SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10 - K/A
        [X]      Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1998

        [ ] Transition Report Under 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 Exchange Act: None

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

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

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

                                 Yes x            No

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

     The aggregate  market value of voting and non-voting  common equity held by
non-affiliates  of  the  Registrant  as of  March  15,  1999  was  approximately
$32,080,751, based on the last sale price of the common stock on the same date.

     At March 15, 1999 there were 18,331,858 shares of common stock outstanding.


PAGE>
                                       1


                                     PART I

================================================================================

                                ITEM 1. BUSINESS

================================================================================

General

     Parallel Petroleum is an independent  energy company.  Our primary business
is  natural  gas  and  oil  exploration,  development  and  production,  and the
acquisition of producing properties.

     We own  interests  in two core 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 gas and oil industry. These terms are: Mcf, Bcf, Bbls and EBO.
Mcf refers to the  quantity  of one  thousand  cubic feet of natural gas and 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.

     At December 31, 1998, our estimated proved reserves were approximately 26.0
Bcf of natural gas and 1.72 million Bbls of oil. The present value of our pretax
future net revenues was  approximately  $26.8 million.  Approximately 72% of our
proved reserves are natural gas and  approximately 67% are categorized as proved
developed reserves.

     During 1998, we  participated  in drilling 23 gross (5.48 net)  exploratory
and  development  wells.  Thirteen gross (3.32 net) wells were productive and 10
gross (2.16 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.


<PAGE>
                                       2


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

Business Strategies

     In  pursuing  our goal of capital  appreciation  for our  stockholders,  we
emphasize the following strategies:

     . focusing on exploration activities;

     . using advanced technologies;

     . serving as geophysical operator;

     . emphasizing cost controls; and

     . positioning for opportunity.

     These strategies are discussed in more detail in the following paragraphs.

     Focusing on  Exploration  Activities.  We seek to increase  our gas and oil
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;

     . located near  existing  wells so data from these wells can be  correlated
       with seismic data for prospects; and

     . a potential to have a meaningful impact on our reserves.


<PAGE>
                                       3


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

     . reduce drilling risks;
 
     . lower finding costs; and

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

     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.

     It is our belief that using 3-D seismic and AVO technologies  also gives us
a  competitive   advantage  over  companies  that  do  not  regularly  use  such
technologies because it increases the 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  assured  by  emphasizing  quality  controls  throughout  the  data
acquisition, processing and interpretation phases.

     We retain experienced  outside consultants and participate with experienced
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.

     Emphasizing   Cost  Controls.   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 this operational  base enables us to add exploratory  prospects and acquire
producing properties at relatively low incremental overhead costs.

     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.

     Positioning  for  Opportunity.   Because  of  intense   competition   among
independent oil and gas producers, we must be able to react quickly to available
exploration  and  acquisition  opportunities.  We attempt 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.


<PAGE>
                                       5

     We continually screen,  review and evaluate potential leases and prospects.
Our sources for possible  acquisitions 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
under-performing  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.

Exploration and Development Activities in 1998

     The scope of our exploration and development  activities is affected by gas
and oil prices. Our 1998 capital  expenditures were approximately 20% lower than
our capital expenditures in 1997. As oil and gas prices continued to deteriorate
during 1998, we decreased our drilling activity.

     . Gulf Coast Area of South Texas

     During 1998, our principal  exploration  and  development  activities  were
concentrated   in  south   Texas.   Our   activities   were   conducted  in  the
Yegua/Frio/Wilcox gas trend in the onshore gulf coast areas in Dewitt,  Jackson,
Lavaca,  Victoria and Wharton Counties.  This trend has been our primary area of
activity since 1993.

<PAGE>
                                       6


     We  participated  in drilling 23 wells in 1998, of which 22 were drilled in
the gulf  coast area of south  Texas.  One dry hole was  drilled in the  Permian
Basin.  The following  table shows the results of our 1998 drilling  activity in
the Yegua/Frio/Wilcox gas trend of south Texas.

<TABLE>
                             1998 Drilling Activity
                           Yegua/Frio/Wilcox Gas Trend

           Target                                                    No. of
          Formation                 Depth Range (feet)           Wells Drilled          Productive          Dry
------------------------------ ------------------------------ --------------------- -------------------- -----------
<S>                                <C>                          <C>                     <C>              <C>   
       
       Yegua                          6,300 - 13,000                   11                   10               1
       Frio                           6,400 -  8,400                    5                    1               4
       Wilcox                        13,200 - 17,500                    6                    2               4
                                                                      ---                  ---             ---
          Total                                                        22                   13               9  
                                                                      ===                  ===             ===
</TABLE>

     At March 1, 1999, we owned interests in 77 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 gas and oil leasehold interests; and
 
     . undivided working interests in gas and oil leases.


<PAGE>
                                       7

     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,  gas and oil leasehold or other  interests in the
AMI, we would then be  obligated  to offer the other  participants  the right to
purchase their pro rata share of the interest 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 confidential  and shared only with
our participants.  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.

     . 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,
1998, we were operator 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 1998, because of the continued decline in
oil prices, we limited our capital  expenditures on our Permian Basin properties
primarily to those activities necessary to maintain optimum well performance. We
drilled one well in the Permian Basin in 1998, which was a dry hole.


<PAGE>
                                       8

     When oil prices recover to levels that will 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:

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

     . selling properties to third parties.



<PAGE>
                                       9


Drilling and Acquisition Costs

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

<TABLE>
                                                                  Year Ended December 31,
                                        -------------------------------------------------------------------------
                                             1998           1997            1996           1995           1994
                                        -----------      ---------       ----------     ----------     ----------
                                                                      (in thousands)
<S>                                     <C>              <C>             <C>            <C>            <C>

Transfers from undeveloped leases held
for sale                                $         --     $     --        $       60      $    197      $      339
                                       
Proved property acquisition  costs                89          918             3,839           372             238

Unproved property acquisition costs            6,034        7,710               369            841          2,542

Exploration costs                              8,556        9,604             8,669          1,519          3,400

Development costs                              3,873        4,877             3,963            889          1,226
                                        ------------     --------        ----------      ---------     ----------
                                        $     18,552     $ 23,109        $   16,900      $   3,818     $    7,745
                                        ============     ========        ==========      =========     ==========         

</TABLE>

Natural Gas and Oil Prices are Volatile

     Industry  conditions started  deteriorating  during the latter part of 1997
and  continued  throughout  1998,  primarily  because of  declining  oil prices.
Recently,  there has been an excess supply of, and reduced demand for, crude oil
worldwide. This excess supply has placed downward pressures on oil prices in the
United States as well as worldwide. Natural gas prices also declined during this
period because of warm weather conditions, which reduced demand.

     Our  profitability  and cash  flows are highly  dependent  on the prices of
natural gas and oil. Current low oil prices and, to a lesser degree, natural gas
prices,  continue to have a material adverse effect on our cash flows. If prices
remain  depressed  for a  sustained  period of time,  this could have a material
adverse effect on our future operations and financial condition.


<PAGE>
                                       10


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

          . weather  conditions;  

          . the supply of foreign oil;

          . the level of product demand;

          . worldwide economic conditions; and

          . the price and availability of alternative fuels.

          The average prices we received for the natural gas and oil we produced
     in 1998, 1997 and 1996 are shown in the table below:

<TABLE>
                                                             Average Price Received for the
                                                                 Year Ended December 31,
                                                          -------------------------------------  

                                                              1998        1997          1996
                                                            ------      ------        -------
<S>                                                         <C>         <C>           <C>

        Natural gas (Mcf)                                   $ 2.04      $ 2.70         $ 2.55
        Oil (Bbl)                                           $12.49      $19.88         $21.83

</TABLE>

     The  average  natural gas price we received at March 15, 1999 was $1.75 per
Mcf. At the same date, the average price we were receiving for our oil sales was
approximately  $12.50 per Bbl. At December  31, 1998,  approximately  75% of our
daily  production  was  natural  gas and  25%  was  oil.  There  is  substantial
uncertainty  regarding future gas and oil prices and we can provide no assurance
that prices will not remain at current levels or decline further.

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.  Demand
for natural gas is typically higher during winter months.

<PAGE>
                                       11



Our Gas and Oil Operations Are Subject to Many Inherent Risks

     Gas and oil  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 gas or
oil in sufficient  quantities to return a profit.  The success of our operations
depends,  in part,  upon the ability of our management and technical  personnel.
There is no assurance  that our gas and oil 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 gas and oil.  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.

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


<PAGE>
                                       12

Executive Officers of Parallel

     At March 15, 1999,  Parallel's  executive officers were Thomas R. Cambridge
and Larry C. Oldham.

     Mr.  Cambridge,  age 63, 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
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 45, 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. Mr. Oldham received
a Bachelor of Business Administration degree from West Texas State University in
1975. He is a member of the American  Institute of Certified Public  Accountants
and a member of the Permian Basin Landman's Association.

     The term of both officers expires at 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 million  key-man life insurance  policy
on the life of Mr.  Cambridge and a $5 million key-man life insurance  policy on
the life of Mr. Oldham.


<PAGE>
                                       13


Employees

     At March 15, 1999,  Parallel had seven full time  employees.  Mr. Thomas R.
Cambridge, the Chief Executive Officer and Chairman of the Board of Directors of
Parallel,  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 eight 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,
1998.

<TABLE>

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

          1998                9.0        2.16         8.0        1.71        4.0        1.16        2.0        .45
          1997               19.0        4.45        17.0        4.08        7.0        6.54        1.0        .20
          1996               20.0        5.20         9.0        2.38        3.0        1.40        1.0        .42
</TABLE>
                         

(1) An exploratory well is a well drilled to find and produce gas or oil in
    an unproved  area,  to find a new  reservoir in a field  previously  found 
    to be productive of gas or oil in another reservoir, or to extend a known 
    reservoir.

(2) A development well is a well drilled within the proved area of a gas or oil 
    reservoir to the depth of a stratigraphic horizon known to be productive.

<PAGE>
                                       14


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

     At March 15, 1999,  we were  participating  in the  completion of two gross
(.31 net) gas wells in Wharton and Victoria, Counties, Texas. At that same date,
four gross (.87 net) gas wells were waiting on completion.  These four wells are
located 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 gas and oil 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, 1998.

<TABLE>
                                                                    Year Ended December 31,
                                           --------------------------------------------------------------------------
                                                1998                         1997                           1996
                                              --------                     --------                       ---------
<S>                                           <C>                          <C>                            <C>

Net Production:
    Oil (Bbls)                                       185,474                       175,246                       221,499
    Gas (Mcf)                                      3,275,882                     3,383,190                     3,654,897
    EBO(1)                                           731,454                       739,111                       830,649

Average Sales Price:
    Oil (per Bbl)                       $              12.49           $             19.88                   $     21.83
    Gas (per Mcf)                       $               2.04           $              2.70                   $      2.55
    EBO                                 $              12.31           $             17.07                   $     17.06

Average Production
      (lifting) Cost per          
    EBO
                                        $               3.33           $              4.29                   $      3.23
Operating Margin
    per EBO(2)                          $               8.98           $             12.78                   $     13.83

Depletion per EBO                       $               8.07           $              5.29                   $      4.47

</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.

<PAGE>
                                       15


     Our 1998 gas sales  represented  approximately  75% of our combined gas and
oil sales for the year ended December 31, 1998.

MARKETS AND CUSTOMERS

     Substantially all of our gas and oil production is sold at the well site on
an as produced basis at floating or market related  prices.  We sell our gas and
oil production to purchasers on a  month-to-month  basis. In the table below, we
show the purchasers  that  accounted for 10% or more of our revenues  during the
specified years.

<TABLE>

                                    1998       1997     1996  
                                  -------    -------  -------                                                          
<S>                               <C>        <C>      <C>

Enron Oil & Gas Transportation       11%       12%       11%

Cox & Perkins Exploration            24%       53%       46%

Allegro Investments                  22%        -         -

Brayton Operating                    18%        -         -

</TABLE>


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

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

<PAGE>
                                       16


OFFICE FACILITIES

     Our corporate offices consist of approximately  5,776 square feet of leased
space in Midland,  Texas. Our current rental rate is $3,461 per month until June
1, 1999 when the rental rate increases to $3,851 per month. The lease expires in
May, 2001.

COMPETITION

     The gas and oil 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 gas and oil 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 substantially greater than ours.

     The  principal  resources  we need for  acquiring,  exploring,  developing,
producing and selling gas and oil are:

     . leasehold prospects under which gas and oil reserves may be discovered;

     . drilling rigs and related equipment to explore for such reserves; and

     . knowledgeable personnel to conduct all phases of gas and oil operations.

<PAGE>
                                       17


GAS AND OIL REGULATIONS

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

     . price controls;

     . taxes; and

     . environmental and other laws relating to the gas and oil 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 changes may have on our business,  financial
condition or results of operations.

     Our gas and oil 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 gas  and  oil  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 gas
and oil are also  imposed.  These  states  also  have  statutes  or  regulations
addressing conservation matters, including provisions for:

     . the unitization or pooling of gas and oil properties;

     . the  establishment of maximum rates of production from gas and oil wells;
       and

     . the regulation of spacing,  plugging and  abandonment of wells.  

<PAGE>
                                       18


     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 interstate pipelines,
although the most recent adjustment generally decreased rates. These regulations

<PAGE>
                                       19


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 gas and oil 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

<PAGE>
                                       20



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 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 gas and oil  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,
       

<PAGE>
                                       21


       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 a
       substantial  portion  of  the  Resource  Conservation  and  Recovery  Act
       requirements  because  our  operations  generate  minimal  quantities  of
       hazardous  wastes.  However,  it is anticipated  that additional  wastes,
       which could include wastes currently  generated during operations,  could
       in the future be designated  as hazardous  wastes.  Hazardous  wastes are
       subject to more rigorous and costly disposal and management  requirements
       than are non-hazardous wastes. Such changes in the regulations may result
       in  Parallel  incurring  additional  capital  expenditures  or  operating
       expenses.

<PAGE>
                                       22


     . 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.



     Parallel may also fall into the category of the current  owner or operator.
We currently own or lease numerous properties that for many years have been used
for exploring  and  producing gas and oil.  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.

<PAGE>
                                       23


                               PART IV


================================================================================

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

================================================================================

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

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

      (b) No reports on Form 8-K were filed by Parallel during the last
          quarter of its fiscal year ended December 31, 1998.

      (c) Exhibits:
      


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

       *3.1      Certificate of Incorporation of Registrant
                

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

        4.1      Certificate of  Designations,  Preferences  and Rightsof Serial
                 Preferred Stock - 6% Convertible  PreferredStock  (Incorporated
                 by reference to Exhibit 4.1 toForm 10-Q of the  Registrant  for
                 the fiscal quarterended September 30, 1998.)

<PAGE>
                                       24
                
                Executive Compensation Plans and Arrangements
                (Exhibit No.'s 10.1 through 10.7):
                ---------------------------------------------                

       10.1      1983 Incentive Stock Option Plan  (Incorporated  byreference to
                 Exhibit 10.2 to Form S-l of the Regis- trant (File No. 2-92397)
                 as filed with the Securitiesand 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  referenceto  Exhibit
                 28.1 to Form S-8 of the Registrant (FileNo.  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  IncorporatedPrototype
                 Simplified  Employee Pension Plan (Incorporated by reference to
                 Exhibit 10.6 of  theRegistrant's  Form 10-K for the fiscal year
                 ended December 31, 1995.)
                

<PAGE>
                                       25

                
                

       10.6      Non-Employee  Directors  Stock  Option  Plan  (Incorporated  by
                 reference to Exhibit 10.6 of  theRegistrant's  Form 10-K Report
                 for the fiscal yearended December 31, 1997).
      
      *10.7      1998 Stock Option Plan
                

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

      *10.9      Letter agreement,  dated March 24, 1999, between the Registrant
                 and Bank One, Texas, N.A.

      *23.1      Consent of Independent Auditors
                

      *23.2      Consent of Independent Petroleum Engineers
                

      *27        Financial Data Schedule


          
------------------------
 *    Previously filed.

                            
<PAGE>  F-1



                        PARALLEL PETROLEUM CORPORATION

                       Index to the Financial Statements



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

Financial Statements:

    Balance Sheets at December 31, 1998 and 1997                          F-3

    Statements of Income for the years ended
       December 31, 1998, 1997, and 1996                                  F-4

    Statements of Stockholders' Equity for the
       years ended December 31, 1998, 1997 and 1996                       F-5

    Statements of Cash Flows for the years ended
       December 31, 1998, 1997 and 1996                                   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 listed in the accompanying index. These financial statements
are the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum Corporation
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.



                                   KPMG LLP


Midland, Texas
February 12, 1999

<PAGE> F-3

                        PARALLEL PETROLEUM CORPORATION

                                Balance Sheets

                          December 31, 1998 and 1997

<TABLE>
Assets                                                  1998           1997
------                                                  ----           ----
<S>
Current assets:                                     <C>            <C>
                                                                 
     Cash and cash equivalents                      $ 1,178,819       597,149
     Accounts receivable:
         Oil and gas                                  1,432,659     1,649,350
         Others, net of allowance for
         doubtful accounts of $71,358 in
         1998 and $28,130 in 1997                       247,740       915,358
         Affiliate                                       11,844         9,506
                                                    -----------     ---------
                                                      1,692,243     2,574,214
     Other assets                                        61,504        37,183
                                                    -----------     ---------
               Total current assets                   2,932,566     3,208,546
                                                    -----------     ---------
Property and equipment, at cost:
    Oil and gas properties, full cost method
      Note 11)                                       65,565,466     62,659,570
    Other                                               287,586        433,922
                                                     ----------     ----------
                                                     65,853,052     63,093,492
    Less accumulated depreciation and depletion     (22,279,355)   (16,514,102)
                                                     ----------     ----------
             Net property and equipment              43,573,697     46,579,390
                                                     ----------     ----------


Other assets, net of accumulated amortization
    of $86,917 in 1998 and $59,085 in 1997               58,519         67,596
                                                     ----------     ----------
                                                   $ 46,564,782     49,855,532
                                                     ==========     ==========
                                                    

Liabilities and Stockholders' Equity
------------------------------------

Current liabilities:
     Accounts payable and accrued liabilities:
         Trade                                     $  2,803,539      5,313,439
         Affiliate                                          214         14,660
     Income taxes payable                                  -            42,586
                                                     ----------     ----------
              Total current liabilities               2,803,753      5,370,685
                                                     ----------     ----------
Long-term debt (Note 3)                              18,035,889     12,182,610
Deferred income taxes (Note 5)                             -         3,183,484

Stockholders' equity:
    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
         1998                                            97,450             -
    Common stock - par value of $.01 per share,
         authorized 60,000,000 shares,issued and
         outstanding 18,306,858 in 1998 and
         18,114,358 in 1997                             183,069        181,144
    Additional paid-in surplus                       32,341,971     22,839,049
    Retained earnings (deficit)                      (6,897,350)     6,098,560
                                                     ----------     ----------
Total stockholders' equity                           25,725,140     29,118,753
Contingencies                                                   
                                                     ----------     ----------
                                                   $ 46,564,782     49,855,532
                                                     ==========     ==========
                                                     
</TABLE>

See accompanying notes to financial statements.

<PAGE> F-4

                        PARALLEL PETROLEUM CORPORATION

                             Statements of Income

                 Years ended December 31, 1998, 1997, and 1996

<TABLE>
                                                      1998            1997            1996
                                                      ----            ----            ----
<S>                                             <C>              <C>             <C>
Oil and gas revenues                            $   9,001,582      12,614,242      14,167,470
                                                 ------------    ------------    ------------
Costs and expenses:
     Lease operating expense                        2,434,658       3,171,234       2,685,662
     General and administrative                       899,016         837,635         520,784
     Depreciation, depletion and amortization       5,966,221       3,959,277       3,738,722
     Impairment of oil and gas properties          14,757,028            -               -     
                                                 ------------    ------------    ------------
Total costs and expenses                           24,056,923       7,968,146       6,945,168
                                                 ------------    ------------    ------------
Operating income (loss)                           (15,055,341)      4,646,096       7,222,302
                                                 ------------    ------------    ------------
Other income (expense), net:
     Interest income                                    2,771           8,984           8,165
     Other income                                     395,683          33,512          65,757
     Interest expense                              (1,381,103)       (813,372)     (1,245,891)
     Other expense                                    (57,947)         (8,840)         (1,566)
                                                 ------------    ------------    ------------
           Total other expense, net                (1,040,596)       (779,716)     (1,173,535)
                                                 ------------    ------------    ------------
Income (loss) before income taxes                 (16,095,937)      3,866,380       6,048,767

Income tax (expense) benefit                        3,100,027      (1,122,450)     (1,718,113)
                                                 ------------    ------------    ------------
           Net income (loss)                     $(12,995,910)      2,743,930       4,330,654
                                                 ============    ============    ============
                                                 
Cumulative preferred stock dividend              $   (276,712)           -               -     
                                                 -------------   ------------    ------------
           Net income (loss) available to
              common stockholders                $(13,272,622)      2,743,930       4,330,654
                                                 ===========     ============    ============
                                                
Net income (loss) per common share:
   Basic                                               $ (.73)            .15             .29
   Diluted                                             $ (.73)            .15             .28

See accompanying notes to financial statements.
</TABLE>

<PAGE> F-5

                        PARALLEL PETROLEUM CORPORATION

                      Statements of Stockholders' Equity

                 Years ended December 31, 1998, 1997, and 1996


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

<S>                              <C>         <C>          <C>        <C>        <C>           <C>              <C>
Balance,
   January 1, 1996              14,854,108   $ 148,540      -          -       11,662,897       (976,024)      10,835,413

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

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

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

   Net income                         -           -         -          -             -         4,330,654        4,330,654
                               -----------   ---------   -------     -------   -----------   -----------      -----------

Balance,
   December 31, 1996            17,406,358     174,063      -          -       21,189,442      3,354,630       24,718,135

   Options exercised               708,000       7,081      -          -        1,633,404           -           1,640,485

   Tax benefits related 
      to options                      -           -         -          -           16,203           -              16,203

   Net income                         -           -         -          -             -         2,743,930        2,743,930
                               -----------   ----------  --------    -------  -----------    -----------      -----------

Balance,
   December 31, 1997            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
                                ==========   =========   =======     ======    ==========    ============      ==========
  

See accompanying notes to financial statements.
</TABLE>

<PAGE> F-6

                        PARALLEL PETROLEUM CORPORATION

                            Statements of Cash Flows

                 Years ended December 31, 1998, 1997 and 1996

<TABLE>
                                                              1998               1997          1996
                                                             ----               ----          ----
<S>                                                      <C>                  <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                     $(12,995,910)        2,743,930      4,330,654
Adjustments to reconcile net income to net cash 
    provided by operating activities:
        Depreciation, depletion and amortization            5,966,221         3,959,277      3,738,722
        Deferred income taxes                              (3,100,027)        1,079,864      1,706,048
        Impairment of oil and gas properties               14,757,028              -              -     
        Provision for losses on trade receivables              43,228              -              -     
Other, net                                                      9,077             5,715        (32,317)
Changes in assets and liabilities:
        Decrease (increase) in trade receivables              838,743           467,014     (2,274,978)
        Decrease (increase) in prepaid expenses and 
           other                                              (24,321)          (29,643)         8,753
        Increase (decrease) in accounts payable and 
           accrued liabilities                                123,421           (67,078)       217,801
        Income tax payable                                       -               30,521         12,065
                                                         ------------       -----------    -----------

               Net cash provided by 
                   operating activities                     5,617,460         8,189,600      7,706,748
                                                         ------------       -----------    -----------

Cash flows from investing activities:
   Additions to property and equipment                    (21,300,419)      (20,516,544)   (15,271,761)
   Proceeds from disposition of property and equipment        892,510         7,580,820        649,000
                                                         ------------       -----------    -----------
              Net cash used in 
                   investing activities                   (20,407,909)      (12,935,724)   (14,622,761)
                                                         ------------       -----------    -----------
Cash flows from financing activities:
   Borrowings from bank line of credit                     18,182,279        16,330,000     22,387,102
   Payments on bank line of credit                        (12,329,000)      (12,668,781)   (25,540,336)
   Proceeds from exercise of options and warrants             166,625         1,640,485        131,438
   Stock offering costs                                      (116,072)             -        (1,205,620)
   Proceeds from common stock issuance                           -                 -        10,626,250
   Proceeds from preferred stock issuance                   9,744,999              -              -     
   Payments of preferred stock dividend                      (276,712)             -              -     
                                                         ------------       -----------    -----------
              Net cash provided by 
                   financing activities                    15,372,119         5,301,704      6,398,834
                                                         ------------       -----------    -----------
              Net increase (decrease) in cash 
                   and cash equivalents                       581,670           555,580       (517,179)

Beginning cash and cash equivalents                           597,149            41,569        558,748
                                                         ------------       -----------    -----------
Ending cash and cash equivalents                         $  1,178,819           597,149         41,569
                                                         ============       ===========    ===========
                                                        
See accompanying notes to financial statements.

</TABLE>
<PAGE> F-7

                        PARALLEL PETROLEUM CORPORATION

                        Notes to Financial Statements

                 Years ended December 31, 1998, 1997 and 1996


(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,
          with no gain or loss recognized.

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

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

<PAGE> F-8

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

                 
          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 charged to the appropriate property and equipment
          accounts.

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

        Income Taxes
        ------------

        The Company accounts for federal income taxes using Statement of
          Financial Accounting Standards No. 109, "Accounting for Income Taxes"
          ("FAS 109").  Under the asset and liability method of FAS 109,
          deferred tax assets and liabilities are recognized for the future tax
          consequences attributable to differences between financial statement
          carrying amounts of existing assets and liabilities and their
          respective tax bases.  Deferred tax assets and liabilities are
          measured using enacted tax rates expected to apply to taxable income
          in the years in which those temporary differences are expected to be
          recovered or settled.  Under FAS 109, the effect on previously
          recorded deferred tax assets and liabilities resulting from a change
          in tax rates is recognized in earnings in the period in which the
          change is enacted.

        Environmental
        -------------

        The Company is subject to extensive Federal, state and local
          environmental laws and regulations.  These laws, which are constantly
          changing, regulate the discharge of materials into the environment and
          may require the Company to remove or mitigate the environmental
          effects of the disposal or release of petroleum or chemical substances
          at various sites.  Environmental expenditures are expensed or
          capitalized depending on their future economic benefit.  Expenditures
          that relate to an existing condition caused by past operations and
          that have no future economic benefits are expensed.  Liabilities for
          expenditures of a noncapital nature are recorded when environmental
          assessment and/or remediation is probable, and the costs can be
          reasonably estimated.  Such liabilities are generally undiscounted
          unless the timing of cash payments for the liability or component are
          fixed or reliably determinable.

        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, 1998, 1997, and 1996 was not material.

<PAGE> F-9

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

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

        Gas Balancing
        -------------

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

        Net Income Per Share
        --------------------

        In 1997, the Financial Accounting Standards Board issued Statement of
          Financial Accounting Standards No. 128, "Earnings per Share"
          ("FAS 128").  FAS 128 replaced the calculation of primary and fully
          diluted earnings per share with basic and diluted earnings per share.
          Unlike primary earnings per share, basic earnings 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 similarly to the
          previously reported fully diluted earnings per share and reflects the
          assumed conversion of all potentially dilutive securities.  In
          accordance with the provisions of FAS 128, the Company adopted FAS 128
          in its year ended December 31, 1997 financial statements and all prior
          period EPS information has been restated.

        Use of Estimates in the Preparation of Financial Statements
        -----------------------------------------------------------

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

        Cash Management
        ---------------

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

        Cash Equivalents
        ----------------

        For purposes of the statements of cash flows, the Company considers all
        demand deposits,money market accounts and certificates of deposit
        purchased with an original maturity of three months or less to be cash
        equivalents.

<PAGE> F-10

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

(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 does not differ from the existing
          rate on the Company's long-term debt balance.

(3)     Long-Term Debt
        --------------

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

<TABLE>
                                                        1998            1997
                                                        ----            ----
        <S>                                         <C>             <C>
        Revolving Facility note payable to bank,
             at bank's base lending rate (7.5%
             at December 31, 1998) (a)              $ 16,623,889    12,182,610
        Development Facility note payable to
             bank, at bank's base lending rate
             plus 5.5% (13% at December 31, 1998)      1,412,000          -      

        Less:  current maturities                           -             -      
                                                    ------------    ----------
                                                    $ 18,035,889    12,182,610
                                                    ============    ==========
                                                   
</TABLE>
_________________

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

        At December 31, 1998, the Company is party to a note agreement with a
          bank. 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,  1998 of $21,100,000 includes (i) a
          $19,100,000 revolving credit facility ("Revolving Facility") and (ii)
          a $2,000,000 non-revolving line of credit ("Development Facility").
          The borrowing base is reduced by a monthly commitment reduction of
          $380,000 until April 1, 1999.  The borrowing base and monthly
          commitment reduction are subject to redetermination every six months
          on April 1 and October 1 of each year, or at such other times as the
          bank elects.  The latest redetermination date was on September 1,
          1998. Indebtedness under the Revolving Facility matures July 1, 2001
          and indebtedness under the Development Facility is due and payable on
          March 31, 1999.  The note is secured by substantially all of the
          Company's oil and gas properties.  Commitment fees of .25% per annum
          on the difference between the   commitment and the average daily
          amount outstanding are due quarterly.

        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 less .25% or (ii) the bank's Eurodollar rate plus a
          margin of 2.5%.  The unpaid principal balance for the Development

  <PAGE> F-11
                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

          Facility bears interest at the bank's base lending rate plus 5.5%.
          Interest under both Facilities is due and payable monthly.

        The loan agreement contains various restrictive covenants and
          compliance requirements, which include (1) maintenance of certain
          financial ratios, (2) limiting the incurrence of additional
          indebtedness, and (3) no payment of dividends for common stock.
 
        On March 23, 1999, the Company entered into an agreement with its bank
          amending   certain terms of the note agreement.  Under the amendment,
          (i) the amount outstanding under the Development Facility of
          $1,592,000 was rolled into the Revolving Facility (ii) the borrowing
          base was redetermined at $18,900,000 (iii) the unpaid principal
          balance for the Revolving Facility bears interest at the bank's prime
          rate plus .25%, or 8% at March 23, 1999, and (iv) the monthly
          commitment reduction was suspended until May 1, 1999,  when the
          borrowing base and monthly commitment reduction are scheduled for
          redetermination by the bank.

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

        At the election of the board of directors, the Company awards both
          incentive stock options and nonqualified stock options to selected
          key employees and officers.  The options are awarded at an exercise
          price based on the closing price of the Company's common stock on the
          date of grant, a two-year and four-year vesting schedule and a
          ten-year exercise period.  As of December 31, 1998, options expire
          beginning in the year-ended December 31, 2001 through 2008.  Exercise
          of the nonqualified stock options resulted in a deferred tax effect of
          $83,457, $16,203, and $0 for the years ended December 31, 1998, 1997
          and 1996, respectively.

        The Company applies APB 25 and related Interpretations in accounting for
          its stock option awards.  No compensation expense has been recognized
          for its stock option awards.  If compensation expense for the stock
          option awards had been determined consistent with Statement of
          Financial Accounting Standards No. 123, "Accounting for Stock-Based
          Compensation" ("FAS 123"), the Company's net income and net income
          per share would have been adjusted to the pro forma amounts indicated
          below for the years ended December 31:

<TABLE>
                                        1998            1997            1996
                                        ----            ----            ----
        <S>                        <C>               <C>            <C>
        Net income (loss)          $ (13,452,020)    $ 2,464,487    $ 4,295,248
        Basic net income (loss)
          per share                      $  (.74)          $ .14          $ .29
        Diluted net income (loss)
          per share                      $  (.74)          $ .13          $ .27
</TABLE>

        The pro forma net income and pro forma net income per share amounts
          noted above are not likely to be representative of the pro forma
          amounts to be reported in future years.  The pro forma amounts for
          1996 reflect

<PAGE> F- 12

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

     
          the initial phase-in of FAS 123 and as a result do not
          reflect any compensation expense for options granted prior to 1995.
          Pro forma adjustments in future years will include compensation
          expense associated with 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 1996.

        Under FAS 123, the fair value of each stock option grant is estimated
          on the date of grant using the Black-Scholes option pricing model
          with the following weighted average assumptions used for grants in
          1998, 1997 and 1996:

<TABLE>
                                        1998            1997         1996
                                        ----            ----         ----
        <S>                           <C>             <C>          <C>
        Risk-free interest rate          5.61            6.41         6.15
        Expected life                 7 years         7 years      7 years
        Expected volatility               .71             .55          .64
</TABLE>

        A summary of the Company's stock option plans as of December 31, 1998,
          1997 and 1996, 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, 1998         December 31, 1997        December 31, 1996
                        ------------------        ------------------       ------------------
                                   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   1,364,250   $ 3.06        1,207,250   $ 1.82       1,134,500   $ 1.55
    Options granted       370,000     3.60          485,000     4.41          85,000     5.40
    Options exercised    (192,500)    (.87)        (323,000)     .44         (12,250)    1.75
    Options canceled         -         -             (5,000)    4.53            -         -
                        ---------   ------        ---------   ------       ---------   ------
  Outstanding at end
    of year             1,541,750   $ 3.46        1,364,250   $ 3.06       1,207,250   $ 1.82
                        =========   ======        =========   ======       =========   ======    
           

  Exercisable at end
    of year               816,750   $ 2.97          775,500   $ 2.08         987,250   $ 1.35
                        =========   ======        =========   ======       =========   ======       

Weighted average fair
  value of options
  granted during the
  year                     $ 2.58                    $ 2.80                   $ 3.70
                        =========                 =========                =========       
                       
</TABLE>

        The following table summarizes information about the Company's stock
          options outstanding at December 31, 1998:

<TABLE>


                              Options Outstanding                                      Options Exercisable               
                       ------------------------------------------------------     ----------------------------------
                            Number         Weighted Average       Weighted             Number           Weighted
Range of               Outstanding at          Remaining          Average          Exercisable at        Average
Exercise Prices        December 31, 1998   Contractual Life    Exercise Price     December 31, 1998   Exercise Price
                       -----------------   ----------------    --------------     -----------------   --------------
<S>                      <C>                   <C>                  <C>               <C>                  <C>
 $.64 - $.69               175,000             4 years              $ .65             175,000              $ .65
$1.03 - $1.75              123,000             4 years              $1.18             105,500              $1.09
$3.19 - $5.50            1,243,750             9 years              $3.01             536,250              $4.10
                         ---------                                                    -------
                         1,541,750                                                    816,750
                         =========                                                    =======
                                                                           

</TABLE>
<PAGE> F-13

                        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, 1998,
          no shares have been purchased in connection with the five-year
          warrant.

        In connection with a private placement offering in 1994, a broker-
          dealer responsible for introducing the Company to the Company's
          principal placement agent received a five-year warrant to purchase
          64,415 shares of common stock at a price of $2.75 per share.  As of
          December 31 1998 and 1997, 50,000 shares have been purchased in
          connection with the five-year warrant.

        The Company has outstanding at December 31, 1998 and 1997, 300,000
          warrants.  Each warrant allows the holder to buy one share of common
          stock for $6.00.  The warrants were issued as part of the Company's
          initial public offering in 1980 and are exercisable for a 30 day
          period commencing on the date a registration statement covering
          exercise is declared effective.  The warrants contain antidilution
          provisions and in the event of liquidation,dissolution, or winding up
          of the Company, the holders are not entitled to participate in the
          assets of the Company.

(5)     Income Taxes
        ------------

        Federal income tax expense differs from the amount computed at the
          Federal statutory rate as follows:
<TABLE>


                                                                            Year ended
                                                                            December 31,
                                                          ------------------------------------------
                                                               1998            1997           1996

                                                               ----            ----           ----
        <S>
        Income tax expense (benefit) at statutory         <C>              <C>             <C>
          rate                                            $ (5,472,619)    $ 1,314,570     2,056,581  
        Change in valuation allowance for deferred
          tax assets                                         2,530,196            -             -     
        Statutory depletion                                   (171,803)       (241,274)     (358,854)           
        Nondeductible expenses and other                        14,199          49,154        20,386
                                                          ------------     -----------     ---------

                   Income tax expense (benefit)           $ (3,100,027)     $ 1,122,450     1,718,113
                                                          ============      ===========     =========
                                                          
  </TABLE>

        Income tax expense is deferred, with the exception of $64,986 in 1997
          related to alternative minimum tax ("AMT").
<PAGE> F-14

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

<TABLE>

                                                                   1998              1997
                                                                   ----              ----
                     Noncurrent
                     ----------
        <S>
        Deferred income tax assets:                             <C>                <C>
           Net operating loss carryforwards                     $ 5,309,428        2,124,284
           Statutory depletion carryforwards                         53,099          787,217
                                                                ------------       ---------
                   Total noncurrent deferred tax assets           6,262,527        2,911,501
                                                                ------------       ---------
                   Less valuation allowance                      (2,530,196)            -
                                                                ------------       ---------
                   Net deferred tax assets                        3,732,331        2,911,501
                                                                ------------       ---------
        Deferred income tax liabilities:
           Property and equipment, principally due to 
              differences in basis, expensing of intangible 
              drilling costs for tax purposes and depletion       3,732,331        6,094,985
                                                                ------------        ---------
                  Total deferred income tax liabilities           3,732,331        6,094,985
                                                                ------------        ---------
                  Net noncurrent deferred income tax
                      liability                                        -            3,183,484
                                                                ============        =========
                                                               
</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 uncertainty of future commodity prices and based on management's
         intention to continue its drilling program (generating intangible
         drilling costs which are projected to create future losses for tax
         purposes), it does not appear more likely than not that the Company
         will be able to utilize all the available carryforwards prior to
         their ultimate expiration.

<PAGE> F-15

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


        As of December 31, 1998, 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>
        1999                     -                   7,000             -       
        2000                     -                  15,000             -   
        2001             $    498,000               24,000             -    
        2002                  421,000                 -                -    
        2003                  138,000                 -                -
        2004                  257,000                 -                -
        2005                   69,000                 -                -
        2006                1,011,000                 -                -
        2007                  792,000                 -                -
        2008                1,596,000                 -           1,733,000
        2009                2,170,000                 -           1,974,000
        2013                8,663,000                 -           8,197,000
                         ------------               ------       ----------
                         $ 15,615,000               46,000       11,904,000
                         ============               ======       ==========
                        
</TABLE>

(6)     Major Customers
        ---------------

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

<TABLE>


                                        1998            1997           1996
                                        ----            ----           ----
        <S>                             <C>             <C>            <C>
        Purchaser A                     11%             12%            11%
        Purchaser B                     24%             53%            46%
        Purchaser C                     22%              -              -
        Purchaser D                     18%              -              -

</TABLE>

<PAGE> F-16

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



(7)     Employee Pension Plan
        ---------------------

        Effective September 1, 1988, the Company established a simplified
          employee pension plan covering all salaried employees of the Company.
          The employees voluntarily contribute a portion of their eligible
          compensation, not to exceed $7,000, adjusted for inflation beginning
          in 1988, to the plan.  The Company's contribution, including the
          employees contribution, cannot exceed the lesser of $30,000 or 15% of
          compensation.  During 1998, 1997 and 1996, the Company contributed an
          aggregate of $11,632, $12,709, and $7,986, respectively, of which
          $3,388, $3,129 and $2,963, respectively, was allocated to a Director
          of the Company.   The Company has no obligation to make contributions
          to the plan.

(8)     Statements of Cash Flows
        ------------------------

        During 1998, 1997 and 1996, $0, $0, and $60,413 were transferred from
          leases held for resale to oil and gas properties, respectively.  These
          transfers are considered non-cash transactions.

        No Federal taxes were paid in 1998, 1997 and 1996, as a result of net
          operating losses or loss carryforwards.

        The Company made interest payments of $1,349,786, $794,079, and
          $1,221,144 in 1998, 1997 and 1996, respectively.

        At December 31, 1998 and 1997, there were $1,868,241 and $4,558,594,
          respectively, of property additions accrued in accounts payable.

(9)     Equity Transactions
        -------------------

        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

  <PAGE> F-17

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)
  
          may redeem the Preferred Stock, in whole or part, after October 20,
            1999, for $10 per share plus accrued dividends.

        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.

(10)    Related Party Transactions
        --------------------------

        During 1998 and 1997, the Company was charged $2,900 and $2,000,
          respectively, for drilling services and lease operating expenses by
          entities in which certain Directors are majority owners.  These
          Directors and their companies own interests in certain wells operated
          by the Company.  During 1998 and 1997, the Company charged $97,000 and
          $45,000, respectively, for the lease operating expenses and drilling
          costs and paid $62,000 and $122,000, 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 1998 and 1997,
          the Company was billed $70,000 and $498,000, respectively, for the
          Company's pro rata share of lease operating and drilling expenses and
          received $218,000 and $211,000 in 1998 and 1997, respectively, in oil
          and gas revenues related to these wells.

        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.

  <PAGE> F-18

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


(11)    Oil and Gas Expenditures
        ------------------------

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

<TABLE>

                                                   1998                1997
                                                   ----                ----
        <S>                                     <C>                 <C>
        Capitalized costs:
            Proved properties                   $ 48,945,738        48,590,827  
            Unproved properties                   16,619,728        14,068,743
                                                ------------        ----------
                                                  65,565,466        62,659,570
                  Accumulated depletion          (22,122,758)      (16,217,470)
                                                ------------       -----------
                                                $ 43,442,708        46,442,100
                                                ============       ===========
                                               
</TABLE>

        Certain directly identifiable internal costs of property acquisition,
          exploration and development activities are capitalized.  Such costs
          capitalized in 1998, 1997 and 1996 totaled $527,500, $461,537, and
          $587,198, respectively.

        Depletion per equivalent unit of production (BOE) was $8.07, $5.29, and
          $4.47 for 1998, 1997 and 1996, 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>

                                                  1998          1997         1996
                                                  ----          ----         ----
        <S>                                  <C>              <C>          <C>
        Transfers from undeveloped leases     
           held for sale                      $       -            -          60,413
        Proved property acquisition costs           88,747      917,883    3,838,495
        Unproved property acquisition costs      6,034,025    7,710,358    7,602,441
        Exploration                              8,555,741    9,604,035    1,435,933
        Development                              3,873,168    4,877,240    3,962,977
                                              ------------   ----------   ----------
                                              $ 18,551,681   23,109,516   16,900,259
                                              ============   ==========   ==========
                                             
</TABLE>

(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 $14,757,000 (approximately $12,300,000 net of tax)
          related to its oil and gas properties during the fourth quarter of
          1998.  No impairment was determined to exist in 1997.

<PAGE> F-19

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

 
(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>

                                                      1998            1997          1996
                                                      ----            ----          ----
        <S>
        Numerator:                               <C>               <C>           <C>
          Net income (loss)                      $ (12,995,910)    2,743,930     4,330,654
          Preferred stock dividend                    (276,712)       -           -
                                                 -------------     ---------     ---------
          Net income (loss) and numerator for
            basic and diluted net income (loss)
            per share available to common
            stockholders                         $ (13,272,622)    2,743,930     4,330,654
                                                 =============     =========     =========
                                                

       Denominator:    
          Weighted average common shares for
            basic earnings (loss) per share         18,300,998    17,862,792    14,957,404

      Effect of dilutive securities:
         Employee stock options                           -          765,403       719,086
         Warrants                                         -           12,795        16,768
                                                 -------------    ----------    ----------

         Weighted average common shares for 
           diluted earnings (loss) per share
           assuming conversions                     18,300,998    18,640,990    15,693,258
                                                 =============    ==========    ==========

      Basic net earnings (loss) per share             $   (.73)         0.15          0.29
                                                      ========          ====          ====
                                                   

      Diluted net earnings (loss) per share           $   (.73)         0.15          0.28
                                                      ========          ====          ====
                                                     

 </TABLE>

        Employee stock options to purchase shares of common stock and
          convertible preferred stock were outstanding during 1998 but were not
          included in the computation of diluted net 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.


<PAGE> F-20
                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


(14)    Supplemental Oil and Gas Reserve Data (Unaudited)
        -------------------------------------------------

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

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

<TABLE>

                                                  Total Proved       Proved Developed
                                                --------------       ----------------
                                                BBL         MCF      BBL         MCF
                                                ---         ---      ---         ---
        <S>                                     <C>      <C>         <C>      <C>
        Reserves as of January 1, 1996          1,503    26,124      1,255    20,854
           Purchase of reserves in place          273     4,797        273     4,797
           Extensions and discoveries             128     9,034        128     9,034
           Revisions of previous estimates        (42)   (3,746)       (40)   (3,684)
           Production                            (221)   (3,655)      (221)   (3,655)
                                                -----    ------      -----    ------

        Reserves as of December 31, 1996        1,641    32,554      1,395    27,346
           Sales of reserves in place            (461)   (2,779)      (461)   (2,779)
           Extensions and discoveries           1,063    14,477        243     9,623
           Revisions of previous estimates       (174)  (10,319)      (164)  (10,478)
           Production                            (175)   (3,385)      (176)   (3,384)
                                                -----    ------      -----    -------

        Reserves as of December 31, 1997        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
                                                =====    ======        ===     ======
                                                
</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 1998, the average sales price received by the Company for its
          oil was approximately $12.49 per Bbl, as compared to $19.88 in 1997,
          while the average sales price for the Company's gas was approximately
          $2.04 per Mcf in 1998, as compared to $2.70 per Mcf in 1997.  At March
          15, 1999, the price received by the Company for its oil production was
          approximately $12.50 per Bbl, while the price received by the Company,
          at that same date, for its gas production was approximately $1.75 per
          Mcf.

<PAGE> F-21

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

        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.


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

<TABLE>

                                                                  December 31,
                                                        -------------------------------
                                                          1998        1997        1996
                                                          ----        ----        ----
        <S>                                             <C>          <C>         <C>
        Future cash flows                               $ 70,141     111,549     153,441
        Future costs:
           Production                                    (20,706)    (28,352)    (39,296)
           Development                                    (5,740)     (6,269)     (2,790)
                                                        --------      ------     -------         
        Future net cash flows before income 
           taxes                                          43,695      76,928     111,355
        Future income taxes                                 -         (8,891)    (22,493)
                                                        --------      ------     -------     
        Future net cash flows                             43,695      68,037      88,862
        10% annual discount for estimated timing 
           of cash flows                                 (16,872)    (21,982)    (31,513)
                                                        --------      ------     -------      

        Standardized measure of discounted net 
           cash flows                                   $ 26,823      46,055      57,349
                                                        ========      ======      ======

</TABLE>

<PAGE> F-22

                        PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

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

<TABLE>


                                                           Years ended December 31,     
                                                         ---------------------------
                                                         1998       1997        1996
                                                         ----       ----        ----
       <S>                                             <C>        <C>          <C>
        Increase (decrease):
            Sales of minerals in place                 $   -      ( 6,491)       -
            Purchase of minerals in place                  -         -          6,437
            Extensions and discoveries and improved
               recovery, net of future production and 
               development costs                          8,916     25,530     23,660
            Accretion of discount                         4,642      6,701      2,589
            Net change in sales prices net of
               production costs                         (16,036)   (18,293)    24,273
            Changes in estimated future
               development costs                            664        (51)        40
            Revisions of quantity estimates              (8,325)   (13,333)    (6,043)
            Net change in income taxes                      365      9,300     (8,940)
            Sales, net of production costs               (6,588)    (9,443)   (11,482)
            Changes of production rates (timing) and
               other                                     (2,870)    (5,214)     1,650
                                                       --------     ------     ------

               Net increase (decrease)                  (19,232)   (11,294)    32,184

        Standardized measure of discounted future 
           net cash flows:
               Beginning of year                         46,055     57,349     25,165
                                                       --------     ------     ------

               End of year                             $ 26,823     46,055     57,349
                                                       ========     ======     ======
                                                      
</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

April 30, 1999                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    April 30, 1999
-----------------------  and Chairman of the 
Thomas R. Cambridge      Board of Directors 
                         (Principal Executive 
                         Officer)            
               

/s/ Larry C. Oldham        President and Treasurer       April 30, 1999
----------------------     (Principal Financial and
Larry C. Oldham            Accounting Officer)



/s/ Ernest R. Duke              Director                 April 30, 1999
----------------------
Ernest R. Duke


/s/ Myrle Greathouse            Director                 April 30, 1999
----------------------
Myrle Greathouse


/s/ Charles R. Pannill           Director                April 30, 1999
----------------------
Charles R. Pannill