEDING SHALL BE CONDUCTED
IN HOUSTON,  TEXAS, BY A SINGLE  ARBITRATOR,  IF THE AMOUNT IN CONTROVERSY IS $1
MILLION OR LESS, OR BY A PANEL OF THREE ARBITRATORS IF THE AMOUNT IN CONTROVERSY
IS OVER $1  MILLION.  ALL  ARBITRATORS  SHALL  BE  SELECTED  BY THE  PROCESS  OF
APPOINTMENT  FROM  A  PANEL  PURSUANT  TO  SECTION  13  OF  THE  AAA  COMMERCIAL
ARBITRATION  RULES AND EACH ARBITRATOR WILL HAVE  AAA-ACKNOWLEDGED  EXPERTISE IN
THE  APPROPRIATE  SUBJECT  MATTER.  ANY AWARD  RENDERED IN ANY SUCH  ARBITRATION
PROCEEDING  SHALL BE FINAL AND BINDING,  AND JUDGMENT UPON ANY SUCH AWARD MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION. IF ANY PARTY TO THIS NOTE OR THE OTHER
LOAN PAPERS  FILES A  PROCEEDING  IN ANY COURT TO RESOLVE ANY SUCH  CONTROVERSY,
DISPUTE OR CLAIM, SUCH ACTION SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF SUCH
PARTY OR A BAR TO THE RIGHT OF ANY  OTHER  PARTY TO SEEK  ARBITRATION  UNDER THE
PROVISIONS OF THIS SECTION OF THAT OR ANY OTHER CLAIM,  DISPUTE OR  CONTROVERSY,
AND THE COURT  SHALL,  UPON MOTION OF ANY PARTY TO THE  PROCEEDING,  DIRECT THAT
SUCH  CONTROVERSY,  DISPUTE  OR CLAIM BE  ARBITRATED  IN  ACCORDANCE  WITH  THIS
SECTION.  NOTWITHSTANDING ANY OF THE FOREGOING, THE PARTIES HERETO AGREE THAT NO
ARBITRATOR OR PANEL OF ARBITRATORS SHALL POSSESS OR HAVE THE POWER TO (i) ASSESS
PUNITIVE DAMAGES,  (ii) DISSOLVE,  RESCIND OR REFORM (EXCEPT THAT THE ARBITRATOR
MAY CONSTRUE  AMBIGUOUS  TERMS) THIS NOTE OR ANY OTHER LOAN PAPERS,  (iii) ENTER
JUDGMENT  ON THE  DEBT,  (iv)  EXERCISE  EQUITABLE  POWERS OR ISSUE OR ENTER ANY
EQUITABLE  REMEDIES  OR  (v)  ALLOW  DISCOVERY  OF  ATTORNEY/CLIENT   PRIVILEGED
INFORMATION,  AND THE PARTIES  HEREBY  WAIVE THE  AFOREMENTIONED  REMEDIES.  THE
COMMERCIAL  ARBITRATION  RULES OF THE AAA ARE HEREBY MODIFIED TO THIS EXTENT FOR
THE PURPOSE OF ARBITRATION OF ANY DISPUTE,  CONTROVERSY OR CLAIM ARISING OUT OF,
IN CONNECTION  WITH, OR RELATING TO ANY LOAN PAPER.  THE PARTIES  HERETO FURTHER
AGREE TO WAIVE, EACH TO EACH OTHER, ANY CLAIMS FOR PUNITIVE  DAMAGES,  AND AGREE
THAT NEITHER AN ARBITRATOR NOR ANY COURT SHALL HAVE THE POWER TO ASSESS PUNITIVE
DAMAGES.  NO  PROVISION  OF, OR THE EXERCISE OF ANY RIGHTS  UNDER,  THIS SECTION
SHALL LIMIT OR IMPAIR THE RIGHT OF

<PAGE>
                                       4



ANY PARTY TO THE LOAN PAPERS BEFORE, DURING OR AFTER ANY ARBITRATION  PROCEEDING
TO:  (i)  EXERCISE  SELF-HELP  REMEDIES  SUCH AS SET OFF OR  REPOSSESSION;  (ii)
FORECLOSE (JUDICIALLY OR OTHERWISE) ANY LIEN ON OR SECURITY INTEREST IN ANY REAL
OR PERSONAL PROPERTY  COLLATERAL;  OR (iii) OBTAIN EMERGENCY RELIEF FROM A COURT
OF  COMPETENT  JURISDICTION  TO PREVENT THE  DISSIPATION,  DAMAGE,  DESTRUCTION,
TRANSFER,  HYPOTHECATION,  PLEDGING OR  CONCEALMENT  OF ASSETS OR OF  COLLATERAL
SECURING ANY INDEBTEDNESS, OBLIGATION OR GUARANTY REFERENCED IN THE LOAN PAPERS.
SUCH  EMERGENCY  RELIEF MAY BE IN THE NATURE OF,  BUT IS NOT  LIMITED  TO:  PRE-
JUDGMENT ATTACHMENTS, GARNISHMENTS,  SEQUESTRATIONS,  APPOINTMENTS OF RECEIVERS,
OR OTHER  EMERGENCY  INJUNCTIVE  RELIEF TO PRESERVE  THE STATUS QUO,  INCLUDING,
WITHOUT  LIMITATION,  THE RIGHT TO OBTAIN A PRELIMINARY  INJUNCTION TO PREVENT A
FORECLOSURE OF THE LIENS EVIDENCED BY THE DEED OF TRUST.

     THIS WRITTEN NOTE, THE LOAN  AGREEMENT AND THE OTHER LOAN PAPERS  REPRESENT
THE FINAL AGREEMENT  BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR,  CONTEMPORANEOUS,  OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     EXECUTED this 18th day of December, 2000.

                              BORROWER:

                                   PARALLEL PETROLEUM CORPORATION,
                                     a Delaware corporation


                                   By:
                                        Larry C. Oldham
                                        President


<PAGE>

                                                    Exhibit 10.16












                       AMENDED AND RESTATED
               LIMITED LIABILITY COMPANY AGREEMENT

                                OF

                      FIRST PERMIAN, L.L.C.

               a Delaware Limited Liability Company







                     Dated as of May 31, 2000





<PAGE>
                                         (i)



                       TABLE OF CONTENTS


ARTICLE I                                                                Page
   Formation . . . . . . . . . . . . . . . . . . . . . . . . . .           2
       Section 1.1.  Formation. . . . . . . . . . . . . . . . .            2
       Section 1.2.  Name . . . . . . . . . . . . . . . . . . .            2
       Section 1.3.  Purpose  . . . . . . . . . . . . . . . . . .          2
       Section 1.4.  Registered Office and Registered Agent; Principal
               Place of Business   . . . . . . . . . . . . . . .           2
       Section 1.5.  Foreign Qualification. . . . . . . . . . .            3
       Section 1.6.  Term . . . . . . . . . . . . . . . . . . .            3
       Section 1.7.  EnCap Transaction Costs. . . . . . . . . .            3

ARTICLE II
   Definitions and References. . . . . . . . . . . . . . . . .             3
       Section 2.1.  Definitions. . . . . . . . . . . . . . . .            3
       Section 2.2.  References and Construction. . . . . . . .            8

ARTICLE III
   Members and Units . . . . . . . . . . . . . . . . . . . . . .           9
       Section 3.1.  Members. . . . . . . . . . . . . . . . . .            9
       Section 3.2.  Units. . . . . . . . . . . . . . . . . . .            9
       Section 3.3.  Additional Members . . . . . . . . . . .              11
       Section 3.4.  Liability to Third Parties . . . . . . .              11
       Section 3.5.  Withdrawal . . . . . . . . . . . . . . .              11

ARTICLE IV
   Capitalization. . . . . . . . . . . . . . . . . . . . . . .             12
       Section 4.1.  Agreed Capital Contributions of Founding Members      12
       Section 4.2.  Agreed Capital Contributions of Persons Admitted as
               Members as of the Date Hereof. . . . . . . . .              12
       Section 4.3.  Further Capital Contributions. . . . . .              12
       Section 4.4.  Non-Payment of Capital Contributions . .              12
       Section 4.5.  Interest on and Return of Capital Contributions       12

ARTICLE V
   Allocations and Distributions . . . . . . . . . . . . . . .             12
       Section 5.1   Allocations. . . . . . . . . . . . . . .              12
       Section 5.2.  Distributions in Respect of the Preferred Units       15
       Section 5.3.  Distributions in Respect of the Common Units          16
       Section 5.4.  Tax Distributions. . . . . . . . . . . .              16
       Section 5.5.  Payment of Cash Distributions. . . . . .              17


<PAGE>
                                    (ii)

       Section 5.6.  Investment Coverage Ratio. . . . . . . .              17

ARTICLE VI
   Management/Governance Provisions. . . . . . . . . . . . . .             18
       Section 6.1.  Board of Directors . . . . . . . . . . .              18
       Section 6.2.  Certain Agreement. . . . . . . . . . . .              18
       Section 6.3.  Removal of Directors . . . . . . . . . .              19
       Section 6.4.  Vacancies. . . . . . . . . . . . . . . .              19
       Section 6.5.  Meetings of Board of Directors . . . . .              19
       Section 6.6.  Certain Specified Actions Requiring Board Approval    20
       Section 6.7.  Officers . . . . . . . . . . . . . . . .              23
       Section 6.8.  Certain Agreed Upon Actions. . . . . . .              23
       Section 6.9.  Use of EnCap Related Parties' Capital Contributions   25
       Section 6.10. Management Fees. . . . . . . . . . . . .              25
       Section 6.11. Placement Fee. . . . . . . . . . . . . .              25

ARTICLE VII
   Accounting and Banking Matters; Capital Accounts; Tax Matters           25
       Section 7.1.  Books and Records. . . . . . . . . . . .              25
       Section 7.2.  Fiscal Year. . . . . . . . . . . . . . .              25
       Section 7.3.  Bank Accounts. . . . . . . . . . . . . .              26
       Section 7.4.  Capital Accounts . . . . . . . . . . . .              26
       Section 7.5.  Tax Partnership. . . . . . . . . . . . .              27
       Section 7.6.  Tax Elections. . . . . . . . . . . . . .              27
       Section 7.7.  Tax Matters Partner. . . . . . . . . . .              27
       Section 7.8.  Confidentiality. . . . . . . . . . . . .              27

ARTICLE VIII
   Indemnification . . . . . . . . . . . . . . . . . . . . . .             28
       Section 8.1.  Power to Indemnify in Actions, Suits or Proceeding
               Other Than Those by or in the Right of the Company          28
       Section 8.2.  Power to Indemnify in Actions, Suits or Proceedings
               by or in the Right of the Company . . . . . . .             28
       Section 8.3.  Authorization of Indemnification . . . .              29
       Section 8.4.  Good Faith Defamed . . . . . . . . . . .              29
       Section 8.5.  Indemnification by a Court . . . . . . .              29
       Section 8.6.  Expenses Payable in Advance. . . . . . .              30
       Section 8.7.  Nonexclusivity of Indemnification and Advancement of
               Expenses . . . . . . . . . . . . . . . . . . .              30
       Section 8.8.  Insurance. . . . . . . . . . . . . . . .              30
       Section 8.9.  Certain Definitions. . . . . . . . . . .              30
       Section 8.10. Survival of Indemnification and Advancement of
               Expenses                                                    31
       Section 8.11  Limitation on Indemnification. . . . . .              31
       Section 8.12. Indemnification of Employees and Agents.              31
       Section 8.13. Severability . . . . . . . . . . . . . .              31

<PAGE>
                                           (iii)
ARTICLE IX
   Dispositions of Units and Substitutions; Redemption of Preferred Units  32
       Section 9.1.  Dispositions . . . . . . . . . . . . . .              32
       Section 9.2.  Substitution . . . . . . . . . . . . . .              32
       Section 9.3.  Redemption of Preferred Units. . . . . .              32

ARTICLE X
   Dissolution, Liquidation, and Termination . . . . . . . . .             33
       Section 10.1. Dissolution. . . . . . . . . . . . . . .              33
       Section 10.2. Liquidation and Termination. . . . . . .              33
       Section 10.3  Deficit Capital Accounts . . . . . . . .              35
       Section 10.4  Certificate of Cancellation. . . . . . .              35

ARTICLE XI
   Representations and Warranties  . . . . . . . . . . . . . .             35
       Section 11.1. Representations and Warranties of Members to
               Each Other. . . . . . . . . . . . . . . . . . .             35
       Section 11.2. Representations and Warranties of EnCap Related
               Entities. . . . . . . . . . . . . . . . . . . .             36
       Section 11.3. Representations and Warranties of Jones
               Foundation, Owen, Owen Foundation, Stai, Bridwell
               and Tejon to the Other Members  . . . . . . . .             36
       Section 11.4. Representations and Warranties of Current
               Members to the EnCap Related Entities.  . . . .             37
       Section 11.5. Survival of Representations and Warranties            37

ARTICLE XII
   General Provisions. . . . . . . . . . . . . . . . . . . . .             37
       Section 12.1. Notices. . . . . . . . . . . . . . . . .              37
       Section 12.2. Amendment or Modification. . . . . . . .              38
       Section 12.3. Entire Agreement . . . . . . . . . . . .              38
       Section 12.4. Effect of Waiver or Consent. . . . . . .              38
       Section 12.5. Successors and Assigns . . . . . . . . .              38
       Section 12.6. Governing Law. . . . . . . . . . . . . .              38
       Section 12.7. Severability . . . . . . . . . . . . . .              38
       Section 12.8. Further Assurances . . . . . . . . . . .              39
       Section 12.9. Title to Company Property. . . . . . . .              39
       Section 12.10.   Public Announcements. . . . . . . . .              39
       Section 12.11.   No Third Party Beneficiaries. . . . .              39
       Section 12.12.   Area of Mutual Interest . . . . . . .              39
       Section 12.13.   Resignation of Baytech and Parallel as Managers    40
       Section 12.14.   Counterparts. . . . . . . . . . . . .              40



<PAGE>
                                       1



                           FIRST AMENDED AND RESTATED

                       LIMITED LIABILITY COMPANY AGREEMENT
                                       OF
                              FIRST PERMIAN, L.L.C.


     THIS FIRST AMENDED AND RESTATED LIMITED  LIABILITY  COMPANY AGREEMENT (this
"Agreement"),  dated as of May 31,  2000 is made and  entered  into by and among
Baytech, Inc., a Texas corporation ("Baytech"),  Parallel Petroleum Corporation,
a  Delaware  corporation  ("Parallel"),   Tejon  Exploration  Company,  a  Texas
corporation  ("Tejon"),  Tejon Investment  Partners, a Texas general partnership
("Tejon  Partners"),  Dodge Jones Foundation  ("Jones  Foundation"),  Mansefeldt
Investment Corporation,  a Texas corporation  ("Mansefeldt"),  Topaz Exploration
Company, a Texas corporation  ("Topaz"),  Tucker S. Bridwell,  a resident of the
State of Texas ("Bridwell"),  Dian Graves Owen, a resident of the State of Texas
("Owen"),  Dian Graves Owen  Foundation  ("Owen  Foundation"),  Harlan  Stai,  a
resident of the State of Texas ("Stai"),  EnCap Energy Capital Fund III, L.P., a
Texas -limited  partnership ("III LP"), EnCap Energy  Acquisition III-B, Inc., a
Texas  corporation  ("III-B Inc."),  Energy Capital  Investment  Company PLC, an
English  investment  company ("ECIC"),  and BOCP Energy Partners,  L.P., a Texas
limited partnership ("BOCP"). Baytech, Parallel, Tejon and Mansefeldt are herein
sometimes  called the "Founding  Members".  Baytech,  Parallel,  Tejon Partners,
Mansefeldt,  Topaz,  Bridwell and Owen are herein  sometimes called the "Current
Members".  III-LP,  III-B Inc.,  ECIC and BOCP are herein  sometimes  called the
"EnCap Related Parties".

                                    RECITALS:

     A. The Founding  Members have  heretofore  formed First Permian L. L. C., a
Delaware limited  liability  company (the "Company"),  pursuant to the terms and
conditions of that certain Limited  Liability Company Agreement dated as of June
25,  1999  (the  "Original  Company  Agreement").  Under  the  Original  Company
Agreement,  the Founding  Members  acquired units of membership  interest in the
Company in exchange  for certain  capital  contributions.  Since the date of the
Original Company Agreement, certain of the Founding Members have assigned all or
a portion of its units of  membership  interest in the Company to certain  other
persons, which persons are referenced in the definition of Current Members.

     B. The Current Members, Tejon, Jones Foundation, Owen Foundation, Stai, and
the EnCap  Related  Parties  desire to amend and  restate the  Original  Company
Agreement  (i) to provide for the  admission of Tejon,  Jones  Foundation,  Owen
Foundation,  Stai and the EnCap Related Parties as members of the Company,  (ii)
to provide for the issuance to Tejon,  Jones  Foundation,  Bridwell,  Owen, Owen
Foundation,  Stai and the EnCap Related  Parties of (A) a new class of preferred
membership  interests in the Company and (B) common membership  interests in the
Company, (iii) to provide for the repayment of certain subordinated indebtedness
owed by the Company to Tejon and Mansefeldt, (iv) to provide for the purchase by
the Company from Tejon and  Mansefeldt,  respectively,  of certain  indebtedness
owed by  Baytech  to the each of them,  (v) to  provide  for the  payment by the
Company of the  Arrangement  Fee (as defined herein) under the terms of the Bank
One Payment  Agreement (as defined herein),  and (vi) to set forth the agreement

<PAGE>
                                       2



of the parties  hereto  with  respect to the  management  and  operation  of the
business and affairs of the Company as hereafter conducted.

                                   AGREEMENT:

     NOW,  THEREFORE,  in consideration of the foregoing Recitals and the mutual
covenants and Agreement  contained herein, the parties hereto do hereby agree to
amend and restate the Original Company Agreement as follows:


                                    ARTICLE I

                                    Formation

     Section 1.1.  Formation.  The Company has  heretofore  been  organized as a
Delaware limited liability company under and pursuant to the Act.

     Section 1.2.  Name. The name of the Company is "First  Permian,  L. L. C.".
The business of the Company shall be conducted in the name of the Company unless
under the law of some  jurisdiction  in which the  Company  does  business  such
business is required to be conducted  under another  name.  In such a case,  the
business of the Company in such  jurisdiction  may be conducted under such other
name or names as the Board of Directors may select.

     Section 1.3. Purpose.  Subject to the terms of this Agreement,  the purpose
of the Company shall be (a) to enter into that certain  Merger  Agreement  dated
June 25, 1999, by and among the Company,  Fina Oil and Chemical  Company and FWT
Oil and Gas Inc. (in this Section, the "Fina Agreement"),  (b) to consummate the
transactions  contemplated by, and perform the obligations of the Company under,
the Fina Agreement,  (c) to acquire additional Leases (as defined herein) in the
continental United States and state and federal waters offshore thereto,  (d) to
own, hold,  maintain,  renew,  drill, and develop the properties acquired by the
Company  under the Fina  Agreement  and any  additional  Leases  acquired by the
Company in accordance  with the terms hereof,  (e) to produce,  collect,  store,
treat,  deliver,  market,  sell  or  other  dispose  of  oil,  gas  and  related
hydrocarbons  and  other  minerals  from  such  properties  and  Leases,  (f) to
farm-out,  sell, abandon, or otherwise dispose of such properties and Leases and
(g) to  engage in or  perform  any and all  activities  that are  related  to or
incident  to the  foregoing  and that may be  lawfully  conducted  by a  limited
liability company under the Act.

     Section 1.4.  Registered  Office and Registered  Agent;  Principal Place of
Business.

     (a)  The  registered  office  of the  Company  required  by  the  Act to be
maintained in the State of Delaware shall be the initial registered office named
in the  Certificate  or such other office (which need not be a place of business
of the Company) as the Board of Directors may designate from time to time in the
manner  provided  by law.  The  registered  agent of the Company in the State of
Delaware shall be the initial  registered agent named in the Certificate or such
other

<PAGE>
                                       3


Person or Persons as the Board of  Directors  may  designate  from time to
time.

     (b) The  principal  place  of  business  of the  Company  shall be 110 West
Louisiana,  Suite 500, Midland,  Texas 79702-7158,  or at such other location as
designated by the Board of Directors.

     Section  1.5.  Foreign  Qualification.  Prior to the  Company's  conducting
business in any jurisdiction  other than Delaware,  the Company shall comply, to
the extent procedures are reasonably available,  with all requirements necessary
to  qualify  the  Company  as  a  foreign  limited  liability  company  in  such
jurisdiction.  At the  request  of the Board of  Directors  or an officer of the
Company, each Member agrees to execute,  acknowledge,  swear to, and deliver all
certificates  and other  instruments  conforming  with this  Agreement  that are
necessary or  appropriate to qualify,  continue,  and terminate the Company as a
foreign limited liability company in all such jurisdictions in which the Company
may conduct business.

     Section 1.6. Term. The Company  commenced on the date the  Certificate  was
filed with the  Secretary of State of Delaware  and shall  continue in existence
until it is dissolved and terminated in accordance with the terms hereof.

     Section 1.7.  EnCap  Transaction  Costs.  The Company shall promptly pay or
reimburse  the EnCap Related  Entities for all  reasonable,  third-party  out of
pocket  costs  and  expenses   incurred  by  them  in   connection   with  their
consideration   of  an  investment  in  the  Company,   due  diligence  and  the
negotiation,   preparation  and  execution  of  this  Agreement,  including  the
reasonable  fees  and  expenses  of  legal  counsel,   petroleum  engineers  and
environmental  and other third  party  consultants;  provided,  that the maximum
amount of such costs and expenses to be borne by the Company shall be $30,000.


                                   ARTICLE II

                           Definitions and References

     Section 2.1. Definitions.  When used in this Agreement, the following terms
shall have the  respective  meanings  assigned to them in this Section 2.1 or in
the sections or other subdivisions referred to below:

     "Acquisition"  shall  mean  an  acquisition  of  Leases,  whether  effected
directly or indirectly  (including  the  acquisition  of common  stock,  limited
liability  company  interests or  partnership  interests in or from a Person who
owns Leases).

     "Acquisition  Costs"  shall mean all  third-party,  out of pocket costs and
expenses  incurred by the Company in connection  with effecting an  Acquisition,
including  the price  paid or  contractually  agreed to be paid to  acquire  the
Leases, title examination costs, brokers' commissions, petroleum engineers' fees
and expenses, attorneys' fees and expenses,
<PAGE>
                                       4



environmental and other  consultants' fees and expenses,  due diligence fees and
expenses, and recording costs.

     "Act"  shall  mean  the  Delaware  Limited  Liability  Company  Act  or any
successor statute, as amended from time to time.

     "Adjusted  Capital  Account" shall mean the capital account  maintained for
each Member as provided in Section 7.4,  (a)  increased by (i) the amount of any
unpaid  Capital  Contributions  agreed to be  contributed  by such Member  under
Article IV, if any, and (ii) an amount equal to such Member's allocable share of
Minimum Gain as computed on the last day of such fiscal year in accordance  with
the  applicable  Treasury  Regulations,  and (b)  decreased  by the  adjustments
provided for in Treas. Reg. 1.704-1(b)(2)(ii)(d)(4)-(6).

     "Affiliate"  shall  mean,  when used with  respect to a Person,  any Person
directly or indirectly  controlling,  controlled by or under common control with
such Person. For purposes of this definition, the terms "controlling, controlled
by or under common control" shall mean the  possession,  directly or indirectly,
of the power to direct or cause the direction of management or policies (whether
through ownership of securities or any partnership or other ownership  interest,
by contract or otherwise) of a Person.

     "Agreement" shall mean this Agreement,  as hereafter  amended,  modified or
changed in accordance with the terms hereof.

     "Annual  Budget"  shall mean the budget of the  Company  with  respect to a
calendar year.

     "Arrangement Fee" shall mean the arrangement fee referenced in Section 8(b)
of the Bank One Agreement.

     "Bank One  Agreement"  shall mean that certain  Restated  Credit  Agreement
dated August 16,  1999,  by and among the  Company,  as  borrower,  Parallel and
Baytech,  as  guarantors,  Bank One,  Texas,  N.A., and the  institutions  named
therein, as banks, and Bank One, Texas, N.A., as Agent.

     "Bank One Payment  Agreement"  shall mean that  certain  Payment  Agreement
dated as of even date  herewith  by and among Bank One,  Texas,  N.A.,  Banc One
Capital Markets, Inc. and the Company.

     "Baytech"  shall have the meaning  assigned  to it in the  preamble to this
Agreement.

     "Baytech/Mansefeldt  Loan Documents" shall mean that certain Loan Agreement
dated  April 17,  2000,  by and  between  Mansefeldt  and  Baytech and all other
documents or  instruments  executed and  delivered in connection  therewith,  as
amended.

     "Baytech/Mansefeldt Term Loan Note" shall mean that certain Term Note dated
April 17, 2000,  executed by Baytech and payable to the order of  Mansefeldt  in
the original principal amount of $1,550,000.


<PAGE>
                                       5


     "Baytech/Tejon Loan Documents" shall mean that certain Loan Agreement dated
April 17,  2000,  by and between  Tejon and Baytech and all other  documents  or
instruments executed and delivered in connection therewith, as amended.

     "Baytech/Tejon  Term Loan  Note"  shall mean that  certain  Term Note dated
April 17,  2000,  executed  by Baytech  and payable to the order of Tejon in the
original principal amount of $1,550,000.

     "Board of  Directors"  or  "Directors"  shall have the  respective  meaning
assigned to them in Section 6.1.

     "BOCP"  shall  have the  meaning  assigned  to it in the  preamble  to this
Agreement.

     "Bridwell"  shall have the meaning  assigned to it in the  preamble to this
Agreement.

     "Capital Contribution" shall mean, for any Member at the particular time in
question,  the aggregate of the dollar  amounts of any cash  contributed  to the
capital of the Company and the fair market value of any property  contributed to
the  capital of the  Company,  or, if the  context in which such term is used so
indicates,  the dollar amounts of cash and the fair market value of any property
agreed to be contributed,  or requested to be contributed, by such Member to the
capital of the Company.

     "Certificate"  shall mean the Certificate of Formation filed by the Company
with the Delaware Secretary of State.

     "Common  Unitholders"  shall  have the  meaning  assigned  to such  term in
Section 3.2(a).

     "Common  Units"  shall have the  meaning  assigned  to such term in Section
3.2(a).

     "Common Unit Sharing  Percentage"  shall mean as to any Common  Unitholder,
the  percentage  obtained by dividing  the number of Common  Units owned by such
Common  Unitholder by the total number of Common Units issued and outstanding at
the time in question.

     "Company " shall mean First Permian, L. L. C., a Delaware limited liability
company.

     "Company  Nonrecourse  Liabilities"  shall have the meaning assigned to the
term "nonrecourse liabilities" in Treasury Regulation section 1.752-1(a)(2).

     "Current  Members" shall have the meaning assigned to it in the preamble to
this Agreement.


<PAGE>
                                       6


     "Dispose"  (including the correlative  terms  "Disposed" or  "Disposition")
shall  mean  any  sale,   assignment,   transfer,   conveyance,   gift,  pledge,
hypothecation or other encumbrance or any other disposition,  whether voluntary,
involuntary or by operation of law.

     "ECIC"  shall  have the  meaning  assigned  to it in the  preamble  to this
Agreement.

     "EnCap Related Entities" shall mean III LP, III-B Inc., ECIC and BOCP.

     "Existing Leasehold and HBP Acreage" shall mean (a) wells and the leasehold
and the acreage  associated  therewith in which a Member or an Affiliate thereof
owned a  working  or  revenue  interest  therein  on or prior to the date of the
Original Company  Agreement (and which wells were not contributed to or acquired
by the Company at the time of the Original  Company  Agreement and therefore the
Company has no interest in) and renewals thereof  (existing  leasehold") and (c)
new leasehold or other property  interests covering the same acreage as existing
leasehold  or acreage  adjacent  or within a one mile  radius  thereof,  even if
acquired after the date of the Original Company Agreement.

     "Exploitation Plan" shall mean, with respect to a Lease or group of related
Leases,  a plan to conduct  drilling,  development,  enhancement,  or production
operations thereon.

     "Founding Members" shall have the meaning assigned to it in the preamble to
this Agreement.

     "GAAP" shall mean generally accepted  accounting  principles and practices,
consistently  applied,  which are recognized as such by the Financial Accounting
Standards Board (or any generally recognized successor).

     "Hedging   Transaction"  shall  mean  any  commodity  hedging   transaction
pertaining to oil, gas and related  hydrocarbons  and  minerals,  whether in the
form of a swap  agreement,  option to acquire or dispose of a futures  contract,
whether on an organized  commodities  exchange or otherwise,  or similar type of
financial  transaction  classified as "notional principal contracts" pursuant to
Treasury  Regulation   1.512(b)-l(a)(1).   Any  Hedging  Transaction  shall  be
identified in the books and records of the Company as a "hedging transaction" in
the manner and at the times prescribed by Treasury Regulation 1.1221-2(e).

     "III LP" shall have the  meaning  assigned  to it in the  preamble  to this
Agreement.

     "III-B Inc." shall have the meaning  assigned to it in the preamble to this
Agreement.

     "Internal  Revenue  Code" shall mean the Internal  Revenue Code of 1986, as
amended from time to time, and any successor statute or statutes.

     "Investment Coverage Ratio" shall have the meaning assigned to such term in
Section 5.6.

<PAGE>
                                       7


     "Jones Foundation" shall have the meaning assigned to it in the preamble to
this Agreement.

     "Lease"  shall  mean a  lease,  mineral  interest,  royalty  or  overriding
royalty,  fee right,  mineral  servitude,  license,  concession  or other  right
covering oil, gas and related  hydrocarbons  (or a contractual  right to acquire
such an interest) or an undivided interest therein or portion thereof,  together
with  all   appurtenances,   easements,   permits,   licenses,   servitudes  and
rights-of-way  situated upon or used or held for future use in  connection  with
such an interest or the exploration, development or operation thereof.

     "Liquidation  Amount"  shall  have the  meaning  assigned  to such  term in
Section 5.2.

     "Mansefeldt"  shall have the meaning  assigned to such term in the preamble
to this Agreement.

     "Mansefeldt Related Parties" shall mean Mansefeldt,  Topaz, Bridwell, Owen,
Owen Foundation and Stai.

     "Mansefeldt   Subordinated  Note"  shall  mean  that  certain  Subordinated
Promissory  Note  dated  June 30,  1999,  executed  by the  Company  in favor of
Mansefeldt in the original principal amount of $8,000,000.

     "Member"  shall mean any Person  executing this Agreement as of the date of
this  Agreement as a member or hereafter  admitted to the Company as a member as
provided  in this  Agreement,  but such term does not include any Person who has
ceased to be a Member.

     "Member  Nonrecourse  Debt"  shall have the  meaning  assigned  to the term
"partner nonrecourse debt" in Treasury Regulation section 1.704.2(b)(4).

     "Member Nonrecourse Deductions" shall have the meaning assigned to the term
"partner nonrecourse deductions" in Treasury Regulation section 1.704-2(i).

     "Minimum  Gain"  shall have the  meaning  assigned to that term in Treasury
Regulation section 1.704-2(d) and section 1.704-2(i)(3), as applicable.

     "Option Securities" shall mean all rights,  options and warrants evidencing
the right to  subscribe  for,  purchase or  otherwise  acquire  Common  Units or
Preferred  Units,  whether  or not the  right  to  subscribe  for,  purchase  or
otherwise acquire is immediately  exercisable or is conditioned upon the passage
of time, the occurrence or  non-occurrence  of the existence or non-existence of
some other event.

     "Original  Company  Agreement"  shall have the  meaning  assigned  to it in
Paragraph A of the Recitals to this Agreement.

     "Owen" shall have the meaning assigned to such term in the preamble to this
Agreement.

<PAGE>
                                       8


     "Owen  Foundation"  shall  have the  meaning  assigned  to such term in the
preamble to this Agreement.

     "Parallel"  shall have the meaning assigned to such term in the preamble to
this Agreement.

     "Person" shall have the meaning assigned to it in Section 18-101(12) of the
Act.

     "Preferred  Unitholders"  shall have the  meaning  assigned to such term in
Section 3.2(a).

     "Preferred  Units" shall have the meaning  assigned to such term in Section
3.2(a).

     "Preferred  Unit  Sharing  Percentage"  shall  mean  as  to  any  Preferred
Unitholder,  the percentage  obtained by dividing the number of Preferred  Units
owned by such Preferred Unitholder by the total number of Preferred Units issued
and outstanding at the time in question.

     "Securities Act" shall mean the Securities Act of 1933, as amended.

     "Tejon"shall  have  the  meaning  assigned  to it in the  preamble  to this
Agreement.

     "Tejon  Partners" shall have the meaning  assigned to it in the preamble to
this Agreement.

     "Tejon  Related  Parties"  shall mean Tejon,  Tejon  Partners and the Jones
Foundation.

     "Tejon Subordinated Note" shall mean that certain  Subordinated  Promissory
Note  dated  June 30,  1999,  executed  by the  Company in favor of Tejon in the
original principal amount of $8,000,000.

     "Topaz"  shall have the meaning  assigned  to such term in the  preamble to
this Agreement.

     "Treasury Regulations" (or any abbreviation thereof used herein) shall mean
temporary or final regulations promulgated under the Internal Revenue Code.

     "Units" shall have the meaning assigned to such term in Section 3.2.

     "Warrant  Option" shall have the meaning  assigned to such term in the Bank
One Payment Agreement.

     Section 2.2. References and Construction.

     (a) All references in this Agreement to articles, sections, subsections and
other subdivisions refer to corresponding  articles,  sections,  subsections and
other subdivisions of this Agreement unless expressly provided otherwise.

<PAGE>
                                       9


     (b) Titles  appearing at the beginning of any of such  subdivisions are for
convenience only and shall not constitute part of such subdivisions and shall be
disregarded in construing the language contained in such subdivisions.

     (c) The words "this  Agreement",  "this  instrument",  "herein",  "hereof",
"hereby",  "hereunder"  and words of similar import refer to this Agreement as a
whole and not to any particular subdivision unless expressly so limited.

     (d) Words in the singular form shall be construed to include the plural and
vice versa, unless the context otherwise requires.

     (e) Examples shall not be construed to limit,  expressly or by implication,
the -matter they illustrate.

     (f)  The  word  "or"  is not  exclusive  and the  word  "includes"  and its
derivatives  shall mean  "includes,  but is not  limited  to" and  corresponding
derivative expressions.

     (g) No  consideration  shall be given to the fact or  presumption  that one
party had a greater or lesser hand in drafting this Agreement.

     (h) All references herein to "$" or "dollars" shall refer to U.S. Dollars.

     (i) Unless the  context  otherwise  requires or unless  otherwise  provided
herein,  the  terms  defined  in this  Agreement  which  refer  to a  particular
agreement,  instrument or document shall also refer to and include all renewals,
extensions,  modifications,   amendments  or  restatements  of  such  agreement,
instrument or document, provided that nothing contained in this subsection shall
be construed to authorize such renewal,  extension,  modification,  amendment or
restatement.

     Exhibits 3.1.  3.2(f)-l.  3.2(f)-2,  4.2.  6.2(a),  6.8(b)-l.  6.8(b)-2 and
6.8(c)  and to  this  Agreement  are  attached  hereto.  Each  such  Exhibit  is
incorporated  herein by  reference  and made a part hereof for all  purposes and
references to this Agreement  shall also include such Exhibit unless the context
in which used shall otherwise require.


                                   ARTICLE III

                                Members and Units

     Section 3.1. Members.  The Members of the Company are set forth in Schedule
3.1.

     Section 3.2. Units.

     (a) The Company shall have two classes of membership interests as follows:
<PAGE>
                                       10


          (i) a class  consisting  of  2,000,000  authorized  common  membership
     interests, which shall be referred to herein as "Common Units"; and

          (ii) a class consisting of 2,000,000  authorized  preferred membership
     interests, which shall be referred to herein as "Preferred Units".

     Each class of membership interests of the Company shall have the rights and
privileges accorded such class as are set forth in this Agreement.  Members that
own Common Units are herein  sometimes  called "Common  Unitholders" and Members
that own Preferred Units are herein  sometimes called  "Preferred  Unitholders".
Common Units and Preferred Units are herein sometimes called the "Units".

     (b)  Subject to the other  terms of this  Agreement,  the Company may issue
Option   Securities  at  such  times,  in  such   circumstances   and  for  such
consideration as may be determined by the Board.

     (c) Contemporaneously  with the execution and delivery of this Agreement by
the parties hereto:

          (i) the units of membership interest in the Company currently owned by
     the Current Members shall be deemed  converted into a like number of Common
     Units; and

          (ii) in  consideration  of the  respective  Capital  Contributions  of
     Tejon,  Jones  Foundation,  Owen, Owen Foundation,  Stai,  Bridwell and the
     EnCap Related  Entities,  as provided for in Section 4.2, the Company shall
     issue to such  Persons the number of  Preferred  Units and Common Units set
     forth  opposite their  respective  name in Exhibit 3.1  (excluding,  in the
     instance  of Dian Graves Owen and Tucker S.  Bridwell,  the 100,000  Common
     Units and  12,500  Common  Units,  respectively,  previously  issued by the
     Company to such persons).

     (d) In connection with the issuance of the Preferred Units and Common Units
to  the  EnCap  Related  Entities,   $9,500,000  of  the  Capital  Contributions
referenced  in  Section  4.2  shall be  allocated  to the  Preferred  Units  and
$6,500,000  of the  Capital  Contributions  referenced  in Section  4.2 shall be
allocated to the Common Units.  In connection with the issuance of the Preferred
Units  to the  Persons  (other  than  the  EnCap  Related  Entities)  listed  in
subsection  (c) above,  $4,000,000  of the Capital  Contributions  referenced in
Section 4.2 shall be allocated to the Preferred Units.

     (e) Exhibit 3.1 sets forth the number of Common Units and  Preferred  Units
owned by each Member after giving  effect to the  transactions  contemplated  by
subsection (c) above.

     (f) Ownership of Units shall be evidenced by certificates (in this Section,
"Unit  Certificates").  Unit Certificates  representing Common Units shall be in
the form of Exhibit  3.2(f)-l  (with the blanks duly  completed  to indicate the
series of Common Units represented thereby), and Unit Certificates  representing
Preferred  Units shall be in the form of Exhibit

<PAGE>
                                       11


3.2(f)-2  (with the blanks duly  completed  to indicate  the series of Preferred
Units  represented   thereby).   The  Company  shall  issue  one  or  more  Unit
Certificates to each Member, which Unit Certificates need not bear a seal of the
Company  but shall be signed by an officer or other  Person  authorized  to sign
such Unit  Certificates by the Board certifying the number,  class and series of
Units  represented  by  such  certificate.   The  Unit  Certificates   shall  be
consecutively numbered (on a class by class or series by series basis) and shall
be entered in the books of the Company as they are issued and shall  exhibit the
holder's name and number of Units.  The Board may determine the conditions  upon
which a new Unit  Certificate may be issued in place of a Unit  Certificate that
is alleged to have been lost,  stolen or destroyed  and may, in its  discretion,
require the owner of such Unit Certificate or its legal  representative  to give
bond, with sufficient  surety,  to indemnify the Company and each transfer agent
and  registrar  against any and all losses or claims that may arise by reason of
the issuance of a new Unit  Certificate in the place of the one so lost,  stolen
or  destroyed.  Each Unit  Certificate  shall bear a legend on the reverse  side
thereof substantially in the following form:

          THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
          1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED OR
          SOLD, UNLESS IT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS
          AN EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH CASE, AN
          OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY SHALL HAVE
          BEEN DELIVERED TO THE COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS
          NOT REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT). THIS SECURITY
          IS SUBJECT TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON TRANSFER AND
          OTHER TERMS AND CONDITIONS SET FORTH IN THE LIMITED LIABILITY COMPANY
          AGREEMENT OF THE COMPANY, DATED AS OF MAY 31, 2000 (AS SUCH AGREEMENT
          MAY BE AMENDED FROM TIME TO TIME), A COPY OF WHICH MAY BE OBTAINED
          FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES. Section 3.3.
          Additional Members. Additional Persons may be admitted to the Company
          as Members as provided more specifically herein.

     Section 3.4.  Liabilities:  to Third Parties. No Member shall be liable for
the debts, obligations or liabilities of the Company, including under a judgment
decree or order of a court.

     Section 3.5. Withdrawal. No Member shall have the right to withdraw, resign
or retire from the Company as a Member.

<PAGE>
                                       12



                            ARTICLE IV

                          Capitalization

     Section 4.1. Agreed Capital Contributions of Founding Members. The Founding
Members have heretofore made Capital Contributions to the Company as provided in
Section 2.2 of the Original Company Agreement.

     Section 4.2. Agreed Capital Contributions of Persons Admitted as Members as
of the  Date  Hereof.  Contemporaneously  with  executing  and  delivering  this
Agreement,  each  Person  listed  in  Exhibit  4.2 shall  make the cash  Capital
Contribution to the Company in the amount set forth opposite its respective name
in Exhibit 4.2.

     Section 4.3.  Further Capital  Contributions.  Unless  otherwise  agreed in
writing,  no Member shall be required to make any Capital  Contributions  to the
Company  other than those made by such Member as  provided  in Sections  4.1 and
4.2. as applicable.

     Section 4.4. Non-Payment of Capital  Contributions.  If any Member (in this
Section,   a   "non-contributing   Member")  fails  to  make  timely  a  Capital
Contribution  to the Company that it has agreed to make to the Company under the
terms hereof, the Company shall have the right to pursue any remedy available to
the  Company at law or in equity  against the non-  contributing  Member for the
collection of the unpaid amount,  including the  prosecution of a suit against a
noncontributing Member. The non-contributing Member shall be responsible for all
costs and expenses  (including  attorneys'  fees and  expenses)  incurred by the
Company or any other Member arising under this Section 4.4.

     Section 4.5. Interest on and Return of Capital Contributions.

     (a) No  interest  shall be paid by the  Company in respect of any  Member's
Capital Contributions or capital account. However, all interest which accrues on
Company funds shall be allocated and credited to the Members in accordance  with
Article V.

     (b) Except as otherwise provided herein or in the Act, no Member shall have
the right to withdraw or to receive a return of its Capital Contribution.


                                    ARTICLE V
                          Allocations and Distributions

     Section 5.1. Allocations.

     (a) Except as otherwise  provided in this Section 5.1 or as may be required
by section 704(c) of the Internal Revenue Code and Treasury  Regulation  Section
1.704-1(b)(2)(iv)(f)(4),  all items of income,  gain, loss, deduction (including
depletion), and credit of the Company, and

<PAGE>
                                       13


the Company's depletable basis in all oil and gas properties, shall be allocated
among  the  Common  Unitholders  in  proportion  to their  Common  Unit  Sharing
Percentages.

     (b) [Section 5. l(b) intentionally not used]

     (c) The Members  intend that the cash  distributions  made to the Preferred
Unitholders under Section 5.2(a) shall be treated as guaranteed payments for the
use of capital  under  Section 707 of the Internal  Revenue Code, or as interest
expense of the  Company,  and not as a  distributable  share of Company  income.
However, if it is determined that such cash distributions may not be so treated,
then gross income for any fiscal year shall be allocated  first to the Preferred
Unitholders in proportion to their Preferred Unit Sharing  Percentages until the
aggregate  amount of gross income  allocated  under this  subsection (c) for all
fiscal years of the Company  equals the aggregate  amount of cash  distributions
that are not so  treated  which are made to the  Preferred  Unitholders  for all
fiscal years of the Company under Section 5.2(a).

     (d) Notwithstanding any of the foregoing  provisions of this Section 5.1 to
the contrary:

          (i) If during any fiscal year of the Company  there is a net  increase
     in Minimum Gain  attributable to a Member  Nonrecourse Debt that gives rise
     to Member Nonrecourse Deductions,  each Member bearing the economic risk of
     loss for such Member  Nonrecourse  Debt shall be allocated items of Company
     deductions and losses for such year  (consisting  first of cost recovery or
     depreciation  deductions  with respect to property  that is subject to such
     Member  Nonrecourse Debt and then, if necessary,  a pro rata portion of the
     Company's  other items of deductions and losses,  with any remainder  being
     treated as an increase in Minimum Gain  attributable to Member  Nonrecourse
     Debt in the  subsequent  year)  equal  to such  Member's  share  of  Member
     Nonrecourse  Deductions,   as  determined  in  accordance  with  applicable
     Treasury Regulations.

          (ii) If for any fiscal year of the Company  there is a net decrease in
     Minimum Gain attributable to Company Nonrecourse  Liabilities,  each Member
     shall  be  allocated  items of  Company  income  and  gain  for  such  year
     (consisting  first of gain  recognized  from  the  disposition  of  Company
     property subject to one or more Company  Nonrecourse  Liabilities and then,
     if necessary, a pro rata portion of the Company's other items of income and
     gain, and then, if necessary,  for subsequent years) equal to such Member's
     share of such net  decrease  (except to the extent such  Member's  share of
     such net decrease is caused by a change in debt  structure with such Member
     commencing  to  bear  the  economic  risk  of loss as to all or part of any
     Company Nonrecourse Liability or by such Member contributing capital to the
     Company that the Company uses to repay a Company Nonrecourse Liability), as
     determined in accordance with applicable Treasury Regulations.

          (iii) If for any fiscal year of the Company there is a net decrease in
     Minimum Gain attributable to a Member Nonrecourse Debt, each Member bearing
     the  economic  risk of loss  for  such  Member  Nonrecourse  Debt  shall be
     allocated items of Company


     income and gain for such year (consisting first of gain recognized from the
     disposition of Company  property  subject to Member  Nonrecourse  Debt, and
     then,  if  necessary,  a pro rata portion of the  Company's  other items of
     income and gain,  and if  necessary,  for  subsequent  years) equal to such
     Member's  share of such net  decrease  (except to the extent such  Member's
     share of such net  decrease is caused by a change in debt  structure  or by
     the Company's use of capital contributed by such Member to repay the Member
     Nonrecourse  Debt) as  determined in accordance  with  applicable  Treasury
     Regulations.

     (e) The losses and  deductions  allocated  pursuant to this Article V shall
not exceed the maximum amount of losses and deductions  that can be allocated to
a Member  without  causing  or  increasing  a deficit  balance  in the  Member's
Adjusted Capital Account.  If, at the end of any fiscal year, as a result of the
allocations  otherwise  provided for in this  Section 5.1, the Adjusted  Capital
Account balance of any Member shall become negative, items of deduction and loss
otherwise allocable to such Member for such year, to the extent such items would
have caused such negative balance,  shall instead be allocated to Members having
positive Adjusted Capital Account balances  remaining at such time in proportion
to such balances.

     (f) In the  event  that a  Member  unexpectedly  receives  any  adjustment,
allocation   or   distribution   described  in  Treasury   Regulations   section
1.704-1(b)(2)(ii)(d)(4)-(6)  that causes or increases a deficit  balance in such
Member's  Adjusted  Capital  Account,  items of Company income and gain shall be
allocated to that Member in an amount and manner  sufficient  to  eliminate  the
deficit balance as quickly as possible.

     (g) The allocations set forth in subsections (d), (e) (last sentence),  and
(f)  (collectively,  the "Regulatory  Allocations")  are intended to comply with
certain  requirements  of the  Treasury  Regulations.  It is the  intent  of the
Members that, to the extent possible,  all Regulatory  Allocations that are made
be offset either with other Regulatory  Allocations or with special  allocations
pursuant  to  this  Section  5.  l(g).  Therefore,   notwithstanding  any  other
provisions  of this  Article  V (other  than the  Regulatory  Allocations),  the
Directors shall make such offsetting  special  allocations in whatever manner it
determines appropriate so that, after such offsetting allocations are made, each
Member's  Adjusted Capital Account balance is, to the extent possible,  equal to
the  Adjusted  Capital  Account  balance  such  Member  would  have  had  if the
Regulatory  Allocations  were not part of this  Agreement  and all Company items
were allocated pursuant to the remaining section of this Article V.

     (h) In accordance with Section 704(c) of the Internal  Revenue Code and the
Treasury  Regulations  thereunder,  income and  deductions  with  respect to any
property carried on the books of the Company at an amount that differs from such
property's adjusted tax basis shall, solely for federal income tax purposes,  be
allocated  among the  Members  in a manner to take into  account  any  variation
between  the  adjusted  tax basis of such  property to the Company and such book
value.  In making such  allocations,  the Directors  shall use the  "traditional
method with  curative  allocations"  pursuant to  Treasury  Regulations  Section
1-704-3(c).

     (i) All items of income, gain, loss, deduction, and credit allocable to any
Units that may have been transferred  shall be allocated  between the transferor
and the  transferee  based on

<PAGE>
                                       14


the portion of the  calendar  year during  which each was  recognized  as owning
those  Units,  without  regard to whether  cash  distributions  were made to the
transferor or the transferee during that calendar year; provided,  however, that
this  allocation  must be made in  accordance  with a method  permissible  under
section  706  of  the  Internal   Revenue  Code  and  the  applicable   Treasury
Regulations.

     Section 5.2. Distributions in Respect of the Preferred Units.

     (a) The  Preferred  Unitholders  will be entitled to receive  distributions
from the Company at the  Designated  Rate (as defined  below) of the  Designated
Amount. Such distributions will be prior and in preference to any declaration or
payment  of  any   distributions   on  the  Common  Units  except  for  the  tax
distributions required by Section 5.4. Distributions on the Preferred Units will
be cumulative  and will accrue  whether or not declared and whether or not there
will be funds  legally  available  for the payment  thereof.  Except as provided
below, the  distributions  will be payable in cash. The  distributions  shall be
payable  quarterly  on  October  1,  January  1, April I and July I of each year
commencing  on October 1, 2000 (in this  Section,  the  "Quarterly  Distribution
Date"),  except that if any such date is not a Business Day (as defined  below),
then such  distribution  shall be payable on the first Business Day  immediately
thereafter to the  Preferred  Unitholders.  As used above and elsewhere  herein,
"Business  Day" shall mean a day,  other than a Saturday  or a Sunday,  on which
commercial  banks  are open for  business  with the  public in  Houston,  Texas.
Distributions  payable on the Preferred  Units for any period that is shorter or
longer than a full quarterly  distribution period shall be computed on the basis
of a 365-day year and the actual number of days elapsed (including the first day
but  excluding  the last day)  occurring  in the period for which such amount is
payable. As used above in this subsection,  (i) the term "Designated Rate" shall
mean 9.00% per annum,  except that if either (A) the  Investment  Coverage Ratio
(as determined in accordance  with Section 5.6) is less than 1.5 to 1 or (B) the
Company fails to pay timely a distribution  due and owing under this Section 5.2
or the  amount  owed under  Section  9.3(b)  and the  Company  does not cure the
default within 10 days after the date such  distribution  or amount was due, the
Designated  Rate shall be increased to 12. 00 % per annum until such time as the
Investment  Coverage  Ratio is equal to or greater than 1. 5 to 1 or the payment
default  is cured  (whichever  is  applicable);  and  (ii) the term  "Designated
Amount"  shall mean  $13,500,000  (which  amount shall be subject to increase as
provided in the last sentence of this  subsection (a) and subject to decrease as
provided  in the  last  sentence  of  Section  9.3(a)).  Any  adjustment  to the
Designated Rate under clause (i)(A) of the immediately  preceding sentence shall
be made as of the effective  date of the Subject  Reserve  Report (as defined in
Section 5.6) upon which the  computation  of the  Investment  Coverage  Ratio is
made.  With respect to the first twelve  quarterly  distributions  payable under
this subsection (a) commencing with the first Quarterly  Distribution  Date, the
Company may, at least 30 days prior to the subject Quarterly  Distribution Date,
elect to pay the cash  distribution  to the Preferred  Unitholders  in Preferred
Units (in this Section,  a "Payment in Kind").  If such an election is made, the
Company shall promptly notify the Preferred  Unitholders of the election to make
a  Payment  in Kind  in lieu of a  payment  in cash  for the  subject  Quarterly
Distribution  Date. An election for any particular  Quarterly  Distribution Date
shall operate only for such Quarterly  Distribution  Date.  Each Payment in Kind
shall be payable as of the Quarterly Distribution Date for which the election to
make such Payment in Kind was made,  except that if such Quarterly  Distribution
Date is not a  Business  Day,  then such
<PAGE>
                                       15



Payment in Kind shall be on the first Business Day immediately thereafter to the
holders  of the  Preferred  Units.  Each  Payment in Kind shall be equal to that
number  of  Preferred  Units  that is  equal in  number  to the  aggregate  cash
distribution  payable on the  subject  Quarterly  Distribution  Date  divided by
$10.00.  The  Company  shall  immediately  reflect on its books and  records the
issuance of such additional Preferred Units. Contemporaneously with a Payment in
Kind,  the  Designated  Amount  shall be  increased  by an  amount  equal to the
aggregate  cash  distribution  that would  have  otherwise  been  payable on the
subject  Quarterly  Distribution  Date had the Payment in Kind election not been
made.

     (b)  Notwithstanding  anything herein to the contrary,  in the event of any
liquidation, dissolution or winding up of the Company, voluntary or involuntary,
the  Preferred  Unitholders  will be entitled to receive,  in  preference to the
holders of the Common Units or other  securities of the Company  junior to or on
parity with the Preferred  Units, a cash amount equal to the  Designated  Amount
plus any distributions cumulated but not paid on the Preferred Units outstanding
(the  "Liquidation  Amount").  A consolidation  or merger of the Company with or
into any other entity or a sale or transfer in a single transaction or series of
related  transactions of all or  substantially  all of the assets of the Company
shall be deemed to be a liquidation for purposes hereof.

     (c) Each Preferred  Unitholder shall be entitled to receive a share of each
distribution  made  to the  Preferred  Unitholders  under  this  Section  5.2 in
accordance with such Preferred Unitholder's Preferred Unit Sharing Percentage.

     Section 5.3. Distributions in Respect of the Common Units.

     (a) The Company may make  distributions  of cash or other properties to the
Common  Unitholders  in  respect  of the  Common  Units  from  time  to  time as
determined by the Directors in accordance with the terms hereof;  provided,  any
distribution  made by the Company to a Common  Unitholder under this Section 5.3
may be made if, and only if, all accrued but unpaid  distributions in respect of
the Preferred Units have been paid in full.

     (b) Each  Common  Unitholder  shall be  entitled to receive a share of each
distribution made to the Common Unitholders under this Section 5.3 determined as
follows:

          (i) first,  to the Common  Unitholders in proportion and to the extent
     necessary to cause the cumulative distributions to them pursuant to Section
     5.4 and this Section  5.3(b)(i) to be in accordance  with their  respective
     Common Unit Sharing Percentages; and

          (ii)  thereafter,  to the Common  Unitholders in accordance with their
     respective Common Unit Sharing Percentages.

     Section 5.4.  Tax  Distributions.  Notwithstanding  Section 5.2 and 5.3, as
soon as conveniently  possible after the end of each taxable year of the Company
(but in no event sooner than the time the Company's  accountants have determined
the Company's  income,  gains,  deductions,  losses and credits for such taxable
year with reasonable  accuracy) cash  distributions

<PAGE>
                                       16


shall be made to the Common  Unitholders  in  proportion to and to the extent of
their respective Presumed Company Tax Liabilities.  For purposes of this Section
5.4,  "Presumed  Company Tax Liability"  shall, as to each Common Unitholder for
any given taxable year of the Company,  be deemed to be equal to (i) the product
of ((a)) the  excess,  if any, of the  cumulative  amount of the income and gain
items  reported or  reportable on such Common  Unitholder's  Schedules K- I (IRS
Form 1065) with respect to the Common Units of the Company for such taxable year
and all prior  taxable  years over ((i)) the sum of the deduction and loss items
reported or  reportable  on such  Schedules  K- I for such  taxable year and all
prior taxable years and ((ii)) the sum of the  depletion  deductions  which such
Common  Unitholder  is entitled by virtue of its interest in the Company  during
such  taxable  year and all prior  taxable  years,  and ((b)) the  higher of the
maximum  effective  federal  individual income tax rate or the federal corporate
income tax rate in effect for such taxable year (as  determined by the Company's
accountants),  minus (ii) the cumulative  amount of prior  distributions to such
Common Unitholder pursuant to this Section 5.4.

     Section 5.5. Payment of Cash  Distributions.  Unless waived in writing by a
Member,  payment of all cash  distributions  to the Members under this Agreement
shall be made by wire transfer of immediately available funds in accordance with
such written  instructions  to the  Directors as may be provided by such Members
from time to time.

     Section 5.6. Investment Coverage Ratio.

     (a) As used in this Agreement,  the term "Investment  Coverage Ratio" shall
mean the ratio of X to Y, where "X" is equal to the pre-income tax present value
of projected net cash flows attributable to the Company's Proved Reserves as set
forth in a  Subject  Reserve  Report,  and  where "Y" is equal to the sum of the
Company's Total Indebtedness plus the Liquidation Amount.

     (b) The EnCap  Related  Entities  shall  have the right to  request  that a
Subject  Reserve  Report be  furnished  by the Company  from time to time at the
expense of the Company;  provided,  however,  that if the EnCap Related Entities
request a Subject Reserve Report more than twice in any given calendar year, the
cost and expense of the third or any  additional  Subject  Reserve Report during
such year  shall be borne by the EnCap  Related  Entities.  Upon  receipt by the
Company  of a  request  from the EnCap  Related  Entities  to  furnish a Subject
Reserve Report,  the Company shall use its reasonable best efforts to obtain and
furnish such Subject  Reserve Report as promptly as practicable and in any event
within 60 days after receipt of such request.

     (c) As used in this Section 5.6:

          (i) "Proved  Reserves" shall have the meaning assigned to such term in
     the  Definitions  for Oil and Gas  Reserves  promulgated  by the Society of
     Petroleum Engineers (or any generally  recognized  successors) as in effect
     from time to time.

          (ii)  "Subject  Reserve  Report" shall mean an  engineering  report or
     reports concerning the oil and gas reserves of the Company: (A) prepared by
     an  independent  petroleum  engineer(s)  acceptable  to the  EnCap  Related
     Entities;  (B)  with an  effective  date  specified  by the  EnCap  Related
     Entities;  (C) which  utilizes  a 10% per annum  discount

<PAGE>
                                       17


     rate; (D) which utilizes prices  determined by the EnCap Related Parties in
     good faith (however, it is contemplated that such determination will likely
     be based upon projected futures market prices reduced by (x) the historical
     average basis differential between such NYMEX prices and posted and/or spot
     prices   actually   received  by  the   Company  and  (y)  any   gathering,
     transportation and processing fees, and in any event the prices so utilized
     will be consistent  with those being used by EnCap  Investments  L.L.C.  in
     connection with other similar  investments of the type contemplated by this
     Agreement and the pricing  assumptions  being  utilized by major U.S. banks
     actively  involved  in energy  lending in their  evaluation  of oil and gas
     properties), escalated at a rate reasonably designated by the EnCap Related
     Entities;  (E) lease operating  expenses and production  taxes derived from
     and consistent  with those actually  incurred by the Company,  escalated at
     the same  rate,  if any,  being  applied  to  prices,  and (F)  such  other
     assumptions  as shall be  designated  by the  EnCap  Related  Entities  and
     approved by the Board of Directors.

          (iii)  "Total  Indebtedness  " shall mean  (without  duplication)  all
     liabilities of the Company and any of its consolidated  subsidiaries in any
     of the  following  categories:  (A)  liabilities  for borrowed  money;  (B)
     liabilities  for the deferred  purchase price of property or services;  (C)
     liabilities  evidenced  by  bonds,  notes,   debentures  or  other  similar
     instruments;  (D)  liabilities  which  (1) would  under  GAAP be shown as a
     liability  and (2) are payable more than one year from the date of creation
     thereof  (other  than  reserves  for  taxes  and  reserves  for  contingent
     obligations);   and  (E)  liabilities  under  futures  contracts,   forward
     contracts,  swap,  cap  or  collar  contracts,  option  contracts,  hedging
     contracts,  other derivative contracts or other similar arrangements to the
     extent that such  liabilities  are not  correctly  reflected in the Subject
     Reserve Report;  provided, that (x) amounts accrued to redeem the Preferred
     Units or representing dividends or other amounts payable on or with respect
     to the Preferred  Units shall not be deemed or otherwise  included in Total
     Indebtedness   and  (y)  liabilities   incurred  by  the  Company  and  its
     consolidated subsidiaries on ordinary trade terms to vendors,  suppliers or
     other  persons  providing  goods and services for use by the Company or any
     such  subsidiary  in the  ordinary  course  of its  business  shall  not be
     included  in Total  Indebtedness  unless  and until  such  liabilities  are
     outstanding  more than 90 days past the  original  invoice or billing  date
     therefor.


                                   ARTICLE VI

                        Management/Governance Provisions

     Section  6.1.  Board of  Directors.  Except  for  situations  in which  the
approval  of the  Members  is  required  by  this  Agreement  or by  nonwaivable
provisions of applicable law, the powers of the Company shall be exercised by or
under the  authority  of, and the business  and affairs of the Company  shall be
managed  under the  direction of managers who shall be referred to herein as the
"Board of Directors" or the "Directors".

     Section 6.2. Certain Agreement.
<PAGE>
                                       19


     (a) From and after the date  hereof,  the Board of Directors of the Company
shall be composed of five  individuals.  Each of  Baytech,  Parallel,  the Tejon
Related Parties  (jointly),  the Mansefeldt  Related  Parties  (jointly) and the
EnCap Related Parties (jointly) shall have the right to designate one individual
to serve on the Board. The initial  designees to the Board, as prescribed by the
foregoing  provisions of this  subsection  (a), are set forth in Exhibit 6.2(a);
immediately  after the execution  and delivery of this  Agreement by the parties
hereto,  the  Board  of  Directors  of the  Company  shall be  composed  of such
designees,  each of whom shall serve until his  successor  is duly  selected and
qualified or until such individual's death, resignation or removal.

     (b) Members of the Board of Directors  will not be paid any fee for serving
on the Board of Directors but will be entitled to  reimbursement  for reasonable
out-of-pocket expenses in attending meetings of the Board of Directors.

     (c) Regular  meetings of the Board of Directors  shall be held quarterly at
such times and places as the Board of Directors may from time to time determine.

     Section  6.3.  Removal of  Directors.  Any Director may be removed from the
Board of Directors,  with or without cause, by the Member(s) who designated such
Director to serve on the Board. Except as provided in the immediately  preceding
sentence, a Director may not be removed from the Board of Directors.

     Section 6.4. Vacancies. In the event that a vacancy is created on the Board
of Directors at any time by the death,  disability,  retirement,  resignation or
removal of a Director,  the Member(s) that had designated such Director to serve
on the Board shall have the sole and exclusive  right to designate a replacement
therefor.

     Section 6.5. Meetings of Board of Directors.

     (a) Meetings of the Board of Directors,  annual, regular or special, may be
held either within or without the State of Texas.

     (b) An annual meeting of the Board of Directors for the transaction of such
business as may properly come before the meeting,  without notice, shall be held
immediately  after the annual  meeting of Members  and at the same place  unless
changed by consent of all the Persons then serving on the Board of Directors.

     (c) Regular meetings of the Board of Directors, of which no notice shall be
necessary,  shall be held at such  times and places as may be fixed from time to
time by  resolution  adopted  by the Board and  communicated  to all  Directors.
Except as otherwise provided by statute, the Certificate, or this Agreement, any
and all business may be transacted at any regular meeting.

     (d) Special meetings of the Board of Directors may be called on forty-eight
(48)  hours'  notice  to  each  Director,  either  personally  or by  facsimile,
overnight  courier,  or  telegram  by any  Member.  Except  as may be  otherwise
expressly  provided by statute,  the Certificate or this

<PAGE>
                                       20



Agreement,  neither the  business to be  transacted  at, nor the purpose of, any
regular or special  meeting of the Board of  Directors  need be specified in the
notice or waiver of notice of such meeting.

     (e) At all meetings of the Board of Directors the presence of a majority of
the number of  Directors  fixed by or in the manner  provided in this  Agreement
shall be necessary and sufficient to constitute a quorum for the  transaction of
business,  except as  otherwise  provided by statute,  the  Certificate  or this
Agreement.  The act of a majority in number of the Persons  then  serving on the
Board of Directors shall be the act of the Board of Directors, unless the act of
a greater  number or certain  specified  Directors  is required by statute,  the
Certificate or this  Agreement,  in which case the act of such greater number or
specified  Directors  shall be requisite to  constitute  the act of the Board of
Directors.  If a quorum  shall not be  present  at any  meeting  of the Board of
Directors,  the Directors  present  thereat may adjourn the meeting from time to
time,  without  notice other than  announcement  at the meeting,  until a quorum
shall be present.  At any such adjourned  meeting any business may be transacted
that might have been transacted at the meeting as originally convened.

     (f) All  meetings of the Board of Directors  shall be presided  over by the
chairman of the meeting,  who shall be a Person  designated by a majority of the
Directors  present at the  meeting.  The chairman of any meeting of the Board of
Directors  shall  determine  the  order of  business  and the  procedure  at the
meeting,  including  such  regulation of the manner of voting and the conduct of
discussion as determined by him to be in order.

     (g) Any action  required  or  permitted  to be taken at any  meeting of the
Board of  Directors  may be taken  without a meeting,  without  prior notice and
without a vote if a consent or consents in writing,  setting forth the action so
taken,  is  signed  by the  requisite  number  of  Directors,  or the  specified
Directors, that would be necessary to authorize or take such action at a meeting
of the Board of Directors. A telegram, telex, cablegram, or similar transmission
by a Director, or a photographic, photostatic, facsimile or similar reproduction
of a writing  signed by a Director,  shall be regarded as signed by the Director
for purposes of this Section 6.5.

     (h)  Subject  to the  provisions  of  applicable  law  and  this  Agreement
regarding  notice of meetings,  Persons  serving on the Board of Directors  may,
unless otherwise restricted by the Certificate or this Agreement, participate in
and hold a meeting of the Board of  Directors by using  conference  telephone or
similar communications  equipment by means of which all Persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 6.5 shall constitute  presence in Person at such meeting,  except when a
Person  participates  in the meeting for the express purpose of objecting to the
transaction  of any  business on the ground  that the  meeting was not  lawfully
called or convened.

     Section 6.6. Certain Specified Actions Requiring Board Approval.

     (a) Notwithstanding anything in this Agreement or in the Certificate to the
contrary,  the Company (and the officers and agents  acting on its behalf) shall
not take any of the following actions without having first received the approval
of the Board of Directors in accordance with

<PAGE>
                                       21





this  Agreement,  unless such actions were  previously  approved by the Board of
Directors as a part of the Annual Budget:

          (i) to commit to or  effect  any  Acquisition  (or  series of  related
     Acquisitions)  (A) where  the  amount of the  estimated  Acquisition  Costs
     attributable  thereto is in excess of $50,000 or (B) where, with respect to
     a given  calendar year and at the time of such  Acquisition(s),  cumulative
     Acquisition  Costs  incurred by the Company during such calendar year equal
     or exceed $150,000;

          (ii) to commit or otherwise agree to any  Exploitation  Plan (A) where
     the amount of the estimated capital expenditures attributable thereto is in
     excess of $50,000 or (B) where, with respect to any given calendar year and
     at the time of such  Exploitation  Plan,  cumulative  capital  expenditures
     incurred by the Company during such calendar year equal or exceed $150,000;

          (iii) to commit to or incur any other expenditure or series of related
     expenditures  not  otherwise  a  part  of  an  approved  Acquisition  or an
     Exploitation Plan (A) if the amount of such expenditure(s)  exceeds $50,000
     or (B) where,  with respect to any given  calendar  year and at the time of
     such proposed expenditure(s), cumulative expenditures of this type incurred
     by the Company during such calendar year equal or exceed $150,000;

          (iv) to create, incur, or assume any indebtedness (exclusive, however,
     of any indebtedness under the Bank One Agreement);

          (v) to  guarantee  in the name or on behalf of the Company the payment
     of money or the  performance  of any  contract or other  obligation  of any
     Person other than the Company;

          (vi) to mortgage,  pledge,  assign in trust or otherwise  encumber any
     Company  property,  or assign any monies owed or to be owed to the Company,
     except as required under the Bank One Agreement;

          (vii) to establish and maintain an Annual Budget;

          (viii) to amend an Annual  Budget in any  material  respect;  to sell,
     lease,  farmout,  dispose,  or abandon any of the Company's  properties and
     assets in a single transaction or a series of related transactions;

          (x) to appoint the Company's  independent certified public accountants
     and attorneys;

          (xi) to appoint the Company's independent petroleum engineers;


<PAGE>
                                       22





          (xii) to amend,  modify or change in any material  respect any loan or
     credit  document,  any  purchase  and sale  document or any other  material
     agreement to which the Company is a party;

          (xiii) to make any loans or any advance  payments of  compensation  or
     other consideration to any officer or other employee of the Company;

          (xiv) to  compromise or settle any lawsuit,  administrative  matter or
     other  dispute  to which the  Company  is a party or to  repair or  replace
     Company  property  damaged or destroyed as a result of an accident or other
     occurrence  when the Company's  share of the costs of repair or replacement
     (either individually or in the aggregate) is in excess of $50,000;

          (xv) to enter into any Hedging Transaction;

          (xvi) to pay any  management or similar fees to a Member other than as
     provided in Section 6.10;

          (xvii)  to admit a new  Member or  authorize  a new class or series of
     securities of the Company;

          (xviii)  while  the  Preferred  Units  are  outstanding,   to  make  a
     distribution to the
     Common Unitholders under Section 5.3,

          (xix)  except as provided  in Section 5.2 or Section  9.3, to issue or
     repurchase any debt or equity securities  (including any Option Securities)
     of the Company;

          (xx) to merge or  consolidate  the  Company  with  any  other  entity,
     convert the Company into another form of entity or exchange  interests with
     any other Person or entity;

          (xxi) to dissolve the Company;

          (xxii) to commence a voluntary bankruptcy by the Company;

          (xxiii) to bind or  obligate  the Company  with  respect to any matter
     outside the scope of the Company's business;

          (xxiv) to loan Company funds to any Member or an Affiliate thereof;

          (xxv)  with  respect  to  the  Bank  One  Agreement:   (A)  to  alter,
     supplement,  modify or amend the Bank One Agreement in any respect;  (B) to
     cause the Partnership to make any voluntary prepayment of the loans due and
     owing under the Bank One

<PAGE>
                                       23


     Agreement;  (C) to request a  redetermination  of the applicable  borrowing
     base under the Bank One  Agreement;  (D) to submit a request for  borrowing
     under the Bank One Agreement;  or (E) to take any other material  action or
     make any material election under the Bank One Agreement;

          (xxvi) to  approve  the  assumptions  designed  by the  EnCap  Related
     Entities  pursuant  to clause  (F) of the  definition  of  Subject  Reserve
     Report, as referenced in Section 5.6 (c); or

          (xxvii)  to  consent  to any of the  matters  referenced  in the  last
     sentence of Section 7.7.

     (b) Notwithstanding the Act or anything herein or in the Certificate to the
contrary,  no separate  Member vote,  consent or approval shall be required with
respect to any of the matters  specified in this Section 6.6 requiring  Board of
Director approval.

     Section 6.7. Officers.

     (a) The Board of Directors  may,  from time to time,  designate one or more
Persons to be  officers  of the  Company.  No officer  need be a resident of the
State of Texas,  a Member or a Director.  Any officers so designated  shall have
such  authority and perform such duties as the Board of Directors may, from time
to time,  delegate  to them.  The  Board  of  Directors  may  assign  titles  to
particular  officers.  Unless the Board of Directors  decide  otherwise,  if the
title is one commonly used for officers of a business  corporation  formed under
the Delaware General Corporation Law (or any successor statute),  the assignment
of such title shall  constitute  the delegation to such officer of the authority
and  duties  that are  normally  associated  with that  office,  subject  to any
specific delegation of authority and duties made to such officer by the Board of
Directors  pursuant to this  subsection  (a) and the other terms and  provisions
hereof  (including  Section  6.6).  Each  officer  shall hold  office  until his
successor shall be duly designated and shall qualify or until his death or until
he shall resign or shall have been removed in the manner  hereinafter  provided.
Any number of offices  may be held by the same  Person.  The  salaries  or other
compensation,  if any, of the officers and agents of the Company  shall be fixed
from time to time by the Board of Directors.

     (b) Any officer may resign as such at any time. Such  resignation  shall be
made in writing and shall take effect at the time  specified  therein,  or if no
time be  specified,  at the time of its receipt by the Board of  Directors.  The
acceptance of a resignation shall not be necessary to make it effective,  unless
expressly  so provided in the  resignation.  Any officer may be removed as such,
either with or without cause, by the Board of Directors; provided, however, that
such removal shall be without  prejudice to the contract rights,  if any, of the
Person so removed. Designation of an officer shall not of itself create contract
rights.  Any vacancy occurring in any office of the Company may be filled by the
Board of Directors.

     Section 6.8. Certain Agreed Upon Actions.

     (a) Contemporaneously  with the execution and delivery of this Agreement by
the parties  hereto,  (i) the Company is authorized to, and shall,  pay to Tejon
the sum of $2,166,876.03

<PAGE>
                                       24


in  respect of the Tejon  Subordinated  Note and (ii) the  Company  shall pay to
Mansefeldt the sum of  $2,166,876.03  in respect of the Mansefeldt  Subordinated
Note. The Company and Tejon  acknowledge  and agree that payment to Tejon of the
sum referenced in clause (i) of the first sentence of this  subsection (a) shall
constitute full and complete payment of all amounts due and owing by the Company
under the Tejon Subordinated Note; and Tejon further agrees that upon receipt of
such sum, it will immediately  deliver the original executed Tejon  Subordinated
Note to the  Company for  cancellation  and  authorizes  the Company to affix or
write a notation to such note to the effect  that it has been paid in full.  The
Company and Mansefeldt  acknowledge  and agree that payment to Mansefeldt of the
sum referenced in clause (ii) of the first sentence of this subsection (a) shall
constitute full and complete payment of all amounts due and owing by the Company
under the Mansefeldt  Subordinated Note; and Mansefeldt further agrees that upon
receipt  of  such  sum,  it  will  immediately  deliver  the  original  executed
Mansefeldt  Subordinated Note to the Company for cancellation and authorizes the
Company to affix or write a notation to such note to the effect that it has been
paid in full.

     (b) Contemporaneously with the execution and delivery of this Agreement, by
the parties  hereto,  (i) the Company is authorized to, and shall,  pay to Tejon
the sum of  $1,556,350.70  for  assignment  of all of Tejon's  right,  title and
interest in and to the Baytech/Tejon  Tenn Loan Note and the Baytech/Tejon  Loan
Documents  and (ii) the Company is authorized  to, and shall,  pay to Mansefeldt
the sum of $1,556,350.70 for assignment of all of Mansefeldt's  right, title and
interest   in  and  to  the   Baytech/Mansefeldt   Term   Loan   Note   and  the
Baytech/Mansefeldt  Loan  Documents.  Upon  receipt of such sum,  (A) Tejon will
deliver  to  the  Company  the  Baytech/Tejon  Loan  Documents,   including  the
Baytech/Tejon  Term Loan  Note  bearing  its  executed  endorsement  in the form
attached  hereto as Exhibit  6.8(b)-l  and (B)  Mansefeldt  will  deliver to the
Company the Baytech/Mansefeldt Loan Documents,  including the Baytech/Mansefeldt
Term Loan Note bearing its executed  endorsement in the form attached  hereto as
Exhibit 6.8(b)-2.  The Company is authorized to, and shall,  convert each of the
Baytech/Tejon  Term  Loan  Note and the  Baytech/Mansefeldt  Term Loan Note into
Common  Units on and  effective  as of July 1,  2000,  and the  officers  of the
Company are hereby directed to take all such actions as are reasonably necessary
to effectuate the foregoing on such date.

     (c) Contemporaneously  with the execution and delivery of this Agreement by
the parties hereto, the Company is authorized to, and shall, execute and deliver
that  certain  Bank  One  Payment  Agreement,  substantially  in the form of the
instrument  attached hereto as Exhibit 6.8(c) in all material respects,  whereby
the Company will pay Bank One, Texas,  N.A. and Banc One Capital  Markets,  Inc.
the  Arrangement Fee (in lieu of any exercise of the Warrant Option) for the sum
of $1,250,000,  and as otherwise provided in the Bank One Payment Agreement.  In
connection with the foregoing, Tucker S. Bridwell is hereby expressly authorized
to execute the document  described in the immediately  preceding sentence in the
name and on behalf of the Company as its duly authorized representative (and the
other  parties  to  such  agreement  are  expressly  authorized  to rely on this
sentence  and the  other  provisions  of this  subsection  as proof of Tucker S.
Bridwell's  authority to so execute such  agreement in the name and on behalf of
the Company).

<PAGE>
                                       25


     Section 6.9.  Use of EnCap  Related  Parties'  Capital  Contributions.  The
Company shall use the Capital  Contributions  made by the EnCap Related  Parties
pursuant to Section 4.2 as follows:  (i)  $300,000  shall be used by the Company
for the exclusive purpose of effecting the transactions  contemplated by Section
6.8(a);  (ii) $3,100,000 shall be used by the Company for the exclusive  purpose
of effecting the transactions  contemplated by Section 6.8(b);  (iii) $1,250,000
shall  be used by the  Company  for  the  exclusive  purpose  of  effecting  the
transactions  contemplated by Section 6.8(c); and (iv) $11,350,000 shall be used
to fund development costs on the Company's properties.

     Section  6.10.  Management  Fees.  In  consideration  of providing  various
managerial  and other  services and assistance to the Company from time to time,
the Company is hereby  authorized  to pay to the Members  listed below an annual
cash  management fee for calendar years 2000 and 2001 and thereafter as approved
by the Board in accordance with the terms hereof:

                   Member(s)                Fee

                  Baytech             $150,000 per year

                  Parallel             $75,000 per year

                 Mansefeldt/Tejon      $75,000 per year


     The fees referenced  above shall be paid to the Members entitled to them in
installments as determined by the Board.

     Section 6.11.  Placement Fee.  Immediately after the execution and delivery
of this  Agreement  by the parties  hereto,  the Company  shall pay to the EnCap
Related  Entities a placement fee equal to $320,000.  The placement fee shall be
shared by and allocated among the EnCap Related Entities in the same proportions
as they acquired  Common Unit and Preferred Units  hereunder.  The placement fee
shall be tendered to the EnCap Related Entities by the Company via wire transfer
of immediately  available funds to an account or accounts  designated in writing
to the Company by EnCap Investments L.L.C.


                                   ARTICLE VII

          Accounting and Banking Matters; Capital Accounts; Tax Matters

     Section 7.1.  Books and Records.  The Company  shall keep and maintain full
and  accurate  books of account for the  Company in  accordance  with  generally
accepted accounting principles consistently applied in accordance with the terms
of this Agreement. Such books shall be maintained at the principal United States
office of the Company.

     Section  7.2.  Fiscal  Year.  The  calendar  year shall be  selected as the
accounting  year of the Company and the books of account  shall be maintained on
an accrual basis.

<PAGE>
                                       26


     Section 7.3. Bank  Accounts.  The Company  shall  maintain one or more bank
accounts in the name of the  Company in such bank or banks as may be  determined
by the Board of  Directors,  which  accounts  shall be used for the  payment  of
expenditures  incurred by the  Company in  connection  with the  business of the
Company and in which shall be deposited any and all receipts of the Company. All
such  receipts  shall be and remain the property of the Company and shall not be
commingled in any way with funds of any other Person.

     Section 7.4. Capital Accounts.

     (a) A capital  account shall be established and maintained for each Member.
Each Member's  capital account (a) shall be increased by (i) the amount of money
contributed  by that  Member  to the  Company,  (ii)  the fair  market  value of
property  contributed by that Member to the Company (net of liabilities  secured
by the  contributed  property  that the Company is  considered to assume or take
subject to under section 752 of the Internal Revenue Code), and (iii) the amount
of any item of  taxable  income or gain and the amount of any item of income and
gain exempt from tax  allocated to such Member for federal  income tax purposes,
and (b) shall be decreased by (i) the amount of money distributed to that Member
of the  Company,  (ii) the fair  market  value of property  distributed  to that
Member by the Company (net of liabilities  secured by the  distributed  property
that the Member is  considered to assume or take subject to under section 752 of
the Internal Revenue Code),  (iii) allocations to that Member of expenditures of
the Company described in section  705(a)(2)(B) of the Code, and (iv) allocations
to that Member of Company loss and  deduction (or items  thereof).  The Members'
capital  accounts  also shall be  maintained  and  adjusted as  permitted by the
provisions of Treasury Regulation sections 1.704- 1(b)(2)(iv)(f) and as required
by the other provisions of Treasury  Regulation  sections 1.704- 1(b)(2)(iv) and
1.704-1(b)(4),  including  adjustments to reflect the allocations to the Members
of depreciation,  depletion, amortization, and gain or loss as computed for book
purposes rather than the allocation of the  corresponding  items as computed for
tax purposes, as required by Treasury Regulation section 1.704-1(b)(2)(iv)(g).

     (b)  Notwithstanding  the  foregoing  provisions  of this  Section 7.4, the
Members' capital accounts shall be adjusted on the date of this Agreement in the
manner required under Treasury Regulation  1.704-1(b)(2)(iv)(f)  to reflect the
fair market value of the Company's assets  immediately prior to the date of this
Agreement,  which  value  shall  be  determined  by  reference  to  the  Capital
Contributions made to the Company for additional Common Units under Sections 4.2
and 4.3.  Thereafter,  the Members'  capital  accounts  shall be maintained  and
adjusted as permitted by the provisions of Treasury Regulation 1.704-1(b)(2)(iv)
and  1.704-1(b)(4),  including  adjustments  to reflect the  allocations  to the
Members of  depreciation,  depletion,  amortization and gain or loss as computed
for book  purposes  rather than the  allocation  of the  corresponding  items as
computed  for  tax  purposes,   as  required  by  Treasury   Regulation  1.704-
1(b)(2)(iv)(g).

     (c) On the transfer of all or part of a Member's Units, the capital account
of the transferor that is attributable to the transferred Units shall carry over
to  the  transferee  Member  in  accordance  with  the  provisions  of  Treasury
Regulation 1.704-1(b)(2)(iv)(1).

<PAGE>
                                       27


     Section 7.5. Tax Partnership.  The Members agree to classify the Company as
a partnership for federal tax purposes.  Neither the Company, any Member nor any
officer or other  representative  of any of the foregoing shall file an election
to classify the Company as an association  taxable as a corporation  for federal
tax purposes.

     Section 7.6. Tax Elections. The Company shall make the following elections:

     (a) To elect the calendar year as the Company's fiscal year if permitted by
applicable law;

     (b) To elect the accrual method of accounting;

     (c) If requested by a Member,  to elect,  in accordance  with Sections 734,
743  and  754 of the  Internal  Revenue  Code  and  applicable  regulations  and
comparable  state  law  provisions,  to  adjust  basis in the  event any Unit is
transferred  in  accordance  with this  Agreement  or any  Company  property  is
distributed to any Member;

     (d) To elect to treat all  organizational and start-up costs of the Company
as deferred  expenses  amortizable  over 60 months under Sections 195 and 709 of
the Internal Revenue Code; and

     (e) To elect  with  respect  to such  other  federal,  state  and local tax
matters as the Board of Directors shall approve.

     Section  7.7.  Tax  Matters  Partner.  The  Board  shall  from time to time
designate a Member to act as the "tax matters partner" under Section 6231 of the
Internal Revenue Code, subject to replacement by the Board (such Member, in this
Section, being called the "tax matters partner").  The tax matters partner shall
promptly  notify  the  Members  if any tax  return or report of the  Company  is
audited  or if any  adjustments  are  proposed  by  any  governmental  body.  In
addition,  the tax matters  partner  shall  promptly  furnish to the Members all
notices concerning  administrative or judicial  proceedings  relating to federal
income tax matters as  required  under the  Internal  Revenue  Code.  During the
pendency  of any such  administrative  or judicial  proceeding,  the tax matters
partner  shall  furnish to the  Members  periodic  reports,  not less often than
monthly,  concerning the status of any such  proceeding.  Without the consent of
the Board,  the tax matters partner shall not extend the statute of limitations,
file a request  for  administrative  adjustment,  file suit  concerning  any tax
refund or deficiency relating to any Company administrative  adjustment or enter
into any  settlement  agreement  relating to any Company  item of income,  gain,
loss, deduction or credit for any fiscal year of the Company.

     Section 7.8.  Confidentiality.  Except as may be required by applicable law
or valid  subpoena  or other  lawful  process or by the rules of any  applicable
stock exchange or other  self-regulatory body or other regulatory  requirements,
each Member agrees that it will  (consistent  with its reasonable  practices and
procedures  adopted in good faith for handling  confidential  information)  keep
confidential all Company geological, geophysical and seismic information and any
and all other information or data relating to the Company's properties and other
assets, the

<PAGE>
                                       28


acquisition or exploration  prospects of the Company,  the production  from such
properties or prospects and the Company's  financial  information,  and will not
disclose any such information to any person whatsoever (other than such Member's
officers,  directors,  employees,  beneficial  owners,  attorneys,  accountants,
advisors or potential  transferees (provided each of such persons is informed of
the  confidential  nature of such  information)  or to  another  Member  and its
representatives);  provided, however, that the foregoing covenant of each Member
shall not apply to any information that (a) was or becomes  generally  available
to the public other than as a result of disclosure  by such Member,  (b) becomes
available  to such Member from a source other than the  Company,  provided  that
such source is not (to the knowledge of such Member) bound by a  confidentiality
agreement  with the  Company  or (c) such  Member can  establish  was within its
possession  prior to it being  furnished  to such  Member by or on behalf of the
Company,  provided that the source of such information was not (to the knowledge
of such Member) bound by a confidentiality agreement with the Company in respect
thereof.


                                  ARTICLE VIII

                                 Indemnification

     Section 8.1. Power to Indemnify in Actions.  Suits or Proceeding Other Than
Those by or in the Right of the  Company.  Subject to Section  8.3,  the Company
shall  indemnify  any Person who was or is a party or is threatened to be made a
party to any  threatened,  pending  or  completed  action,  suit or  proceeding,
whether civil,  criminal,  administrative or investigative (other than an action
by or in the  right of the  Company)  by  reason of the fact that he is or was a
Member,  Director or officer of the Company, or is or was serving at the request
of the Company as a member,  manager,  director,  officer,  employee or agent of
another limited  liability  company,  corporation,  partnership,  joint venture,
trust  or  other  enterprise,  against  expenses  (including  attorneys'  fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in  connection  with such action,  suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful.  The termination of
any action, suit or proceeding by judgment,  order, settlement,  conviction,  or
upon a plea of nolo contenders or its equivalent, shall not, of itself, create a
presumption  that the Person did not act in good faith and in a manner  which he
reasonably  believed  to be in or not  opposed  to  the  best  interests  of the
Company, and, with respect to any criminal action or proceeding,  had reasonable
cause to believe that his conduct was unlawful.

     Section 8.2.  Power to Indemnify in Actions,  Suits or Proceedings by or in
the Right of the Company.  Subject to Section 8.3, the Company  shall  indemnify
any  Person  who was or is a party  or is  threatened  to be made a party to any
threatened,  pending  or  completed  action  or suit by or in the  right  of the
Company to  procure a judgment  in its favor by reason of the fact that he is or
was a Member,  Director or officer of the  Company,  or is or was serving at the
request of the  Company as a member,  manager,  director,  officer,  employee or
agent of another limited  liability  company,  corporation,  partnership,  joint
venture,  trust or other enterprise against expenses (including attorneys' fees)
actually  and  reasonably  incurred  by him in  connection  with

<PAGE>
                                       29


the defense or  settlement  of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company and except  that no  indemnification  shall be made in respect of
any claim,  issue or matter as to which such Person shall have been  adjudged to
be liable for negligence or willful misconduct in the performance of his duty to
the Company or for a material  breach of this  Agreement  unless and only to the
extent that the court in which such action or suit was brought  shall  determine
upon application that,  despite the adjudication of liability but in view of all
the circumstances of the case, such Person is fairly and reasonably  entitled to
indemnity for such expenses which such court shall deem proper.

     Section 8.3.  Authorization of Indemnification.  Any indemnification  under
this Article VIII (unless  ordered by a court) shall be made by the Company only
as authorized in the specific case upon a determination that  indemnification of
the Member,  Director or officer is proper in the  circumstances  because he has
met the applicable  standard of conduct set forth in Section 8.1 or Section 8.2.
Such  determination  shall be made (i) by the Board of  Directors  by a majority
vote of a quorum  consisting  of Directors who were not parties to such action,,
suit or  proceeding,  or (ii) if such a quorum is not  obtainable,  or,  even if
obtainable a quorum of disinterested  Directors so directs, by independent legal
counsel in a written  opinion,  or (iii) by the  Members.  To the extent  that a
Member,  Director or officer has been  successful  on the merits or otherwise in
defense of any action,  suit or proceeding referred to in Section 8.1 or Section
8.2,  or in  defense  of any  claim,  issue  or  matter  therein,  he  shall  be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith,  without the necessity of authorization
in the specific case.

     Section 8.4. Good Faith Defined.  For purposes of any  determination  under
Section  8.3,  a Person  shall be  deemed to have  acted in good  faith and in a
manner he reasonably  believed to be in or not opposed to the best  interests of
the Company, or, with respect to any criminal action or proceeding,  to have had
no reasonable cause to believe his conduct was unlawful,  if his action is based
on the records or books of account of the Company or another  enterprise,  or on
information  supplied  to him by the  Directors  or  officers  of the Company or
another  enterprise  in the  course of their  duties,  or on the advice of legal
counsel for the Company or another enterprise or on information or records given
or reports made to the Company or another enterprise by an independent certified
public  accountant or by an appraiser or other expert  selected with  reasonable
care by the Company or another enterprise. The term "another enterprise" as used
in this Section 8.4 shall mean any other limited liability company, corporation,
partnership,  joint venture, trust, employee benefit plan or other enterprise of
which such  Person is or was  serving at the request of the Company as a member,
manager,  director,  officer,  employee or agent. The provisions of this Section
8.4 shall not be deemed to be exclusive or to limit in any way the circumstances
in which a Person may be deemed to have met the  applicable  standard of conduct
set forth in Section 8.1 or Section 8.2, as the case may be.

     Section  8.5.  Indemnification  by a Court.  Notwithstanding  any  contrary
determination  in the specific case under Section 8.3, and  notwithstanding  the
absence of any determination thereunder,  any Member, Director or officer of the
Company may apply to any court of competent  jurisdiction  in the State of Texas
(which  court  shall  apply  Delaware  law) for  indemnification  to

<PAGE>
                                       30


the extent otherwise  permissible  under Sections 8.1 and 8.2. The basis of such
indemnification  by a  court  shall  be  a  determination  by  such  court  that
indemnification  of the Member,  Director or officer of the Company is proper in
the  circumstances  because he has met the  applicable  standards of conduct set
forth  in  Section  8.1  or  8.2,  as  the  case  may  be.  Neither  a  contrary
determination  in the  specific  case under  Section  8.3 nor the absence of any
determination  thereunder  shall be a defense  to such  application  or create a
presumption  that  the  Member,  Director  or  officer  of the  Company  seeking
indemnification  has not met any applicable  standard of conduct.  Notice of any
application for  indemnification  pursuant to this Section 8.5 shall be given to
the Company  promptly upon the filing of such  application.  If  successful,  in
whole or in part,  the  Member,  Director  or  officer  of the  Company  seeking
indemnification  shall also be entitled  to be paid the  expense of  prosecuting
such application.

     Section 8.6.  Expenses Payable in Advance.  Expenses  incurred by a Member,
Director or officer of the Company in defending or investigating a threatened or
pending  action,  suit or proceeding  shall be paid by the Company in advance of
the final  disposition  of such action,  suit or  proceeding  upon receipt of an
undertaking  by or on behalf of such  Member,  Director or officer to repay such
amount  if it shall  ultimately  be  determined  that he is not  entitled  to be
indemnified by the Company as authorized by this Article VIII.

     Section 8.7. Nonexclusivity of Indemnification and Advancement of Expenses.
The  indemnification and advancement of expenses provided by or granted pursuant
to this Article VIII shall not be deemed  exclusive of any other rights to which
those seeking  indemnification  or advancement of expenses may be entitled under
any agreement,  contract, vote of Members or disinterested Directors or pursuant
to the direction (howsoever embodied) of any court of competent  jurisdiction or
otherwise,  both as to  action  in his  official  capacity  and as to  action in
another  capacity while holding such office,  it being the policy of the Company
that  indemnification  of the Persons specified in Sections 8.1 and 8.2 shall be
made to the fullest extent permitted by law. The provisions of this Article VIII
shall not be deemed to  preclude  the  indemnification  of any Person who is not
specified  in Section  8.1 or Section  8.2 but whom the Company has the power or
obligation to indemnify under the provisions of the Act or otherwise.

     Section 8.8. Insurance.  The Company may purchase and maintain insurance on
behalf of any Person who is or was a Member, Director or officer of the Company,
or is or was a serving  at the  request  of the  Company  as a member,  manager,
director,  officer,  employee  or agent of another  limited  liability  company,
corporation,  partnership,  joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against him and incurred by him in any
such capacity,  or arising out of his status as such, whether or not the Company
would have the power or the  obligation to indemnify him against such  liability
under the provisions of this Article VIII.

     Section  8.9.  Certain  Definitions.  For  purposes of this  Article  VIII,
references to "the Company" shall include,  in addition to the resulting entity,
any constituent entity (including any constituent of a constituent)  absorbed in
a consolidation or merger which, if its separate existence had continued,  would
have had power and  authority to indemnify  its  members,  managers,  directors,
officers,  and  employees or agents,  so that any Person who is or was a member,

<PAGE>
                                       31



manager, director,  officer, employee or agent of such constituent entity, or is
or was serving at the request of such constituent  entity as a member,  manager,
director,  officer,  employee  or agent of another  limited  liability  company,
partnership,  joint venture, trust or other enterprise,  shall stand in the same
position under the provisions of this Article VIII with respect to the resulting
or surviving entity as he would have with respect to such constituent  entity if
its  separate  existence  had  continued.  For  purposes of this  Article  VIII,
references to "fines"  shall include any excise taxes  assessed on a Person with
respect to an employee  benefit plan;  and references to "serving at the request
of the  Company"  shall  include  any  service as a member,  manager,  director,
officer,  employee or agent of the Company which imposes  duties on, or involves
services  by,  such  member,  manager,  director or officer  with  respect to an
employee benefit plan, its participants or beneficiaries; and a Person who acted
in good faith and in a manner he  reasonably  believed to be in the  interest of
the participants  and  beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best  interests of the Company" as
referred to in this Article VIII.

     Section 8.10. Survival of Indemnification and Advancement of Expenses.  The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article VIII shall,  unless otherwise provided when authorized or ratified,
continue  as to a Person who has ceased to be a Member,  Director or officer and
shall inure to the benefit of the heirs,  executors and administrators of such a
Person.

     Section  8.11.  Limitation  on  Indemnification.  Notwithstanding  anything
contained  in this  Article  VIII to the  contrary,  except for  proceedings  to
enforce rights to indemnification  (which shall be governed by Section 8.5), the
Company shall not be obligated to indemnify  any Member,  Director or officer in
connection  with a proceeding (or part thereof)  initiated by such Person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors.

     Section 8.12.  Indemnification of Employees and Agents. The Company may, to
the  extent  authorized  from  time to time by the Board of  Directors,  provide
rights to  indemnification  and the  advancement  of expenses to  employees  and
agents  of the  Company  similar  to those  conferred  in this  Article  VIII to
Members, Directors and officers of the Company.

     Section  8.13.  Severability.  The  provisions  of this  Article  VIII  are
intended  to comply  with the Act.  To the  extent  that any  provision  of this
Article  VIII  authorizes  or requires  indemnification  or the  advancement  of
expenses  contrary  to the  Act or  the  Certificate,  the  Company's  power  to
indemnify  or advance  expenses  under such  provision  shall be limited to that
permitted by the Act and the Certificate and any limitation  required by the Act
or the Certificate  shall not affect the validity of any other provision of this
Article VIII.

<PAGE>
                                       32


                                   ARTICLE IX

     Dispositions of Units and Substitutions; Redemption of Preferred Units

     Section 9.l.  Dispositions.  A Member may Dispose of Units,  in whole or in
part,  subject to the following:  (a) no such Disposition  shall be made if such
Disposition  would result in the  violation of any  applicable  federal or state
securities laws; and (b) the Company shall not be required to recognize any such
Disposition until the instrument  pursuant to which the Units are to be Disposed
has been delivered to the Board of Directors for recordation on the books of the
Company. Any costs incurred by the Company in connection with any Disposition by
a  Member  of all or a part  of  its  Units  shall  be  borne  by  such  Member.
Notwithstanding  anything  herein to the contrary,  the terms and  provisions of
this Section 9.1 shall not be deemed to be  applicable  to a  redemption  of the
Preferred Units as provided in Section 9.3.

     Section 9.2. Substitution.

     (a) Unless an assignee  of Units  becomes a Member in  accordance  with the
provisions  set forth below,  such assignee  shall not be entitled to any of the
rights  granted to a Member  hereunder in respect of such Units,  other than the
right to  receive  allocations  of income,  gain,  loss,  deduction,  credit and
similar  items  and  distributions  to which the  assignor  would  otherwise  be
entitled, to the extent such items are assigned.

     (b) An assignee of the Units of a Member,  or any  portion  thereof,  shall
become a Member  entitled  to all of the  rights of a Member in  respect of such
Units if, and only if (i) the assignor  gives the assignee such right,  (ii) the
other  Members  consent  to  such  substitution  (which  consent  shall  not  be
unreasonably  withheld,  conditioned or delayed) and (iii) the assignee executes
and delivers such instruments,  in form and substance reasonably satisfactory to
the other Members, as the other Members may deem reasonably  necessary to effect
such  substitution  and to confirm the  agreement of the assignee to be bound by
all of the terms and provisions of this Agreement.

     Section 9.3. Redemption of Preferred Units.

     (a) The  Company  shall have the option to redeem the  Preferred  Units (in
multiples of an aggregate of 100,000  Preferred Units,  with the Preferred Units
of each Preferred  Unitholder thereof being redeemed on a pro rata basis) at any
time at a cash  redemption  price per  Preferred  Unit equal to the  Liquidation
Amount divided by the number of Preferred Units then outstanding; provided, that
if the Company  elects to effect a redemption  on or prior to December 31, 2002,
the Liquidation  Amount shall be increased by an amount equal to X multiplied by
Y, where "X" equals the  cumulative  cash  dividends that would have been earned
hereunder on the Preferred  Units so redeemed in the absence of such  redemption
from the date of the redemption  through December 31, 2002, and where "Y" equals
 .50. If the Company so elects to effect a redemption  under this subsection (a),
it shall  give  notice  of same to the  Preferred  Unitholders  not less than 30
Business  Days  prior  to the  date on  which  such  redemption  is to be  made.
Contemporaneously  with a  redemption  of less than all of the  Preferred  Units
outstanding, the

<PAGE>
                                       33



Designated  Amount shall be reduced by the aggregate amount paid with respect to
such  redemption  exclusive of (i) that portion of such payment that  represents
the payment of distributions cumulated but not paid and (ii) if applicable,  any
additional amount added to the Liquidation Amount as described in the proviso to
the first sentence of this subsection (a).

     (b) On the fifth  anniversary  date of the date  hereof  and  provided  the
Preferred Units have not been previously redeemed in full pursuant to subsection
(a),  the Company  shall be required to redeem all of the  Preferred  Units at a
cash redemption  price per share equal to the Liquidation  Amount divided by the
number of Preferred Units then outstanding.


                                    ARTICLE X

                    Dissolution, Liquidation, and Termination

     Section 10.1. Dissolution. The Company shall dissolve and its affairs shall
be- wound up on the first to occur of the following:

     (a) December 31, 2015;

     (b) the  election  by the Board to  dissolve  the  Company as  provided  in
Section 6.6(a)(xxi);

     (c) the sale or other disposition of all or substantially all of the assets
of the Company; or

     (d) entry of a decree of judicial  dissolution of the Company under Section
18-802 of the Act.

     Section 10.2.  Liquidation and Termination.  On dissolution of the Company,
the  liquidator  shall be a Person  selected  by the  Board  of  Directors.  The
liquidator  shall  proceed  diligently to wind up the affairs of the Company and
make  final  distributions  as  provided  herein  and in the Act.  The  costs of
liquidation shall be borne as a Company expense.  Until final distribution,  the
liquidator  shall  continue to operate the  Company  properties  with all of the
power  and  authority  of the  Director.  The  steps to be  accomplished  by the
liquidator are as follows:

     (a) as  promptly  as  possible  after  dissolution  and again  after  final
liquidation,  the liquidator  shall cause a proper  accounting to be made of the
Company's  assets,  liabilities,  and  operations  through  the  last day of the
calendar  month in which the  dissolution  occurs or the  final  liquidation  is
completed, as applicable.

     (b) The liquidator  shall pay,  satisfy or discharge from Company funds all
of the debts,  liabilities  and obligations of the Company  (including,  without
limitation,  all expenses  incurred in  liquidation)  or otherwise make adequate
provision for payment and discharge thereof

<PAGE>
                                       34


(including,  without  limitation,  the  establishment  of a cash escrow fund for
contingent  liabilities  in such amount and for such term as the  liquidator may
reasonably determine).

     (c) All remaining assets of the Company shall be distributed to the Members
as follows:

          (i) the  liquidator  may  sell  any or all  Company  property  and any
     resulting  gain or loss from each sale shall be computed  and  allocated to
     the capital accounts of the Members as provided in Section 5.1;

          (ii) with respect to all Company  property that has not been sold, the
     fair market  value of that  property  shall be  determined  and the capital
     accounts  of the  Members  shall be adjusted to reflect the manner in which
     the unrealized income,  gain, loss, and deduction inherent in property that
     has  not  been  reflected  in the  capital  accounts  previously  would  be
     allocated  among the  Members  under  Section  5.1 if there  were a taxable
     disposition  of that property for the fair market value of that property on
     the date of distribution; and

          (iii) Company  property shall be distributed  among the Members in the
     amounts specified in Sections 5.2 and 5.3.

     All  distributions  in kind to the Members  shall be valued for purposes of
determining each Member's  interest therein at its fair market value at the time
of such  distribution,  and  such  distributions  shall be made  subject  to the
liability of each distributes for costs, expenses,  and liabilities  theretofore
incurred  or  for  which  the  Company  has  committed  prior  to  the  date  of
termination,  and those costs,  expenses,  and liabilities shall be allocated to
the distributes pursuant to this Section 10.2. It is intended that the foregoing
distributions to each Member will be equal to each Member's  respective positive
capital  account  balance as  determined  after giving  effect to the  foregoing
adjustments  and to all  adjustments  attributable  to  allocations  of items of
income, gain, loss and deduction realized by the Company during the taxable year
in question and all adjustments  attributable to contributions and distributions
of money and property  effected prior to such  distribution.  To the extent that
any such Member's  positive  capital account balance does not correspond to such
distribution,  the allocations provided for in Section 5.1 shall be adjusted, to
the least extent necessary, to produce a capital account balance for the Partner
which  corresponds to the amount of such  distribution.  Any distribution to the
Members in  liquidation  of the Company shall be made by the later of the end of
the taxable  year in which the  liquidation  occurs or 90 days after the date of
such liquidation. For purposes of the preceding sentence, the term "liquidation"
shall   have  the  same   meaning   as  set   forth   in   Treasury   Regulation
1.704-l(b)(2)(ii).  The  distribution  of cash  and/or  property  to a Member in
accordance  with the  provisions  of this  Section 10.2  constitutes  a complete
return to the Member of its Capital Contribution and a complete  distribution to
the  Member  of its Units  and all the  Company's  property  and  constitutes  a
compromise  to which all Members  have  consented  within the meaning of Section
18-502(b) of the Act. To the extent that a Member  returns funds to the Company,
it has no claim against any other Member for those funds.

<PAGE>
                                       35


     Section  10.3 Deficit  Capital  Accounts.  Notwithstanding  anything to the
contrary contained in this Agreement,  and notwithstanding any custom or rule of
law to the contrary,  no Member shall be obligated to restore a deficit  balance
in its capital account at any time.

     Section 10.4 Certificate of Cancellation. On completion of the distribution
of Company  assets as provided  herein,  the Company shall be terminated and the
Members shall file a certificate of cancellation  with the Secretary of State of
Delaware,  cancel any other  filings made pursuant to Section 1.5, and take such
other actions as may be necessary to terminate the Company.


                                   ARTICLE XI

                         Representations and Warranties

     Section 11.1. Representations and Warranties of Members to Each Other. Each
Member hereby  severally (and not jointly or jointly and severally) as to itself
only represents, warrants and covenants to the other Members as follows:

     (a) Such Member (if not an individual) is duly organized,  validly existing
and in good standing under the laws of the jurisdiction of its formation.

     (b) Such  Member has the  requisite  power and  authority  to  execute  and
deliver this Agreement and to perform its obligations hereunder. Such Member, if
an  individual,  is not a minor and has the requisite  legal capacity to execute
and deliver this Agreement and to perform its obligations hereunder.

     (c) The  execution,  delivery  and  performance  by such  Member (if not an
individual)  of this  Agreement  has been  duly and  validly  authorized  by all
requisite  limited liability  company,  partnership or corporate (as applicable)
action.

     (d)  The  execution,  delivery  and  performance  by  such  Member  of this
Agreement  (i)  (if  not  an  individual)  is  within  its  limited   liability,
partnership  or  corporate  (as  applicable)  powers and (ii) will not (A) be in
contravention  of or violate any  provisions  of its charter or other  governing
documents,  as amended to the date  hereof (in the  instance  of a Member not an
individual),  or  (ii)  be in  contravention  of or  result  in  any  breach  or
constitute a default  under any  applicable  law,  rule,  regulation,  judgment,
license,  permit or order or any loan,  note or other agreement or instrument to
which such Member is a party or by which it or any of its properties are bound.

     (e) When delivered to the other Members, this Agreement will have been duly
and validly  executed  and will be binding upon such Member and  enforceable  in
accordance with the terms hereof.

<PAGE>
                                       36


     (f)  No  consent,  approval,   authorization  or  order  of  any  court  or
governmental  agency  or  authority  or of any  third  party  which has not been
obtained is required in connection with the execution,  delivery and performance
by such Member of this Agreement.

     (g) Such Member nor any of its  Affiliates  has  employed  or retained  any
broker,  agent or finder in connection  with this Agreement or the  transactions
contemplated  herein,  or paid or agreed to pay any brokerage fee, finder's fee,
commission or similar  payment to any Person on account of this Agreement or the
transactions  provided for herein  (exclusive  of the  placement fee paid by the
Company under Section 6.11);  and such Member shall  indemnify and hold harmless
the Company and the other Members from any costs, including attorneys' fees, and
liability  arising  from the claim of any  broker,  agent or finder  employed or
retained by such Member in connection with the Company or this Agreement.

     (h) There is no pending or, to such Member's knowledge (after due inquiry),
threatened  judicial,  administrative  or arbitral  action,  suit or  proceeding
against  or  investigation  of  such  Member  or  its  ability  to  perform  its
obligations under this Agreement.

     Section 11.2.  Representations  and  Warranties of EnCap Related  Entities.
Each of the EnCap Related  Entities hereby severally (and not jointly or jointly
and severally) and as to itself only  represents,  warrants and covenants to the
other Members as follows:

     (a) It is an "accredited  investor" as such term is defined in Regulation D
promulgated  under the Securities Act. It is acquiring its Units as contemplated
hereby for its own account for investment and not with a view to, or for sale or
other  disposition  in  connection  with,  any  distribution  of all or any part
thereof, except in compliance with applicable federal and state securities laws.

     (b) It understands that the Units issued to it hereunder will not have been
registered  pursuant to the Securities Act or any  applicable  state  securities
laws,  that the Units will be  characterized  as "restricted  securities"  under
federal securities laws, and that under such laws and applicable regulations the
Units cannot be sold or  otherwise  disposed of without  registration  under the
Securities Act or an exemption therefrom.

     (c) It has, prior to its execution of this  Agreement,  been furnished with
sufficient  written and other  information about the Company to make an informed
investment decision.

     Section 11.3.  Representations  and Warranties of Jones  Foundation,  Owen,
Owen Foundation,  Stai,  Bridwell and Tejon to the Other Members.  Each of Jones
Foundation,  Owen, Owen  Foundation,  Stai,  Bridwell and Tejon hereby severally
(and not jointly or jointly  and  severally)  and as to itself only  represents,
warrants and covenants to the other Members as follows:

     (a) It is an "accredited  investor" as such term is defined in Regulation D
promulgated  under the Securities Act. It is acquiring its Units as contemplated
hereby for its own account for investment and not with a view to, or for sale or
other  disposition  in  connection  with,  any

<PAGE>
                                       37


distribution  of all or any part thereof,  except in compliance  with applicable
federal and state securities laws.

     (b) It understands that the Units issued to it hereunder will not have been
registered  pursuant to the Securities Act or any  applicable  state  securities
laws,  that the Units will be  characterized  as "restricted  securities"  under
federal securities laws, and that under such laws and applicable regulations the
Units cannot be sold or  otherwise  disposed of without  registration  under the
Securities Act or an exemption therefrom.

     (c) It has, prior to its execution of this  Agreement,  been furnished with
sufficient  written and other  information about the Company to make an informed
investment decision.

     Section 11.4.  Representations  and  Warranties  of Current  Members to the
EnCap Related  Entities.  Each Current Member hereby  represents and warrants to
the EnCap Related Entities that (a) as of the date hereof, none of the financial
statements  or other  written  documents or  information  delivered  herewith or
heretofore  by or on behalf of the Company or such  Member to the EnCap  Related
Entities in connection with this  Agreement,  the Company or its assets contains
any untrue  statement  of a material  fact or omits to state any  material  fact
(other  than facts which the EnCap  Related  Entities  recognize  to be industry
risks normally  associated with the oil and gas business)  necessary to keep the
statements  contained herein or therein from being misleading;  and (b) there is
no fact  peculiar to the Company or its assets (other than facts which the EnCap
Related Entities recognize to be industry risks normally associated with the oil
and gas business) which  materially  adversely  affects or in the future may (so
far as Member  can now  reasonably  foresee)  materially  adversely  affect  the
Company,  its financial condition or its assets and which has not been set forth
in  this  Agreement  or in the  other  documents,  certificates  and  statements
furnished to the EnCap  Related  Entities by or on behalf of the Company or such
Member prior to the date hereof in connection with the transactions contemplated
hereby.

     Section   11.5.   Survival   of   Representations   and   Warranties.   All
representations,  warranties  and covenants  made by each of the Members in this
Agreement  or any  other  document  contemplated  thereby  or  hereby  shall  be
considered  to have been relied upon by the other party hereto and shall survive
the execution and delivery of this Agreement or such other document,  regardless
of any investigation made by or on behalf of any such party.


                                   ARTICLE XII

                               General Provisions

     Section  12.l.  Notices.  Except as expressly  set forth to the contrary in
this Agreement, all notices,  requests, or consents provided for or permitted to
be given under this  Agreement  must be in writing  and must be given  either by
depositing  that writing in the United States mail,  addressed to the recipient,
postage paid, and  registered or certified  with return receipt  requested or by
delivering that writing to the recipient in person, by courier,  or by facsimile
transmission;  and a notice,  request,  or consent given under this Agreement is
effective  on receipt by the Person


<PAGE>
                                       38


to receive it. All notices,  requests,  and consents to be sent to a Member must
be sent to or made at the addresses given for that Member on Exhibit 3.1 or such
other  address as that  Member may specify by notice to the other  Members.  All
notices,  requests,  and  consents to be sent to the Company  must be sent to or
made at the address of the Company's  principal  place of business (with the fax
number  being  (915)  686-7034)  or such other  address  (or fax  number) as the
Company may specify by notice to the Members.

     Section 12.2.  Amendment or Modification.  This Agreement may be amended or
modified from time to time only by a written  instrument  executed and agreed to
by those Common  Unitholders  whose  aggregate  Common Unit Sharing  Percentages
equal or exceed 90 %;  provided,  however,  that if at the time of such proposed
amendment  or  modification,  all  or a  portion  of  the  Preferred  Units  are
outstanding, then any such amendment or modification must also receive the prior
written approval of those Preferred  Unitholders whose aggregate  Preferred Unit
Sharing  Percentages  equal or exceed  90 % if such  amendment  or  modification
adversely affects the rights, preferences, or privileges of the Preferred Units;
provided,  further,  that any amendment or  modification  to this Agreement that
increases  a  Member's  required  Capital  Contributions  to the  Company or its
liability  for Company debt and  obligations  shall only be  effective  with the
written approval of such Member; and provided,  further, this Section 12.2 shall
not be amended or  modified  without  the prior  written  approval of all of the
Members.

     Section 12.3.  Entire  Agreement.  This  Agreement  constitute the full and
complete  agreement  of the parties  hereto with  respect to the subject  matter
thereof.  Without limitation of the foregoing,  this Agreement supersedes in its
entirety the Original  Company  Agreement and any amendments,  modifications  or
changes thereto.

     Section  12.4.  Effect of Waiver or  Consent.  The failure of any Person to
insist upon strict  performance  of a covenant  hereunder  or of any  obligation
hereunder,  irrespective of the length of time for which such failure continues,
shall not be a waiver of such Person's right to demand strict  compliance in the
future. No consent or waiver, express or implied, to or of any breach or default
in the  performance of any obligation  hereunder  shall  constitute a consent or
waiver to or of any other  breach or default in the  performance  of the same or
any other obligation hereunder.

     Section 12.5. Successors and Assigns. Subject to Article IX, this Agreement
shall be  binding  upon and  inure  to the  benefit  of the  Members  and  their
respective heirs, legal representatives, successors, and assigns.

     Section  12.6  Governing  Law.  THIS  AGREEMENT IS GOVERNED BY AND SHALL BE
CONSTRUED IN  ACCORDANCE  WITH THE LAWS OF THE STATE OF DELAWARE,  EXCLUDING ANY
CONFLICT-OF-LAWS  RULE OR  PRINCIPLE  THAT  MIGHT  REFER THE  GOVERNANCE  OR THE
CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION.

     Section 12.7.  Severability.  If any provision of this Agreement is held to
be  unenforceable,  this  Agreement  shall  be  considered  divisible  and  such
provision shall be deemed

<PAGE>
                                       39


inoperative to the extent it is deemed  unenforceable,  and in all other respect
this Agreement shall remain in full force and effect; provided, however, that if
any provision may be made enforceable by limitation thereof, then such provision
shall be deemed to be so limited and shall be  enforceable to the maximum extent
permitted by applicable law.

     Section 12.8. Further Assurances. In connection with this Agreement and the
transactions  contemplated  hereby,  each Member  shall  execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary  or  appropriate  to  effectuate  and perform the  provisions  of this
Agreement and those transactions.

     Section 12.9. Title to Company Property. All property owned by the Company,
whether real or personal, tangible or intangible, shall be deemed to be owned by
the,  Company,  and no Member,  individually,  shall have any  ownership of such
property. The Company shall hold all of its property in its own name.

     Section 12.10. Public Announcements.  The Company or any Member shall issue
a press release or other public  statement with respect to this Agreement or the
transactions  contemplated hereby only after having providing reasonable advance
notice of same to the other Members.

     Section 12.11. No Third Party  Beneficiaries.  Except as otherwise provided
in Section  6.8(c) and in Article VIII,  it is the intent of the parties  hereto
that no third-party beneficiary rights be created or deemed to exist in favor of
any Person not a party to this Agreement,  unless otherwise  expressly agreed to
in writing by the parties.

     Section 12.12. Area of Mutual Interest. An area of mutual interest (in this
Section, "AMI") is hereby established as being any lands located within one mile
of any  Company  property.  If any  Member  of any of its  Affiliates  (in  this
Section,  an "Acquiring  Party"),  acquires from an unaffiliated third party any
interest (in this Section,  a "Subsequently  Acquired  Interest") in lands lying
within the AMI, the Company  shall have the first and prior right to acquire the
Subsequently Acquired Interest upon the terms set forth below:

     (a) Within 15 days after acquiring the Subsequently Acquired Interest,  the
Acquiring  Party  shall  notify the Company in writing of the  acquisition  of a
Subsequently Acquired Interest. Such notice shall set forth (i) a description of
the  Subsequently  Acquired  Interest,  (ii) the total cost of the  Subsequently
Acquired  Interest,  including  all land and  legal  costs  associated  with the
acquisition  thereof and (iii) any other  pertinent  terms of such  acquisition,
including copies of applicable leases, assignments, bank draft or other evidence
of payment for such Subsequently Acquired Interest.

     (b) The Company shall have 15 days from the receipt of the notice described
in subsection (a) above to elect,  by written  notice to the Acquiring  Party to
acquire the  Subsequently  Acquired  Interest.  If the  Acquiring  Party has not
received an election in writing from the Company within such 15-day period,  the
Company  shall be  deemed  to have  elected  not to  acquire  such  Subsequently
Acquired Interest.

<PAGE>
                                       40


     (c) An election by the Company to acquire a Subsequently  Acquired Interest
shall  constitute a binding  obligation  of the Company to pay the total cost of
the  Subsequently  Acquired  Interest  within 15 days from the date the  Company
gives notice to the Acquiring Party of its election to purchase the Subsequently
Acquired Interest.  The notice set forth in subsection (a) above shall be deemed
an  invoice  for the  Acquiring  Party's  total  costs  for  acquisition  of the
Subsequently Acquired Interest. Against receipt of such amount from the Company,
the  Acquiring  Party shall  execute and deliver to the Company an assignment of
the  Subsequently  Acquired  Interest (which  assignment shall contain a special
warranty of title).

     (d)  Notwithstanding the foregoing or anything else herein to the contrary,
nothing  herein  shall  preclude  any Member or its  Affiliates  from  managing,
operating or  developing-  its (or theirs)  Existing  Leasehold and HBP Acreage.
Each  Member who either  directly or  indirectly  (through  an  Affiliate)  owns
Existing  Leasehold and HBP Acreage  covenants and agrees with the EnCap Related
Entities  to furnish to them,  within 20 days after the date  hereof,  a list or
schedule  in form and  content  reasonably  satisfactory  to the  EnCap  Related
Parties detailing such Member's Existing Leasehold and HBP Acreage.

     (e)  Notwithstanding the foregoing or anything else herein to the contrary,
for  purposes  of this  Section,  an  "Affiliate"  of any of the  EnCap  Related
Entities shall include only (i) EnCap  Investments L. L. C., (ii) any subsidiary
of EnCap  Investments  L. L. C., or (iii) any  investment  fund managed by EnCap
Investments L.L.C. or any subsidiary thereof.

     Section 12.13.  Resignation of Baytech and Parallel as Managers.  By virtue
of their execution and delivery of this Agreement,  each of Baytech and Parallel
shall be deemed to have  resigned as the  "Managers" of the Company and agree to
execute such other  documents  and  instruments,  if any, as shall be reasonably
requested by the Company to evidence the foregoing.

     Section 12.14.  Counterparts.  This Agreement may be executed in any number
of counterparts,  with each such counterpart constituting an original and all of
such counterparts constituting but one and the same instrument.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>



     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              BAYTECH, INC.

                              By:  /s/ Ben A. Strickling
                                   ----------------------------
                              Name:  Ben A. Strickling
                              Title: President
<PAGE>

     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              PARALLEL PETROLEUM CORPORATION


                              By:  /s/ Larry C. Oldham
                                   ----------------------------
                              Name:   Larry C. Oldham
                              Title:  President


<PAGE>


     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              TEJON EXPLORATION COMPANY

                              By:  /s/ Joseph Edwin Canon
                                   ----------------------------
                              Name:  Joseph Edwin Canon
                              Title: Vice President


                              TEJON INVESTMENT PARTNERS

                              By:  TEJON EXPLORATION COMPANY

                              By:  /s/ Joseph Edwin Canon
                                   ----------------------------
                              Name:  Joseph Edwin Canon
                              Title: Vice President

                              DODGE JONES FOUNDATION

                              By:  /s/ Joseph Edwin Canon
                                   ----------------------------
                              Name:  Joseph Edwin Canon
                              Title: Executive Director

<PAGE>


     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              MANSEFELDT  INVESTMENT CORPORATION

                              By:  /s/ Tucker Bridwell
                                   ----------------------------
                              Name:  Tucker Bridwell
                              Title: President



                              TOPAZ EXPLORATION COMPANY

                              By:  /s/ Tucker Bridwell
                                   ----------------------------
                              Name:  Tucker Bridwell
                              Title: President



                                   ----------------------------
                                   Dian Graves Owen


                              DIAN GRAVES OWEN FOUNDATION

                              By:
                              Name:
                              Title:



                                   ----------------------------
                                   Harlan Stai



                                   /s/ Tucker S. Bridwell
                                   ----------------------------
                                   Tucker S. Bridwell
<PAGE>

     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              MANSEFELDT  INVESTMENT CORPORATION

                              By:
                              Name:
                              Title: President

                              TOPAZ EXPLORATION COMPANY

                              By:
                              Name:
                              Title: President



                                   /s/ Dian Graves Owen
                                   ----------------------------
                                   Dian Graves Owen


                              DIAN GRAVES OWEN FOUNDATION

                              By:  /s/ Dian Graves Owen
                                   ----------------------------
                              Name:  Dian Graves Owen
                              Title: Chair



                                   /s/ Harlan Stai
                                   ----------------------------
                                   Harlan Stai



                                   ----------------------------
                                   Tucker S. Bridwell
<PAGE>

     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              ENCAP ENERGY CAPITAL FUND III, L.P.

                              By:  ENCAP INVESTMENTS L.L.C., General Partner

                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Managing Director


                              ENCAP ENERGY ACQUISITION III-B, INC.


                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Vice President


                              ENERGY  CAPITAL  INVESTMENT  COMPANY  PLC



                              By:
                              Name:  Gary R. Petersen
                              Title: Director


                              BOCP ENERGY PARTNERS, L.P.

                              By: ENCAP INVESTMENTS, L.L.C., Manager


                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Managing Director

<PAGE>

     IN  WITNESS   WHEREOF,   the  Members  have  executed  this   Agreement  in
counterparts, as of the date first above written.


                              ENCAP ENERGY CAPITAL FUND III, L.P.

                              By:  ENCAP INVESTMENTS L.L.C., General Partner

                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Managing Director


                              ENCAP ENERGY ACQUISITION III-B, INC.



                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Vice President


                              ENERGY  CAPITAL  INVESTMENT  COMPANY PLC


                              By:  /s/ Gary R. Petersen
                                   ----------------------------
                              Name:  Gary R. Petersen
                              Title: Director


                              BOCP ENERGY PARTNERS, L.P.

                              By:  ENCAP INVESTMENTS, L.L.C., Manager


                              By:  /s/ David B. Miller
                                   ----------------------------
                              Name:  David B. Miller
                              Title: Managing Director


<PAGE>

                                   EXHIBIT 3.1

<TABLE>




MEMBERS                                ADDRESS FOR                        PREFERRED         COMMON
                                     NOTICE PURPOSES                        UNITS            UNITS
--------------------                -----------------                     ---------         --------
<S>                                  <C>                                   <C>                <C>


Baytech, Inc.                      Baytech, Inc.                                    -0-          350,000
                                   110 W. Louisiana Ave., Suite 200
                                   Midland, Texas 79702
                                   Attention: Ben A. Strickling III
                                   Fax No.: 915-686-9921


Parallel Petroleum Corporation     Parallel Petroleum Corporation                   -0-          350,000
                                   One Marienfeld Place, Suite 465
                                   110 N. Marienfeld
                                   Midland, Texas 79701
                                   Attention: Larry C. Oldham
                                   Fax No.: 915-684-3905


Tejon Exploration Company          c/o Tejon Exploration Company                100,000         9,608.25
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Joseph E. Canon
                                   Fax No.: 915-673-2028




Tejon Investment Partners          c/o Tejon Exploration Company                    -0-          150,000
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Joseph E. Canon
                                   Fax No.: 915-673-2028



Dodge Jones Foundation             c/o Tejon Exploration Company                100,000         9,608.25
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Joseph E. Canon
                                   Fax No.: 915-673-2028




Mansefeldt Investment              c/o Mansefeldt Investment                        -0-           35,000
Corporation                        Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017


Topaz Exploration Company          c/o Mansefeldt Investment                        -0-            2,500
                                   Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017



<PAGE>

Tucker S. Bridwell                 c/o Mansefeldt Investment                     20,000        14,421.65
                                   Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017




Dian Graves Owen                   c/o Mansefeldt Investment                     70,000      106,725.775
                                   Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017




Dian Graves Owen Foundation        c/o Mansefeldt Investment                    100,000         9,608.25
                                   Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017



Harlan Stai                        c/o Mansefeldt Investment                     10,000          960.825
                                   Corporation
                                   400 Pine Street, Suite 900
                                   Abilene, Texas 79601
                                   Attention: Tucker S. Bridwell
                                   Fax No.: 915-675-5017




EnCap Energy Capital Fund          c/o EnCap Investments L.L.C.                 451,028           86,673
III, L.P.                          3811 Turtle Creek Blvd., Suite 1080
                                   Dallas, Texas 75219
                                   Attention:  David B. Dunton
                                   Fax No.: 214-599-0200



EnCap  Energy  Acquisition         c/o EnCap Investments L.L.C.                 341,110           65,550
III-B, Inc.                        3811 Turtle Creek Blvd., Suite 1080
                                   Dallas, Texas 75219
                                   Attention:  David B. Dunton
                                   Fax No.: 214-599-0200




Energy Capital Investment          c/o EnCap Investments L.L.C.                  47,500            9,128
Company PLC                        3811 Turtle Creek Blvd., Suite 1080
                                   Dallas, Texas 75219
                                   Attention:  David B. Dunton
                                   Fax No.: 214-599-0200




BOCP Energy Partners, L.P.         c/o EnCap Investments L.L.C.                 110,362           21,208
                                   3811 Turtle Creek Blvd., Suite 1080
                                   Dallas, Texas 75219
                                   Attention:  David B. Dunton
                                   Fax No.: 214-599-0200

</TABLE>

<PAGE>
                                                            EXHIBIT 3.2(f)-l

          THE UNITS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
          TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON
          TRANSFER AND OTHER TERMS AND CONDITIONS SET FORTH IN
          THAT CERTAIN AMENDED AND RESTATED LIMITED LIABILITY
          COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
          31, 2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
          TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
          COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.

              Certificate of Common Units in First Permian, L.L.C.

Certificate No._______                                            _______Units

     First  Permian,  L. L.  C.,  a  Delaware  limited  liability  company  (the
"Company"),  hereby  certifies that (the  "Holder") is the  registered  owner of
Common Units in the Company (the "Common  Units").  The rights,  preferences and
limitations  of the  Common  Units are set  forth in that  certain  Amended  and
Restated Limited  Liability Company Agreement of the Company dated as of May 31,
2000,  as  amended,  supplemented  or  restated  from  time  to time  (the  "LLC
Agreement"), a copy of which is on file at the principal office of the Company.

     This  Certificate and Common Units  evidenced  hereby are not negotiable or
transferable except as provided in the LLC Agreement.

Dated:__________________                    First Permian, L.L.C.

                                            By:____________________________

          THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
          ACT"), AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS
          BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN
          EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH
          CASE, AN OPINION OF COUNSEL REASONABLY SATISFACTORY
          TO THE COMPANY SHALL HAVE BEEN DELIVERED TO THE
          COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS NOT
          REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT).
          THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS,
          RESTRICTIONS ON TRANSFER AND OTHER TERMS AND
          CONDITIONS SET FORTH IN THAT CERTAIN AMENDED AND
          RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF THE
          COMPANY, DATED AS OF MAY 31, 2000 (AS SUCH AGREEMENT
          MAY BE AMENDED FROM TIME TO TIME), A COPY OF WHICH
          MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL
          EXECUTIVE OFFICES.
<PAGE>

                                                            EXHIBIT 3.2(f)-2

          THE UNITS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
          TO CERTAIN VOTING AGREEMENTS, RESTRICTIONS ON
          TRANSFER AND OTHER TERMS AND CONDITIONS SET FORTH IN
          THAT CERTAIN AMENDED AND RESTATED LIMITED LIABILITY
          COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
          31, 2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
          TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
          COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.

             Certificate of Preferred Units in First Permian, L.L.C.

Certificate No._____                                   ______Preferred Units

     First  Permian,  L. L.  C.,  a  Delaware  limited  liability  company  (the
"Company"),  hereby  certifies that (the  "Holder") is the  registered  owner of
Preferred Units in the Company (the "Preferred Units"). The rights,  preferences
and  limitations  of the Preferred  Units are set forth in that certain  Limited
Liability Company Agreement of the Company dated as of May 31, 2000, as amended,
supplemented  or  restated  from time to time (the "LLC  Agreement"),  a copy of
which is on file at the principal office of the Company.

     This Certificate and Preferred Units evidenced hereby are not negotiable or
transferable except as provided in the LLC Agreement.

Dated:__________________                      First Permian, L.L.C.

                                              By:_______________________

          THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
          SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
          ACT"), AND MAY NOT BE OFFERED OR SOLD, UNLESS IT HAS
          BEEN REGISTERED UNDER THE SECURITIES ACT OR UNLESS AN
          EXEMPTION FROM REGISTRATION IS AVAILABLE (AND, IN SUCH
          CASE, AN OPINION OF COUNSEL REASONABLY SATISFACTORY
          TO THE COMPANY SHALL HAVE BEEN DELIVERED TO THE
          COMPANY TO THE EFFECT THAT SUCH OFFER OR SALE IS NOT
          REQUIRED TO BE REGISTERED UNDER THE SECURITIES ACT).
          THIS SECURITY IS SUBJECT TO CERTAIN VOTING AGREEMENTS,
          RESTRICTIONS ON TRANSFER AND OTHER TERMS AND
          CONDITIONS SET FORTH IN THAT CERTAIN LIMITED LIABILITY
          COMPANY AGREEMENT OF THE COMPANY, DATED AS OF MAY
          31,2000 (AS SUCH AGREEMENT MAY BE AMENDED FROM TIME
          TO TIME), A COPY OF WHICH MAY BE OBTAINED FROM THE
          COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.


<PAGE>

                                                       EXHIBIT 4.2


Member                                  Capital Contribution

Tejon Exploration Company                    $1,000,000.00

Dodge Jones Foundation                       $1,000,000.00

Dian Graves Owen                             $  700,000.00

Dian Graves Owen Foundation                  $1,000,000.00

Harlan Stai                                  $  100,000.00

Tucker S. Bridwell                           $  200,000.00

EnCap Energy Capital Fund III, L.P.          $7,596,263.00

EnCap Energy Acquisition III-B, Inc.         $5,745,010.00

Energy Capital Investment Company PLC        $  800,000.00

BOCP Energy Partners, L.P.                   $1,858,728.00


<PAGE>


                                 EXHIBIT 6.2(a)

Nominating Member(s)                         Designee

Baytech                                   Ben A. Strickling III

Parallel                                  Larry C. Oldham

Tejon Related Parties                     Joseph E. Canon

Mansefeldt Related Parties                Tucker S. Bridwell

EnCap Related Parties                     David B. Miller

<PAGE>
                                                        EXHIBIT 6.8(B)-1


                               ASSIGNMENT OF NOTE

     The  undersigned in  consideration  of the cash payment of One Million Five
Hundred Fifty Thousand and No/100 Dollars ($1,550,000.00) (principal) along with
Six  Thousand  Three  Hundred  Fifty and  70/100  Dollars  ($6,350.70)  (accrued
interest),  does hereby  assign all of its right,  title and  interest in and to
this Note,  including  the security  and rights  described  hereunder,  to First
Permian, L.L.C., without recourse.


                                   TEJON EXPLORATION COMPANY



                                   By:  ____________________
                                        Joseph Edwin Canon,
                                        Vice President



<PAGE>
                                                        EXHIBIT 6.8(B)-2


                               ASSIGNMENT OF NOTE

     The  undersigned in  consideration  of the cash payment of One Million Five
Hundred Fifty Thousand and No/100 Dollars ($1,550,000.00) (principal) along with
Six  Thousand  Three  Hundred  Fifty and  70/100  Dollars  ($6,350.70)  (accrued
interest),  does hereby  assign all of its right,  title and  interest in and to
this Note,  including  the security  and rights  described  hereunder,  to First
Permian, L.L.C., without recourse.


                                   MANSEFELDT  INVESTMENT
                                   CORPORATION



                                    By: ____________________
                                        Tucker S. Bridwell,
                                        President

<PAGE>
                                       1


                                                        EXHIBIT 6.8(c)

                                PAYMENT AGREEMENT

     This Payment Agreement (this "Agreement"), dated May 31, 2000 is among BANK
ONE,  TEXAS,  N.A. ("Bank One"),  BANC ONE CAPITAL  MARKETS,  INC.  (Arranger"),
together with Bank One, collectively, "Payees," and individually, each a "Payee"
and FIRST PERMIAN, L.L.C. ("Borrower,).


                                    RECITALS

     Payees are  entitled to payment of an  "Arrangement  Fee"  (hereinafter  so
called) in accordance with the terms of that certain  Restated Credit  Agreement
dated August 16, 1999 (the "Credit Agreement"),  and those certain letters dated
June 25, 1999, June 30, 1999 and July 26, 1999 (the  "Letters")  among Bank One,
Borrower and Arranger, copies of which Letters are attached hereto as Exhibit A,
reference to which is made for all purposes. The parties hereto have agreed that
the  Arrangement  Fee payable  under the terms of the Credit  Agreement  and the
Letters  shall be  $1,250,000.00,  which  amount  shall be due and payable on or
before June 1, 2000.

     NOW,  THEREFORE,  in  consideration  of the  foregoing,  the  covenants and
agreements  herein  contained,  and other good and valuable  consideration,  the
receipt and  sufficiency of which are hereby  acknowledged,  the parties hereto,
intending to be legally bound, hereby covenant and agree as follows:

     Section 1. Payment of Arrangement Fee. Subject to the provisions of Section
2 of this  Agreement,  Borrower shall pay in full  settlement of the Arrangement
Fee  on  or  before  June  1,  2000  (the  "Closing  Date"),  the  cash  sum  of
$1,250,000.00.  Payees shall furnish wiring  instructions  to Borrower,  and the
payment of the  Arrangement Fee by Borrower in the manner directed by the Payees
shall be deemed the "Closing".

     Section  2.  Look  Back.  Borrower  shall be  obligated  to pay  additional
consideration  to Payees if prior to December 31, 2000,  Borrower  consummates a
Look-Back Transaction,  and the fair market value of the Units indicated by such
Look-Back  Transaction  exceeds $25.00 per unit (as such units exist on the date
hereof, and after giving effect to any splits or reclassification of Units after
the date hereof) then in each such case,  Borrower  shall promptly pay to Payees
an amount in cash equal to the difference between  $1,250,000.00 (as adjusted to
reflect   additional  amounts  paid  as  a  result  of  any  previous  Look-Back
Transactions)  and the value of 5% of the Units (on a fully  diluted basis after
giving effect to the Look-Back Transactions and after giving effect to any other
splits or reclassification of Units) as indicated by such Look-Back Transaction.
The  value of the  Units as  indicated  in the  Look-Back  Transaction  shall be
adjusted by assuming all Units were outstanding and that Borrower had additional
cash equal to the consideration paid in the transaction.

     As used herein, the following terms have the following meanings.

<PAGE>
                                       2


     "Look-Back  Transaction"  shall mean (it) consummation of a public offering
or  disposition  of Units,  (b) a private sale, or series of private  sales,  of
Units  constituting more than fifty percent (50%) of the Units then outstanding,
(c) the sales or disposition (or a series of related sales or  dispositions)  or
liquidation  of  all  or  substantially  all  of the  assets  of  Borrower  on a
consolidated  basis,  including  any  sale  or  disposition  of  the  membership
interests  or  assets  of the  subsidiaries  of  Borrower,  or (d)  any  merger,
consolidation,  combination or similar  transaction  involving Borrower in which
the Units are changed or converted.

     "Units" means, collectively, (a) Units of Borrower, and (b) any other class
of equity  security  issued by  Borrower  that is not  limited to a fixed sum in
respect to the rights of the  holders of such  security  to  participate  in the
distribution  of assets  upon any  liquidation,  dissolution  or  winding  up of
Borrower.

     Section 3. Not a Look-Back  Transaction.  The transactions  contemplated in
that  certain  Consent  Letter of even date, a true and correct copy of which is
attached hereto as Exhibit B, reference to which is made for all purposes, shall
not be considered a Look-Back Transaction.

     Section 4. Further Assurances. At the Closing, and at all times thereafter,
Payees  shall,  as  reasonably  requested  by  Borrower,  execute and deliver to
Borrower such other  documents as shall be  reasonably  requested by Borrower to
comply with the purposes and intent of this Agreement.

     Section 5. Representations and Warranties of Borrower.  Borrower represents
and warrants to Payees that the  following  are true and correct as of this date
and will be true and correct through the Closing Date as if made on that date:

     (a) Authorization and Validity. The execution,  delivery and performance of
this Agreement and the other agreements contemplated hereby by Borrower, and the
consummation  of the  transactions  contemplated  hereby and thereby,  have been
unanimously  approved and duly  authorized by Borrower.  This Agreement and each
other  agreement  contemplated  hereby  have been or will be duly  executed  and
delivered by Borrower and  constitute or win constitute as of the Closing legal,
valid and binding obligations of Borrower,  enforceable against it in accordance
with their respective terms, except as may be limited by applicable  bankruptcy,
insolvency  or  similar  laws  affecting  creditors'  rights  generally  or  the
availability of equitable remedies.

     (b) Survival of Representations.  The above  representations and warranties
shall survive the expiration or termination of this Agreement,  the discharge of
all  other  obligations  owed by the  parties  to each  other  and  shall not be
affected by any  investigation by or on behalf of Payees,  or by any information
which Payees may have or obtain with respect thereto.

     Section 6.  Representations and Warranties of Payees.  Payees represent and
warrant to Borrower  that the following are true and correct as of this date and
will be true and correct  through the Closing Date as if made on that date:

<PAGE>
                                       3


     (a)Authorization and Validity.  The execution,  delivery and performance of
this Agreement and the other agreements  contemplated  hereby by Payees, and the
consummation  of the  transactions  contemplated  hereby and thereby,  have been
unanimously  approved and duly  authorized  by Payees.  This  Agreement and each
other  agreement  contemplated  hereby  have been or will be duly  executed  and
delivered by Payees and  constitute or will  constitute as of the Closing legal,
valid and binding obligations of Payees,  enforceable against them in accordance
with their respective terms, except as may be limited by applicable  bankruptcy,
insolvency  or  similar  laws  affecting  creditors'  rights  generally  or  the
availability of equitable remedies.

     (b) No Transfer. Payees have not elected to receive, nor transferred, sold,
assigned or redeemed the right to receive a grant of costless warrants under the
terms of the  Letters,  and  have in fact  elected  to  receive  payment  of the
Arrangement Fee in cash rather than the grant of costless warrants (the "Warrant
Option") as described in the Letters.[Specifically, reference is made to Section
1(b) of that  certain  Letter dated July 26, 1999,  as  descriptive  of both the
Warrant Option and the Arrangement Fee].

     (c) Survival of Representations.  The above  representations and warranties
shall survive the expiration or termination of this Agreement,  the discharge of
all  other  obligations  owed by the  parties  to each  other  and  shall not be
affected by any investigation by or on behalf of Borrower, or by any information
which Borrower may have or obtain with respect thereto.

     Section 7.  Release of Claims.  Payees  release  any claim they have to the
Warrant  Option.  Nothing  contained  herein shall  release any other rights the
Payees have under the Loan Documents to which the Arrangement Fee relates.

     Section 8. Notices. Any notice or communication  pursuant hereto must be in
writing and delivered  personally or sent by certified mail, postage prepaid and
with return receipt  requested,  to the address specified on the signature pages
of this Agreement.  Notices delivered personally shall be deemed communicated as
of actual receipt;  mailed notices shall be deemed communicated as of 10:00 a.m.
on the third  business day after  mailing.  Any party may change its address for
notice by written notice given to the other parties.

     Section 9. Costs, Expenses, and Legal Fees. Each party hereto agrees to pay
the costs and expenses,  including  reasonable  attorneys' fees, incurred by the
other party in successfully  (i) enforcing any of the terms of this Agreement or
(H) providing that the other party breached any of the terms of this Agreement.

     Section 10.  Waiver.  The waiver by any party of any breach or provision of
this Agreement  must be in writing and shall not constitute a continuing  waiver
or a  waiver  of any  subsequent  breach  of the same or a  different  provision
hereof.

     Section 11. Severability.  If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term hereof,  such  provision  shall be fully  severable and this  Agreement
shall be construed and enforced as if such illegal,  invalid,  or  unenforceable
provision never comprised a part of this Agreement; and the remaining provisions
of this  Agreement  shall  remain  in full  force  and  effect  and shall not be
affected by the

<PAGE>
                                       4


illegal,  invalid,  or  enforceable  provision  or by its  severance  here from.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there
shall be added automatically as part of this Agreement a provision as similar in
its  terms  to such  illegal,  invalid,  or  unenforceable  provision  as may be
possible and be legal, valid, and enforceable.

     Section 12. Confidentiality. Nothing herein shall restrict Bank One and the
Arranger (or require the consent of Borrower) from dividing the  Arrangement Fee
between each other in any manner.  Borrower agrees not to disclose any or all of
the terms of this  Agreement  to any person other than  employees,  attorneys or
accounts of Borrower to whom it is necessary to disclose  the  information  (and
whom shall be made aware of this  promise not to disclose) or as may be required
by law or any court or regulatory agency having jurisdiction over Borrower.

     Section  13.  Miscellaneous.  This  Agreement  may be  amended  only  by an
instrument in writing  executed by the person  against whom  enforcement  of the
amendment  is sought.  There are no oral  agreements  among the  parties to this
Agreement.  This Agreement and the rights and  obligations of the parties hereto
shall be governed by,  construed,  and enforced in accordance with internal laws
(and not the conflicts  laws) of Texas.  This Agreement is performable in Harris
County,  Texas.  The captions in this Agreement are for convenience of reference
only.  This  Agreement  shall be binding on the parties  hereto and their heirs,
estates, personal representatives, successors, and assigns. This Agreement shall
not be construed  against the party  responsible  for, or primarily  responsible
for,  preparing  this  Agreement.  Time is of the  essence  with  respect to the
obligations in this Agreement.  This Agreement may be signed by facsimile and in
counterparts.

     IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
executed this Agreement as of the date first above written.

Address:                           BANK ONE, TEXAS, N.A.
910 Travis Street, Sixth Floor
Houston, Texas 77002               By:_________________________
Attn:  Richard G. Sylvan           Richard G. Sylvan, First Vice
                                   President

Address:                           BANC ONE CAPITAL MARKETS, INC.
1717 Main Street, 4th Floor
Dallas, Texas 75201
Attn:  Jorge Gutierrez             By:_________________________
                                      Jorge Gutierrez, Director

Address:                          FIRST PERMIAN, L.L.C.
P.0. Box 2455
Midland, Texas 79702              By:__________________________
                                     Tucker S. Bridwell, Its Duly
                                     Authorized Representative and
                                     Agent

<PAGE>

                                                    Exhibit 10.22



                             SECOND
                   RESTATED CREDIT AGREEMENT

                             AMONG

              FIRST PERMIAN, L.L.C., AS BORROWER,

                              AND

                     BANK ONE, TEXAS, N.A.
               AND THE INSTITUTIONS NAMED HEREIN
                            AS BANKS

                              AND

                     BANK ONE, TEXAS, N.A.,
                    AS ADMINISTRATIVE AGENT

                              AND

                BANC ONE CAPITAL MARKETS, INC.,
             AS SOLE LEAD ARRANGER AND BOOK MANAGER

                        OCTOBER 25, 2000


<PAGE>
                                       i



                                TABLE OF CONTENTS

                                                                    Page No.

1.   Definitions . . . . . . . . . . . . . . . . . . . . . . .         1

2.   Commitments of the Bank . . . . . . . . . . . . . . . . .        13
     (a)  Terms of Revolving Commitment. . . . . . . . . . . .        13
     (b)  Procedure for Borrowing  . . . . . . . . . . . . . .        13
     (c)  Letters of Credit. . . . . . . . . . . . . . . . . .        14
     (d)  Procedure for Obtaining Letters of Credit. . . . . .        15
     (e)  Type and Number of Advances. . . . . . . . . . . . .        16
     (f)  Voluntary Reduction of Revolving Commitment. . . . .        16
     (g)  Monthly Commitment Reductions. . . . . . . . . . . .        16
     (h)  Several Obligations. . . . . . . . . . . . . . . . .        16

3.   Notes Evidencing Loans. . . . . . . . . . . . . . . . . .        16
     (a)  Form of Revolving Notes. . . . . . . . . . . . . . .        16
     (b)  Issuance of Additional Notes . . . . . . . . . . . .        17
     (c)  Interest Rate. . . . . . . . . . . . . . . . . . . .        17
     (d)  Payment of Interest. . . . . . . . . . . . . . . . .        17
     (e)  Payment of Principal . . . . . . . . . . . . . . . .        17
     (f)  Payment to Banks . . . . . . . . . . . . . . . . . .        17
     (g)  Sharing of Payments, Etc.. . . . . . . . . . . . . .        18
     (h)  Non-Receipt of Funds by the Agent. . . . . . . . . .        18

4.   Interest Rates. . . . . . . . . . . . . . . . . . . . . .        18
     (a)  Options. . . . . . . . . . . . . . . . . . . . . . .        18
     (b)  Interest Rate Determination. . . . . . . . . . . . .        19
     (c)  Conversion Option. . . . . . . . . . . . . . . . . .        19
     (d)  Recoupment . . . . . . . . . . . . . . . . . . . . .        20
     (e)  Interest Rates Applicable After Default. . . . . . .        20

5.   Special Provisions Relating to Loans. . . . . . . . . . .        20
     (a)  Unavailability of Funds or Inadequacy of Pricing . .        20
     (b)  Change in Laws . . . . . . . . . . . . . . . . . . .        21
     (c)  Increased Cost or Reduced Return . . . . . . . . . .        21
     (d)  Discretion of Bank as to Manner of Funding . . . . .        23
     (e)  Breakage Fees. . . . . . . . . . . . . . . . . . . .        23

6.   Collateral Security . . . . . . . . . . . . . . . . . . .        24

<PAGE>
                                       ii


7. Borrowing Base. . . . . . . . . . . . . . . . . . . . . . .        24
     (a)  Initial Borrowing Base . . . . . . . . . . . . . . .        24
     (b)  Subsequent Determinations of Borrowing Base. . . . .        25


8.   Fees. . . . . . . . . . . . . . . . . . . . . . . . . . .        26
     (a)  Unused Commitment Fee. . . . . . . . . . . . . . . .        26
         (b)  Agency Fees  . . . . . . . . . . . . . . . . . .        26
         (c)  The Letter of Credit Fee . . . . . . . . . . . .        27

9.     Prepayments . . . . . . . . . . . . . . . . . . . . . .        27
         (a)  Voluntary Prepayments  . . . . . . . . . . . . .        27
         (b)  Mandatory Prepayment For Borrowing Base Deficiency.     27

10.    Representations and Warranties. . . . . . . . . . . . .        27
  (a)  Creation and Existence. . . . . . . . . . . . . . . . .        27
  (b)  Power and Authority . . . . . . . . . . . . . . . . . .        27
  (c)  Binding Obligations . . . . . . . . . . . . . . . . . .        28
  (d)  No Legal Bar or Resultant Lien. . . . . . . . . . . . .        28
  (e)  No Consent. . . . . . . . . . . . . . . . . . . . . . .        28
  (f)  Financial Condition . . . . . . . . . . . . . . . . . .        28
  (g)  Liabilities     . . . . . . . . . . . . . . . . . . . .        28
  (h)  Litigation. . . . . . . . . . . . . . . . . . . . . . .        28
  (i)  Taxes; Governmental Charges . . . . . . . . . . . . . .        29
  (j)  Titles, Etc . . . . . . . . . . . . . . . . . . . . . .        29
  (k)  Defaults. . . . . . . . . . . . . . . . . . . . . . . .        29
  (1)  Casualties; Taking of Properties. . . . . . . . . . . .        29
  (m)  Use of Proceeds; Margin Stock . . . . . . . . . . . . .        29
  (n)  Location of Business and Offices. . . . . . . . . . . .        30
  (o)  Compliance with the Law . . . . . . . . . . . . . . . .        30
  (p)  No Material Misstatements . . . . . . . . . . . . . . .        30
  (q)  Not A Utility . . . . . . . . . . . . . . . . . . . . .        30
  (r)  ERISA . . . . . . . . . . . . . . . . . . . . . . . . .        30
  (s)  Public Utility Holding Company Act. . . . . . . . . . .        30
  (t)  Subsidiaries. . . . . . . . . . . . . . . . . . . . . .        31
  (u)  Environmental Matters . . . . . . . . . . . . . . . . .        31
  (v)  Liens . . . . . . . . . . . . . . . . . . . . . . . . .        31

11. Conditions of Lending  . . . . . . . . . . . . . . . . . .        31

12. Affirmative Covenants  . . . . . . . . . . . . . . . . . .        33

<PAGE>
                                       iii


  (a)  Financial Statements and Reports  . . . . . . . . . . .        33
  (b)  Certificates of Compliance  . . . . . . . . . . . . . .        34
  (c)  Accountants' Certificate  . . . . . . . . . . . . . . .        34
  (d)  Taxes and Other Liens . . . . . . . . . . . . . . . . .        35
  (e)  Compliance with Laws  . . . . . . . . . . . . . . . . .        35
  (f)  Further Assurances  . . . . . . . . . . . . . . . . . .        35
  (g)  Performance of Obligations  . . . . . . . . . . . . . .        35
  (h)  Insurance . . . . . . . . . . . . . . . . . . . . . . .        35
  (i)  Accounts and Records  . . . . . . . . . . . . . . . . .        36
  (j)  Right of Inspection . . . . . . . . . . . . . . . . . .        36
  (k)  Notice of Certain Events  . . . . . . . . . . . . . . .        37
  (1)  ERISA Information and Complianc . . . . . . . . . . . .        37
  (m)  Environmental Reports and Notices . . . . . . . . . . .        37
  (n)  Compliance and Maintenance. . . . . . . . . . . . . . .        38
  (o)  Operation of Properties . . . . . . . . . . . . . . . .        38
  (p)  Compliance with Leases and Other Instruments. . . . . .        38
  (q)  Certain Additional Assurances Regarding
       Maintenance and Operations of Properties  . . . . . . .        39
  (r)  Sale of Certain Assets/Prepayment of Proceeds . . . . .        39
  (s)  Title Matters . . . . . . . . . . . . . . . . . . . . .        39
  (t)  Curative Matters  . . . . . . . . . . . . . . . . . . .        40
  (u)  Change of Principal Place of Business . . . . . . . . .        40

13.  Negative Covenants  . . . . . . . . . . . . . . . . . .          40
  (a)  Negative Pledge . . . . . . . . . . . . . . . . . . .          40
  (b)  Current Ratio . . . . . . . . . . . . . . . . . . . .          40
  (e)  Minimum Interest Coverage Ratio . . . . . . . . . . .          41
  (d)  General and Administrative Expenses . . . . . . . . .          41
  (e)  Consolidations and Mergers  . . . . . . . . . . . . .          41
  (f)  Debts, Guaranties and Other Obligations . . . . . . .          41
  (g)  Distributions . . . . . . . . . . . . . . . . . . . .          42
  (h)  Loans and Advances  . . . . . . . . . . . . . . . . .          42
  (i)  Sale or Discount of Receivables . . . . . . . . . . .          42
  (j)  Nature of Business  . . . . . . . . . . . . . . . . .          42
  (k)  Transactions with Affiliates  . . . . . . . . . . . .          42
  (1)  Hedging Transactions  . . . . . . . . . . . . . . . .          42
  (m)  Investments . . . . . . . . . . . . . . . . . . . . .          43
  (n)  Amendment to Certificate of Formation or Limited
       Liability Company Agreement . . . . . . . . . . . . .          43
  (o)  Pre-Payment of Other Indebtedness . . . . . . . . . .          43


<PAGE>
                                       iv


14.  Events of Default . . . . . . . . . . . . . . . . . . .          43

15.  The Agent and the Banks . . . . . . . . . . . . . . . .          45
  (a)  Appointment and Authorization. . . . . . . . . . . .           45
  (b)  Note Holders . . . . . . . . . . . . . . . . . . . .           46
  (c)  Consultation with Counsel. . . . . . . . . . . . . .           46
  (d)  Documents. . . . . . . . . . . . . . . . . . . . . .           47
  (e)  Resignation or Removal of Agent. . . . . . . . . . .           47
  (f)  Responsibility of Agent. . . . . . . . . . . . . . .           47
  (g)  Independent Investigation. . . . . . . . . . . . . .           49
  (h)  Indemnification. . . . . . . . . . . . . . . . . . .           49
  (i)  Benefit of Section 15. . . . . . . . . . . . . . . .           49
  (j)  Pro Rata Treatment . . . . . . . . . . . . . . . . .           49
  (k)  Assumption as to Payments. . . . . . . . . . . . . .           50
  (1)  Other Financings . . . . . . . . . . . . . . . . . .           50
  (m)  Interests of Banks . . . . . . . . . . . . . . . . .           50
  (n)  Investments. . . . . . . . . . . . . . . . . . . . .           51

16.  Exercise of Rights . . . . . . . . . . . . . . . . . .           51

17.  Notices  . . . . . . . . . . . . . . . . . . . . . . .           51

18.  Expenses . . . . . . . . . . . . . . . . . . . . . . .           52

19.  Indemnity  . . . . . . . . . . . . . . . . . . . . . .           52

20.  Governing Law  . . . . . . . . . . . . . . . . . . . .           53

21.  Invalid Provisions . . . . . . . . . . . . . . . . . .           53

22.  Maximum Interest Rate  . . . . . . . . . . . . . . . .           53

23.  Amendments . . . . . . . . . . . . . . . . . . . . . .           54

24.  Multiple Counterparts  . . . . . . . . . . . . . . . .           54

25.  Conflict . . . . . . . . . . . . . . . . . . . . . . .           54

26.  Survival . . . . . . . . . . . . . . . . . . . . . . .           54

27.  Parties Bound  . . . . . . . . . . . . . . . . . . . .           54


<PAGE>
                                       v



28.  Assignments and Participation  . . . . . . . . . . . .           55

29.  Choice of Forum: Consent to Service of Process
     and Jurisdiction . . . . . . . . . . . . . . . . . . .           56

30.  Waiver of Jury Trial . . . . . . . . . . . . . . . . .           57

31.  Other Agreements . . . . . . . . . . . . . . . . . . .           57

32.  Financial Terms  . . . . . . . . . . . . . . . . . . .           57

<PAGE>
                                       vi




Exhibits

Exhibit "A"  -      Notice of Borrowing
Exhibit "B"  -      Revolving Note
Exhibit "C"  -      Certificate of Compliance
Exhibit "D"  -      Form of Assignment and Acceptance Agreement

Schedules

Schedule 1   -     Liens
Schedule 2   -     Financial Condition
Schedule 3   -     Liabilities
Schedule 4   -     Litigation
Schedule 5   -     Borrower's Membership Interests
Schedule6    -     Environmental Matters
Schedule 7   -     Title Matters
Schedule 8   -     Curative Matters

<PAGE>
                                       1



                        SECOND RESTATED CREDIT AGREEMENT

     THIS  SECOND  RESTATED  CREDIT  AGREEMENT  (hereinafter  referred to as the
"Agreement") executed as of the 25th day of October,  2000, by and between FIRST
PERMIAN,  L.L.C., a Delaware limited liability company (hereinafter  referred to
as "Borrower") and BANK ONE, TEXAS, N.A., a national banking  association ("Bank
One"),  and each of the  financial  institutions  which is a party.  hereto  (as
evidenced by the  signature  pages to this  Agreement) or which may from time to
time become a party hereto  pursuant to the  provisions  of Section 28 hereof or
any  successor  or assignee  thereof  (hereinafter  collectively  referred to as
"Banks",  and individually,  "Bank") and Bank One, as Administrative  Agent (the
"Agent").

                                   WITNESSETH:

     WHEREAS,  Borrower,  Agent, the Banks,  Parallel Petroleum  Corporation and
Baytech, Inc. entered into a Credit Agreement dated as of June 30, 1999 pursuant
to which the Banks agreed to make available loan facilities in aggregate amounts
of up to $110,000,000 (the "Original Credit Agreement"); and

     WHEREAS,  Borrower,  Agent, the Banks, Parallel Petroleum Corporation,  and
Baytech,  Inc.  entered into a Restated Credit  Agreement dated as of August 16,
1999  pursuant to which the Banks agreed to make  available  loan  facilities in
aggregate amounts of up to $110,000,000 (the "Restated Credit Agreement"); and

     WHEREAS, as of May 17, 2000, the Borrower,  the Agent, the Banks,  Parallel
Petroleum  Corporation  and  Baytech,  Inc.  entered  into a First  Amendment to
Restated  Credit  Agreement to make certain  amendments  to the Restated  Credit
Agreement; and

     WHEREAS,  the Borrower,  the Agent and the Banks have agreed to restate the
Restated Credit Agreement to make certain additional changes thereto, including,
but not limited to, releasing the guaranties of Parallel  Petroleum  Corporation
and Baytech, Inc.;

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
herein contained, the parties hereby agree as follows:

     1. Definitions. When used herein the terms "Agent",  "Agreement",  "Bank ",
"Banks",  "Bank One",  "Borrower",  "Original  Credit  Agreement"  and "Restated
Credit Agreement" shall have the meanings  indicated above. When used herein the
following terms shall have the following meanings:

          Advance or Advances means a loan or loans hereunder.

          Affiliate means any Person which, directly or indirectly, controls, is
     controlled by or is under common control with the relevant Person.  For the
     purposes  of  this  definition,   "control"  (including,  with  correlative
     meanings,  the terms  "controlled by" and "under common control with"),  as
     used  with  respect  to any  Person,  shall  mean a member  of the

<PAGE>
                                        2


     board of  directors,  a partner or an officer of such Person,  or any other
     Person with possession,  directly or indirectly,  of the power to direct or
     cause the direction of the management and policies of such Person,  through
     the  ownership  (of  record,  as  trustee,  or by proxy) of voting  shares,
     partnership  interests or voting rights,  through a management  contract or
     otherwise.  Any Person owning or  controlling  directly or  indirectly  ten
     percent  or more of the  voting  shares,  partnership  interests  or voting
     rights, or other equity interest of another Person shall be deemed to be an
     Affiliate of such Person.

          Alternate  Base Rate means,  as of any date,  a rate of  interest  per
     annum  equal to the  higher  of (i) the Base Rate for such day and (ii) the
     sum of the Federal Funds Effective Rate for such date plus one- half of one
     percent (.50%) per annum.

          Assignment and Acceptance  means a document  substantially in the form
     of Exhibit "E" hereto.

          Base Rate means, as of any date, the fluctuating  rate of interest per
     annum  established  from time to time by Agent as its Base Rate (which rate
     of interest may not be the lowest,  best or most favorable rate of interest
     which Agent may charge on loans to its customers).  Each change in the Base
     Rate shall become effective without prior notice to Borrower  automatically
     as of the opening of business on the date of such change in the Base Rate.

          Base Rate Interest  Period means,  with respect to any Base Rate Loan,
     the period ending on the last day of each month,  provided,  however,  that
     (i) if any Base  Rate  Interest  Period  would  end on a day which is not a
     Business Day, such Interest Period shall be extended to the next succeeding
     Business Day, and (ii) if any Base Rate Interest Period would otherwise end
     after the Revolving  Maturity  Date such  Interest  Period shall end on the
     Revolving Maturity Date.

          Base Rate Loans mean any loan during any period  which bears  interest
     based upon the Alternate  Base Rate or which would bear interest based upon
     the  Alternate  Base Rate if the Maximum  Rate ceiling was not in effect at
     that particular time.

          Base Rate Margin means:

               (i)  five-eighths  of one percent  (.625%) per annum whenever the
          Borrowing Base Usage is equal to or greater than ninety percent (90%);
          or

               (ii)  one-half  of one  percent  (.50%)  per annum  whenever  the
          Borrowing  Base Usage is equal to or greater than sixty percent (60%),
          but less than ninety percent (90%); or

<PAGE>
                                       3

               (iii) one quarter of one percent  (.25%) per annum  whenever  the
          Borrowing Base Usage is equal to or greater than  thirty-five  percent
          (35%), but less than sixty percent (60%); or

               (iii) zero percent (O%) per annum  whenever  the  Borrowing  Base
          Usage is less than thirty-five percent (35%).

          Borrowing Base shall mean the value assigned by the Banks from time to
     time to the Oil and Gas Properties pursuant to Section 7 hereof.  Until the
     next  determination  of the Borrowing Base pursuant to Section 7(b) hereof,
     the Borrowing Base shall be $68,000,000.

          Borrowing Base Usage means, as of any date, all amounts outstanding on
     the Revolving Loan plus all outstanding  Letters of Credit,  divided by the
     Borrowing Base.

          Borrowing Date means the date elected by Borrower  pursuant to Section
     2(b) hereof for an Advance on the Revolving Loan.

          Business Day means the normal banking hours during any day (other than
     Saturdays or Sundays)  that banks are legally open for business in Midland,
     Texas.

          Cash  Equivalents  shall mean (i)  securities  issued or directly  and
     fully  guaranteed  or insured by the United States of America or any agency
     or instrumentality  thereof (provided that the full faith and credit of the
     United States of America is pledged in support  thereof) having  maturities
     of not more than six months from the date of acquisition,  (ii) U.S. dollar
     denominated time deposits, certificates of deposit and bankers' acceptances
     of (x) any Bank, (y) any domestic  commercial  bank of recognized  standing
     having  capital and surplus in excess of  $100,000,000  or (z) any Bank (or
     the parent company of such bank) whose  short-term  commercial paper rating
     from  Standard  &  Poor's  Corporation  ("S&P")  is at  least  A-1  or  the
     equivalent thereof or from Moody's Investors Service,  Inc.  ("Moody's") is
     at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"),
     in each case with  maturities  of not more than six months from the date of
     acquisition,  (iii)  repurchase  obligations  with a term of not more  than
     seven days for underlying  securities of the types  described in clause (i)
     above  entered into with any bank meeting the  qualifications  specified in
     clause (ii) above,  (iv)  commercial  paper  issued by any Bank or Approved
     Bank or by the parent  company of any Bank or Approved Bank and  commercial
     paper issued by, or guaranteed by, any industrial or financial company with
     a  short-term  commercial  paper  rating of at least A-1 or the  equivalent
     thereof by S&P or at least P-1 or the  equivalent  thereof by Moody's  (any
     such company,  an "Approved  Company"),  or  guaranteed  by any  industrial
     company with a long term  unsecured  debt rating of at least A or A2 or the
     equivalent of each thereof, from S&P or Moody's, as the case may be, and in
     each case maturing  within six months after the date of acquisition and (v)
     investments in money market funds substantially


<PAGE>
                                       4

     all of whose assets are comprised of  securities  of the type  described in
     clauses (i) through (iv) above.

          Change of Control  shall occur if any Person (or syndicate or group of
     Persons  which is deemed a Person for the  purposes  of  Sections  13(d) or
     14(d)(ii)  of the  Securities  Act of  1934,  as  amended)  shall  acquire,
     directly or indirectly an amount of issued and outstanding  voting stock of
     Borrower  (including the acquisition of newly-issued  stock)  sufficient to
     change the  control of  Borrower  by causing  the  election  or change of a
     majority of the directors of Borrower.

          Change of Management  means a Change of Management  shall occur if (i)
     Tucker  Bridwell  ever  ceases to act as  Chairman  or (ii) Don Tiffin ever
     ceases to act as General  Manager of Borrower,  and a replacement  for such
     officer,  acceptable  to Agent,  is not  appointed  within thirty (30) days
     thereafter.

          Commitment means the Revolving Commitment.

          Current  Assets  means  the  total of  current  assets  determined  in
     accordance with GAAP minus receivables due from Affiliates, plus, as of any
     date, the current unused availability on the Revolving Commitment.

          Current   Liabilities  means  the  total  of  current  obligations  as
     determined  in  accordance  with  GAAP  minus  (i)  current  maturities  of
     long-term debt and (ii) payables due to Affiliates.

          Default  means  all  the  events   specified  in  Section  14  hereof,
     regardless  of whether  there  shall have  occurred  any passage of time or
     giving of notice,  or both,  that would be necessary in order to constitute
     such event as an Event of Default.

          Defaulting Bank is used herein as defined in Section 3(f) hereof.

          EBITDA means  earnings for any period  before  provision  for interest
     expense, income taxes,  depreciation,  depletion,  amortization,  gains and
     losses on asset  sales and  other  non-cash  charges  for such  period,  as
     determined in accordance with GAAP.

          Effective Date means the date of this Agreement.

          Eligible  Assignee  means  any of (i) a Bank or  other  lender  or any
     Affiliate of a Bank or other lender; (ii) a commercial bank organized under
     the laws of the United States, or any state thereof,  and having a combined
     capital  and  surplus of at least  $100,000,000;  (iii) a  commercial  bank
     organized  under  the laws of any  other  country  which is a member of the
     Organization  for  Economic  Cooperation  and  Development,  or a political
     subdivision of any

<PAGE>
                                       5


     such  country,  and  having a  combined  capital  and  surplus  of at least
     $100,000,000.00,  provided  that such  bank is  acting  through a branch or
     agency  located  in the  United  States;  (iv) a Person  that is  primarily
     engaged in the business of commercial  lending and that (A) is a subsidiary
     of a Bank, (B) a subsidiary of a Person of which a Bank is a subsidiary, or
     (C) a Person of which a Bank is a  subsidiary;  (v) any other entity (other
     than a natural  person)  which is an  "accredited  investor" (as defined in
     Regulation D under the  Securities  Act) which extends credit or buys loans
     as one  of  its  businesses,  including,  but  not  limited  to,  insurance
     companies,  mutual funds,  investments funds and lease financing companies;
     and (vi) with respect to any Bank that is a fund that invests in loans, any
     other fund that  invests  in loans and is  managed  by the same  investment
     advisor of such Bank or by an  Affiliate  of such  investment  advisor (and
     treating  all  such  funds  so  managed  as a  single  Eligible  Assignee);
     provided,  however,  that no  Affiliate  of  Borrower  shall be an Eligible
     Assignee.

          Environmental  Laws means the  Comprehensive  Environmental  Response,
     Compensation  and  Liability  Act of  1980,  as  amended  by the  Superfund
     Amendments and Reauthorization Act of 1986, 42 U.S.C.A.  9601, et seq., the
     Resource  Conservation  and Recovery Act, as amended by the Hazardous Solid
     Waste Amendment of 1984, 42 U.S.C.A. 6901, et seq., the Clean Water Act, 33
     U.S.C.A. 1251, et seq., the Clean Air Act, 42 U.S.C.A.  1251, et seq., the
     Toxic Substances Control Act, 15 U.S.C.A.  2601, et seq., The Oil Pollution
     Act of 1990, 33 U.S.C. 2701, et seq., and all other laws, statutes, codes,
     acts,  ordinances,   orders,  judgments,   decrees,   injunctions,   rules,
     regulations,  orders,  permits  and  restrictions  of any  federal,  state,
     county, municipal and other governments,  departments, commissions, boards,
     agencies, courts, authorities, officials and officers, domestic or foreign,
     relating to oil pollution,  air pollution,  water pollution,  noise control
     and/or the handling, discharge, disposal or recovery of on-site or off-site
     asbestos,  radioactive  materials,  spilled or leaked  petroleum  products,
     distillates  or  fractions  and   industrial   solid  waste  or  "hazardous
     substances" as defined by 42 U.S.C.  9601, et seq., as amended, as each of
     the foregoing may be amended from time to time.

          Environmental Liability means any claim, demand, obligation,  cause of
     action, order, violation,  damage, injury, judgment,  penalty or fine, cost
     of  enforcement,  cost of  remedial  action or any other  costs or  expense
     whatsoever,   including  reasonable   attorneys'  fees  and  disbursements,
     resulting from the violation or alleged  violation of any Environmental Law
     or the release of any substance into the  environment  which is required to
     be  remediated  by a  regulatory  agency or  governmental  authority or the
     imposition of any Environmental  Lien (as hereinafter  defined) which could
     reasonably be expected to  individually or in the aggregate have a Material
     Adverse Effect.

          Environmental  Lien means a Lien in favor of any  court,  governmental
     agency or  instrumentality  or any other  Person (i) for any  Environmental
     Liability or (ii) for damages  arising from or cost  incurred by such court
     or governmental  agency or instrumentality or

<PAGE>
                                       6


     other person in response to a release or threatened  release of asbestos or
     "hazardous  substance" into the  environment,  the imposition of which Lien
     could reasonably be expected to have a Material Adverse Effect.

          ERISA means the Employee  Retirement  Income  Security Act of 1974, as
     amended.

          Eurodollar  Base Rate shall mean the offered rate for the period equal
     to or greater than the Interest Period for U.S. dollar deposits of not less
     than  $1,000,000  as of 11:00  a.m.  City of London,  England  time two (2)
     Business Days prior to the first day of the Interest Period as shown on the
     display  designated as "British  Bankers  Association  Interest  Settlement
     Rates" on Reuter's for the purpose of  displaying  such rate.  In the event
     such rate is not  available  on  Reuter's,  then such offered rate shall be
     otherwise  independently   determined  by  the  Agent  from  an  alternate,
     substantially  independent source available to Agent or shall be calculated
     by Agent by substantially  similar  methodology as that theretofore used to
     determine such offered rate.

          Eurodollar Business Day means a Business Day on which dealings in U.S.
     Dollar deposits are carried on in the London interbank market.

          Eurodollar  Interest  Period means with respect to any Eurodollar Loan
     (i) initially,  the period  commencing on the date such  Eurodollar Loan is
     made and ending one (1), two (2) or three (3) months thereafter as selected
     by the Borrower  pursuant to Section  4(a)(ii),  and (ii) thereafter,  each
     period  commencing on the day following the last day of the next  preceding
     Interest Period  applicable to such Eurodollar Loan and ending one (1), two
     (2) or three (3) months thereafter, as selected by the Borrower pursuant to
     Section 4(a)(ii);  provided,  however,  that (i) if any Eurodollar Interest
     Period would otherwise  expire on a day which is not a Eurodollar  Business
     Day, such Interest  Period shall expire on the next  succeeding  Eurodollar
     Business  Day unless the result of such  extension  would be to extend such
     Interest  Period into the next calendar  month, in which case such Interest
     Period shall end on the immediately preceding Eurodollar Business Day, (ii)
     if any Eurodollar  Interest Period begins on the last  Eurodollar  Business
     Day of a  calendar  month  (or on a day for which  there is no  numerically
     corresponding day in the calendar month at the end of such Interest Period)
     such  Interest  Period shall end on the last  Eurodollar  Business Day of a
     calendar  month,  and (iii) any  Eurodollar  Interest  Period  which  would
     otherwise expire after the Maturity Date shall end on such Maturity Date.

          Eurodollar  Loan means any loan  during any  period  which,  except as
     otherwise provided in Section 4(e) hereof, bears interest at the Eurodollar
     Rate, or which would bear interest at such rate if the Maximum Rate ceiling
     was not in effect at a particular time.

          Eurodollar Margin means:

<PAGE>
                                       7


               (i) two and  one-eighth  percent  (2.125%) per annum whenever the
          Borrowing Base Usage is equal to or greater than ninety percent (90%);
          or

               (ii) two percent (2%) per annum whenever the Borrowing Base Usage
          is equal to or greater than sixty percent (60%),  but less than ninety
          percent (90%); or

               (iii) one and  three-quarters  percent (1.75%) per annum whenever
          the  Borrowing  Base  Usage is equal to or  greater  than  thirty-five
          percent (35%), but less than sixty percent (60%); or

               (iii) one and  one-half  percent  (1.50%) per annum  whenever the
          Borrowing Base Usage is less than thirty-five percent (35%).

          Eurodollar  Rate  means,  with  respect to a  Eurodollar  Loan for the
     relevant Interest Period, the sum of (i) the quotient of (A) the Eurodollar
     Base Rate applicable to such Interest Period,  divided by (B) one minus the
     Reserve  Requirement  (expressed as a decimal)  applicable to such Interest
     Period,  plus the (ii)  Eurodollar  Margin.  The  Eurodollar  Rate shall be
     rounded to the next  higher  multiple of 1/100th of one percent if the rate
     is not such a multiple.

          Federal Funds Effective Rate shall mean, for any day, an interest rate
     per annum equal to the weighted  average of the rates on overnight  Federal
     funds  transactions  with members of the Federal Reserve System arranged by
     Federal  funds  brokers on such day, as published for such day (or, if such
     day is not a Business Day, for the immediately  preceding  Business Day) by
     the Federal  Reserve Bank of New York, or, if such rate is not so published
     for any day which is a  Business  Day,  the  average of the  quotations  at
     approximately  10:00 a.m.  (Dallas  time) on such day on such  transactions
     received by the Agent from three (3) Federal  funds  brokers of  recognized
     standing selected by the Agent in its sole discretion.

          Financial   Statements   mean  balance  sheets,   income   statements,
     statements of cash flow and appropriate  footnotes and schedules,  prepared
     in accordance with GAAP.

          GAAP means  generally  accepted  accounting  principles,  consistently
     applied.

          General  and  Administrative  Expenses  means  expenses  of  providing
     corporate,  management,  supervisory  and  engineering  services  and other
     corporate  services with respect to management  and assets of the Borrower,
     determined in accordance with GAAP.

          Interest  Payment Date means the last day of each calendar month,  and
     in  addition,  in  the  case  of  Eurodollar  Loans,  the  last  day of the
     applicable Interest Period.

<PAGE>
                                       8


          Interest  Period means any Base Rate  Interest  Period,  or Eurodollar
     Interest Period.

          Letters of Credit is used herein as defined in Section 2(c) hereof.

          Lien means any mortgage,  deed of trust,  pledge,  security  interest,
     assignment,  encumbrance or lien (statutory or otherwise) of every kind and
     character.

          Loans mean the Revolving Loan.

          Loan Documents means this Agreement,  the Notes,  the Guaranties,  the
     Security  Interests and all other documents executed in connection with the
     transaction described in this Agreement.

          Majority Banks mean Banks holding 66-2/3% or more of the Commitment or
     if the  Commitment  has  been  terminated,  Banks  holding  66-2/3%  of the
     outstanding Loans.

          Material  Adverse Effect means any  circumstance  or event which could
     have  a  material   adverse   effect  on  (i)  the  assets  or  properties,
     liabilities,   financial  condition,   business,   operations,  affairs  or
     circumstances of the Borrower, or (ii) the ability of the Borrower to carry
     out its  businesses as of the date of this  Agreement or as proposed at the
     date of this Agreement to be conducted or to meet its obligations under the
     Notes, this Agreement or the other Loan Documents on a timely basis.

          Maximum Rate means at any  particular  time in  question,  the maximum
     non-usurious  rate of  interest  which  under  applicable  law may  then be
     charged on the Note.  If such Maximum  Rate changes  after the date hereof,
     the Maximum Rate shall be automatically increased or decreased, as the case
     may be,  without notice to Borrower from time to time as the effective date
     of each change in such Maximum Rate.

          Minimum  Interest  Coverage  Ratio  means the ratio of EBITDA  for the
     period  being  measured  to the sum of (i) Total  Interest  Expense for the
     period being measured plus (ii) Preferred Dividends paid in cash during the
     period being measured.

          Monthly  Commitment  Reduction is used  herein,  as defined in Section
     2(e) hereof.

          Net Income means  Borrower's net income after income taxes  calculated
     in accordance with GAAP.

          Notes mean the Revolving Notes,  substantially in the form of Exhibits
     "B" hereto issued or to be issued hereunder to each Bank, respectively,  to
     evidence the indebtedness to

<PAGE>
                                       9


     such Bank arising by reason of the Advances on the Revolving Loan, together
     with all modifications, renewals and extensions thereof or any part thereof

          Oil and Gas Properties  means all oil, gas and mineral  properties and
     interests,  related  personal  properties,  in which Borrower grants to the
     Banks  either a first and prior  lien and  security  interest  pursuant  to
     Section 6 hereof or a negative pledge pursuant to Section 13 hereof.

          Other Financing is used herein as defined in Section 15(l) hereof.

          Payor is used herein as defined in Section 3(h) hereof.

          Permitted  Liens  shall  mean  (i)  royalties,  overriding  royalties,
     reversionary interests, production payments and similar burdens; (ii) sales
     contracts or other  arrangements  for the sale of production of oil, gas or
     associated liquid or gaseous  hydrocarbons which would not (when considered
     cumulatively  with the  matters  discussed  in clause  (i)  above)  deprive
     Borrower of any material right in respect of any such Borrower's  assets or
     properties  (except for rights  customarily  granted  with  respect to such
     contracts  and  arrangements);  (iii)  statutory  Liens  for taxes or other
     assessments that are not yet delinquent (or that, if delinquent,  are being
     contested  in good faith by  appropriate  proceedings,  levy and  execution
     thereon  having  been  stayed and  continue to be stayed and for which such
     Borrower has set aside on its books  adequate  reserves in accordance  with
     GAAP); (iv) easements,  rights of way, servitudes,  permits, surface leases
     and other  rights in  respect to surface  operations,  pipelines,  grazing,
     logging, canals, ditches, reservoirs or the like, conditions, covenants and
     other restrictions,  and easements of streets, alleys, highways, pipelines,
     telephone  lines,  power lines,  railways and other easements and rights of
     way on, over or in respect of Borrower's  assets or properties  and that do
     not individually or in the aggregate,  cause a Material Adverse Effect; (v)
     materialmen's,   mechanic's,   repairman's,   employee's,   warehousemen's,
     landlord's,   carrier's,   pipeline's,   contractor's,    sub-contractor's,
     operator's,  non-  operator's  (arising under  operating or joint operating
     agreements),  and other Liens (including any financing  statements filed in
     respect  thereof)  incidental  to  obligations   incurred  by  Borrower  in
     connection with the construction, maintenance, development, transportation,
     storage or operation of  Borrower's  assets or properties to the extent not
     delinquent (or which,  if delinquent,  are being contested in good faith by
     appropriate  proceedings  and for which Borrower has set aside on its books
     adequate reserves in accordance with GAAP); (vi) all contracts,  agreements
     and  instruments,  and all defects  and  irregularities  and other  matters
     affecting  Borrower's  assets and properties which were in existence at the
     time Borrower's assets and properties were originally  acquired by Borrower
     and all routine operational  agreements entered into in the ordinary course
     of   business,   which   contracts,   agreements,   instruments,   defects,
     irregularities and other matters and routine operational agreements are not
     such as to, individually or in the aggregate, interfere materially with the
     operation, value or use of Borrower's assets and properties,

<PAGE>
                                       10


     considered  in the  aggregate;  (vii) liens in  connection  with  workmen's
     compensation,  unemployment  insurance  or other social  security,  old age
     pension  or  public  liability  obligations;   (viii)  legal  or  equitable
     encumbrances  deemed to exist by reason of the existence of any  litigation
     or other  legal  proceeding  or  arising  out of a  judgment  or award with
     respect to which an appeal is being  prosecuted  in good faith and levy and
     execution  thereon have been stayed and continue to be stayed;  (ix) rights
     reserved to or vested in any municipality, governmental, statutory or other
     public authority to control or regulate Borrower's assets and properties in
     any manner, and all applicable laws, rules and orders from any governmental
     authority;  (x)  landlord's  liens;  (xi) Liens  incurred  pursuant  to the
     Security  Instruments;  and  (xii)  Liens  existing  at the  date  of  this
     Agreement  which have been  disclosed  to Banks in writing by  Borrower  or
     identified in Schedule "1" hereto.

          Person  means  an  individual,  a  corporation,   a  partnership,   an
     association,  a trust or any other  entity  or  organization,  including  a
     government  or  political  subdivision  or  an  agency  or  instrumentality
     thereof.

          Plan  means any plan  subject to Title IV of ERISA and  maintained  by
     Borrower,  or any such plan to which  Borrower is required to contribute on
     behalf of its employees.

          Pre-Approved  Contracts  as used herein  shall mean any  contracts  or
     agreements entered into in connection with any Rate Management  Transaction
     designed  to hedge,  provide a price floor for or swap crude oil or natural
     gas or  otherwise  sell  up to  (i)  eighty  percent  (80%)  of  Borrower's
     anticipated  production from proved,  developed producing reserves of crude
     oil through  December 31, 2002, and thereafter tip to seventy-five  percent
     (75%) of such anticipated  production,  and/or (ii) eighty percent (80%) of
     Borrower's anticipated, proved, developed producing reserves of natural gas
     through  December 31, 2002, and thereafter,  seventy-five  percent (75%) of
     such anticipated  production,  during the period from immediately preceding
     settlement date (or the commencement of the term of such hedge transactions
     if there is no prior settlement date) to such settlement date, (iii) with a
     maturity of twenty-four  (24) months or less, (iv) with "strike prices" per
     barrel or Mmbtu  greater than Agent's  forecasted  price in the most recent
     engineering  evaluation of Borrower's Oil and Gas Properties,  adjusted for
     the  difference  between the  forecasted  price and the  Borrower's  actual
     product  price  as  reasonably  determined  by  the  Agent,  and  (v)  with
     counterparties to the hedging agreement reasonably approved by Agent.

          Pro Rata or Pro Rata Part  means for each Bank,  (i) for all  purposes
     where no Loans are outstanding, such Bank's Revolving Commitment Percentage
     and (ii)  otherwise,  the proportion  which the portion of the  outstanding
     Loans owed to such Bank bears to the  aggregate  outstanding  Loans owed to
     all Banks at the time in question.
<PAGE>
                                       11


          Rate  Management  Transactions  means any  transaction  (including  an
     agreement with respect  thereto) now existing or hereafter  entered into by
     Borrower  which is a rate  swap,  basis  swap,  forward  rate  transaction,
     commodity swap,  commodity  option,  equity or equity index swap, equity or
     equity index option,  bond option,  interest rate option,  forward exchange
     transaction,  cap  transaction,  floor  transaction,   collar  transaction,
     forward  transaction,  currency swap transaction,  cross-currency rate swap
     transaction,  currency option or any other similar  transaction  (including
     any option with respect to any of these  transactions)  or any  combination
     thereof,  whether linked to one or more interest rates, foreign currencies,
     commodity prices, equity prices or other financial measures.

          Regulation D shall mean  Regulation D of the Board of Governors of the
     Federal  Reserve  System as from time to time in effect  and any  successor
     thereto and other  regulation or official  interpretation  of said Board of
     Governors  relating to reserve  requirements  applicable to member banks of
     the Federal Reserve System.

          Reimbursement  Obligations  shall mean at any time, the obligations of
     the  Borrower  in respect  of all  Letters of Credit  then  outstanding  to
     reimburse  amounts  paid by any Bank in respect of any  drawing or drawings
     under a Letter of Credit.

          Release Price is used herein as defined in Section 12(r) hereof.

          Reserve  Requirement  means, with respect to any Interest Period,  the
     maximum aggregate reserve requirement  (including all basic,  supplemental,
     marginal  and  other  reserves)  which is  imposed  under  Regulation  D on
     Eurocurrency liabilities.

          Required Payment is used herein as defined in Section 3(h) hereof.

          Revolving  Commitment  means  (A) for all  Banks,  the  lesser  of (i)
     $110,000,000  or (ii) the Borrowing Base, in each case as reduced from time
     to time  pursuant to Sections 2 and 7 hereof,  and (B) as to any Bank,  its
     obligation  to make Advances  hereunder on the Revolving  Loan and purchase
     participations  in Letters of Credit  issued  hereunder by Agent in amounts
     not exceeding,  in the aggregate,  an amount equal to such Bank's Revolving
     Loan Commitment  Percentage times the total Revolving  Commitment as of any
     date.  The Revolving  Commitment of each Bank  hereunder  shall be adjusted
     from time to time to  reflect  assignments  made by such Bank  pursuant  to
     Section 28 hereof. Each reduction in the Revolving  Commitment shall result
     in a Pro Rata reduction in each Bank's Revolving Commitment.

<PAGE>
                                       12


          Revolving  Commitment  Percentage  means for each Bank the  percentage
     derived  by  dividing  its   Revolving   Commitment  at  the  time  of  the
     determination  by the  Revolving  Commitment  of all  Banks  at the time of
     determination.  The Revolving Commitment  Percentage of each Bank hereunder
     shall be  adjusted  from time to time to reflect  assignments  made by such
     Bank pursuant to Section 28 hereof.

          Revolving  Loan  means  a loan  or  loans  made  under  the  Revolving
     Commitment pursuant to Section 2 hereof.

          Revolving Maturity Date means September 1, 2003.

          Revolving  Notes  means the  Revolving  Notes  described  in Section 3
     hereof.

          Security   Instruments  is  used  collectively  herein  to  mean  this
     Agreement, all Deeds of Trust, Mortgages, Security Agreements,  Assignments
     of  Production  and Financing  Statements  and other  collateral  documents
     covering  the  Oil  and  Gas  Properties  and  related  personal  property,
     equipment,  oil and gas inventory and proceeds of the  foregoing,  all such
     documents to be in form and substance satisfactory to Agent.

          Subsidiary  means any corporation or other entity of which  securities
     or  other  ownership  interests  having  ordinary  voting  power to elect a
     majority of the board of  directors  or other  persons  performing  similar
     functions  are at the time  directly  or  indirectly  owned by  Borrower or
     another subsidiary.

          Total Interest Expense means Borrower's total interest expense for any
     period, as determined in accordance with GAAP,  excluding non-cash interest
     items such as amortization of loan costs.

          Total  Outstandings  means,  as of any date,  the sum of (i) the total
     principal  balance  outstanding on the Revolving Notes, plus (ii) the total
     face amount of all outstanding  Letters of Credit, plus (iii) the amount of
     all unpaid Reimbursement Obligations.

          Tranche means a set of Eurodollar  Loans made by the Banks at the same
     time and for the same Interest Period.

          Unscheduled  Redeterminations means a redetermination of the Borrowing
     Base  made at any  time  other  than  on the  dates  set  for  the  regular
     semi-annual redetermination of the Borrowing Base which are made (A) at the
     reasonable  request of Borrower,  (B) at the reasonable request of Majority
     Banks,  or (C) at any time it appears to Agent or  Majority  Banks,  in the
     exercise of their reasonable  discretion,  that either (i) there has been a
     decrease

<PAGE>
                                       13


     in the value of the Oil and Gas  Properfies,  or (ii) an event has occurred
     which is reasonably expected to have a Material Adverse Effect.

          Unused Commitment Fee Rate shall be:

               (i)  one-half  of one  percent  (.50%)  per  annum  whenever  the
          Borrowing Base Usage is equal to or greater than ninety percent (90%),
          or

               (ii)  three-eighths of one percent (.375%) per annum whenever the
          Borrowing Base Usage is equal to or greater than  thirty-five  percent
          (35%) but less than ninety percent (90%); or

               (iii)  one-fourth  of one percent  (.25%) per annum  whenever the
          Borrowing Base Usage is less than thirty-five percent (35%).

     2. Commitments of the Banks.

     (a) Terms of Revolving Commitment.  On the terms and conditions hereinafter
set forth, each Bank agrees severally to make Advances to the Borrower from time
to time  during the period  beginning  on the  Effective  Date and ending on the
Revolving  Maturity  Date in such  amounts as the  Borrower may request up to an
amount not to exceed, in the aggregate principal amount outstanding at any time,
the Revolving Commitment less Total Outstandings. The obligation of the Borrower
hereunder shall be evidenced by this Agreement and the Revolving Notes issued in
connection  herewith,  said  Revolving  Notes to be as  described  in  Section 3
hereof.  Notwithstanding any other provision of this Agreement, no Advance shall
be  required  to be made  hereunder  if any  Event of  Default  (as  hereinafter
defined)  has  occurred  and is  continuing  or if any  event or  condition  has
occurred or failed to occur which with the passage of time or service of notice,
or both, would constitute an Event of Default.  Each Advance under the Revolving
Commitment  shall be an aggregate  amount of at least $1,000,000 or in multiples
of $500,000 in excess thereof.  Irrespective of the face amount of the Revolving
Note or Notes,  the Banks shall never have the  obligation to Advance any amount
or amounts in excess of the  Revolving  Commitment  or to increase the Revolving
Commitment.

     (b)  Procedure  for  Borrowing.  Whenever the  Borrower  desires an Advance
hereunder  on the  Revolving  Loan,  it shall  give  Agent  telegraphic,  telex,
facsimile  or  telephonic  notice  ("Notice  of  Borrowing")  of such  requested
Advance,  which in the case of telephonic notice, shall be promptly confirmed in
writing.  Each Notice of Borrowing  shall be in the form of Exhibit "A" attached
hereto and shall be received by Agent not later than 11:00 a.m.  Midland,  Texas
time,  (i) one Business Day prior to the Borrowing  Date in the case of the Base
Rate  Loan,  or (ii)  three  Eurodollar  Business  Days  prior  to any  proposed


<PAGE>
                                       14


Borrowing Date in the case of Eurodollar  Loans.  Each Notice of Borrowing shall
specify (i) the Borrowing Date (which, if at Base Rate Loan, shall be a Business
Day and if a Eurodollar  Loan, a Eurodollar  Business  Day),  (ii) the principal
amount to be borrowed,  (iii) the portion of the Advance  constituting Base Rate
Loans and/or Eurodollar Loans, (iv) if any portion of the proposed Advance is to
constitute  Eurodollar  Loans,  the initial Interest Period selected by Borrower
pursuant to Section 4, hereof to be  applicable  thereto,  and (v) the date upon
which such Advance is required.  Upon receipt of such Notice, Agent shall advise
each Bank  thereof;  provided,  that if the Banks have received at least one (1)
day's notice of such Advance  prior to funding of a Base Rate Loan,  or at least
three  (3)  days  notice  of each  Advance  prior  to  funding  in the case of a
Eurodollar  Loan,  each Bank shall provide Agent at its office at 2301 West Wall
Street,  Midland, Texas 79702, not later than 1:00 p.m., Midland, Texas time, on
the Borrowing Date, in immediately  available  funds,  its pro rata share of the
requested  Advance,  but the  aggregate of all such  fundings by each Bank shall
never exceed such Banks Revolving Commitment. Not later than 2:00 p.m., Midland,
Texas time, on the Borrowing Date, Agent shall make available to the Borrower at
the same office, in like funds, the aggregate amount of such requested  Advance.
Neither  Agent nor any Bank shall incur any  liability to the Borrower in acting
upon any Notice  referred  to above  which  Agent or such Bank  believes in good
faith to have been given by a duly authorized officer or other person authorized
to borrow on behalf of Borrower or for otherwise acting in good faith under this
Section  2(b).  Upon  funding  of  Advances  by Banks in  accordance  with  this
Agreement,  pursuant  to any such  Notice,  the  Borrower  shall  have  effected
Advances hereunder.

     (c) Letters of Credit.  On the terms and conditions  hereinafter set forth,
the Agent shall from time to time during the period  beginning on the  Effective
Date and ending on the Revolving  Maturity  Date upon request of Borrower  issue
standby  Letters of Credit for the account of Borrower (the "Letters of Credit")
in such face amounts as Borrower may request, but not to exceed in the aggregate
face  amount  at  any  time   outstanding   the  sum  of  Five  Million  Dollars
($5,000,000).  The face amount of all Letters of Credit  issued and  outstanding
hereunder  shall be  considered  as Advances  on the  Revolving  Commitment  for
Borrowing  Base  purposes and all payments  made by the Agent on such Letters of
Credit shall be considered as Advances under the Revolving Notes. Each Letter of
Credit  issued for the  account of Borrower  hereunder  shall (i) be in favor of
such  beneficiaries  as  specifically  requested  by  Borrower,   (ii)  have  an
expiration  date not  exceeding the earlier of (a) one year or (b) the Revolving
Maturity  Date,  and (iii)  contain  such other terms and  provisions  as may be
required by Agent.  Each Bank (other than Agent)  agrees that,  upon issuance of
any Letter of Credit hereunder,  it shall automatically  acquire a participation
in the Agent's  liability under such Letter of Credit in an amount equal to such
Bank's Revolving Commitment  Percentage of such liability,  and each Bank (other
than Agent) thereby shall absolutely, unconditionally and irrevocably assume, as
primary  obligor and not as surety,  and shall be  unconditionally  obligated to
Agent to pay and  discharge  when due, its  Revolving

<PAGE>
                                       15


Commitment  Percentage  of Agent's  liability  under such Letter of Credit.  The
Borrower  hereby  unconditionally  agrees to pay and reimburse the Agent for the
amount  of each  demand  for  payment  under any  Letter  of  Credit  that is in
compliance  with the  provisions of any such Letter of Credit at or prior to the
date on which payment is to be made by the Agent to the beneficiary  thereunder,
without  presentment,  demand,  protest or other  formalities of any kind.  Upon
receipt from any  beneficiary  of any Letter of Credit of any demand for payment
under such Letter of Credit, the Agent shall promptly notify the Borrower of the
demand and the date upon  which such  payment is to be made by the Agent to such
beneficiary  in respect of such  demand.  Forthwith  upon receipt of such notice
from the Agent,  Borrower  shall  advise the Agent  whether or not it intends to
borrow  hereunder to finance its obligations to reimburse the Agent,  and if so,
submit a Notice of Borrowing  as provided in Section  2(b)  hereof.  If Borrower
fails to so advise  Agent and  thereafter  fails to reimburse  Agent,  the Agent
shall  notify  each  Bank of the  demand  and the  failure  of the  Borrower  to
reimburse the Agent,  and each Bank shall  reimburse the Agent for its Revolving
Commitment  Percentage of each such draw paid by the Agent and  unreimbursed  by
the  Borrower.  All such amounts paid by Agent  and/or  reimbursed  by the Banks
shall be treated as an Advance or Advances under the Revolving Commitment, which
Advances  shall be  immediately  due and payable and shall bear  interest it the
Maximum Rate.

     (d)  Procedure  for  Obtaining  Letters of  Credit.  The amount and date of
issuance, renewal, extension or reissuance of a Letter of Credit pursuant to the
Banks'  commitments  above in Section  2(c) shall be  designated  by  Borrower's
written request delivered to Agent at least three (3) Business Days prior to the
date of such issuance,  renewal,  extension or reissuance.  Concurrently with or
promptly following the delivery of the request for a Letter of Credit,  Borrower
shall execute and deliver to the Agent an application and agreement with respect
to the Letters of Credit,  said application and agreement to be in the form used
by the  Agent.  The Agent  shall not be  obligated  to issue,  renew,  extend or
reissue such Letters of Credit if (A) the amount  thereon when added to the face
amount of the outstanding  Letters of Credit plus any Reimbursement  Obligations
exceeds Five Million  Dollars  ($5,000,000) or (B) the amount thereof when added
to the Total Outstandings would exceed the Revolving Commitment. Borrower agrees
to pay the Agent  for the  benefit  of the Banks  commissions  for  issuing  the
Letters of Credit (calculated separately for each Letter of Credit) in an amount
equal to the greater of (i) the Eurodollar Margin then in effect per annum times
the maximum  face amount of the Letter of Credit or (ii)  $500.00.  In addition,
Borrower agrees to pay to the Agent for its own account an additional commission
of  one-quarter  of one percent  (.25%)  times the  maximum  face amount of such
Letter of Credit for issuing each such Letter of Credit.  Such commissions shall
be payable prior to the issuance of each Letter of Credit and thereafter on each
anniversary date of such issuance while such Letter of Credit is outstanding.

<PAGE>
                                       16


     (e) Type and Number of  Advances.  Any  Advance  made  under the  Revolving
Commitment may be a Base Rate Loan or a Eurodollar Loan, or combination thereof,
selected  by  Borrower  pursuant  to Section  4(a)  hereof  the total  number of
Tranches  under the Revolving  Commitment  which may be  outstanding at any time
shall never exceed three (3).

     (f) Voluntary  Reduction of Revolving  Commitment.  The Borrower may at any
time, or from time to time,  upon not less than three (3) Business  Days;  prior
written notice to Agent, reduce or terminate the Revolving Commitment; provided,
however,  that (i) each  reduction in the  Revolving  Commitment  must be in the
amount of $1,000,000 or more, in increments of $500,000 and (ii) each  reduction
must be  accompanied  by a prepayment  of the  Revolving  Notes in the amount by
which the  outstanding  principal  balance of the  Revolving  Notes  exceeds the
Revolving Commitment as reduced pursuant to this Section 2.

     (g)  Monthly  Commitment  Reductions.  The  Revolving  Commitment  shall be
reduced as of the first day of each month by an amount  determined  by the Banks
pursuant to Section  7(b)  hereof  (the  "Monthly  Commitment  Reduction").  The
Monthly Commitment Reduction shall be $0 beginning on October 1, 2000, with like
reductions   continuing  on  the  first  day  of  each  month  thereafter  until
redetermined pursuant to Section 7(b) hereof. If as a result of any such Monthly
Commitment   Reduction,   the  Total  Outstandings  ever  exceed  the  Revolving
Commitment then in effect,  the Borrower shall make the mandatory  prepayment of
principal required pursuant to Section 9(b) hereof.

     (h) Several Obligations.  The obligations of the Banks under the Commitment
are several and not joint.  The failure of any Bank to make an Advance  required
to be made by it shall not relieve any other Bank of its  obligation to make its
Advance,  and no Bank shall be responsible  for the failure of any other Bank to
make the  Advance to be made by such other  Bank.  No Bank shall be  required to
lend hereunder any amount in excess of its legal lending limit.

     3. Notes Evidencing  Loans. The loans described above in Section 2 shall be
evidenced by promissory notes of Borrower as follows:

     (a) Form of Revolving  Notes.  The  Revolving  Loan shall be evidenced by a
Note or Notes in the aggregate face amount of $110,000,000,  and shall be in the
form of Exhibit  "B"  hereto  with  appropriate  insertions  (each a  "Revolving
Note").  Notwithstanding  the face  amount of the  Revolving  Notes,  the actual
principal  amount due from the  Borrower  to Banks on  account of the  Revolving
Notes,  as of any date of  computation,  shall be the sum of  Advances  then and
theretofore  made on  account  thereof,  less all  principal  payments  actually
received  by Banks  in  collected  funds  with  respect  thereto.  Although  the
Revolving  Notes may be dated as of the  Effective  Date,  interest  in  respect

<PAGE>
                                       17


thereof  shall be payable only for the period  during which the loans  evidenced
thereby are outstanding  and,  although the stated amount of the Revolving Notes
may be  higher,  the  Revolving  Notes  shall be  enforceable,  with  respect to
Borrower's obligation to pay the principal amount thereof, only to the extent of
the unpaid principal amount of the Loans. Irrespective of the face amount of the
Revolving  Notes,  no Bank shall ever be obligated  to advance on the  Revolving
Conunitinent any amount in excess of its Revolving Commitment then in effect.

     (b) Issuance of  Additional  Notes.  At the  Effective  Date there shall be
outstanding  one  Revolving  Note in the aggregate  face amount of  $110,000,000
payable  to the order of Bank One.  From time to time new Notes may be issued to
other Banks as such Banks become  parties to this  Agreement.  Upon request from
Agent,  the  Borrower  shall  execute  and  deliver  to  Agent  any  such new or
additional  Notes.  From time to time as new Notes are  issued  the Agent  shall
require that each Bank  exchange its Note(s) for newly issued  Note(s) to better
reflect the extent of each Bank's Commitment hereunder.

     (c) Interest Rates.  The unpaid  principal  balance of the Notes shall bear
interest from time to time as set forth in Section 4 hereof.

     (d)  Payment of  Interest.  Interest  on the Notes shall be payable on each
Interest Payment Date.

     (e) Payment of Principal.  The unpaid principal  balance of the Notes shall
be due and  payable  to the Agent for the  ratable  benefit  of the Banks on the
Revolving Maturity Date unless earlier due in whole or in part as a result of an
acceleration  of  the  amount  due  or  pursuant  to  the  mandatory  prepayment
provisions of Section 9 hereof.

     (f) Payment to Banks. Each Bank's Pro Rata Part of payment or prepayment of
the Loans shall be  directed  by wire  transfer to such Bank by the Agent at the
address  provided  to the Agent for such Bank for  payments  no later  than 2:00
p.m., Midland,  Texas, time on the Business Day such payments or prepayments are
deemed hereunder to have been received by Agent; provided, however, in the event
that any Bank shall have failed to make an Advance as contemplated under Section
2 hereof (a "Defaulting Bank") and the Agent or another Bank or Banks shall have
made such Advance,  payment received by Agent for the account of such Defaulting
Bank or Banks shall not be  distributed to such  Defaulting  Bank or Banks until
such Advance or Advances shall have been repaid in full to the Bank or Banks who
funded such Advance or Advances.  Any payment or prepayment received by Agent at
any time after  12:00  noon,  Midland,  Texas,  time on a Business  Day shall be
deemed to have been received on the next Business Day.  Interest  shall cease to
accrue on any  principal as of the end of the day  preceding the Business Day on
which any such payment or prepayment  is deemed  hereunder to have been received
by  Agent.  If Agent  fails to  transfer  any  principal

<PAGE>
                                       18


amount to any Bank as  provided  above,  then Agent shall  promptly  direct such
principal amount by wire transfer to such Bank.

     (g) Sharing of Payments. Etc. If any Bank shall obtain any payment (whether
voluntary,  involuntary,  or  otherwise)  on account  of the Loans,  (including,
without  limitation,  any  set-off)  which is in  excess of its Pro Rata Part of
payments  on the Loans,  as the case may be,  obtained  by all Banks,  such Bank
shall purchase from the other Banks such  participation as shall be necessary to
cause such  purchasing  Bank to share the excess  payment  pro rata with each of
them;  provided that, if all or any portion of such excess payment is thereafter
recovered  from such  purchasing  Bank,  the purchase shall be rescinded and the
purchase price restored to the extent of the recovery.  The Borrower agrees that
any Bank so  purchasing  a  participation  from  another  Bank  pursuant to this
Section may, to the fullest extent permitted by law,  exercise all of its rights
of payment (including the right of offset) with respect to such participation as
fully as if such Bank were the direct  creditor of the Borrower in the amount of
such participation.

     (h)  Non-Receipt  of Funds by the Agent.  Unless the Agent  shall have been
notified by a Bank or the Borrower (the "Payor") prior to the date on which such
Bank is to make  payment to the Agent of the proceeds of a Loan to be made by it
hereunder  or the  Borrower is to make a payment to the Agent for the account of
one or more of the Banks,  as the case may be (such  payment being herein called
the "Required Payment"), which notice shall be effective upon, receipt, that the
Payor does not intend to make the Required  Payment to the Agent,  the Agent may
assume that the  Required  Payment has been made and may, in reliance  upon such
assumption (but shall not be required to), make the amount thereof  available to
the  intended  recipient on such date and, if the Payor has not in fact made the
Required  Payment to the Agent,  the recipient of such payment shall, on demand,
pay to the Agent the amount made available to it together with interest  thereon
in respect of the period  commencing on the date such amount was made  available
by the  Agent  until  the  date  the  Agent  recovers  such  amount  at the rate
applicable to such portion of the applicable Loan.

     4. Interest Rates.

     (a) Options.

          (i) Base Rate Loans. On all Base Rate Loans the Borrower agrees to pay
     interest on the Notes calculated on the basis of the actual days elapsed in
     a year consisting of 360 days with respect to the unpaid  principal  amount
     of each  Base  Rate  Loan  from  the  date the  proceeds  thereof  are made
     available  to  Borrower  until  maturity   (whether  by   acceleration   or
     otherwise),  at a  varying  rate per annum  equal to the  lesser of (i) the
     Maximum Rate (defined  herein),  or (ii) the sum of the Alternate Base Rate
     plus the Base Rate Margin.

<PAGE>
                                       19



     Subject to the provisions of this Agreement as to prepayment, the principal
     of the Notes  representing Base Rate Loans shall be payable as specified in
     Section  3(e)  hereof  and the  interest  in respect of each Base Rate Loan
     shall be payable on each Interest  Payment Date. Past due principal and, to
     the extent permitted by law, past due interest in respect to each Base Rate
     Loan,  shall bear  interest,  payable  on demand,  at the rate set forth in
     Section 4(e) hereof.

          (ii) Eurodollar  Loans. On all Eurodollar Loans the Borrower agrees to
     pay interest  calculated on the basis of a year consisting of 360 days with
     respect to the unpaid  principal  amount of each  Eurodollar  Loan from the
     date the proceeds  thereof are made  available to Borrower  until  maturity
     (whether by acceleration  or otherwise),  at a varying rate per annum equal
     to the lesser of (i) the Maximum Rate, or (ii) the Eurodollar Rate plus the
     Eurodollar Margin. Subject to the provisions of this Agreement with respect
     to prepayment,  the principal of the Notes shall be payable as specified in
     Section 3(e) hereof and the interest with respect to each  Eurodollar  Loan
     shall be payable on each Interest  Payment Date. Past due principal and, to
     the extent permitted by law, past due interest shall bear interest, payable
     on demand,  at the rate set forth in Section  4(e)  hereof.  Upon three (3)
     Eurodollar  Business  Days' written notice prior to the making by the Banks
     of any  Eurodollar  Loan  (in  the  case  of the  initial  Interest  Period
     therefor) or the expiration date of each succeeding Interest Period (in the
     case of subsequent  Interest  Periods  therefor),  Borrower  shall have the
     option,  subject to compliance  by Borrower  with all of the  provisions of
     this  Agreement,  as long as no  Default  or Event of  Default  exists,  to
     specify whether the Interest Period  commencing on any such date shall be a
     one (1),  two (2) or three  (3)  month  period.  If  Agent  shall  not have
     received  timely notice of a designation of such Interest  Period as herein
     provided,  Borrower shall be deemed to have elected to convert all maturing
     Eurodollar Loans to Base Rate Loans.

     (b) Interest Rate  Determination.  The Agent shall  determine each interest
rate  applicable to the Loans  hereunder.  The Agent shall give prompt notice to
the  Borrower  and the  Banks of each rate of  interest  so  determined  and its
determination thereof shall be conclusive absent error.

     (c) Conversion Option.  Borrower may elect from time to time (i) to convert
all or any part of its  Eurodollar  Loans to Base  Rate  Loans by  giving  Agent
irrevocable  notice of such  election in writing  prior to 10:00 a.m.  (Midland,
Texas  time) on the  conversion  date and such  conversion  shall be made on the
requested  conversion  date,  provided that any such  conversion of a Eurodollar
Loan shall only be made on the last day of the Eurodollar  Interest
<PAGE>
                                       20


Period with  respect  thereof,  (ii) to convert all or any part of its Base Rate
Loans to Eurodollar Loans by giving the Agent irrevocable written notice of such
election three (3) Eurodollar Business Days prior to the proposed conversion and
such  conversion  shall be made on the  requested  conversion  date or,  if such
requested conversion date is not a Eurodollar Business Day or a Business Day, as
the case may be, on the next succeeding Eurodollar Business Day or Business Day,
as the case may be. Any such  conversion  shall not be deemed to be a prepayment
of any of the loans for purposes of this Agreement or the Notes.

     (d)  Recoupment.  If at any time the applicable  rate of interest  selected
pursuant to Sections  4(a)(i) or 4(a)(ii)  above shall exceed the Maximum  Rate,
thereby  causing the  interest  on the Notes to be limited to the Maximum  Rate,
then any subsequent  reduction in the interest rate so selected or  subsequently
selected  shall not reduce the rate of  interest  on the Notes below the Maximum
Rate until the total  amount of interest  accrued on the Notes equals the amount
of interest  which would have accrued on the Notes if the rate or rates selected
pursuant to Sections  4(a)(i) or (ii), as the case may be, had at all times been
in effect.

     (e) Interest Rates  Applicable After Default.  Notwithstanding  anything to
the contrary contained in this Section 4, during the continuance of a Default or
an Event of Default  the  Majority  Banks may, at their  option,  by notice from
Agent to the Borrower (which notice may be revoked at the option of the Majority
Banks  notwithstanding  the provisions of Section 15 hereof,  which requires all
Banks to consent to changes in interest  rates)  declare  that no Advance may be
made  as,  converted  into,  or  continued  as a  Eurodollar  Loan.  During  the
continuance of an Event of Default, the Majority Banks, may, at their option, by
notice from Agent to the Borrower  (which notice may be revoked at the option of
Majority  Banks  notwithstanding  the  provisions  of Section  15 hereof,  which
requires  all Banks to consent to changes in interest  rates)  declare  that (i)
each  Eurodollar  Loan shall bear interest for the  remainder of the  applicable
Interest  Period at the rate otherwise  applicable to such Interest  Period plus
two percent  (2%) per annum and (ii) each Base Rate Loan shall bear  interest at
the rate  otherwise  applicable to such  Interest  Period plus two percent (2%),
provided that, during the continuance of an Event of Default under Section 14(f)
or 14(g),  the  interest  rate set forth in clauses  (i) and (ii) above shall be
applicable to all  outstanding  Loans without any election or action on the part
of the Agent or any Bank.

     5. Special Provisions Relating to Loans.

     (a) Unavailability of Funds or Inadequacy of Pricing. In the event that, in
connection  with any  proposed  Eurodollar  Loan,  the Agent  determines,  which
determination  shall,  absent manifest  error, be final,  conclusive and binding
upon all  parties,  due to  changes  in  circumstances  since  the date  hereof,
adequate and fair means do not exist for determining the Eurodollar Rate or such
rate will not accurately  reflect the costs to the Banks of funding a Eurodollar
Loan for such Eurodollar  Interest  Period,  the Agent shall give notice of such



<PAGE>
                                       21


determination to the Borrower and the Banks, whereupon, until the Agent notifies
the Borrower and the Banks that the circumstances giving rise to such suspension
no longer exist, the obligations of the Banks to make, continue or convert Loans
into  Eurodollar  Loans shall be suspended,  and all loans to Borrower  shall be
Base Rate Loans during the period of suspension.

     (b) If at any time any new law or any  change  in  existing  laws or in the
interpretation  of any new or existing  laws shall make it unlawful for any Bank
to make or continue to maintain or fund Eurodollar  Loans  hereunder,  then such
Bank shall  promptly  notify  Borrower in writing and such Bank's  obligation to
make, continue or convert Loans into Eurodollar Loans under this Agreement shall
be  suspended  until it is no longer  unlawful for such Bank to make or maintain
Eurodollar Loans.  Upon receipt of such notice,  Borrower shall either repay the
outstanding  Eurodollar Loan owed to the Banks, without penalty, on the last day
of the current,  Interest Periods (or, if any Bank may not lawfully  continue to
maintain and fund such Eurodollar  Loan,  immediately),  or Borrower may convert
such Eurodollar Loan at such appropriate time to a Base Rate Loan.

     (c) Increased Cost or Reduced Return.

          (i) If, after the date hereof,  the  adoption of any  applicable  law,
     rule,  or  regulation,  or any  change  in any  applicable  law,  rule,  or
     regulation,  or any change in the interpretation or administration  thereof
     by any governmental  authority,  central bank, or comparable agency charged
     with the  interpretation  or administration  thereof,  or compliance by any
     Bank with any request or directive (whether or not having the force of law)
     of any such governmental authority, central bank, or comparable agency:

               (A) shall  subject  such Bank to any tax,  duty,  or other charge
          with respect to any Eurodollar  Loan, its Notes,  or its obligation to
          make Eurodollar  Loans, or change the basis of taxation of any amounts
          payable to such Bank under this  Agreement  or its Notes in respect of
          any Eurodollar  Loan (other than franchise  taxes and taxes imposed on
          the overall net income of such Bank);

               (B) shall impose, modify, or deem applicable any reserve, special
          deposit,  assessment,  or  similar  requirement  (other  than  reserve
          requirements,  if any, taken into account in the  determination of the
          Eurodollar  Rate) relating to any extensions of credit or other assets
          of, or any deposits with or other  liabilities  or Commitment of, such
          Bank, including the Commitment of such Bank hereunder; or

<PAGE>
                                       22


               (C) shall impose on such Bank or on the London  interbank  market
          any other  condition  affecting  this Agreement or its Notes or any of
          such extensions of credit or liabilities or Commitment;

          and the result of any of the foregoing is to increase the cost to such
          Bank of  making,  converting  into,  continuing,  or  maintaining  any
          Eurodollar  Loan or to reduce any sum received or  receivable  by such
          Bank under this  Agreement or its Notes with respect to any Eurodollar
          Loan,  then  Borrower  shall pay to such Bank on demand such amount or
          amounts  as will  compensate  such  Bank for such  increased  cost or,
          reduction.  If any Bank requests  compensation  by Borrower under this
          Section  5(c),  Borrower  may,  by notice to such Bank (with a copy to
          Agent),  suspend  the  obligation  of such  Bank  to make or  continue
          Eurodollar  Loans,  or to  convert  all or part of the Base  Rate Loan
          owing to such Bank to a Eurodollar  Loan, until the event or condition
          giving rise to such request  ceases to be in effect (in which case the
          provisions  of this Section 5(c) shall be  applicable);  provided that
          such suspension shall not affect the right of such Bank to receive the
          compensation so requested.

          (ii) If, after the date hereof,  any Bank shall have  determined  that
     the adoption of any applicable law, rule, or regulation  regarding  capital
     adequacy or any change therein or in the  interpretation  or administration
     thereof by any governmental  authority,  central bank, or comparable agency
     charged with the interpretation or administration  thereof,  or any request
     or directive regarding capital adequacy (whether or not having the force of
     law) of any  such  govenunental  authority,  central  bank,  or  comparable
     agency,  has or would have the effect of reducing the rate of return on the
     capital  of  such  Bank  or any  corporation  controlling  such  Bank  as a
     consequence  of such  Bank's  obligations  hereunder  to a level below that
     which  such  Bank or such  corporation  could  have  achieved  but for such
     adoption,  change,  request,  or directive  (taking into  consideration its
     policies  with  respect to capital  adequacy),  then from time to time upon
     demand Borrower shall pay to such Bank such additional amount or amounts as
     will compensate such Bank for such reduction.

          (iii) Each Bank shall promptly  notify Borrower and Agent of any event
     of which it has  knowledge,  occurring  after the date  hereof,  which will
     entitle  such Bank to  compensation  pursuant to this Section 5(c) and will
     designate a separate  lending office,  if applicable,  if such  designation
     will avoid the need for,  or reduce the amount of,  such  compensation  and
     will not, in the judgment of such Bank, be otherwise disadvantageous to it.
     Any Bank  claiming  compensation  under this Section 5(c) shall  furnish to
     Borrower  and Agent a  statement  setting  forth the  additional  amount or
     amounts to be paid to it hereunder which shall be conclusive in the absence
     of  manifest  error.  In  determining  such  amount,  such Bank may use any
     reasonable averaging and attribution methods.

<PAGE>
                                       23


          (iv) Any  Bank  giving  notice  to the  Borrower  through  the  Agent,
     pursuant to this Section 5(c) shall give to the Borrower a statement signed
     by an officer of such Bank  setting  forth in  reasonable  detail the basis
     for, and the  calculation  of such  additional  cost,  reduced  payments or
     capital  requirements,  as the  case  may be,  and the  additional  amounts
     required to compensate such Bank therefor.

          (v) Within five (5) Business Days after receipt by the Borrower of any
     notice  referred to in this Section  5(c),  the  Borrower  shall pay to the
     Agent for the  account of the Bank  issuing  such  notice  such  additional
     amounts as are required to  compensate  such Bank for the  increased  cost,
     reduced payments or increased capital  requirements  identified therein, as
     the case may be.

     (d)  Discretion  of Bank  as to  Manner  of  Funding.  Notwithstanding  any
provisions  of this  Agreement to the  contrary,  each Bank shall be entitled to
fund and  maintain  its  funding of all or any part of its Loan in any manner it
sees fit, it being understood,  however, that for the purposes of this Agreement
all  determinations  hereunder shall be made as if each Bank had actually funded
and maintained  each  Eurodollar  Loan through the purchase of deposits having a
maturity  corresponding  to  the  last  day of the  Eurodollar  Interest  Period
applicable  to  such  Eurodollar  Loan  and  bearing  an  interest  rate  to the
applicable interest rate for such Eurodollar Period.

     (e) Breakage Fees. Without duplication under any other provision hereof, if
any Bank incurs any loss, cost or expense  including,  without  limitation,  any
loss of profit and loss, cost, expense or premium reasonably  incurred by reason
of the  liquidation or  reemployment of deposits or other funds acquired by such
Bank to fund or maintain any Eurodollar  Loan or the relending or reinvesting of
such  deposits or amounts paid or prepaid to the Banks as a result of any of the
following  events  (other than any such  occurrence as a result in the change of
circumstances described in Sections 5(a) and (b)):

          (i) any payment,  prepayment or  conversion of a Eurodollar  Loan on a
     date other than the last day of its Eurodollar  Interest Period (whether by
     acceleration, prepayment or otherwise);

          (ii) any failure to make a principal  payment of a Eurodollar  Loan on
     the due date thereof, or

          (iii) any  failure  by the  Borrower  to borrow,  continue,  prepay or
     convert  to a  Eurodollar  Loan on the dates  specified  in a notice  given
     pursuant to Section 2(c) or 4(c) hereof,

<PAGE>
                                       24


     then the Borrower shall pay to such Bank such amount as will reimburse such
     Bank for such  loss,  cost or  expense.  If any Bank makes such a claim for
     compensation,  it shall  furnish to Borrower and Agent a statement  setting
     forth  the  amount of such  loss,  cost or  expense  in  reasonable  detail
     (including  an  explanation  of the basis for and the  computation  of such
     loss,  cost or expense) and the amounts  shown on such  statement  shall be
     conclusive and binding absent manifest error.

     6.  Collateral  Security.  To secure the  performance  by  Borrower  of its
obligations hereunder, and under the Notes and Security Instruments, whether now
or hereafter  incurred,  matured or unmatured,  direct or  contingent,  joint or
several, or joint and several, including extensions, modifications, renewals and
increases thereof, and substitutions therefore,  Borrower has heretofore granted
and  assigned  to Agent for the  ratable  benefit of the Banks a first and prior
Lien on certain of its Oil and Gas Properties,  proceeds of production,  certain
related equipment, oil and gas inventory, and proceeds of the foregoing. The Oil
and Gas Properties herewith mortgaged to the Agent shall represent not less than
85% of the Engineered  Value (as hereinafter  defined) of Borrower's Oil and Gas
Properties as of the Effective  Date.  Obligations  arising from Rate Management
Transactions  shall be secured by the  Collateral (as  hereinafter  defined) and
repaid on a pari  passu  basis  with the  indebtedness  and  obligations  of the
Borrower  under  the  Loan  Documents.  All  Oil and Gas  Properties  and  other
collateral in which Borrower  herewith  granted or hereafter grants to Agent for
the ratable benefit of the Banks a first and prior Lien (to the  satisfaction of
the Agent) in accordance  with this Section 6, as such  properties and interests
are from time to time  constituted,  are  hereinafter  collectively  called  the
"Collateral".

     The granting and assigning of such security interests and Liens by Borrower
shall be pursuant  to  Security  Instruments  in form and  substance  reasonably
satisfactory  to the  Agent.  Concurrently  with  the  delivery  of  each of the
Security  Instruments  or within a reasonable  time  thereafter  as specified in
Section 12(s)  hereof,  Borrower  shall furnish to the Agent  mortgage and title
opinions and other title  information  satisfactory to Agent with respect to the
title  and Lien  status  of  Borrower's  interests  in not less  than 90% of the
Engineered  Value  of the  Oil  and  Gas  Properties  covered  by  the  Security
Instruments as Agent shall have designated.  "Engineered Value" for this purpose
shall mean future net revenues discounted at the discount rate being used by the
Agent as of the date of any such determination  utilizing the pricing parameters
used in the engineering report furnished to the Agent for the ratable benefit of
the Banks,  pursuant  to  Sections 7 and 12  hereof.  Borrower  will cause to be
executed  and  delivered  to the  Agent,  in  the  future,  additional  Security
Instruments  if  the  Agent  reasonably  deems  such  are  necessary  to  insure
perfection or maintenance of Banks' security  interests and Liens in the Oil and
Gas Properties or any part of thereof.

     7. Borrowing Base.

          (a) Initial  Borrowing Base. At the Effective Date, the Borrowing Base
     shall be $68,000,000.

<PAGE>
                                       25


          (b)   Subsequent   Determinations   of  Borrowing   Base.   Subsequent
     determinations  of the  Borrowing  Base shall be made by the Banks at least
     semi-annually on April 1 and October 1 of each year beginning April 1, 2001
     or as Unscheduled  Redeterininations.  in connection  with, and as of, each
     determination  of the Borrowing Base, the Banks shall also  redetermine the
     Monthly  Commitment  Reduction.  The Borrower  shall fumish to the Banks as
     soon as  possible  but in any  event no  later  than  March 1 of each  year
     thereafter  beginning March 1, 2001, with an engineering report in form and
     substance  satisfactory  to the Agent prepared by an independent  petroleum
     engineering  acceptable  to  Agent  covering  the Oil  and  Gas  Properties
     utilizing economic and pricing parameters used by Agent as established from
     time to time, together with such other information  concerning the value of
     the Oil and Gas  Properties as the Agent shall deem  necessary to determine
     the value of the Oil and Gas  Properties.  By September 1 of each year,  or
     within  thirty (30) days after either (i) receipt of notice from Agent that
     the Banks require an Unscheduled Redetermination, or (ii) the Borrower give
     notice  to  Agent  of its  desire  to have an  Unscheduled  Redetermination
     performed, the Borrower shall furnish to the Banks an engineering report in
     form and substance  satisfactory  to Agent prepared by Borrower's  in-house
     engineering staff valuing the Oil and Gas Properties utilizing economic and
     pricing  parameters  used by the  Agent as  established  from time to time,
     together with such other information, reports and data concerning the value
     of the Oil and Gas Properties as Agent shall deem  reasonably  necessary to
     determine the value of such Oil and Gas  Properties.  Agent shall by notice
     to the Borrower no later than April 1 and October 1 of each year, or within
     a reasonable  time  thereafter  (herein called the  "Determination  Date"),
     notify the Borrower of the  designation  by the Banks of the new  borrowing
     Base and Monthly  Commitment  Reduction  for the period  beginning  on such
     Determination  Date  and  continuing  until,  but not  including,  the next
     Determination Date. If an Unscheduled Redetermination is made by the Banks,
     the Agent shall notify the Borrower  within a reasonable time after receipt
     of all  requested  information  of  the  new  Borrowing  Base  and  Monthly
     Commitment  Reduction,  and such new Borrowing Base and Monthly  Commitment
     Reduction shall continue until the next Determination Date. If the Borrower
     does  not  furnish  all  such  information,  reports  and  data by any date
     specified in this Section  7(b),  unless such failure is of no fault of the
     Borrower,  the Banks  may  nonetheless  designate  the  Borrowing  Base and
     Monthly  Commitment  Reduction  at any  amounts  which  the  Banks in their
     discretion  determine and may  redesignate  the Borrowing  Base and Monthly
     Commitment  Reduction from time to time thereafter  until the Banks receive
     all such information, reports and data, whereupon the Banks shall designate
     a new Borrowing Base and Monthly  Commitment  Reduction as described above.
     Each Bank shall  determine  the amount of the  Borrowing  Base and  Monthly
     Commitment  Reduction based upon the loan collateral  value which such Bank
     in its discretion (using such methodology,  assumptions and discounts rates
     as such Bank customarily uses in assigning  collateral value to oil and gas
     properties,  oil  and gas  gathering  systems,  gas  processing  and  plant
     operations)  assigns to such Oil and Gas  Properties of the Borrower at the
     time in  question  and based upon such other  credit  factors  consistently
     applied (including, without limitation, the assets,

<PAGE>
                                       26


     liabilities,  cash flow, business,  properties,  prospects,  management and
     ownership  of the  Borrower and its  affiliates)  as such Bank  customarily
     considers in evaluating  similar oil and gas credits,  but such Bank in its
     discretion  shall not be required to give any additional  positive value to
     any Oil and Gas Property over the current  economic and pricing  parameters
     used by such Bank for such  Determination  Date which  additional  value is
     derived  directly from a hedging,  forward sale or swap agreement  covering
     such  Oil and Gas  Property  as of the  date  of  such  determination.  All
     determinations  or Unscheduled  Redeterminations  of the Borrowing Base and
     the Monthly  Commitment  Reduction  require the approval of Majority Banks;
     provided,  however,  that notwithstanding  anything to the contrary herein,
     the amount of the Borrowing Base may not be increased,  nor may the Monthly
     Commitment Reduction be reduced,  without the approval of all Banks. If the
     required  percentage of Banks cannot  otherwise agree on the Borrowing Base
     or the Monthly Commitment  Reduction,  each Bank shall submit in writing to
     the Agent its proposed Borrowing Base and Monthly Commitment  Reduction and
     the Borrowing  Base and Monthly  Commitment  Reduction  shall be set on the
     basis of the  lowest  Borrowing  Base and the  highest  Monthly  Commitment
     Reduction  proposed  by any  Bank.  If at any  time  any of the Oil and Gas
     Properties are sold, the Borrowing Base then in effect shall  automatically
     be reduced by a sum equal to the amount of  prepayment  required to be made
     pursuant to Section 12(r) hereof.  The Borrowing Base shall be additionally
     reduced from time to time pursuant to the  provisions of Sections 2(d), (e)
     and  12(t)  hereof.  It is  expressly  understood  that the  Banks  have no
     obligation  to  designate  the  Borrowing  Base or the  Monthly  Commitment
     Reduction  at any  particular  amounts,  except  in the  exercise  of their
     discretion, whether in relation to the Revolving Commitment or otherwise.

          8. Fees.

          (a) Unused  Commitment  Fee. The  Borrower  shall pay to Agent for the
     ratable  benefit  of the  Banks  an  unused  commitment  fee  (the  "Unused
     Commitment  Fee")  equivalent to the Unused  Commitment  Fee Rate times the
     daily average of the  unadvanced  amount of the Revolving  Commitment.  The
     Unused  Commitment Fee shall be payable in arrears on the last Business Day
     of each calendar  quarter  beginning  September 30, 2000 with the final fee
     payment due on the  Maturity  Date for any period then ending for which the
     Unused  Commitment Fee shall not have been  theretofore  paid. In the event
     the  Revolving  Commitment  terminates  on any date prior to the end of any
     such monthly  period,  the Borrower  shall pay to the Agent for the ratable
     benefit of the Banks,  on the date of such  termination,  the total  Unused
     Commitment Fee due for the period in which such termination occurs.

          (b) Agency Fees.  The Borrower shall pay to the Agent certain fees for
     acting as Agent hereunder in amounts set forth in the Fee Letter dated June
     25, 1999 among Borrower, Agent and Bank One Capital Markets, Inc.

<PAGE>
                                       27


          (c) The  Letter of  Credit  Fee.  Borrower  shall pay to the Agent the
     Letter of Credit fees required above in Section 2(d).

          9. Prepayments.

          (a) Voluntary  Prepayments.  Subject to the provisions of Section 5(e)
     hereof, the Borrower may at any time and from time to time, without penalty
     or premium,  prepay the Notes,  in whole or in part.  Each such  prepayment
     shall be made on at least three (3)  Eurodollar  Business  Days'  notice to
     Agent in the case of  Eurodollar  Loan  Tranches and without  notice in the
     case of Base Rate Loans and shall be in a minimum  amount of  $1,000,000 or
     an integral multiple of $500,000 in excess thereof or the unpaid balance on
     the Notes,  whichever is less, plus accrued interest thereon to the date of
     prepayment.

          (b) Mandatory  Prepayment For Borrowing Base Deficiency.  In the event
     the Total  Outstandings  ever exceed the  Borrowing  Base as  determined by
     Banks pursuant to Section 7(b) hereof,  the Borrower  shall,  within thirty
     (30) days  after  notification  from the Agent,  either (A) by  instruments
     reasonably  satisfactory  in form and  substance  to the Bank,  provide the
     Agent with collateral with value and qualify in amounts satisfactory to all
     of the Banks in their discretion in order to increase the Borrowing Base by
     an amount at least equal to such excess, or (B) prepay,  without premium or
     penalty,  the principal amount of the Revolving Notes in an amount at least
     equal  to  such  excess  plus  accrued  interest  thereon  to the  date  of
     prepayment.  If the Total Outstandings ever exceed the Revolving Commitment
     solely as a result of a Monthly Commitment  Reduction or any other required
     reduction in the Revolving  Commitment,  then in such event, Borrower shall
     immediately prepay the principal amount of the Revolving Notes in an amount
     at  least  equal  to such  excess  plus  accrued  interest  to the  date of
     prepayment.

          10.  Representations  and Warranties.  In order to induce the Banks to
     enter into this Agreement,  the Borrower hereby  represents and warrants to
     the Banks (which  representations  and warranties will survive the delivery
     of the Notes) that:

          (a) Creation and Existence.  Borrower is a limited  liability  company
     duly organized, validly existing and in good standing under the laws of the
     jurisdiction  in  which  it  was  formed  and  is  duly  qualified  in  all
     jurisdictions  wherein failure to qualify may result in a Material  Adverse
     Effect.  Borrower  has all power and  authority to own its  properties  and
     assets and to transact the business in which it is engaged.

          (b) Power and Authority.  Borrower is duly authorized and empowered to
     execute, deliver and perform its Loan Documents,  including this Agreement;
     and all  corporation  action  on  Borrower's  part  for the due  execution,
     delivery and performance of the Loan  Documents,  including this Agreement,
     have been duly and effectively taken.

<PAGE>
                                       28


          (c) Binding  Obligations.  This Agreement and the other Loan Documents
     will, constitute valid and binding obligations of Borrower,  enforceable in
     accordance  with its  respective  terms  (except  that  enforcement  may be
     subject to any applicable bankruptcy,  insolvency, or similar debtor relief
     laws  now  or  hereafter  in  effect  and  relating  to  or  affecting  the
     enforcement of creditors' rights generally).

          (d) No Legal Bar or Resultant Lien. The Loan Documents, including this
     Agreement,  do not and will not,  to the best of the  Borrower's  knowledge
     violate any provisions of any contract,  agreement, law, regulation, order,
     injunction,  judgment,  decree or writ to which  Borrower  is  subject,  or
     result in the creation or imposition of any lien or other  encumbrance upon
     any assets or properties of Borrower, other than those contemplated by this
     Agreement.

          (e) No Consent. The execution, delivery and performance by Borrower of
     its Loan Documents,  including this Agreement, does not require the consent
     or approval of any other person or entity, including without limitation any
     regulatory authority or governmental body of the United States or any state
     thereof or any  political  subdivision  of the  United  States or any state
     thereof.

          (f) Financial Condition.  The audited Financial Statements of Borrower
     for the year ended  December 31, 1999,  which have been  delivered to Banks
     are complete and correct in all material respects, and fully and accurately
     reflect in all material respects the financial condition and results of the
     operations  of  Borrower  as of the date or  dates  and for the  period  or
     periods stated. No change has since occurred in the condition, financial or
     otherwise,  of  Borrower  which is  reasonably  expected to have a Material
     Adverse  Effect,  except as disclosed to the Banks in Schedule "2" attached
     hereto.

          (g)  Liabilities.  Borrower  has  no  material  liability,  direct  or
     contingent, except as disclosed to the Banks in the Financial Statements or
     on  Schedule  "3"  attached  hereto.   No  unusual  or  unduly   burdensome
     restrictions,  restraint, or hazard exists by contract, law or governmental
     regulation or otherwise  relative to the business,  assets or properties of
     Borrower which is reasonably expected to have a Material Adverse Effect.

          (h) Litigation. Except as described in the Financial Statements, or as
     otherwise disclosed to the Banks in Schedule "4" attached hereto,  there is
     no litigation,  legal or administrative proceeding,  investigation or other
     action of any  nature  pending  or, to the  knowledge  of the  officers  of
     Borrower  threatened  against or  affecting  Borrower  which  involves  the
     possibility  of any judgment or liability  not fully  covered by insurance,
     and which is reasonably expected to have a Material Adverse Effect.

<PAGE>
                                       29


          (i) Taxes:  Governmental  Charges.  Borrower has filed all tax returns
     and reports required to be filed and has paid all taxes, assessments,  fees
     and other governmental charges levied upon it or its assets,  properties or
     income which are due and payable,  including  interest and  penalties,  the
     failure of which to pay could  reasonably  be  expected  to have a Material
     Adverse  Effect,  except  such as are  being  contested  in good  faith  by
     appropriate  proceedings  and for which  adequate  reserves for the payment
     thereof  as  required  by GAAP has  been  provided  and levy and  execution
     thereon have been stayed and continue to be stayed.

          (j) Titles,  Etc. Borrower has good and defensible title to all of its
     assets, including without limitation, the Oil and Gas Properties,  free and
     clear of all liens or other encumbrances except Permitted Liens.

          (k) Defaults.  Borrower is not in default and no event or circumstance
     has occurred which, but for the passage of time or the giving of notice, or
     both,  would  constitute  a default  under  any loan or  credit  agreement,
     indenture,  mortgage,  deed of trust, security agreement or other agreement
     or  instrument  to which  Borrower is a party in any respect  that would be
     reasonably  expected to have a Material Adverse Effect. No Event of Default
     hereunder has occurred and is continuing.

          (1)  Casualties;  Taking of Properties.  Since the dates of the latest
     Financial  Statements  of the  Borrower  delivered  to Banks,  neither  the
     business nor the assets or properties of Borrower has been affected (to the
     extent it is reasonably  likely to cause a Material Adverse  Effect),  as a
     result of any  fire,  explosion,  earthquake,  flood,  drought,  windstorm,
     accident, strike or other labor disturbance, embargo, requisition or taking
     of property or  cancellation  of contracts,  permits or  concessions by any
     domestic or foreign government or any agency thereof,  riot,  activities of
     armed forces or acts of God or of any public enemy.

          (m) Use of  Proceeds;  Margin  Stock.  The  proceeds of the  Revolving
     Commitment  may be used by the  Borrower  for the  purposes  of  Letters of
     Credit and general corporate purposes.  Borrower is not engaged principally
     or as one of its important  activities in the business of extending  credit
     for the purpose of purchasing or carrying any "margin  stock" as defined in
     Regulation U of the Board of Governors  of the Federal  Reserve  System (12
     C.F.R.  Part  221),  or  for  the  purpose  of  reducing  or  retiring  any
     indebtedness  which was  originally  incurred to purchase or carry a margin
     stock or for any other purpose which might  constitute  this  transaction a
     "purpose  credit"  within the meaning of  Regulation G or U of the Board of
     Governors of the Federal Reserve System.

          Neither Borrower nor any person or entity acting on behalf of Borrower
     has taken or will take any action which might cause the loans  hereunder or
     any of the Loan Documents,

<PAGE>
                                       30


     including  this  Agreement,  to  violate  Regulation  G or U or  any  other
     regulation  of the Board of Governors of the Federal  Reserve  System or to
     violate  the  Securities  Exchange  Act of 1934 or any  rule or  regulation
     thereunder,  in each case as now in effect or as the same may  hereafter be
     in effect.

          (n) Location of Business and Offices.  The principal place of business
     and chief  executive  offices of the  Borrower  is  located at the  address
     stated in Section 17 hereof.

          (o)  Compliance  with the Law.  To the best of  Borrower's  knowledge,
     neither Borrower:

               (i) is not in  violation  of any law,  judgment,  decree,  order,
          ordinance,  or govenunental  rule or regulation to which Borrower,  or
          any of its assets or properties are subject; or

               (ii) has not failed to obtain any license,  permit,  franchise or
          other govenunental  authorization necessary to the ownership of any of
          its assets or properties or the conduct of its business;

     which  violation  or  failure  is  reasonably  expected  to have a Material
     Adverse Effect.

     (p) No Material Misstatements. No information,  exhibit or report furnished
by Borrower to the Banks in connection  with the  negotiation  of this Agreement
contained any material  misstatement of fact or omitted to state a material fact
or any fact  necessary to make the statement  contained  therein not  materially
misleading.

     (q) Not A Utility.  Borrower is not an entity engaged in the State of Texas
in the Generation,  transmission,  or  distribution  and sale of electric power;
(ii)  transportation,  distribution and sale through a local distribution system
of  natural or other gas for  domestic,  commercial,  industrial,  or other use;
(iii) provision of telephone or telegraph  service to others;  (iv)  production,
transmission,  or  distribution  and sale of steam or water;  (v) operation of a
railroad; or (vii) provision of sewer service to others.

     (r) ERISA.  Borrower is in  compliance  in all material  respects  with the
applicable  provisions  of ERISA,  and no  "reportable  event",  as such term is
defined  in  Section  403 of ERISA,  has  occurred  with  respect to any Plan of
Borrower.

     (s)  Public  Utility  Holding  Company  Act.  Borrower  is  not a  "holding
company", or "subsidiary company" of a "holding company", or an "affiliate" of a
"holding  company" or of a  "subsidiary  company" of a "holding  company",  or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.

<PAGE>
                                       31


     (t) Subsidiaries. The Borrower has no Subsidiaries.

     (u)  Environmental  Matters.  Except as disclosed on Schedule "5", Borrower
has not received  notice or  otherwise  learned of any  Environmental  Liability
which would be reasonably  likely to  individually  or in the  aggregate  have a
Material  Adverse Effect arising in connection with (A) any non- compliance with
or violation of the requirements of any  Environmental Law or (B) the release or
threatened  release of any toxic or hazardous waste into the  environment,  (ii)
has not received notice of any threatened or actual liability in connection with
the release or notice of any threatened  release of any toxic or hazardous waste
into the environment  which would be reasonably likely to individually or in the
aggregate  have a Material  Adverse  Effect or (iii) has not received  notice or
otherwise learned of any federal or state  investigation  evaluating whether any
remedial  action is needed to respond to a release or threatened  release of any
toxic or hazardous  waste into the  environment  for which Borrower is or may be
liable which may reasonably be expected to result in a Material Adverse Effect.

     (v) Liens.  Except (i) as  disclosed  on  Schedule  "1" hereto and (ii) for
Permitted Liens, the assets and properties of the Borrower are free and clear of
all liens and encumbrances.

     11. Conditions of Lending.

     (a) The  effectiveness  of this  Agreement,  and the obligation to make the
initial  Advance  or issue any  initial  Letter of  Credit  under the  Revolving
Commitment  shall  be  subject  to  satisfaction  of  the  following  conditions
precedent:

          (i)  Execution  and  Delivery.  The Borrower  shall have  executed and
     delivered the  Agreement,  Notes and other  required Loan Documents and the
     other Security Instruments,  all in form and substance  satisfactory to the
     Agent;

          (ii) Legal  Opinion.  The Agent shall have  received  from  Borrower's
     legal  counsel a favorable  legal opinion or opinions in form and substance
     satisfactory  to it (i) as to the matters set forth in  Subsections  10(a),
     (b),  (c),  (d),  (e) and (h) hereof  and (ii) as to such other  matters as
     Agent or its counsel may reasonably request;

          (iii) Resolutions. The Agent shall have received appropriate certified
     resolutions of Borrower;

          (iv)  Good  Standing.  The  Agent  shall  have  received  evidence  of
     existence and good standing for Borrower;



<PAGE>
                                       32


          (v) Incumbency.  The Agent shall have received a signed certificate of
     Borrower,  certifying  the names of the officers of Borrower  authorized to
     sign  loan  documents  on  behalf  of  Borrower,  together  with  the  true
     signatures of each such officer.  The Agent may  conclusively  rely on such
     certificate  until the Agent  receives a further  certificate  of  Borrower
     canceling or amending the prior  certificate  and submitting  signatures of
     the officers named in such further certificate;

          (vi) Certificate of Formation of Limited Liability Company.  The Agent
     shall have received copies of all amendments to the Borrower's  Certificate
     of Formation, certified by the Secretary of State of the State of Delaware,
     and a copy of all amendments to the Borrower's  Limited  Liability  Company
     Agreement,  certified  by one or more  officers  of Borrower as being true,
     correct and complete;

          (vii)   Representation  and  Warranties.   The   representations   and
     warranties  of Borrower  under this  Agreement  are true and correct in all
     material  respects as of such date,  as if then made  (except to the extent
     that such  representations  and  warranties  related  solely to an  earlier
     date);

          (viii) No Event of Default.  No Event of Default  shall have  occurred
     and be  continuing  nor shall any event  have  occurred  or failed to occur
     which,  with the  passage  of time or service  of  notice,  or both,  would
     constitute an Event of Default;

          (ix) Other Documents. Agent shall have received such other instruments
     and documents  incidental and appropriate to the  transaction  provided for
     herein  as  Agent  or its  counsel  may  reasonably  request,  and all such
     documents  shall be in form and substance  reasonably  satisfactory  to the
     Agent; and

          (x) Legal  Matters  Satisfactory.  All legal  matters  incident to the
     consummation of the  transactions  contemplated  hereby shall be reasonably
     satisfactory  to special  counsel for Agent  retained at the expense of the
     Borrower.

     (b) The  obligation of the Banks to make any Advance or issue any Letter of
Credit under the Revolving  Commitment  (including the initial Advance) shall be
subject to the following  additional  conditions  precedent that, at the date of
making each such Advance and after giving effect thereto:

          (i) Representation and Warranties.  The representations and warranties
     of  Borrower  under this  Agreement  are true and  correct in all  material
     respects as of such date,  as if then made  (except to the extent that such
     representations and warranties related solely to an earlier date);

<PAGE>
                                       33


          (ii) No Event of Default.  No Event of Default shall have occurred and
     be  continuing  nor shall any event have occurred or failed to occur which,
     with the passage of time or service of notice, or both, would constitute an
     Event of Default;

          (iii)  Other   Doctunents.   Agent  shall  have  received  such  other
     instruments  and documents  incidental and  appropriate to the  transaction
     provided for herein as Agent or its counsel may reasonably request, and all
     such documents  shall be in form and substance  reasonably  satisfactory to
     the Agent; and

          (iv) Legal Matters  Satisfactory.  All legal  matters  incident to the
     consummation of the  transactions  contemplated  hereby shall be reasonably
     satisfactory  to  special  counsel  for Agent  retained  at the  expense of
     Borrower.

     12. Affirmative  Covenants. A deviation from the provisions of this Section
12 shall  not  constitute  an Event of  Default  under  this  Agreement  if such
deviation is consented to in writing by the Majority  Banks prior to the date of
deviation. The Borrower will at all times comply with the covenants contained in
this  Section 12 from the date  hereof and for so long as the  Commitment  is in
existence  or any amount is owed to the Agent or the Banks under this  Agreement
or the other Loan Documents.

     (a) Financial Statements and Reports. Borrower shall promptly fumish to the
Agent from time to time upon request such information regarding the business and
affairs  and  financial  condition  of  Borrower,  as the Agent  may  reasonably
request, and will furnish to the Agent.

          (i) Annual  Financial  Statements.  As soon as  available,  and in any
     event within ninety (90) days after the close of each fiscal year beginning
     with  the  fiscal  year  ended   December  31,  1999,  the  annual  audited
     consolidated and consolidating  Financial Statements of Borrower,  prepared
     in accordance with GAAP  accompanied by an unqualified  opinion rendered by
     an independent accounting firm reasonably acceptable to the Agent;

          (ii) Quarterly Financial Statements.  As soon as available, and in any
     event within forty-five (45) days after the end of each calendar quarter of
     each year (except the last calendar quarter of any fiscal year),  beginning
     with the fiscal quarter ended  September 30, 2000, the quarterly  unaudited
     consolidated and consolidating Financial Statements of Borrower prepared in
     accordance with GAAP;

          (iii) Report on  Properties.  As soon as available and in any event on
     or before March 1 and September 1 of each calendar  year, and at such other
     times as any Bank, in accordance  with Section 7 hereof,  may request,  the
     engineering  reports

<PAGE>
                                       34


     required to be  furnished  to the Agent under such Section 7 on the Oil and
     Gas Properties;

          (iv)  Monthly  Production  Reports.  Within 30 days  after  request of
     Agent,  a  report,  in  form  and  substance  satisfactory  to  the  Agent,
     indicating  the  next  preceding  month's  sales  volume,  sales  revenues,
     production  taxes,  operating expense and net operating income from the Oil
     and Gas Properties,  with detailed calculations and worksheets, all in form
     and substance satisfactory to Agent;

          (v) SEC Reports.  As soon as  available,  and in any event within five
     (5) days of filing,  copies of all filings by  Borrower,  if any,  with the
     Securities and Exchange Commission;

          (vi) Additional  Information.  Promptly upon request of the Agent from
     time to time any additional financial information or other information that
     the Agent may reasonably request.

All such reports, information,  balance sheets and Financial Statements referred
to in Subsection 12(a) above shall be in such detail as the Agent may reasonably
request  and  shall be  prepared  in a  manner  consistent  with  the  Financial
Statements.

     (b)  Certificates  of Compliance.  Concurrently  with the furnishing of the
annual audited Financial  Statements  pursuant to Subsection 12(a)(i) hereof and
the quarterly  unaudited Financial  Statements pursuant to Subsection  12(a)(ii)
hereof for the months  coinciding with the end of each fiscal quarter,  Borrower
shall  furnish to the Agent a  certificate  in the form of Exhibit "C"  attached
hereto,  signed  by the  Chairman,  President  or  Chief  Financial  Officer  of
Borrower,  (i) stating that Borrower has fulfilled in all material  respects its
obligations  under the Notes and the Loan  Documents,  including this Agreement,
and that all  representations  and warranties  made herein and therein  continue
(except  to the extent  they  relate  solely to an earlier  date) to be true and
correct in all material respects (or specifying the nature of any change), or if
a Default  has  occurred,  specifying  the  Default  and the  nature  and status
thereof;  (ii)  to the  extent  requested  from  time  to  time  by  the  Agent,
specifically  affirming compliance of Borrower in all material respects with any
of its  representations  (except to the extent they relate  solely to an earlier
date)  or  obligations   under  said   instruments;   (iii)  setting  forth  the
computation,  in reasonable  detail as of the end of each period, as applicable,
covered by such  certificate,  of compliance with Sections 13(b),  (c), (d), (e)
and (f); and (iv)  containing or accompanied by such financial or other details,
information  and material as the Agent may  reasonably  request to evidence such
compliance.

     (c)  Accountants'  Certificate.  Concurrently  with the  furnishing  of the
annual Financial  Statements pursuant to Section 12(a)(i) hereof,  Borrower will
furnish  a  statement

<PAGE>
                                       35



from the firm of independent  public  accountants  which prepared such Financial
Statement to the effect that nothing has come to its  attention to cause them to
believe that there existed on the date of such  statements  any Event of Default
and specifically  calculating  Borrower's  compliance with Sections 13(b),  (c),
(d), (e) and (f) of this Agreement.

     (d) Taxes and Other Liens. The Borrower will pay and discharge promptly all
taxes, assessments and governmental charges or levies imposed upon the Borrower,
or upon the income or any assets or property of Borrower,  as well as all claims
of any kind (including claims for labor, materials, supplies and rent) which, if
unpaid,  might become a Lien or other  encumbrance upon any or all of the assets
or property of Borrower  and which could  reasonably  be expected to result in a
Material  Adverse  Effect;  provided,  however,  that the Borrower  shall not be
required to pay any such tax,  assessment,  charge, levy or claim if the amount,
applicability  or validity thereof shall currently be contested in good faith by
appropriate  proceedings  diligently conducted,  levy and execution thereon have
been stayed and continue to be stayed and if Borrower shall have set up adequate
reserves therefor, if required, under GAAP.

     (e) Compliance with Laws. Borrower will observe and comply, in all material
respects, with all applicable laws, statutes,  codes, acts, ordinances,  orders,
judgments,  decrees,  injunctions,  rules, regulations,  orders and restrictions
relating to environmental  standards or controls or to energy regulations of all
federal,   state,   county,   municipal  and  other  governments,   departments,
commissions,  boards,  agencies,  courts,  authorities,  officials and officers,
domestic or foreign.

     (f) Further Assurances.  The Borrower will cure promptly any defects in the
creation and issuance of the Notes and the  execution  and delivery of the Notes
and the Loan  Documents,  including  this  Agreement.  The  Borrower at its sole
expense will promptly  execute and deliver to Agent upon its reasonable  request
all such other and further  documents,  agreements and instruments in compliance
with or accomplishment of the covenants and agreements in this Agreement,  or to
correct any  omissions in the Notes or more fully to state the  obligations  set
out herein.

     (g) Performance of  Obligations.  The Borrower will pay the Notes and other
obligations incurred by it hereunder according to the reading,  tenor and effect
thereof and hereof, and Borrower will do and perform every act and discharge all
of the obligations provided to be performed and discharged by the Borrower under
the Loan Documents,  including this  Agreement,  at the time or times and in the
manner specified.

     (h)  Insurance.  The Borrower now  maintains  and will continue to maintain
insurance  with  financially  sound and  reputable  insurers with respect to its
assets against such liabilities,  fires, casualties, risks and contingencies and
in such types and amounts as is

<PAGE>
                                       36


customary in the case of persons  engaged in the same or similar  businesses and
similarly  situated.  Upon request of the Agent,  the  Borrower  will furnish or
cause to be furnished to the Agent from time to time a summary of the  insurance
coverage of Borrower in form and substance  satisfactory  to the Agent,  and, if
requested, will furnish the Agent copies of the applicable policies. Upon demand
by Agent any insurance policies covering any such property shall be endorsed (i)
to provide that such  policies  may not be canceled,  reduced or affected in any
manner for any reason without  fifteen (15) days prior notice to Agent,  (ii) to
provide for insurance against fire,  casualty and other hazards normally insured
against,  in the amount of the full value (less a reasonable  deductible  not to
exceed  amounts  customary in the industry for similarly  situated  business and
properties) of the property insured, and (iii) to provide for such other matters
as the Agent may  reasonably  require.  The Borrower shall at all times maintain
adequate insurance with respect to all of its assets,  including but not limited
to, the Oil and Gas  Properties  or any  collateral  against its  liability  for
injury to persons or property, which insurance shall be by financially sound and
reputable insurers and shall without limitation provide the following coverages:
comprehensive  general liability  (including  coverage for damage to underground
resources and equipment,  damage caused by blowouts or cratering,  damage caused
by  explosion,  damage to  underground  minerals or  resources  caused by saline
substances,  broad  form  property  damage  coverage,  broad form  coverage  for
contractually   assumed   liabilities  and  broad  form  coverage  for  acts  of
independent  contractors),  worker's compensation and automobile liability.  The
Borrower  shall at all times  maintain  cost of control of well  insurance  with
respect to the Oil and Gas Properties  which shall include the Borrower  against
seepage and pollution expense;  redrilling expense; and cost of control of well;
fires, blowouts,  etc., if deemed economical in the reasonable discretion of the
Borrower.  Additionally,  the  Borrower  shall at all  times  maintain  adequate
insurance  with respect to all of its other assets and wells in accordance  with
prudent business practices.

     (i) Accounts and Records. Borrower will keep books, records and accounts in
which  full,  true  and  correct  entries  will  be  made  of  all  dealings  or
transactions  in relation to its business and  activities,  prepared in a manner
consistent  with  prior  years,  subject  to  changes  suggested  by  Borrower's
auditors.

     (j) Right of  Inspection.  Borrower  will permit any  officer,  employee or
agent of the Banks to examine Borrower's books,  records and accounts,  and take
copies and  extracts  therefrom,  all at such  reasonable  times  during  normal
business hours and as often as the Banks may reasonably request.  The Banks will
use best  efforts  to keep  all  Confidential  Information  (as  herein  defmed)
confidential and will not disclose or reveal the Confidential Information or any
part thereof other than (i) as required by law, and (ii) to the Banks',  and the
Banks'  subsidiaries,   Affiliates,   officers,  employees,  legal  counsel  and
regulatory  authorities  or  advisors  to whom it is  necessary  to reveal  such
information  for the purpose of  effectuating  the agreements  and  undertakings
specified herein or as otherwise  required in


<PAGE>
                                       37


connection  with the  enforcement  of the  Banks'  and the  Agent's  rights  and
remedies under the Notes,  this Agreement and the other Loan Documents.  As used
herein,   "Confidential   Information"  means  information  about  the  Borrower
furnished by the  Borrower to the Banks,  but does not include  information  (i)
which was publicly  known,  or otherwise  known to the Banks, at the time of the
disclosure,  (ii) which  subsequently  becomes  publicly known through no act or
omission by the Banks,  or (iii)  which  otherwise  becomes  known to the Banks,
other than through disclosure by the Borrower.

     (k) Notice of Certain Events.  The Borrower shall promptly notify the Agent
if Borrower learns of the occurrence of (i) any event which constitutes an Event
of Default  together  with a detailed  statement  by Borrower of the steps being
taken to cure such Event of  Default;  (ii) any legal,  judicial  or  regulatory
proceedings  affecting Borrower,  or any of the assets or properties of Borrower
which, if adversely determined,  could reasonably be expected to have a Material
Adverse  Effect;  (iii) any dispute  between  Borrower and any  governmental  or
regulatory  body or any other Person or entity which,  if adversely  determined,
might reasonably be expected to cause a Material Adverse Effect;  (iv) any other
matter which in  Borrower's  reasonable  opinion  could have a Material  Adverse
Effect.

     (l) ERISA Information and Compliance. The Borrower will promptly furnish to
the Agent  immediately  upon becoming aware of the occurrence of any "reportable
event",  as such term is defined in Section 4043 of ERISA, or of any "prohibited
transaction",  as such term is defined in Section 4975 of the  Internal  Revenue
Code of 1954,  as  amended,  in  connection  with any Plan or any trust  created
thereunder,  a written notice signed by the chief financial  officer of Borrower
specifying  the nature  thereof,  what action  Borrower is taking or proposes to
take with respect  thereto,  and,  when known,  any action taken by the Internal
Revenue Service with respect thereto.

     (m)  Environmental  Reports and Notices.  The Borrower  will deliver to the
Agent (i) promptly upon its becoming available,  one copy of each report sent by
Borrower to any court,  governmental  agency or instrumentality  pursuant to any
Environmental Law, (ii) notice, in writing,  promptly upon Borrower's receipt of
notice or otherwise learning of any claim,  demand,  action,  event,  condition,
report or investigation  indicating any potential or actual liability arising in
connection with (x) the non- compliance with or violation of the requirements of
any  Environmental  Law which  reasonably  could be  expected to have a Material
Adverse Effect;  (y) the release or threatened release of any toxic or hazardous
waste into the environment which reasonably could be expected to have a Material
Adverse  Effect or which  release  Borrower  would  have a duty to report to any
court or  government  agency or  instrumentality,  or (iii) the existence of any
Envirorunental Lien on any properties or assets of Borrower,  and Borrower shall
immediately deliver a copy of any such notice to Agent.

<PAGE>
                                       38


     (n) Compliance and Maintenance. The Borrower will (i) observe and comply in
all material  respects with all  Environmental  Laws; (ii) except as provided in
Subsections 12(p) and 12(q) below, maintain the Oil and Gas Properties and other
assets and  properties in good and workable  condition at all times and make all
repairs,  replacements,  additions,  betterments and improvements to the Oil and
Gas  Properties and other assets and properties as are needed and proper so that
the business carried on in connection  therewith may be exercised in good faith;
(iii) take or cause to be taken  whatever  actions are necessary or desirable to
prevent an event or condition of default by Borrower under the provisions of any
gas  purchase  or sales  contract  or any  other  contract,  agreement  or lease
comprising a part of the Oil and Gas  Properties  or other  collateral  security
hereunder  which  default  could  reasonably be expected to result in a Material
Adverse  Effect;  and (iv) furnish Agent upon request  evidence  satisfactory to
Agent  that  there  are no  Liens,  claims  or  encumbrances  on the Oil and Gas
Properties, except laborers', vendors',  repairmen's,  mechanics',  worker's, or
materialmen's  liens arising by operation of law or incident to the construction
or improvement of property if the obligations secured thereby are not yet due or
are being contested in good faith by appropriate  legal proceedings or Permitted
Liens.

     (o) Operation of Properties. Except as provided in Subsection 12(p) and (q)
below,  the Borrower  will  operate,  or use  reasonable  efforts to cause to be
operated,  all Oil and Gas  Properties  in a  careful  and  efficient  manner in
accordance  with the practice of the industry and in  compliance in all material
respects with all applicable laws, rules, and regulations,  and in compliance in
all material respects with all applicable proration and conservation laws of the
jurisdiction  in which the  properties are situated,  and all  applicable  laws,
rules,  and  regulations,  of every other agency and authority from time to time
constituted to regulate the  development and operation of the properties and the
production  and sale of  hydrocarbons  and other minerals  therefrom;  provided,
however,  that the  Borrower  shall  have the right to  contest in good faith by
appropriate  proceedings,  the applicability or lawfulness of any such law, rule
or regulation and pending such contest may defer compliance  therewith,  as long
as such  deferment  shall not  subject  the  properties  or any part  thereof to
foreclosure or loss.

     (p) Compliance with Leases and Other Instruments.  The Borrower will pay or
cause to be paid and discharge all rentals, delay rentals, royalties, production
payment,  and indebtedness  required to be paid by Borrower (or required to keep
unimpaired  in all  material  respects  the  rights of  Borrower  in Oil and Gas
Properties) accruing under, and perform or cause to be performed in all material
respects each and every act,  matter,  or thing required of Borrower by each and
all of the assignments,  deeds, leases, subleases,  contracts, and agreements in
any way  relating to Borrower  or any of the Oil and Gas  Properties  and do all
other things  necessary of Borrower to keep unimpaired in all material  respects
the rights of  Borrower  thereunder  and to prevent  the  forfeiture  thereof or
default thereunder;  provided,  however, that nothing in this Agreement shall be
deemed to require Borrower to perpetuate

<PAGE>
                                       39



or renew  any oil and gas  lease or other  lease by  payment  of rental or delay
rental or by commencement or continuation of operations nor to prevent  Borrower
from  abandoning  or  releasing  any oil and gas  lease or  other  lease or well
thereon  when,  in any of such events,  in the opinion of Borrower  exercised in
good faith,  it is not in the best  interest of the Borrower to  perpetuate  the
same.

     (q) Certain Additional  Assurances Regarding  Maintenance and Operations of
Properties.  With  respect  to those  Oil and Gas  Properties  which  are  being
operated  by  operators  other  than the  Borrower,  the  Borrower  shall not be
obligated  to  perform  any  undertakings  contemplated  by  the  covenants  and
agreement  contained in Subsections  12(o) or 12(p) hereof which are performable
only by such operators and are beyond the control of the Borrower;  however, the
Borrower  agrees to promptly take all  reasonable  actions  available  under any
operating  agreements  or otherwise to bring about the  performance  of any such
material undertakings required to be performed thereunder.

     (r) Sale of  Certain  Assets/Prepayment  of  Proceeds.  The  Borrower  will
immediately  pay over to the Agent  for the  ratable  benefit  of the Banks as a
prepayment  of  principal  on the Notes,  an amount equal to 100% of the Release
Price  received by Borrower from the sale of the Oil and Gas  Properties,  which
sale has been approved in advance by the Majority Banks. Provided, however, that
the foregoing sentence shall not apply to asset sales with proceeds valued at up
to $500,000  between each Borrowing Base  Determination  Date. The term "Release
Price" as used herein shall mean a price  determined by Majority Banks, in their
discretion  based upon the loan  collateral  value of the Oil and Gas Properties
being  sold by  Borrower  which  such  Banks in  their  discretion  (using  such
methodology,  assumptions and discounts  rates as such Banks  customarily use in
assigning  collateral  value to oil and gas  properties,  oil and gas  gathering
systems,  gas  processing  and  plant  operations)  assign  to such  Oil and Gas
Properties at the time in question as approved  pursuant to each Bank's internal
credit  procedures.  Any such  prepayment  of principal on the  Revolving  Notes
required  by this  Section  12(r),  shall  not be in lieu  of,  but  shall be in
addition to, any Monthly  Commitment  Reduction or any  mandatory  prepayment of
principal required to be paid pursuant to Section 9(b) hereof

     (s) Title  Matters.  Within thirty (30) days after the Effective  Date with
respect to the Oil and Gas  Properties  listed on Schedule  "6" hereto,  furnish
Agent with title opinions and/or title  information  reasonably  satisfactory to
Agent  showing  good  and  defensible  title  of  Borrower  to such  Oil and Gas
Properties subject only to the Permitted Liens. As to any Oil and Gas Properties
hereafter mortgaged to Agent,  Borrower will promptly (but in no event more than
thirty (30) days following such  mortgaging),  furnish Agent with title opinions
and/or  title  information  reasonably  satisfactory  to Agent  showing good and
defensible  title of Borrower  to such Oil and Gas  Properties  subject  only to
Permitted Liens.

<PAGE>
                                       40


     (t) Curative Matters. Within thirty (30) days after the Effective Date with
respect to matters  listed on Schedule "7" and,  thereafter,  within thirty (30)
days after  receipt by Borrower  from Agent or its counsel of written  notice of
title defects the Agent reasonably  requires to be cured,  Borrower shall either
(i) provide such curative  information,  in form and substance  satisfactory  to
Agent,  or  (ii)  substitute  Oil  and  Gas  Properties  of  value  and  quality
satisfactory to the Agent for all of Oil and Gas Properties for which such title
curative was requested but upon which Borrower elected not to provide such title
curative information, and, within sixty (60) days of such substitution,  provide
title opinions or title  information  satisfactory to the Agent covering the Oil
and Gas Properties so substituted.  If the Borrower fails to satisfy (i) or (ii)
above within the time specified, the loan collateral value assigned by the Banks
to the Oil and Gas Properties for which such curative  information was requested
shall be deducted from the Borrowing Base resulting in a reduction thereof.

     (u) Change of  Principal  Place of Business.  Borrower  shall give Agent at
least  thirty  (30)  days  prior  written  notice of its  intention  to move its
principal place of business from the address as set forth in Section 17 hereof.

     13. Negative Covenants.  A deviation from the provisions of this Section 13
shall not  constitute an Event of Default under this Agreement if such deviation
is consented to in writing by the Majority Banks prior to the date of deviation.
The  Borrower  will at all times  comply with the  covenants  contained  in this
Section  13 from  the  date  hereof  and for so  long  as the  Commitment  is in
existence  or any amount is owed to the Agent or the Banks under this  Agreement
or the other Loan Documents.

     (a)  Negative  Pledge.  The  Borrower  shall not without the prior  written
consent of the Banks:

          (i)  create,  incur,  assume or  permit  to exist  any Lien,  security
     interest or other  encumbrance  on any of its assets or  properties  except
     Permitted Liens; or

          (ii) sell,  lease,  transfer  or  otherwise  dispose of, in any fiscal
     year,  any of its assets except for (A) sales,  leases,  transfers or other
     dispositions  made  in the  ordinary  course  of  Borrower's  oil  and  gas
     businesses, and (B) sales made with the consent of Majority Banks which are
     made pursuant to, and in full compliance with, Section 12(r) hereof;

     (b) Current Ratio.  Borrower shall not allow its ratio of Current Assets to
Current  Liabilities  to be less  than  1.1 to 1.0 as of the  end of any  fiscal
quarter.

<PAGE>
                                       41


     (c) Minimum  Interest  Coverage  Rating.  The  Borrower  will not allow its
Minimum  Interest  Coverage  Ratio to be less than (i) 1.5 to 1.0 for the period
from September 30, 2000 to and including June 30, 2001,  (ii) 2.0 to 1.0 for the
fiscal  quarters ended  September 30, 2001 and December 31, 2001, and (iii) 2.75
to 1.0 as of the end of each fiscal  quarter  thereafter.  The  aforesaid  ratio
shall be calculated as of the end of each fiscal  quarter for the four preceding
fiscal  quarters  ending with the fiscal  quarter for which such  measurement is
being made.

     (d) General and Administrative  Expenses. The Borrower will never allow its
General and Administrative  Expenses (including  management fees) for any fiscal
year to exceed $2,500,000 in any year, said amount to be tested as of the end of
each fiscal year.

     (e) Consolidations and Mergers. Borrower will not consolidate or merge with
or into any other Person,  except that Borrower may merge with another Person if
Borrower is the  surviving  entity in such merger and if,  after  giving  effect
thereto, no Default or Event of Default shall have occurred and be continuing.

     (f)  Debts,  Guaranties  and Other  Obligations.  Without  the  consent  of
Majority Banks,  Borrower will not incur, create, assume or in any manner become
or be liable in respect of any  indebtedness,  nor will  Borrower  guarantee  or
otherwise  in any manner  become or be liable in  respect  of any  indebtedness,
liabilities  or other  obligations  of any other  person or  entity,  whether by
agreement  to  purchase  the  indebtedness  of any  other  person  or  entity or
agreement for the  furnishing of funds to any other person or entity through the
purchase or lease of goods,  supplies or services (or by way of stock  purchase,
capital contribution,  advance or loan) for the purpose of paying or discharging
the  indebtedness of any other person or entity,  or otherwise,  except that the
foregoing restrictions shall not apply to:

          (i)  the  Notes  and  any  renewal  or  increase  thereof,   or  other
     indebtedness  of  the  Borrower  heretofore   disclosed  to  Banks  in  the
     Borrower's Financial Statements or on Schedule "3" hereto; or

          (ii) taxes,  assessments or other government charges which are not yet
     due or are being  contested in good faith by  appropriate  action  promptly
     initiated and diligently conducted, if such reserve as shall be required by
     GAAP shall have been made therefor and levy and execution thereon have been
     stayed and continue to be stayed; or

          (iii)  indebtedness  (other than in connection  with a loan or lending
     transaction)  incurred in the ordinary course of business,  including,  but
     not limited to indebtedness for drilling, completing, leasing and reworking
     oil and gas wells; or

<PAGE>
                                       42



          (iv) other  indebtedness  not  exceeding  $1,000,000  in the aggregate
     outstanding at any time; or

          (v) any renewals or extensions of (but,  other than in the case of the
     Notes, not increases in) any of the foregoing.

     (g) Distributions.  Borrower will not declare or pay any cash distribution,
purchase,  redeem or otherwise acquire for value any of its membership interests
now or hereafter  outstanding,  return any capital to its  members,  or make any
distribution  of its assets to its  stockholders  as such,  except the foregoing
shall not apply to (i)  distributions  made to its  members  for the  payment of
federal  income  taxes  directly  attributable  to  Borrower's  income  and (ii)
dividends on its preferred stock; provided, however, that immediately before and
after giving effect to any such  distribution no (i) Default or Event of Default
or  (ii)  Borrowing  Base  deficiency  or  requirement  to  make  any  mandatory
prepayment of principal pursuant to Section 9(b) hereof, shall exist.

     (h)  Loans  and  Advances.  Borrower  shall  not make or  permit  to remain
outstanding any loans or advances to or in any person or entity, except that the
foregoing restriction shall not apply to:

          (i) loans or  advances to any person,  the  material  details of which
     have been set forth in the Financial  Statements of the Borrower heretofore
     furnished to Banks; or

          (ii)  advances made in the ordinary  course of Borrower's  oil and gas
     business.

     (i) Sale or Discount of  Receivables.  Borrower  will not  discount or sell
with  recourse,  or sell for less than the  greater of the face or market  value
thereof, any of its notes receivable or accounts receivable.

     (j) Nature of Business.  Borrower will not permit any material change to be
made in the character of its business as carried on at the date hereof.

     (k)  Transactions  with  Affiliates.  Borrower  will  not  enter  into  any
transaction with any Affiliate,  except transactions upon terms that are no less
favorable  to it than would be obtained  in a  transaction  negotiated  at arm's
length with an unrelated third party.

     (l) Hedging Transactions.  Borrower will not enter into any Rate Management
Transactions,   except  the  foregoing  prohibitions  shall  not  apply  to  (x)
transactions  consented
<PAGE>
                                       43


to in  writing  by the  Majority  Banks  which  are on terms  acceptable  to the
Majority Banks, or (y) Pre-Approved Contracts with Agent or a Bank.

     (m)  Investments.  Borrower shall not make any investments in any person or
entity,  except  such  restriction  shall  not  apply  to  investments  in  Cash
Equivalents.

     (n) Amendment to Certificate of Formation or Limited  Liability  Agreement.
Borrower will not permit any amendment to, or any alteration of, its Certificate
of Formation or its Limited Liability Company Agreement.

     (o)  Prepayment  of Other  Indebtedness.  Except as otherwise  provided for
herein or  otherwise  in this  Agreement,  Borrower  shall not make any payment,
prepayment  or other  unscheduled  principal  payment  on, or redeem  any of its
indebtedness (other than indebtedness owed to the Banks hereunder).

     14.  Events of Default.  Any one or more of the  following  events shall be
considered an "Event of Default" as that term is used herein:

     (a) The Borrower  shall fail to pay when due or declared due the  principal
of, and the interest on, the Notes, or any fee or any other  indebtedness of the
Borrower incurred pursuant to this Agreement or any other Loan Document; or

     (b) Any representation or warranty made by Borrower under this Agreement or
any other Loan Document, or in any certificate or statement furnished or made to
the Banks pursuant hereto, or in connection herewith,  or in connection with any
document furnished  hereunder,  shall prove to be untrue in any material respect
as of the date on which  such  representation  or  warranty  is made (or  deemed
made),  or  any  representation,  statement  (including  financial  statements),
certificate,  report  or other  data  furnished  or to be  furnished  or made by
Borrower under any Loan Document,  including this Agreement, proves to have been
untrue in any material respect, as of the date as of which the facts therein set
forth were stated or certified; or

     (c) Default shall be made in the due  observance or  performance  of any of
the  covenants or agreements  of the Borrower  contained in the Loan  Documents,
including  this  Agreement  (excluding  covenants  contained  in Section  12(s),
Section 12(w),  Section 12(x) and Section 13 of the Agreement for which there is
no cure period), and such default shall continue for more than thirty (30) days;
or

     (d)  Default  shall be made in the due  observance  or  performance  of the
covenants of Borrower contained in Section 12(s),  Section 12(w),  Section 12(x)
or Section 13 of this Agreement; or

<PAGE>
                                       44


     (e) Default shall be made in respect of any obligation for borrowed  money,
other than the Notes, for which Borrower is liable (directly, by assumption,  as
guarantor or otherwise),  or any obligations secured by any mortgage,  pledge or
other security  interest,  lien, charge or encumbrance with respect thereto,  on
any asset or property of Borrower or in respect of any agreement relating to any
such  obligations  unless such  Borrower  is not liable for same  (i.e.,  unless
remedies  or  recourse  for  failure  to pay  such  obligations  is  limited  to
foreclosure  of the  collateral  security  therefor),  and if such default shall
continue beyond the applicable grace period, if any; or

     (f) Borrower shall commence a voluntary case or other  proceedings  seeking
liquidation,  reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking an appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall consent
to any such relief or to the  appointment  of or taking  possession  by any such
official in an involuntary  case or other  proceeding  commenced  against it, or
shall make a general  assignment  for the  benefit of  creditors,  or shall fail
generally  to pay its debts as they  become  due,  or shall  take any  corporate
action authorizing the foregoing; or

     (g) An involuntary  case or other  proceeding,  shall be commenced  against
Borrower seeking liquidation,  reorganization or other relief with respect to it
or its debts under any bankruptcy  insolvency or similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,  custodian
or other similar  official of it or any  substantial  part of its property,  and
such involuntary case or other proceeding shall remain  undismissed and unstayed
for a period of sixty (60) days; or an order for relief shall be entered against
Borrower under the federal bankruptcy laws as now or hereinafter in effect; or

     (h) A final  judgment  or order  for the  payment  of money  in  excess  of
$500,000 (or  judgments or orders  aggregating  in excess of $500,000)  shall be
rendered   against   Borrower  and  such  judgments  or  orders  shall  continue
unsatisfied and unstayed for a period of thirty (30) days; or

     (i) In the  event  the  Total  Outstandings  shall at any time  exceed  the
Borrowing Base  established for the Revolving Notes, and the Borrower shall fail
to comply with the provisions of Section 9(b) hereof, or

     (j) A Change of Control shall occur; or

     (k) A Change of Management shall occur; or

<PAGE>
                                       45


     Upon occurrence of any Event of Default  specified in Subsections 14(f) and
(g) hereof,  the entire  principal  amount due under the Notes and all  interest
then accrued thereon, and any other liabilities of the Borrower hereunder, shall
become  immediately due and payable all without notice and without  presentment,
demand, protest, notice of protest or dishonor or any other notice of default of
any kind, all of which are hereby expressly waived by the Borrower. In any other
Event of Default,  the Agent, upon request of Majority Banks, shall by notice to
the Borrower  declare the  principal  of, and all interest  then accrued on, the
Notes and any other  liabilities  hereunder  to be  forthwith  due and  payable,
whereupon the same shall forthwith  become due and payable without  presentment,
demand, protest, notice of intent to accelerate, notice of acceleration or other
notice of any kind, all of which the Borrower hereby expressly waives,  anything
contained  herein  or in the  Note  to  the  contrary  notwithstanding.  Nothing
contained in this Section 14 shall be construed to limit or amend in any way the
Events of Default  enumerated  in the Note,  or any other  document  executed in
connection with the transaction contemplated herein.

     Upon the occurrence and during the continuance of any Event of Default, the
Banks are hereby authorized at any time and from time to time, without notice to
the Borrower (any such notice being expressly  waived by the Borrower),  to set-
off  and  apply  any and all  deposits  (general  or  special,  time or  demand,
provisional or final) at any time held and other  indebtedness at any time owing
by any of the Banks to or for the credit or the account of the Borrower  against
any and all of the  indebtedness  of the  Borrower  under the Notes and the Loan
Documents,  including this  Agreement,  irrespective of whether or not the Banks
shall have made any demand under the Loan Documents, including this Agreement or
the Notes and although such indebtedness may be umnatured. Any amount set-off by
any of the Banks shall be applied against the indebtedness owed the Banks by the
Borrower  pursuant to this Agreement and the Notes.  The Banks agree promptly to
notify the Borrower  after any such setoff and  application,  provided  that the
failure to give such notice  shall not affect the  validity of such  set-off and
application.  The rights of the Bank under this Section are in addition to other
rights and  remedies  (including,  without  limitation,  other rights of setoff)
which the Banks may have.

     15. The Agent and the Banks.

     (a) Appointment and  Authorization.  Each Bank hereby appoints Agent as its
nominee and agent, in its name and on its behalf:  (i) to act as nominee for and
on behalf of such Bank in and under  all Loan  Documents;  (ii) to  arrange  the
means whereby the funds of Banks are to be made  available to the Borrower under
the Loan  Documents;  (iii) to take such action as may be  requested by any Bank
under the Loan Documents  (when such Bank is entitled to make such request under
the Loan Documents);  (iv) to receive all documents and items to be furnished to
Banks  under  the  Loan  Documents;  (v) to be  the  secured  party,  mortgagee,
beneficiary,  and similar  party in respect of, and to receive,  as the case may
be, any collateral for the benefit of Banks; (vi) to promptly distribute to each
Bank all material information,  requests,  documents and items received from the
Borrower  under the Loan


<PAGE>
                                       46


Documents;  (vii) to promptly  distribute to each Bank such Bank's Pro Rata Part
of each  payment or  prepayment  (whether  voluntary,  as proceeds of  insurance
thereon,  or otherwise) in accordance  with the terms of the Loan  Documents and
(viii) to deliver to the appropriate  Persons requests,  demands,  approvals and
consents  received  from Banks.  Each Bank hereby  authorizes  Agent to take all
actions and to exercise such powers under the Loan Documents as are specifically
delegated  to Agent by the terms  hereof  or  thereof,  together  with all other
powers reasonably  incidental thereto.  With respect to its Commitment hereunder
and the Notes  issued to it, Agent and any  successor  Agent shall have the same
rights  under the Loan  Documents as any other Bank and may exercise the same as
though it were not the  Agent;  and the term  "Bank" or  "Banks"  shall,  unless
otherwise  expressly  indicated,  include Agent and any  successor  Agent in its
capacity as a Bank.  Agent and any successor Agent and its Affiliates may accept
deposits from,  lend money to, act as trustee under  indentures of and generally
engage in any kind of business  with the  Borrower,  and any person which may do
business  with the  Borrower,  all as if Agent and any  successor  Agent was not
Agent hereunder and without any duty to account therefor to the Banks;  provided
that,  if any payments in respect of any property (or the proceeds  thereof) now
or  hereafter  in the  possession  or  control  of Agent  which may be or become
security for the obligations of the Borrower arising under the Loan Documents by
reason  of the  general  description  of  indebtedness  secured  or of  property
contained in any other agreements,  documents or instruments related to any such
other business shall be applied to reduction of the  obligations of the Borrower
arising under the Loan  Documents,  then each Bank shall be entitled to share in
such application according to its pro rata part thereof. Each Bank, upon request
of any other  Bank,  shall  disclose  to all other  Banks all  indebtedness  and
liabilities,  direct and contingent, of the Borrower to such Bank as of the time
of such request.

     (b) Note  Holders.  From time to time as other Banks become a party to this
Agreement,  Agent shall obtain  execution by the Borrower of additional Notes in
amounts  representing  the  Commitment of each such new Bank, up to an aggregate
face amount of all Revolving Notes not exceeding $110,000,000. The obligation of
such Bank shall be governed by the provisions of this  Agreement,  including but
not  limited to, the  obligations  specified  in Section 2 hereof.  From time to
time,  Agent may require  that the Banks  exchange  their Notes for newly issued
Notes to better reflect the  Commitment of the Banks.  Agent may treat the payee
of any Note as the holder  thereof  until  written  notice of transfer  has been
filed with it, signed by such payee and in form satisfactory to Agent.

     (c)  Consultation  with  Counsel.  Banks agree that Agent may consult  with
legal counsel  selected by Agent and shall not be liable for any action taken or
suffered  in good faith by it in  accordance  with the  advice of such  counsel.
Banks acknowledge that Gardere & Wynne,  L.L.P. is counsel for Bank One, both as
Agent and as a Bank,  and that such  firm  does not  represent  any of the other
Banks in connection with this transaction.

<PAGE>
                                       47


     (d) Documents.  Agent shall not be under a duty to examine or pass upon the
validity, effectiveness, enforceability, genuineness or value of any of the Loan
Documents or any other instrument or document  furnished  pursuant thereto or in
connection  therewith,  and Agent  shall be entitled to assume that the same are
valid, effective, enforceable and genuine and what they purport to be.

     (e)  Resignation  or  Removal  of Agent.  Subject  to the  appointment  and
acceptance of a successor Agent as provided below,  Agent may resign at any time
by giving  written  notice  thereof to Banks and the Borrower,  and Agent may be
removed at any time with or without  cause by all Banks.  If no successor  Agent
has been so  appointed  by all Banks  (and  approved  by the  Borrower)  and has
accepted such  appointment  within 30 days after the retiring  Agent's giving of
notice of resignation or removal of the retiring Agent,  then the retiring Agent
may, on behalf of Banks,  appoint a successor Agent. Any successor Agent must be
approved by Borrower, which approval will not be unreasonably withheld. Upon the
acceptance of any  appointment  as Agent  hereunder by a successor  Agent,  such
successor Agent shall thereupon succeed to and become vested with all the rights
and duties of the retiring  Agent,  and the retiring  Agent, as the case may be,
shall be  discharged  from its  duties  and  obligations  hereunder.  After  any
retiring Agent resignation or removal hereunder as Agent, the provisions of this
Section 15 shall  continue  in effect for its  benefit in respect to any actions
taken or omitted to be taken by it while it was acting as Agent.  To be eligible
to be an Agent  hereunder the party serving,  or to serve, in such capacity must
own a Pro Rata Part of the Commitment equal to the level of Commitment  required
to be held by any Bank pursuant to Section 28 hereof.

     (f) Responsibility of Agent. It is expressly understood and agreed that the
obligations of Agent under the Loan Documents are only those expressly set forth
in the Loan  Documents  as to each,  and that Agent  shall be entitled to assume
that no Default or Event of Default has occurred and is continuing, unless Agent
has actual  knowledge  of such fact or has  received  notice  from a Bank or the
Borrower that such Bank or the Borrower  considers that a Default or an Event of
Default has  occurred  and is  continuing  and  specifying  the nature  thereof.
Neither Agent nor any of its directors,  officers,  attorneys or employees shall
be  liable  for any  action  taken or  omitted  to be taken by them  under or in
connection with the Loan Documents, except for its or their own gross negligence
or willful  misconduct.  Agent shall not incur  liability under or in respect of
any of the Loan  Documents  by acting  upon any  notice,  consent,  certificate,
warranty or other paper or instrument  believed by it to be genuine or authentic
or to be signed by the proper  party or  parties,  or with  respect to  anything
which  it  may do or  refrain  from  doing  in the  reasonable  exercise  of its
judgment, or which may seem to it to be necessary or desirable.

     Agent shall not be responsible to Banks for any of the Borrower's recitals,
statements,   representations  or  warranties  contained  in  any  of  the  Loan
Documents,  or in any certificate

<PAGE>
                                       48


or other document referred to or provided for in, or received by any Bank under,
the Loan  Documents,  or for the value,  validity,  effectiveness,  genuineness,
enforceability or sufficiency of any of the Loan Documents or for any failure by
the Borrower to perform any of its  obligations  hereunder or thereunder.  Agent
may employ agents and attorneys-in-fact  and shall not be answerable,  except as
to  money  or  securities  received  by it or its  authorized  agents,  for  the
negligence or misconduct of any such agents or attorneys-in-fact  selected by it
with reasonable care.

     The  relationship  between  Agent  and each  Bank is only that of agent and
principal  and has no  fiduciary  aspects.  Nothing  in the  Loan  Documents  or
elsewhere  shall be construed to impose on Agent any duties or  responsibilities
other than those for which express  provision is therein made. In performing its
duties and functions hereunder, Agent does not assume and shall not be deemed to
have assumed, and hereby expressly  disclaims,  any obligation or responsibility
toward or any relationship of agency or trust with or for the Borrower or any of
its beneficiaries or other creditors.  As to any matters not expressly  provided
for  by the  Loan  Documents,  Agent  shall  not be  required  to  exercise  any
discretion  or take any action,  but shall be required to act or to refrain from
acting (and shall be fully  protected  in so acting or  refraining  from acting)
upon the instructions of all Banks and such  instructions  shall be binding upon
all Banks and all holders of the Notes; provided,  however, that Agent shall not
be  required  to take any action  which is  contrary  to the Loan  Documents  or
applicable law.

     Agent shall have the right to exercise or refrain from exercising,  without
notice or  liability to the Banks,  any and all rights  afforded to Agent by the
Loan  Documents or which Agent may have as a matter of law;  provided,  however,
Agent shall not,  without the consent of Majority  Banks,  take any other action
with regard to amending the Loan  Documents,  waiving any default under the Loan
Documents or taking any other action with  respect to the Loan  Documents  which
requires  consent  of  Majority  Banks.  Provided  further,   however,  that  no
amendment,  waiver,  or other action shall be effected pursuant to the preceding
sentence  without  the  consent  of all  Banks  which:  (i) would  increase  the
Borrowing Base or decrease the Monthly Commitment  Reduction,  (ii) would reduce
any fees hereunder,  or the principal of, or the interest on, any Bank's Note or
Notes,  (iii)  would  postpone  any  date  fixed  for any  payment  of any  fees
hereunder,  or any principal or interest of any Bank's Note or Notes, (iv) would
materially  increase any Bank's obligations  hereunder or would materially alter
Agent's  obligations to any Bank hereunder,  (v) would release Borrower from its
obligation to pay any Bank's Note or Notes,  (vi) release any of the  Collateral
(except as otherwise  provided in Section 12(r) hereof),  (vii) would change the
definition of Majority Banks, (viii) would amend, modify or change any provision
of this Agreement  requiring the consent of all the Banks, (ix) would extend the
Revolving  Maturity  Date,  or (x) would  amend this  sentence  or the  previous
sentence.  Agent  shall  not have  liability  to Banks for  failure  or delay in
exercising any right or power  possessed by Agent pursuant to the Loan Documents

<PAGE>
                                       49



or otherwise  unless such failure or delay is caused by the gross  negligence of
the Agent, in which case only the Agent  responsible  for such gross  negligence
shall have liability therefor to the Banks.

     (g) Independent Investigation.  Each Bank severally represents and warrants
to Agent that it has made its own  independent  investigation  and assessment of
the  financial  condition  and affairs of the  Borrower in  connection  with the
making  and  continuation  of its  participation  hereunder  and has not  relied
exclusively  on any  information  provided  to such Bank by Agent in  connection
herewith,  and each Bank  represents,  warrants and  undertakes to Agent that it
shall continue to make its own independent appraisal of the credit worthiness of
the Borrower while the Notes are outstanding or its Commitment  hereunder are in
force. Agent shall not be required to keep itself informed as to the performance
or observance by the Borrower of this Agreement or any other  document  referred
to or provided for herein or to inspect the properties or books of the Borrower.
Other  than as  provided  in this  Agreement,  Agent  shall  not have any  duty,
responsibility  or  liability  to  provide  any Bank  with any  credit  or other
information  concerning  the  affairs,  financial  condition  or business of the
Borrower which may come into the possession of Agent.

     (h)  Indemnification.  Banks agree to indemnify Agent, ratably according to
their  respective  Commitment on a Pro Rata basis,  from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs,  expenses or  disbursements  of any proper and reasonable  kind or nature
whatsoever which may be imposed on, incurred by or asserted against Agent in any
way  relating to or arising  out of the Loan  Documents  or any action  taken or
omitted by Agent under the Loan Documents, provided that no Bank shall be liable
for any portion of such liabilities,  obligations,  losses, damages,  penalties,
actions,  judgments,  suits,  costs,  expenses or  disbursements  resulting from
Agent's gross negligence or willful  misconduct.  Each Bank shall be entitled to
be  reimbursed  by the Agent for any amount  such Bank paid to Agent  under this
Section 15(h) to the extent the Agent has been  reimbursed  for such payments by
the Borrower or any other Person.  The parties intend for the provisions of this
Section to apply to and protect the Agent from the consequences of any liability
including strict liability  imposed or threatened to be imposed on Agent as well
as from the  consequences of its own negligence,  whether or not that negligence
is the sole, contributing or concurring cause of any such liability.

     (i) Benefit of Section 15. The agreements  contained in this Section 15 are
solely for the benefit of Agent and the Banks and are not for the benefit of, or
to be relied upon by, the  Borrower,  any Affiliate of the Borrower or any other
person.

     (j) Pro Rata Treatment.  Subject to the provisions of this Agreement,  each
payment  (including  each  prepayment)  by the Borrower and  collection by Banks
(including

<PAGE>
                                       50


offsets)  on  account of the  principal  of and  interest  on the Notes and fees
provided for in this Agreement,  payable by the Borrower shall be made Pro Rata;
provided,  however,  in the event that any Defaulting  Bank shall have failed to
make an Advance as contemplated under Section 3 hereof and Agent or another Bank
or Banks shall have made such Advance, payment received by Agent for the account
of such  Defaulting  Bank or Banks shall not be distributed  to such  Defaulting
Bank or Banks until such  Advance or Advances  shall have been repaid in full to
the Bank or Banks who funded such Advance or Advances.

     (k)  Assumption as to Payments.  Except as  specifically  provided  herein,
unless Agent shall have received  notice from the Borrower  prior to the date on
which any payment is due to Banks hereunder that the Borrower will not make such
payment in full,  Agent  may,  but shall not be  required  to,  assume  that the
Borrower  has made such  payment in full to Agent on such date and Agent may, in
reliance upon such assumption,  cause to be distributed to each Bank on such due
date an amount equal to the amount then due such Bank.  If and to the extent the
Borrower  shall not have so made such payment in full to Agent,  each Bank shall
repay to Agent forthwith on demand such amount distributed to such Bank together
with interest thereon,  for each day from the date such amount is distributed to
such Bank until the date such Bank repays such amount to Agent,  at the interest
rate applicable to such portion of the Revolving Loan.

     (l)  Other  Financings.  Without  limiting  the  rights  to which  any Bank
otherwise is or may become entitled, such Bank shall have no interest, by virtue
of this  Agreement  or the Loan  Documents,  in (a) any present or future  loans
from,  letters of credit issued by, or leasing or other  financial  transactions
by, any other Bank to, on behalf of, or with the Borrower (collectively referred
to herein as "Other Financings") other than the obligations  hereunder;  (b) any
present or future guarantees by or for the account of the Borrower which are not
contemplated by the Loan Documents;  (c) any present or future property taken as
security for any such Other Financings;  or (d) any property now or hereafter in
the possession or control of any other Bank which may be or become  security for
the obligations of the Borrower arising under any loan document by reason of the
general  description of indebtedness  secured or property contained in any other
agreements, documents or instruments relating to any such Other Financings.

     (m)  Interests of Banks.  Nothing in this  Agreement  shall be construed to
create a  partnership  or joint venture  between  Banks for any purpose.  Agent,
Banks and the Borrower recognize that the respective  obligations of Banks under
the  Commitment  shall be several and not jointly and that neither Agent nor any
of Banks shall be responsible or liable to perform any of the obligations of the
other under this Agreement.  Each Bank is deemed to be the owner of an undivided
interest in and to all rights,  titles,  benefits and  interests  belonging  and
accruing to Agent under the Security Instruments, including, without limitation,
liens and security  interests in any collateral,  fees and payments of principal
and

<PAGE>
                                       51


interest by the Borrower  under the  Commitment  on a Pro Rata basis.  Each Bank
shall perform all duties and  obligations  of Banks under this  Agreement in the
same proportion as its ownership  interest in the Loans  outstanding at the date
of determination thereof.

     (n)  Investments.  Whenever  Agent  in  good  faith  determines  that it is
uncertain  about how to distribute to Banks any funds which it has received,  or
whenever  Agent in good faith  determines  that there is any  dispute  among the
Banks  about how such  funds  should be  distributed,  Agent may choose to defer
distribution of the funds which are the subject of such  uncertainty or dispute.
If Agent in good faith  believes  that the  uncertainty  or dispute  will not be
promptly  resolved,  or if Agent is otherwise  required to invest funds  pending
distribution to the Banks, Agent may invest such funds pending  distribution (at
the  risk of the  Borrower).  All  interest  on any  such  investment  shall  be
distributed upon the distribution of such investment and in the same proportions
and to the same  Persons as such  investment.  All monies  received by Agent for
distribution to the Banks (other than to the Person who is Agent in its separate
capacity as a Bank) shall be held by the Agent pending such distribution  solely
as Agent for such Banks,  and Agent shall have no equitable title to any portion
thereof.

     16. Exercise of Rights. No failure to exercise, and no delay in exercising,
on the part of the Agent or the Banks,  any right  hereunder  shall operate as a
waiver thereof,  nor shall any single or partial  exercise  thereof preclude any
other or further exercise thereof or the exercise of any other right. The rights
of the Agent and the Banks  hereunder  shall be in addition to all other  rights
provided  by law.  No  modification  or  waiver  of any  provision  of the  Loan
Documents,  including  this  Agreement,  or the Note nor  consent  to  departure
therefrom,  shall be effective unless in writing,  and no such consent or waiver
shall  extend  beyond the  particular  case and purpose  involved.  No notice or
demand  given in any case shall  constitute  a waiver of the right to take other
action  in the same,  similar  or other  circumstances  without  such  notice or
demand.

     17. Notices. Any notices or other  communications  required or permitted to
be given by this Agreement or any other  documents and  instruments  referred to
herein must be given in writing  (which may be by  facsimile  transmission)  and
must be personally  delivered or mailed by prepaid  certified or registered mail
or e-mailed to the party to whom such notice or communication is directed at the
address of such party as follows: (a) BORROWER:  FIRST PERMIAN, L.L.C., 110 West
Louisiana  Avenue,  Midland,  Texas  79702-7158,  Facsimile No.  915-686-  7034,
Attention: Don Tiffin, General Manager, e-mall: dtiffin@firstpermian.com; with a
copy to: (i) Tucker Bridwell,  Chairman, c/o Mansefeldt Investment  Corporation,
400 Pine, Suite 1000, Abilene, Texas 79601, Facsimile No. 915-675- 5017, e-mail:
mansefel@abilene.com; (ii) David Dunton, Vice President, EnCap Investments, LLC,
3811 Turtle Creek  Boulevard,  Suite 1080,  Dallas,  Texas 75219,  Facsimile No.
214-599-0200,  e-mail:  duntond@epenergy.com;  (b) AGENT: BANK ONE, TEXAS, N.A.,
910 Travis Street, Houston, Texas 77002, Facsimile No. 713- 751-7894, Attention:
Richard G. Sylvan, First Vice President,  e-mail:  dick_sylvan@mail.bankone.com.
Any such  notice or other  communication  shall be  deemed  to have  been  given
(whether  actually  received  or  not) on the  day

<PAGE>
                                       52


it is personally delivered, delivered by facsimile or e-mail as aforesaid or, if
mailed,  on the third day after it is mailed as aforesaid.  Any party may change
its address for purposes of this  Agreement  by giving  notice of such change to
the other party pursuant to this Section 17. Any notice  required to be given to
the Banks shall be given to the Agent and distributed to all Banks by the Agent.

     18.  Expenses.  The Borrower  shall pay (i) all  reasonable  and  necessary
out-of-pocket expenses of the Banks, including reasonable fees and disbursements
of special  counsel for the Agent,  in connection  with the  preparation of this
Agreement,  any  waiver or  consent  hereunder  or any  amendment  hereof or any
Default or Event of Default or alleged Default or Event,  of Default  hereunder,
(ii) all reasonable and necessary out-of-pocket expenses of the Agent, including
reasonable fees and disbursements of special counsel for the Agent in connection
with  the  preparation  of any  participation  agreement  for a  participant  or
participants  requested by the Borrower or any amendment  thereof and (iii) if a
Default  or  an  Event  of  Default   occurs,   all   reasonable  and  necessary
out-of-pocket  expenses incurred by the Banks,  including fees and disbursements
of counsel,  in connection with such Default and Event of Default and collection
and other  enforcement  proceedings  resulting  therefrom.  The Borrower  hereby
acknowledges  that Gardere & Wynne,  L.L.P.  is special  counsel to Bank One, as
Agent and as a Bank,  under this  Agreement  and that it is not  counsel to, nor
does it represent the Borrower in connection with the transactions  described in
this Agreement.  The Borrower is relying on separate  counsel in the transaction
described  herein.  The Borrower shall  indemnify the Banks against any transfer
taxes, document taxes, assessments or charges made by any governmental authority
by reason of the  execution,  delivery  and  filing of the Loan  Documents.  The
obligations of this Section 18 shall survive any  termination of this Agreement,
the expiration of the Loans and the payment of all  indebtedness of the Borrower
to the Banks hereunder and under the Notes.

     19. Indemnity. The Borrower agrees to indemnify and hold harmless the Banks
and their respective officers,  employees, agents, attorneys and representatives
(singularly,   an  "Indemnified  Party",  and  collectively,   the  "Indemnified
Parties")  from and  against  any  loss,  cost,  liability,  damage  or  expense
(including  the  reasonable  fees and  out-of-pocket  expenses of counsel to the
Banks,  including all local counsel hired by such counsel) ("Claim") incurred by
the Banks in investigating  or preparing for,  defending  against,  or providing
evidence,  producing  documents  or taking  any other  action in  respect of any
commenced or threatened litigation,  administrative  proceeding or investigation
under any federal  securities law,  federal or state  environmental  law, or any
other  statute  of any  jurisdiction,  or any  regulation,  or at common  law or
otherwise, which is alleged to arise out of or is based upon any acts, practices
or  omissions  or alleged  acts,  practices  or omissions of the Borrower or its
agents or arises in connection  with the duties,  obligations  or performance of
the  Indemnified  Parties  in  negotiating,   preparing,  executing,  accepting,
keeping, completing,  countersigning,  issuing, selling, delivering,  releasing,
assigning,  handling,  certifying,  processing  or receiving or taking any other
action with respect to the Loan Documents and all documents, items and materials
contemplated  thereby even if any of the foregoing  arises out of an Indemnified
Party's ordinary negligence. The indemnity set forth herein shall be in addition
to any other  obligations or

<PAGE>
                                       53


liabilities  of  the  Borrower  to  the  Banks  hereunder  or at  common  law or
otherwise,  and shall survive any termination of this Agreement,  the expiration
of the Loans and the payment of all  indebtedness  of the  Borrower to the Banks
hereunder  and  under  the  Notes,  provided  that the  Borrower  shall  have no
obligation  under this Section to the Banks with respect to any of the foregoing
arising out of the gross  negligence  or willful  misconduct of any Bank. If any
Claim is asserted  against any Indemnified  Party,  the Indemnified  Party shall
endeavor to notify the  Borrower  of such Claim (but  failure to do so shall not
affect the  indemnification  herein made except to the extent of the actual harm
caused by such failure).  The Indemnified  Party shall have the right to employ,
at the Borrower's expense,  counsel of the Indemnified  Parties' choosing and to
control  the defense of the Claim.  The  Borrower  may at its own  expense  also
participate  in the  defense of any  Claim.  Each  Indemnified  Party may employ
separate  counsel in  connection  with any Claim to the extent such  Indemnified
Party believes it reasonably  prudent to protect such  Indemnified  Party.  [The
parties  intend for the  provisions of this Section to apply to and protect each
Indemnified  Party  from the  consequences  of any  liability  including  strict
liability  imposed  or  threatened  to be  imposed  on Agent as well as from the
consequences of its own negligence,  whether or not that negligence is the sole,
contributing, or concurring cause of any Claim.]

     20.  Governing Law. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED,  AND IS
INTENDED TO BE PERFORMED, IN MIDLAND, MIDLAND COUNTY, TEXAS, AND THE SUBSTANTIVE
LAWS  OF  TEXAS  SHALL  GOVERN  THE  VALIDITY,  CONSTRUCTION,   ENFORCEMENT  AND
INTERPRETATION  OF  THIS  AGREEMENT  AND ALL  OTHER  DOCUMENTS  AND  INSTRUMENTS
REFERRED TO HEREIN, UNLESS OTHERWISE SPECIFIED THEREIN.

     21.  Invalid  Provisions.  If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement,  such  provisions  shall be fully severable and this
Agreement  shall be  construed  and  enforced  as if such  illegal,  invalid  or
unenforceable  provision had never comprised a part of this  Agreement,  and the
remaining  provisions of the Agreement shall remain in full force and effect and
shall not be affected by the illegal,  invalid or unenforceable  provision or by
its severance from this Agreement.

     22. Maximum Interest Rate.  Regardless of any provisions  contained in this
Agreement or in any other  documents  and  instruments  referred to herein,  the
Banks  shall never be deemed to have  contracted  for or be entitled to receive,
collect or apply as  interest  on the Notes any amount in excess of the  Maximum
Rate, and in the event any Bank ever  receives,  collects or applies as interest
any such excess,  or if an acceleration of the maturities of any Notes or if any
prepayment by the Borrower  results in the Borrower  having paid any interest in
excess of the Maximum Rate, such amount which would be excessive  interest shall
be applied to the  reduction  of the unpaid  principal  balance of the Notes for
which such excess was  received,  collected  or applied,  and, if the  principal
balance of such Note is paid in full,  any remaining  excess shall  forthwith be
paid to the  Borrower.  All sums  paid or agreed to be paid to the Banks for the
use, forbearance or detention of the

<PAGE>
                                       54


indebtedness  evidenced by the Notes and/or this Agreement  shall, to the extent
permitted  by  applicable  law, be  amortized,  prorated,  allocated  and spread
throughout the full term of such indebtedness  until payment in full so that the
rate or amount of interest on account of such  indebtedness  does not exceed the
Maximum Rate. In  determining  whether or not the interest paid or payable under
any specific  contingency exceeds the Maximum Rate of interest permitted by law,
the  Borrower  and the  Banks  shall,  to the  maximum  extent  permitted  under
applicable law, (i) characterize any non-principal payment as an expense, fee or
premium, rather than as interest; and (ii) exclude voluntary prepayments and the
effect thereof;  and (iii) compare the total amount of interest  contracted for,
charged or received with the total amount of interest  which could be contracted
for, charged or received  throughout the entire contemplated term of the Note at
the Maximum Rate.

     For  purposes  of  Section  303 of the Texas  Finance  Code,  to the extent
applicable  to any Bank or Agent,  Borrower  agrees  that the  Maximum  Rate (as
defined  herein)  shall be the  "weekly  ceiling"  as defined  in said  Chapter,
provided  that such Bank or Agent as  applicable,  may also rely,  to the extent
permitted  by  applicable  laws of the State of Texas and the  United  States of
America,  on alternative  maximum rates of interest under the Texas Finance Code
or other laws applicable to such Banks or Agent from time to time if greater.

     23.  Amendments.  This  Agreement  may be amended only by an  instrument in
writing  executed  by an  authorized  officer  of the  party  against  whom such
amendment is sought to be enforced.

     24.  Multiple  Counterparts.  This Agreement may be executed in a number of
identical separate counterparts,  each of which for all purposes is to be deemed
an original, but all of which shall constitute,  collectively, one agreement. No
party to this  Agreement  shall  be bound  hereby  until a  counterpart  of this
Agreement has been executed by all parties hereto.

     25.  Conflict.  In the event any term or provision  hereof is  inconsistent
with or  conflicts  with any  provision  of the  Loan  Documents,  the  terms or
provisions contained in this Agreement shall be controlling.

     26. Survival. All covenants, agreements, undertakings,  representations and
warranties  made in the Loan Documents,  including this Agreement,  the Notes or
other  documents and  instruments  referred to herein shall survive all closings
hereunder and shall not be affected by any investigation made by any party.

     27.  Parties Bound.  This Agreement  shall be binding upon and inure to the
benefit of the parties hereto and their respective successors,  assigns,  heirs,
legal representatives and estates, provided, however, that the Borrower may not,
without  the prior  written  consent  of all of the Banks,  assign  any  rights,
powers, duties or obligations hereunder.

<PAGE>
                                       55


     28. Assignments and Participations.

     (a) Each Bank shall have the right to sell,  assign or transfer  all or any
part of its  Note or  Notes,  its  Commitment  and its  rights  and  obligations
hereunder to one or more  Affiliates,  Banks,  financial  institutions,  pension
plans,  insurance  companies,  investment  funds,  or  similar  Persons  who are
Eligible  Assignees  or to a Federal  Reserve  Bank;  provided,  that each sale,
assignment or transfer (other than to an Affiliate,  a Bank or a Federal Reserve
Bank), shall require the consent of Agent and the Borrower,  which consents will
not be unreasonably withheld;  provided,  further,  however, that if an Event of
Default has occurred and is continuing, the consent of the Borrower shall not be
required.  Any such assignee,  transferee or recipient shall have, to the extent
of such sale, assignment, or transfer, the same rights, benefits and obligations
as it would if it were  such  Bank and a holder  of such  Note,  Commitment  and
rights and  obligations,  including,  without  limitation,  the right to vote on
decisions  requiring  consent or approval of all Banks or Majority Banks and the
obligation  to  fund  its  Commitment;   provided,  that  (1)  each  such  sale,
assignment, or transfer (other than to an Affiliate, a Bank or a Federal Reserve
Bank) shall be in an aggregate  principal amount not less than  $5,000,000,  (2)
each remaining Bank shall at all times maintain its Commitment then  outstanding
in an aggregate  principal  amount at least equal to  $5,000,000;  (3) each such
sale  assignment  or  transfer  shall be of a Pro Rata  portion  of such  Bank's
Revolving  Commitment,  (4) no Bank  may  offer  to  sell  its  Note  or  Notes,
Commitment,  rights and  obligations  or  interests  therein in violation of any
securities  laws; and (5) no such  assignments  (other than to a Federal Reserve
Bank) shall become effective until the assigning Bank and its assignee  delivers
to Agent and Borrower an Assignment and Acceptance and the Note or Notes subject
to such  assignment  and other  documents  evidencing  any such  assignment.  An
assignment fee in the amount of $3,500 for each such  assignment  (other than to
an  Affiliate,  a Bank or the Federal  Reserve Bank) will be payable to Agent by
assignor or assignee.  Within five (5) Business Days after its receipt of copies
of the Assignment and Acceptance and the other  documents  relating  thereto and
the Note or Notes, the Borrower shall execute and deliver to Agent (for delivery
to the  relevant  assignee)  a new  Note or  Notes  evidencing  such  assignee's
assigned  Commitment  and if the  assignor  Bank has  retained  a portion of its
Commitment,  a  replacement  Note  in the  principal  amount  of the  Commitment
retained  by the  assignor  (except as  provided  in the last  sentence  of this
paragraph  (a) such Note or Notes to be in exchange  for, but not in payment of,
the Note or Notes  held by such  Bank).  On and after the  effective  date of an
assignment  hereunder,  the assignee shall for all purposes be a Bank,  party to
this Agreement and any other Loan Document  executed by the Banks and shall have
all the rights and obligations of a Bank under the Loan  Documents,  to the same
extent as if it were an original party thereto, and no further consent or action
by Borrower, Banks or the Agent shall be required to release the transferor Bank
with respect to its Commitment assigned to such assignee and the transferor Bank
shall henceforth be so released.

<PAGE>
                                       56


     (b) Each Bank  shall have the right to grant  participations  in all or any
part of such Bank's Notes and Commitment hereunder to one or more pension plans,
investment funds, insurance companies,  financial institutions or other Persons,
provided, that:

          (i) each Bank granting a participation  shall retain the right to vote
     hereunder,  and no  participant  shall be  entitled  to vote  hereunder  on
     decisions  requiring  consent or approval  of all Banks or  Majority  Banks
     (except as set forth in (iii) below);

          (ii) in the  event any Bank  grants a  participation  hereunder,  such
     Bank's  obligations under the Loan Documents shall remain  unchanged,  such
     Bank shall remain solely  responsible  to the other parties  hereto for the
     performance of such  obligations,  such Bank shall remain the holder of any
     such Note or Notes for all purposes  under the Loan  Documents,  and Agent,
     each Bank and Borrower  shall be entitled to deal with the Bank  granting a
     participation in the same manner as if no  participation  had been granted;
     and

          (iii) no  participant  shall  ever  have any  right by  reason  of its
     participation to exercise any of the rights of Banks hereunder, except that
     any Bank may agree with any  participant  that such Bank will not,  without
     the consent of such  participant  (which  consent  may not be  unreasonably
     withheld)  consent to any  amendment  or waiver  requiring  approval of all
     Banks.

     (c) It is understood  and agreed that any Bank may provide to assignees and
participants and prospective  assignees and participants  financial  information
and reports and data concerning  Borrower's  properties and operations which was
provided to such Bank pursuant to this Agreement.

     (d) Upon the reasonable request of either Agent or Borrower, each Bank will
identify those to whom it has assigned or participated any part of its Notes and
Commitment, and provide the amounts so assigned or participated.

     29. Choice of Forum:  Consent to Service of Process and  Jurisdiction.  THE
OBLIGATIONS  OF BORROWER  UNDER THE LOAN  DOCUMENTS ARE  PERFORMABLE  IN MIDLAND
COUNTY,  TEXAS. ANY SUIT, ACTION OR PROCEEDING AGAINST THE BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR ANY JUDGMENT  ENTERED BY ANY COURT IN RESPECT  THEREOF,
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS,  COUNTY OF HARRIS, OR IN THE
UNITED STATES COURTS LOCATED IN MIDLAND  COUNTY,  TEXAS AND THE BORROWER  HEREBY
SUBMITS TO THE  NONEXCLUSIVE  JURISDICTION OF SUCH COURTS FOR THE PURPOSE OF ANY

<PAGE>
                                       57



SUCH SUIT,  ACTION OR PROCEEDING.  THE BORROWER HEREBY  IRREVOCABLY  CONSENTS TO
SERVICE  OF  PROCESS  IN ANY SUIT,  ACTION OR  PROCEEDING  IN SAID  COURT BY THE
MAILING THEREOF BY BANK BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE
BORROWER,  AS APPLICABLE,  AT THE ADDRESS FOR NOTICES AS PROVIDED IN SECTION 17.
THE  BORROWER  HEREBY  IRREVOCABLY  WAIVES  ANY  OBJECTION  WHICH  IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING  ARISING
OUT OF OR RELATING  TO ANY LOAN  DOCUMENT  BROUGHT IN THE COURTS  LOCATED IN THE
STATE OF TEXAS,  COUNTY OF HARRIS,  AND HEREBY  FURTHER  IRREVOCABLY  WAIVES ANY
CLAIM THAT ANY SUCH  SUIT,  ACTION OR  PROCEEDING  BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.

     30. Waiver of Jury Trial. THE BORROWER HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED  BY  APPLICABLE  LAW,  ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING  ARISING  OUT OF OR RELATED  TO THIS  AGREEMENT  OR THE  TRANSACTIONS
CONTEMPLATED HEREBY.

     31. Other  Agreements.  THIS WRITTEN CREDIT AGREEMENT  REPRESENTS THE FINAL
AGREEMENT  BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS,  OR SUBSEQUENT  ORAL  AGREEMENTS  OF THE PARTIES.  THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

     32.  Financial Terms. All accounting terms used in this Agreement which are
not specifically defined herein shall be construed in accordance with GAAP.

<PAGE>
                                       58

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed as of the day and year first above written.

                              BORROWER:

                              FIRST PERMIAN, L.L.C.
                              a Delaware limited liability company



                              By: /s/ Tucker S. Bridwell
                                  ----------------------------
                                  Tucker S. Bridwell, Chairman


                              BANKS:

                              BANK ONE, TEXAS, N.A.,
                              a national banking association


                              By: /s/ Richard G. Sylvan
                                  ----------------------------
                                  Richard G. Sylvan, First Vice
                                  President


                              ADMINISTRATIVE AGENT:

                              BANK ONE, TEXAS, N.A.,
                              a national banking association


                              By: /s/ Richard G. Sylvan
                                  ----------------------------
                                  Richard G. Sylvan, First Vice
                                  President


<PAGE>

                                       1



                                   EXHIBIT "A"

                               NOTICE OF BORROWING

     The  undersigned  hereby  certifies  that  he  is  the  _______________  of
____________,  Manager of FIRST PERMIAN,  L.L.C., a Delaware  limited  liability
company,  and that as such he is  authorized to execute this Notice of Borrowing
on behalf of the  Borrower  (as such term is  defined  in the  Agreement).  With
reference to that certain Second Restated  Credit  Agreement dated as of October
25,  2000 (as same may be  amended,  modified,  increased,  supplemented  and/or
restated from time to time, the "Agreement")  entered into by and among Borrower
and BANK ONE, TEXAS,  N.A. ("Bank One"),  and the financial  institutions  party
thereto  (the  "Banks"),  the  undersigned  further  certifies,  represents  and
warrants on behalf of the Borrower that all of the following statements are true
and correct (each  capitalized term used herein having the same meaning given to
it in the Agreement unless otherwise specified):

               (a)  Borrower requests that the Banks advance Borrower on
     the Revolving Loan _____________ the aggregate sum of $___________
     by no later than ________________.  Immediately following such
     Advance, the aggregate outstanding balance of Advances shall equal
     $____________ on the Revolving Loan.

               (b)  This Advance shall be a:  Base Rate Loan ___________, or
     Eurodollar Loan _________, (if Eurodollar please state requested
     Interest Period ______ months).

               (c)  As of the date hereof, and as a result of the making of the
     requested Advance, there does not and will not exist any Default or
     Event of Default.

               (d)  Borrower has performed and complied with all agreements
     and conditions contained in the Agreement which are required to be
     performed or complied with by Borrower before or on the date hereof.

               (e)  The representations and warranties contained in the
     Agreement are true and correct in all material respects as of the date
     hereof and shall be true and correct upon the making of the Advance,
     with the same force and effect as though made on and as of the date
     hereof and thereof.

               (f)  No change that would cause a Material Adverse Effect to
     the condition, financial or otherwise, of Borrower has occurred since
     the most recent Financial Statement provided to the Banks.

<PAGE>
                                       2

EXECUTED AND DELIVERED this _____ day of _________, ______.


                                   FIRST PERMIAN, L.L.C.
                                   a Delaware limited liability company


                                   By:
                                   Name:
                                   Title:

<PAGE>
                                       1


                                   EXHIBIT "B"

                                 REVOLVING NOTE

$_____________                                   __________, 2000


     FOR VALUE RECEIVED,  the  undersigned,  FIRST PERMIAN,  L.L.C.,  a Delaware
limited liability company  (hereinafter  referred to as the "Borrower"),  hereby
unconditionally promises to pay to the order of ___________________ (the "Bank")
at the offices of BANK ONE, TEXAS, N.A. (the "Agent") in ______________  County,
Texas,   the   principal   sum   of   ________________   AND   ___/100   DOLLARS
($_____________),  in lawful money of the United States of America together with
interest  from the date  hereof  until paid at the rates  specified  in the Loan
Agreement (as hereinafter  defined).  All payments of principal and interest due
hereunder     are     payable     at     the     offices     of     Agent     at
_______________________________,  attention: Energy Department, or at such other
address as Bank shall designate in writing to Borrower.

     The  principal  and all  accrued  interest  on this  Note  shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.

     This Note is  executed  pursuant to that  certain  Second  Restated  Credit
Agreement dated October 25, 2000 between  Borrower,  the Agent and Banks (as the
same may be amended from time to time,  the "Loan  Agreement"  and is one of the
Notes referred to therein.  Reference is made to the Loan Agreement and the Loan
Documents  (as that term is defined in the Loan  Agreement)  for a statement  of
prepayment, rights and obligations of Borrower, for a statement of the terms and
conditions  under  which  the due date of this Note may be  accelerated  and for
statements  regarding  other  matters  affecting  this Note  (including  without
limitation  the  obligations  of the holder hereof to advance  funds  hereunder,
principal and interest payment due dates,  voluntary and mandatory  prepayments,
exercise of rights and  remedies,  payment of attorneys'  fees,  court costs and
other  costs of  collection  and certain  waivers by Borrower  and others now or
hereafter obligated for payment of any sums due hereunder).  Upon the occurrence
of an Event of Default,  as that term is defined in the Loan  Agreement and Loan
Doctunents,  the holder  hereof (i) may declare  forthwith  to be  entirely  and
immediately  due and  payable  the  principal  balance  hereof and the  interest
accrued  hereon,  and (ii) shall have all rights and remedies of the Bank tinder
the Loan  Agreement and Loan  Documents.  This Note may be prepaid in accordance
with the terms and provisions of the Loan Agreement.

     Regardless of any provision contained in this Note, the holder hereof shall
never be entitled to receive,  collect or apply,  as interest on this Note,  any
amount in  excess  of the  Maximum  Rate (as such  term is  defined  in the Loan
Agreement),  and, if the holder hereof ever  receives,  collects,  or applies as
interest,  any such amount which would be excessive interest, it shall be deemed
a partial  prepayment  of principal and treated  hereunder as such;  and, if the
indebtedness  evidenced  hereby  is paid in full,  any  remaining  excess  shall
forthwith be paid to Borrower.  In determining  whether or not the interest paid
or payable,  under any specific contingency,  exceeds the Maximum Rate, Borrower
and the holder hereof shall, to the maximum extent  permitted  under  applicable
law (i) characterize  any  non-principal  payment as an expense,  fee or premium
rather than as interest,  (ii)  exclude  voluntary  prepayments  and the effects
thereof,  and (iii)  spread the total amount of interest  throughout  the entire
contemplated  term of the obligations  evidenced by this Note and/or referred to
in the Loan Agreement so that the interest rate is uniform throughout the entire
term of

<PAGE>
                                       2

this Note;  provided  that,  if this Note is paid and  performed in full
prior to the end of the full  contemplated  term  thereof;  and if the  interest
received for the actual  period of existence  thereof  exceeds the Maximum Rate,
the holder  hereof  shall refund to Borrower the amount of such excess or credit
the amount of such excess against the  indebtedness  evidenced  hereby,  and, in
such event, the holder hereof shall not be subject to any penalties  provided by
any laws for contracting for, charging,  taking, reserving or receiving interest
in excess of the Maximum Rate.

     If any payment of  principal or interest on this Note shall become due on a
day other than a Business  Day (as such term is defined in the Loan  Agreement),
such  payment  shall  be made  on the  next  succeeding  Business  Day and  such
extension  of time  shall in such case be  included  in  computing  interest  in
connection with such payment.

     If this Note is placed in the hands of an attorney for collection, or if it
is collected  through any legal proceeding at law or in equity or in bankruptcy,
receivership  or other  court  proceedings,  Borrower  agree to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.

     Borrower and each surety,  endorser,  guarantor and other party ever liable
for payment of any sums of money  payable on this Note,  jointly  and  severally
waive presentment and demand for payment,  notice of intention to accelerate the
maturity,  protest, notice of protest and nonpayment,  as to this Note and as to
each and all installments hereof, and agree that their liability under this Note
shall not be affected by any renewal or extension in the time of payment hereof,
or in any  indulgences,  or by any  release  or change in any  security  for the
payment of this Note,  and hereby  consent to any and all renewals,  extensions,
indulgences, releases or changes.

     This  Note  shall be  governed  by and  construed  in  accordance  with the
applicable  laws of the United  States of  America  and the laws of the State of
Texas.

     THIS  WRITTEN  NOTE,  THE  LOAN  AGREEMENT  AND THE  OTHER  LOAN  DOCUMENTS
REPRESENT THE FINAL  AGREEMENTS  BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR,  CONTEMPORANEOUS,  OR  SUBSEQUENT  ORAL  AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREENIENTS BETWEEN THE PARTIES.

<PAGE>
                                      3

EXECUTED as of the date and year first above written.


                                   BORROWER:

                                   FIRST PERMIAN, L.L.C.
                                   a Delaware limited liability company



                                   By:
                                   Name:
                                   Title:

<PAGE>
                                       1


                                   EXHIBIT "C"

                            CERTIFICATE OF COMPLIANCE

     The  undersigned  hereby  certifies  that  he is  the  ________________  of
____________  Manager of FIRST PERMIAN,  L.L.C.,  a Delaware  limited  liability
company  (the  "Borrower")  and that as such he is  authorized  to execute  this
Certificate  of  Compliance on behalf of the  Borrower.  With  reference to that
certain Second Restated Credit Agreement, dated as of October 25, 2000, (as same
may be amended, modified,  increased,  supplemented and/or restated from time to
time, the "Agreement") entered into among the Borrower and BANK ONE, TEXAS, N.A.
as  "Agent,"  for itself and the Banks  signatory  thereto  (the  "Banks"),  the
undersigned further certifies, represents and warrants on behalf of the Borrower
that all of the following statements are true and correct (each capitalized term
used  herein  having  the  same  meaning  given  to it in the  Agreement  unless
otherwise specified):

          (a)  The  Borrower  has   fulfilled  in  all  material   respects  its
     obligations  under  the  Notes  and  Security  Instruments,  including  the
     Agreement,  and all  representations and warranties made herein and therein
     continue (except to the extent they relate solely to an earlier date) to be
     true and  correct in all  material  respects  [if the  representations  and
     warranties  are not true and correct,  the party  signing this  certificate
     shall  except  from the  foregoing  statement  the  matters  for which such
     representations  and warranties are no longer true specifying the nature of
     any such change.]

          (b) No Event of Default has occurred  under the Security  Instruments,
     including the  Agreement  [if an Event of Default has  occurred,  the party
     certifying hereto shall specify the facts constituting the Event of Default
     and the nature and status thereof].

          (c) To the  extent  requested  from  time to time  by the  Agent,  the
     certifying party shall  specifically  affirm  compliance of the Borrower in
     all  material  respects  with  any of its  representations  and  warranties
     (except to the extent they relate solely to an earlier date) or obligations
     under said instruments.

          (d)  Financial  Computations  for  the  period  ending  ______________
     (provide calculations on a consolidated basis):

                    (i)  Current Ratio;

                    (ii) Minimum Interest Coverage Ratio; and

                    (iii)  General and Administrative Expenses.

<PAGE>
                                       2


     EXECUTED,  DELIVERED  AND  CERTIFIED TO this  ______day of  ______________,
20___.

                                   BORROWER:

                                   FIRST PERMIAN, L.L.C.
                                   a Delaware limited liability company



                                   By:
                                   Name:
                                   Title:

<PAGE>
                                       1

                                   EXHIBIT "D"

                       ASSIGNMENT AND ACCEPTANCE AGREEMENT

     This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and Acceptance")
dated as of  ______________.  _____ is made  between  ____________________  (the
"Assignor") and ______________ (the "Assignee").

                                    RECITALS

     WHEREAS,  the  Assignor is party to that  certain  Second  Restated  Credit
Agreement dated as of October 25, 2000 (the "Loan Agreement") by and among First
Permian,  L.L.C., a Delaware limited liability company (hereinafter  referred to
as the "Company"),  the Banks signatory thereto (the "Banks"),  Bank One, Texas,
N.A., as Administrative Agent (in such capacity, the "Agent"), and the financial
institutions  party thereto (unless otherwise defined herein,  capitalized terms
used  herein  have  the  respective  meanings  assigned  to  them  in  the  Loan
Agreement);

     WHEREAS as provided under the Loan Agreement, the Assignor has committed to
make Loans (the  "Committed  Loans") to the Company in aggregate  amounts not to
exceed  $110,000,000  on the Revolving Loan (the "Revolving  Commitment"),  such
Revolving  Commitment  being evidenced by a Revolving Note in the face amount of
$110,000,000 (the "Note");  the Revolving  Commitment is hereinafter referred to
as (the "Commitment");

     WHEREAS,  [the  Assignor  has made  Committed  Loans to the  Company in the
aggregate  principal amount of $______________  on the Revolving  Commitment [no
Committed Loans are outstanding under the Loan Agreement]; and

     WHEREAS,  the Assignor wishes to assign to the Assignee [part] [all] of the
rights and  obligations  of the Assignor  under the Loan Agreement in respect of
its Commitment, in an amount equal to $_____________ on the Revolving Commitment
for a total of $_______________ for the total Commitment (the "Assigned Amount")
on the terms and subject to the  conditions  set forth  herein and the  Assignee
wishes to accept  assignment of such rights and assume such obligations from the
Assignor on such terms and subject to such conditions;

     NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, the parties hereto agree as follows:

     1. Assignment and Acceptance.

     (a) Subject to the terms and conditions of this  Assignment and Acceptance,
(i) the Assignor hereby sells,  transfers and assigns to the Assignee,  and (ii)
the Assignee hereby purchases, assumes and undertakes from the Assignor, without
recourse  and without  representation  or  warranty  (except as provided in this
Assignment and Acceptance) ___% (the "Assignee's  Percentage  Share") of (A) the
Commitment [and the Committed Loans] of the Assignor, (B) the Notes, and (C) all
related  rights,  benefits,  obligations,  liabilities  and  indemnities  of the
Assignor under and in connection with the Loan Agreement and the Loan Documents.

<PAGE>
                                        2



     [If appropriate,  add paragraph  specifying payment to Assignor by Assignee
of  outstanding  principal  of,  accrued  interest on, and fees with respect to,
Committed Loans assigned.]

     (b) With  effect on and after the  Effective  Date (as defined in Section 5
hereof),  the Assignee shall be a party to the Loan Agreement and succeed to all
of the rights and be obligated to perform all of the obligations of a Bank under
the Loan Agreement,  including the requirements  concerning  confidentiality and
the payment of  indemnification,  with a  Commitment  in an amount  equal to the
Assigned  Amount.  The Assignee  agrees that it will perform in accordance  with
their terms all of the obligations  which by the terms of the Loan Agreement are
required to be performed by it as a Bank. It is the intent of the parties hereto
that the Commitment of the Assignor  shall, as of the Effective Date, be reduced
by an amount equal to the Assigned Amount and the Assignor shall  relinquish its
rights and be released  from its  obligations  under the Loan  Agreement  to the
extent such obligations have been assumed by the Assignee.

     (c) After giving effect to the  assignment and assumption set forth herein,
on the Effective Date the Assignee's Commitment will be $__________.

     (d) After giving effect to the  assignment and assumption set forth herein,
on the Effective Date the Assignor's Commitment will be $____________.

     2. Payments.

     (a) As consideration for the sale,  assignment and transfer contemplated in
Section 1 hereof,  the Assignee  shall pay to the Assignor on the Effective Date
in   immediately   available   funds  an  amount  equal  to   $________________,
representing  the  Assignee's  Pro Rate  Share of the  principal  amount  of all
Committed Loans.

     (b)  The  [Assignor]  [Assignee]  further  agrees  to pay to  the  Agent  a
processing fee in the amount specified in Section 28 of the Loan Agreement.

     3. Reallocation of Payments. Any interest,  fees and other payments accrued
to the Effective Date with respect to the  Commitment,  the Committed  Loans and
the Notes shall be for the account of the Assignor. Any interest, fees and other
payments  accrued on and after the  Effective  Date with respect to the Assigned
Amount  shall be for the account of the  Assignee.  Each of the Assignor and the
Assignee  agrees  that it will hold in trust for the other  party any  interest,
fees and other amounts which it may receive to which the other party is entitled
pursuant to the  preceding  sentence and pay to the other party any such amounts
which it may receive promptly upon receipt.

     4. Independent  Credit Decision.  The Assignee (a) acknowledges that it has
received a copy of the Loan  Agreement and the  Schedules and Exhibits  thereto,
together  with copies of the most  recent  financial  statements  referred to in
Section 12 of the Loan Agreement, and such other documents and information as it
has deemed appropriate to make its own credit and legal analysis and decision to
enter  into  this  Assignment  and  Acceptance;  and (b)  agrees  that it  will,
independently


<PAGE>
                                       3


and without reliance upon the Assignor, the Agent or any other Bank and based on
such  documents  and  information  as it shall  deem  appropriate  at the  time,
continue  to make its own  credit  and legal  decisions  in taking or not taking
action under the Loan Agreement.

     5. Effective Date; Notices.

     (a) As between the Assignor and the Assignee,  the effective  date for this
Assignment  and  Acceptance  shall be  ______________,  _______ (the  "Effective
Date");  provided that the following conditions precedent have been satisfied on
or before the Effective Date:

          (i) this Assignment and Acceptance  shall be executed and delivered by
     the Assignor and the Assignee, together with the Notes;

          (ii) the consent of the Agent required for an effective  assignment of
     the Assigned Amount by the Assignor to the Assignee under Section 28 of the
     Loan Agreement shall have been duly obtained and shall be in full force and
     effective as of the Effective Date;

          (iii) the  Assignee  shall pay to the  Assignor all amounts due to the
     Assignor under this Assignment and Acceptance;

          (iv) the  processing  fee  referred  to in Section  2(b) hereof and in
     Section 28 of the Loan Agreement shall have been paid to the Agent; and

          (v) the  Assignor  shall have  assigned  and the  Assignee  shall have
     assumed a percentage equal to the Assignee's Percentage Share of the rights
     and obligations of the Assignor under the Loan Agreement (if such agreement
     exists).

     (b) Promptly following the execution of this Assignment and Acceptance, the
Assignor shall deliver to the Agent for  acknowledgment  by the Agent, a copy of
this Assignment and Acceptance.

     6. Agent. [INCLUDE ONLY IF ASSIGNOR IS AGENT]

     (a) The Assignee  hereby  appoints and authorizes the Assignor to take such
action  as agent on its  behalf  and to  exercise  such  powers  under  the Loan
Agreement as are  delegated  to the Agent by the Banks  pursuant to the terms of
the Loan Agreement.

     (b) The Assignee shall assume no duties or obligations held by the Assignor
in its capacity as Agent under the Loan Agreement.]

     7.  Withholding  Tax. The Assignee (a) represents and warrants to the Bank,
the Agent and the Company that under  applicable law and treaties no tax will be
required to be withheld by the Bank with  respect to any  payments to be made to
the Assignee hereunder, (b) agrees to furnish (if

<PAGE>
                                       4


it is organized under the laws of any jurisdiction  other than the United States
or any State  thereof) to the Agent and the  Company  prior to the time that the
Agent or Company is required to make any payment of principal,  interest or fees
hereunder,  duplicate executed originals of either U.S. Internal Revenue Service
Form 4224 or U.S. Internal Revenue Service Form 101 (wherein the Assignee claims
entitlement  to the  benefits  of a tax  treaty  that  provides  for a  complete
exemption from U.S.  federal income  withholding tax on all payments  hereunder)
and  agrees  to  provide  new  Forms  4224 or 1001  upon the  expiration  of any
previously delivered form or comparable statements in accordance with applicable
U.S. law and regulations and amendments thereto,  duly executed and completed by
the  Assignee,  and (c)  agrees  to comply  with all  applicable  U.S.  laws and
regulations with regard to such withholding tax exemption.

     8. Representations and Warranties.

     (a) The  Assignor  represents  and  warrants  that (i) it is the  legal and
beneficial  owner of the interest  being  assigned by it hereunder and that such
interest is free and clear of any Lien or other adverse  claim;  (ii) it is duly
organized and existing and it has the full power and authority to take,  and has
taken,  all  action  necessary  to  execute  and  deliver  this  Assignment  and
Acceptance  and any other  documents  required  or  permitted  to be executed or
delivered by it in connection with this Assignment and Acceptance and to fulfill
its obligations hereunder;  (iii) on notices to, or consents,  authorizations or
approvals of, any Person are required (other than any already given or obtained)
for  its  due  execution,  delivery  and  performance  of  this  Assignment  and
Acceptance, and apart from any agreements or undertakings or filings required by
the Loan  Agreement,  no further  action by, or notice to, or filing  with,  any
Person is required of it for such execution,  delivery or performance;  and (iv)
this  Assignment  and  Acceptance has been duly executed and delivered by it and
constitutes the legal, valid and binding obligation of the Assignor, enforceable
against  the  Assignor  in  accordance  with the terms  hereof,  subject,  as to
enforcement,  to bankruptcy,  insolvency,  moratorium,  reorganization and other
laws of general  application  relating to or affecting  creditors' rights and to
general equitable principles.

     (b) The  Assignor  makes no  representation  or  warranty  and  assumes  no
responsibility  with respect to any  statements,  warranties or  representations
made in or in connection  with the Loan  Agreement or the  execution,  legality,
validity,  enforceability,   genuineness,  sufficiency  or  value  of  the  Loan
Agreement or any other instrument or document  fumished  pursuant  thereto.  The
Assignor makes no  representation or warranty in connection with, and assumes no
responsibility with respect to, tho solvency,  financial condition or statements
of the Company,  or the performance or observance by the Company,  of any of its
respective  obligations  under the Loan  Agreement  or any other  instrument  or
document furnished in connection therewith.

     (c) The Assignee  represents and warrants that (i) it is duly organized and
existing and it has full power and authority to take, and has taken,  all action
necessary  to execute and  deliver  this  Assignment  and  Acceptance  any other
documents  required or permitted to be executed or delivered by it in connection
with this Assignment and Acceptance,  and to fulfill its obligations  hereunder;
(ii) no notices to, or consents,  authorizations or approvals of, any Person are
required  (other  than any

<PAGE>
                                       5


already given or obtained) for its due  execution,  delivery and  performance of
this Assignment and Acceptance; and apart from any agreements or undertakings or
filings  required by the Loan Agreement,  no further action by, or notice to, or
filings  with,  any Person is  required  of it for such  execution,  delivery or
performance;  (iii) this  Assignment  and  Acceptance has been duly executed and
delivered by it and constitutes the legal,  valid and binding  obligation of the
Assignee,  enforceable against the Assignee in accordance with the terms hereof,
subject,   as   to   enforcement,   to   bankruptcy,   insolvency,   moratorium,
reorganization  and other laws of general  application  relating to or affecting
creditors'  rights  and to  general  equitable  principles;  and  (iv)  it is an
Eligible Assignee.

     9. Further  Assurances.  The Assignor and the Assignee each hereby agree to
execute and  deliver  such other  instruments,  and take such other  action,  as
either  party  may  reasonably  request  in  connection  with  the  transactions
contemplated by this  Assignment and  Acceptance,  including the delivery of any
notices or other documents or instruments to the Company or the Agent, which may
be  required in  connection  with the  assignment  and  assumption  contemplated
hereby.

     10. Miscellaneous.

     (a) Any  amendment  or  waiver  of any  provision  of this  Assignment  and
Acceptance  shall be in writing and signed by the parties hereto.  No failure or
delay by either  party  hereto  in  exercising  any  right,  power or  privilege
hereunder  shall operate as a waiver thereof and any waiver of any breach of the
provisions of this Assignment and Acceptance  shall be without  prejudice to any
rights with respect to any other further breach thereof.

     (b) All  payments  made  hereunder  shall be made  without  any  set-off or
counterclaim.

     (c) The Assignor and the Assignee shall each pay its own costs and expenses
incurred  in  connection  with  the  negotiation,   preparation,  execution  and
performance of this Assignment and Acceptance.

     (d) This  Assignment  and  Acceptance  may be  executed  in any  number  of
counterparts  and all of such  counterparts  taken  together  shall be deemed to
constitute one and the same instrument.

     (e) THIS  ASSIGNMENT AND  ACCEPTANCE  SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE  WITH THE LAW OF THE STATE OF TEXAS.  The  Assignor  and the Assignee
each  irrevocably  submits  to the  non-exclusive  jurisdiction  of any State or
Federal court sitting in Texas over any suit,  action or proceeding  arising out
of or relating to this Assignment and Acceptance and irrevocably agrees that all
claims in respect of such action or  proceeding  may be heard and  determined in
such Texas State or Federal court.  Each party to this Assignment and Acceptance
hereby  irrevocably  waives, to the fullest extent it may effectively do so, the
defense  of  an  inconvenient  forum  to  the  maintenance  of  such  action  or
proceeding.

     (f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY  KNOWINGLY,  VOLUNTARILY  AND
INTENTIONALLY  WAIVE ANY  RIGHTS  THEY MAY HAVE TO A

<PAGE>
                                       6


TRIAL BY JURY IN RESPECT OF ANY  LITIGATION  BASED  HEREON,  OR ARISING  OUT OF,
UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE LOAN AGREEMENT,
ANY  RELATED  DOCUMENTS  AND  AGREEMEINTS  OR ANY COURSE OF  CONDUCT,  COURSE OF
DEALING OR STATEMENTS (WHETHER ORAL OR WRITTEN).

     (g)  Assignee  hereby  provides  the  administrative  detail on  Addendum 1
hereto.

     [Other provisions to be added as may be negotiated between the Assignor and
the Assignee,  provided that such provisions are not inconsistent  with the Loan
Agreement.]

     IN  WITNESS  WHEREOF,  the  Assignor  and the  Assignee  have  caused  this
Assignment and Acceptance to be executed and delivered by their duly  authorized
officers as of the date first above written.

                                   [ASSIGNOR]


                                   By:
                                   Title:


                                   By:
                                   Title:
                                   Address:


                                   [ASSIGNEE]


                                   By:
                                   Title:


                                   By:
                                   Title:
                                   Address:

<PAGE>
                                       7


(If required by Section 28 of the Loan Agreement)

ACKNOWLEDGED AND CONSENTED TO:

BANK ONE, TEXAS, N.A., as Agent

By:
Name:
Title:


FIRST PERMIAN, L.L.C.
a Delaware limited liability company


By:
Name:
Title:


<PAGE>

                                  ADDENDUM 1 TO


                       ASSIGNMENT AND ACCEPTANCE AGREEMENT


The following administrative details apply to the Assignee:

(A)  Notice Address:     _____________________________

     Assignee name:      _____________________________
     Address:            _____________________________
                         _____________________________
                         _____________________________

     Attention:          _____________________________
Telephone:               ( )__________________________
Telecopier:              ( )__________________________
Telex (Answerback):      _____________________________

(B)  Payment Instructions:

Account No.:             _____________________________
At:                      _____________________________
                         _____________________________
                         _____________________________

Reference:               _____________________________
Attention:               _____________________________

<PAGE>



                                   SCHEDULE 1

                                      LIENS

                                      NONE

<PAGE>

                                   SCHEDULE 2

                               FINANCIAL CONDITION

                                      NONE



<PAGE>

                                   SCHEDULE 3

                                   LIABILITIES

                                      NONE

<PAGE>

                                   SCHEDULE 4

                                   LITIGATION

                                      NONE

<PAGE>

                                   SCHEDULE 5

                              ENVIRONMENTAL MATTERS

                                      NONE

<PAGE>
                                   SCHEDULE 6

                                  TITLE MATTERS

                                      NONE

<PAGE>



                                   SCHEDULE 7

                                CURATIVE MATTERS

                                      NONE

<PAGE>


                                                                 Exhibit 23.1

                        Consent of Independent Auditors'




The Board of Directors and Stockholders
Parallel Petroleum Corporation


We consent to the incorporation by reference in the registration statements (No.
33-46959,  No.  33-57348 and No.  333-34617) on Forms S-8, and the  registration
statement (No.  33-90296) on Form S-3 of Parallel  Petroleum  Corporation of our
report  dated  February  2, 2001,  relating  to the  balance  sheets of Parallel
Petroleum  Corporation  as of  December  31,  2000  and  1999,  and the  related
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year  period ended December 31, 2000, which appears in the December
31, 2000 annual report on Form 10-K of Parallel Petroleum Corporation.



/s/ KPMG LLP


Midland, Texas
March 26, 2001

<PAGE>

                                                            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,  No. 33-57348 and No.
333-34617) on Forms S-8, and the registration  statement (No.  33-90296) on Form
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, 2000.



/s/ JOE C. NEAL & ASSOCIATES


Midland, Texas
March 23, 2001



<PAGE>




                                                                 Exhibit 23.3

Consent of Independent Petroleum Engineers




As independent  petroleum  engineers,  we hereby consent to the incorporation by
reference in the  registration  statements (No.  33-46959,  No. 33-57348 and No.
333-34617) on Forms S-8, and the registration  statement (No.  33-90296) on Form
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, 2000.



/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.




Midland, Texas
April 2, 2001