##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2005
 o
    
    Transition Report Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number: 0  13305
 PARALLEL PETROLEUM CORPORATION
  Delaware
    
    75-1971716(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1004 N. Big Spring, Suite 400Midland, Texas
    
    79701(Address of Principal Executive Offices
    
    (Zip Code)
    
  Yes o
    
    No þ
  Yes o
    
    No þ
  Yes þ
    
    No o
 ü
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
  Yes o
    
    No þ




---



##### 



Item No.
    
    PagePART IItem 1. Business
    
    
    5Item 1A. Risk Factors
    
    
    19Item 1B. Unresolved Staff Comments
    
    
    28Item 2. Properties
    
    
    28Item 3. Legal Proceedings
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5. Market for Registants Common Equity, Related Stockholders Matters
and Issuer Purchases of Equity Securities
    
    
    31Item 6. Selected Financial Data
    
    
    33Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    35Item 7A. Quantitive and Qualitative Disclosure About Market Risk
    
    
    50Item 8. Financial Statements and Supplementary Data
    
    
    52Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
    
    
    53Item 9A. Controls and Procedures
    
    
    53Item 9B. Other Information
    
    
    57PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    57Item 11. Executive Compensation
    
    
    62Item 12. Security Ownership of Certain Benefical Owners and Management and
Related Stockholder Matters
    
    
    72Item 13. Certain Relationships and Related Transactions
    
    
    73Item 14. Principal Accountant Fees and Services
    
    
    74PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    76Consent of BDO Seidman, LLPConsent of Cawley Gillespie & Associates, Inc.Certification of Principal Executive Officer Pursuant Section 302Certification of Principal Financial Officer Pursuant Section 302Certification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906




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##### Table of Contents



Cautionary Statement Regarding Forward Looking Statements
  
    
    our future financial and operating performance and results;
    
    our business strategy;
    
    market prices;
    
    sources of funds necessary to conduct operations and complete acquisitions;
    
    development costs;
    
    number and location of planned wells;
    
    our future commodity price risk management activities; and
    
    our plans and forecasts.
   
    
    fluctuations in prices of oil and natural gas;
    
    demand for oil and natural gas;
    
    losses due to potential or future litigation;
    
    future capital requirements and availability of financing;
    
    geological concentration of our reserves;
    
    risks associated with drilling and operating wells;
    
    competition;
    
    general economic conditions;
    
    governmental regulations;
    
    receipt of amounts owed to us by purchasers of our production and counterparties to
our derivative contracts;
    
    decisions to either enter into derivative contracts or not;
    
    events similar to 911;
    
    actions of third party co-owners of interests in properties in which we also own an interest;
    
    fluctuations in interest rates;
    
    weaknesses in our internal controls; and




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##### Table of Contents




    
    the inherent variability in early production tests.




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##### Table of Contents



Financial Statement Restatement
 Overview
   Year ended
    
    
    Quarter EndedDecember 31, 2004
    
    
    March 31, 2005
    
    
    June 30, 2005
    
    
    September 30, 2005(dollars in thousands)Net income (loss) as previously reported
    
    $
    5,585
    
    
    $
    (550
    )
    
    $
    1,453
    
    
    $
    8,587Adjustments to net income
    
    
    (3,314
    )
    
    
    (10,154
    )
    
    
    (2,699
    )
    
    
    (6,598
    )Restated net income (loss)
    
    $
    2,271
    
    
    $
    (10,704
    )
    
    $
    (1,246
    )
    
    $
    1,989
  As previously
    
    
    
    
    
    
    Asreported
    
    
    Adjustment
    
    
    RestatedNet cash provided by operating activities
    
    $
    19,112
    
    
    $
    4,022
    
    
    $
    23,134Net cash used in investing activities
    
    $
    (34,680
    )
    
    $
    (4,022
    )
    
    $
    (38,702
    )
  History of the Derivatives Issue
 Accounting for Derivative Instruments and Hedging Activities
 (1)




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Effects of the Restatement
  Year endedDecember 31, 2004(in thousands)Income (expense) amounts:Disqualification of the use of hedge accounting
for certain derivative transactions
    
    $
    (5,021
    )Provision for income taxes
    
    
    1,707Net decrease in reported net income and
net income available to common shareholders
    
    $
    (3,314
    )Per share amounts:Basic, as previously reported
    
    $
    0.20Adjustment
    
    
    (0.13
    )Basic, as restated
    
    $
    0.07Diluted, as previously reported
    
    $
    0.20Adjustment
    
    
    (0.13
    )Diluted, as restated
    
    $
    0.07
 (2)




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##### Table of Contents



Quarter endedMarch 31, 2005
    
    
    June 30, 2005
    
    
    September 30, 2005
    
    
    Total(in thousands)Income (expense) amounts:Disqualification of the use of hedge accounting
for certain derivative transactions
    
    $
    (15,385
    )
    
    $
    (4,090
    )
    
    $
    (9,996
    )
    
    $
    (29,471
    )Provision for income taxes
    
    
    5,231
    
    
    
    1,391
    
    
    
    3,398
    
    
    
    10,020Net decrease in reported net income and
net income available to common shareholders
    
    $
    (10,154
    )
    
    $
    (2,699
    )
    
    $
    (6,598
    )
    
    $
    (19,451
    )Per share amounts:Basic, as previously reported
    
    $
    (0.02
    )
    
    $
    0.04
    
    
    $
    0.25
    
    
    $
    0.27Adjustment
    
    
    (0.36
    )
    
    
    (0.08
    )
    
    
    (0.19
    )
    
    
    (0.63
    )Basic, as restated
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.36
    )Diluted, as previously reported
    
    $
    (0.02
    )
    
    $
    0.04
    
    
    $
    0.25
    
    
    $
    0.27Adjustment
    
    
    (0.36
    )
    
    
    (0.08
    )
    
    
    (0.19
    )
    
    
    (0.63
    )Diluted, as restated
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.36
    )
 Quarter endedSeptember 30, 2004
    
    
    December 31, 2004
    
    
    Total(in thousands)Income (expense) amounts:Disqualification of the use of hedge accounting
for certain derivative transactions
    
    $
    (4,417
    )
    
    $
    (604
    )
    
    $
    (5,021
    )Provision for income taxes
    
    
    1,502
    
    
    
    205
    
    
    
    1,707Net decrease in reported net income and
net income available to common shareholders
    
    $
    (2,915
    )
    
    $
    (399
    )
    
    $
    (3,314
    )Per share amounts:Basic, as previously reported
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.11Adjustment
    
    
    (0.12
    )
    
    
    (0.01
    )
    
    
    (0.13
    )Basic, as restated
    
    $
    (0.08
    )
    
    $
    0.06
    
    
    $
    (0.02
    )Diluted, as previously reported
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.11Adjustment
    
    
    (0.12
    )
    
    
    (0.02
    )
    
    
    (0.14
    )Diluted, as restated
    
    $
    (0.08
    )
    
    $
    0.05
    
    
    $
    (0.03
    )
 (3)




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As previously
    
    
    
    
    
    
    Asreported
    
    
    Adjustment
    
    
    RestatedNet cash provided by operating activities
    
    $
    19,112
    
    
    $
    4,022
    
    
    $
    23,134Net cash used in investing activities
    
    $
    (34,680
    )
    
    $
    (4,022
    )
    
    $
    (38,702
    )
  
 (4)




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PART I
 
 ITEM 1. BUSINESS
 About Our Company
  
    
    Permian Basin of west Texas and New Mexico;
    
    Fort Worth Basin of north Texas; and
    
    The onshore gulf coast area of south Texas.
    
    
    Bbl or Bbls- barrel or barrels of oil or other liquid hydrocarbons;
    
    Bcf   billion cubic feet of natural gas;
    
    BOE   equivalent barrel of oil or 6 Mcf of natural gas for one barrel of oil;
    
    MBbls   thousand barrels of oil or other liquid hydrocarbons;
    
    MBoe   thousand barrels of oil equivalent;
    
    MMBbls   million barrels of oil or other liquid hydrocarbons;
    
    MMBoe   million barrels of oil equivalent;
    
    MMBtu   million British thermal units;
    
    Mcf   thousand cubic feet of natural gas; and
    
    MMcf   million cubic feet of natural gas.
   Available Information
 (http://www.sec.gov)
 (5)




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##### Table of Contents



http://www.plll.com.
  cindyt@plll.com
 Developments in 2005; 2006 Capital Budget
     Proved Reserves as of December 31, 2005
   About Our Strategy and Business
    (6)




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
    
    focuses on projects having less geological risk;
    
    emphasizes acquisition, exploitation, development and enhancement activities;
    
    includes the utilization of horizontal and fracture stimulation technologies on certain types of reservoirs;
    
    focuses on acquiring producing properties; and
    
    expands the scope of our operations by diversifying our exploratory and development
efforts, both in and outside of our current areas of operation.
  
    
    operational enhancements, such as surface facility reconfiguration, and the
installation of new or additional compression equipment;
    
    workovers;
    
    well recompletions;
    
    behind-pipe recompletions;
    
    refracing (restimulating a producing formation within an existing wellbore to
enhance production and add reserves);
    
    installation of injection wells and related facilities;
    
    development well drilling (infill drilling);
    
    cost reduction programs; and
    
    secondary recovery operations, including waterfloods.
       (7)




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Use Advanced Technologies -
 
    
    reduce drilling risks;
    
    lower finding costs;
    
    provide for more efficient production of oil and natural gas from our properties; and
    
    increase the probability of locating and producing reserves that might not otherwise be discovered.
   (2) Serve as Geophysical Operator -
  (3) Conduct Exploratory Activities -
 
    
    having known geological and reservoir characteristics;
    
    being in close proximity to existing wells so data from the existing wells can be
correlated with seismic data on or near the prospect being evaluated; and
    
    having a potentially meaningful impact on our reserves.
 (4) Use Horizontal Drilling and Fracture Stimulations -
  (8)




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##### Table of Contents



Drilling Activities in 2005
  Number of WellsNumber of
    
    
    Drilling or
    
    
    GrossDepth
    
    
    Gross
    
    
    Waiting on Completion
    
    
    Productive
    
    
    GrossArea
    
    Range (feet)
    
    
    Wells Drilled
    
    
    at December 31, 2005
    
    
    Wells
    
    
    Dry WellsNorth TexasBarnett Shale
    
    
    7,000
    
    
    
    
    
    
    
    8,000
    
    
    
    9
    
    
    
    5
    
    
    
    4
    
    
    
    0Permian BasinCarm-Ann/Means
    
    
    4,000
    
    
    
    
    
    
    
    4,500
    
    
    
    18
    
    
    
    1
    
    
    
    17
    
    
    
    0Harris
    
    
    4,000
    
    
    
    
    
    
    
    4,500
    
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0Fullerton
    
    
    4,000
    
    
    
    
    
    
    
    5,000
    
    
    
    12
    
    
    
    0
    
    
    
    12
    
    
    
    0Wolfcamp Gas
    
    
    4,300
    
    
    
    
    
    
    
    4,500
    
    
    
    16
    
    
    
    14
    
    
    
    2
    
    
    
    0Diamond M (Deep)
    
    
    6,500
    
    
    
    
    
    
    
    7,000
    
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0Onshore Gulf Coast
of Texas
    
    
    
    
    
    
    Yegua
    
    
    6,300
    
    
    
    
    
    
    
    13,000
    
    
    
    6
    
    
    
    1
    
    
    
    1
    
    
    
    4Wilcox
    
    
    11,000
    
    
    
    
    
    
    
    11,500
    
    
    
    5
    
    
    
    1
    
    
    
    4
    
    
    
    0Cook Mountain
    
    
    11,000
    
    
    
    
    
    
    
    15,000
    
    
    
    4
    
    
    
    1
    
    
    
    2
    
    
    
    1Texas Panhandle
    
    
    11,000
    
    
    
    
    
    
    
    11,500
    
    
    
    3
    
    
    
    0
    
    
    
    3
    
    
    
    075
    
    
    
    25
    
    
    
    45
    
    
    
    5
     
    
    utilization of horizontal and fracture stimulation technologies on certain types of reservoirs;
    
    producing property acquisitions;
    
    recompleting existing wellbores;
    
    restimulating producing reservoirs;
    
    identifying potential infill drilling locations;
    
    making mechanical improvements to surface facilities and downhole equipment; and
    
    reviewing the feasibility of applying new drilling and production technologies that
could either improve recovery potential or result in the discovery of a new reservoir.
 (9)




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
    
    shutting in temporarily uneconomic properties;
    
    plugging wells we believe to be permanently impaired or depleted;
    
    terminating oil and gas leases that are uneconomic under existing operating conditions; and/or
    
    selling properties to third parties.
 Drilling and Acquisition Costs
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Proved property acquisition costs
    
    $
    23,763
    
    
    $
    39,763
    
    
    $
    2,209
    
    
    $
    48,044
    
    
    $
    27Unproved property acquisition costs
    
    
    11,743
    
    
    
    7,400
    
    
    
    3,831
    
    
    
    2,295
    
    
    
    3,420Exploration costs
    
    
    15,455
    
    
    
    6,794
    
    
    
    3,240
    
    
    
    1,291
    
    
    
    6,820Development costs
    
    
    26,390
    
    
    
    13,954
    
    
    
    5,650
    
    
    
    9,308
    
    
    
    1,203$
    77,351
    
    
    $
    67,911
    
    
    $
    14,930
    
    
    $
    60,938
    
    
    $
    11,470
 Capital Investment Budget for 2006
   Resource Gas Projects
   Fort Worth Basin of North Texas
 Barnett Shale Gas Project, Tarrant County, Texas
 .
 (10)




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##### Table of Contents



Permian Basin of New Mexico
 Wolfcamp Gas Project, Eddy and Chavez Counties, New Mexico
    Area 1
  Area 2
   Area 3 
  (11)




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##### Table of Contents



Permian Basin of West Texas
  Fullerton San Andres Field, Andrews County, Texas
   Carm-Ann San Andres Field / N. Means Queen Unit, Andrews & Gaines Counties ,Texas
   Harris San Andres Field, Andrews and Gaines Counties, Texas 
   Diamond M Shallow Leases, Scurry County, Texas
   Diamond M Canyon Reef Unit, Scurry County, Texas
 (12)




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##### Table of Contents



Other Permian Basin Projects
  Onshore Gulf Coast of South Texas
 Yegua/Frio/Wilcox Gas Project, Jackson, Wharton and Liberty Counties, Texas
  Other Projects
 Utah/Colorado CBM (Coal Bed Methane) Gas/Conventional Oil and Gas Projects, Uinta
Basin
   East Texas Cotton Valley Reef Gas Project
   Oil and Natural Gas Prices
  (13)




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##### Table of Contents



Average Price Received for theYear Ended December 31,2005
    
    2004
    
    2003Oil (Bbl)
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    29.11Natural gas (Mcf)
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    5.40
   Employees
   Wells Drilled
  Exploratory Wells (1)
    
    
    Development Wells (2)Ended YearDecember
    
    Productive
    
    
    Dry
    
    
    Productive
    
    
    Dry31,
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    Net2005
    
    
    21.0
    
    
    
    5.32
    
    
    
    6.0
    
    
    
    0.64
    
    
    
    48.0
    
    
    
    27.5
    
    
    
    
    
    
    
    2004
    
    
    17.0
    
    
    
    1.68
    
    
    
    4.0
    
    
    
    0.95
    
    
    
    50.0
    
    
    
    31.8
    
    
    
    
    
    
    
    2003
    
    
    15.0
    
    
    
    5.05
    
    
    
    8.0
    
    
    
    2.09
    
    
    
    3.0
    
    
    
    2.6
    
    
    
    1.0
    
    
    
    0.25
 
 (1)
    
    An exploratory well is a well drilled to find and produce oil or natural gas in an unproved area, to find a
new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a
known reservoir.

(2) A development well is a well drilled within the proved area of an oil or natural gas reservoir to the depth of a
stratigraphic horizon known to be productive.  (14)




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##### Table of Contents



Volumes, Prices and Lifting Costs
  Year Ended December 31,2005
    
    2004
    
    2003(in thousands, except per unit data)Production, Prices and Lifting Costs:Oil (Bbls)
    
    
    923
    
    
    
    729
    
    
    
    629Natural gas (Mcf)
    
    
    3,592
    
    
    
    2,690
    
    
    
    3,356BOE
    
    
    1,522
    
    
    
    1,177
    
    
    
    1,188Oil price (per Bbl)(1)
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    29.11Natural gas price (per Mcf)(1)
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    5.40BOE price(1)
    
    $
    51.57
    
    
    $
    37.55
    
    
    $
    30.66Average Production (lifting) Cost per BOE
    
    $
    9.24
    
    
    $
    8.06
    
    
    $
    7.07
 
 (1)
    
    Average price received at the wellhead for our oil and natural gas.   2005
    
    
    2004
    
    
    2003(in thousands)Oil revenue
    
    $
    47,800
    
    
    $
    28,455
    
    
    $
    18,300Effect of oil hedges
    
    
    (12,139
    )
    
    
    (7,458
    )
    
    
    (1,659
    )Natural gas revenue
    
    
    30,690
    
    
    
    15,735
    
    
    
    18,121Effect of natural gas hedges
    
    
    (201
    )
    
    
    (895
    )
    
    
    (907
    )$
    66,150
    
    
    $
    35,837
    
    
    $
    33,855
  Markets and Customers
  (15)




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##### Table of Contents



2005
    
    2004
    
    2003Allegro Investments, Inc.
    
    
    14
    %
    
    
    22
    %
    
    
    30
    %Conoco, Inc.
    
    
    12
    %
    
    
    
    
    
    
    Texland Petroleum, Inc.
    
    
    40
    %
    
    
    43
    %
    
    
    33
    %
    Office Facilities
   Competition
    
    
    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 can respond quickly to exploration and acquisition opportunities.
  
    
    leasehold prospects under which oil and natural gas reserves may be discovered;
    
    drilling rigs and related equipment to explore for such reserves; and
 (16)




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##### Table of Contents




    
    knowledgeable and experienced personnel to conduct all phases of oil and natural gas operations.
 Oil and Gas Regulations
  
    
    price controls;
    
    taxes; and
    
    environmental and other laws relating to the oil and gas industry.
    
    
    the unitization of pooling of oil and gas properties;
    
    the establishment of maximum rates of production from oil and gas wells; and
    
    the regulation of spacing, plugging and abandonment of wells.
     (17)




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##### Table of Contents



Environmental Regulations
  
    
    require prior governmental authorization for certain activities;
    
    limit or prohibit activities because of protected areas or species;
    
    impose substantial liabilities for pollution related to our operations or properties; and
    
    provide significant penalties for noncompliance.
  
    
    containment or cleanup;
    
    personal injury;
    
    property damage; and
    
    penalties assessed or other claims sought for natural resource damages.
  
    
    Water. The Oil Pollution Act, or OPA, was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 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 oil and gas wastes, any form of pollutant, and, in some instances, storm
water runoff, into waters of the United States. The FWPCA provides for civil, criminal
and administrative penalties for any unauthorized discharges and, along with the OPA,
imposes substantial potential liability for the costs of removal, remediation or
damages resulting from an unauthorized discharge and, along with the OPA, imposes
substantial potential liability for the costs of removal, remediation or damages
resulting from an unauthorized discharge. State laws for the control of water pollution
also provide civil, criminal and administrative penalties and liabilities in the case
of an unauthorized discharge into state waters. The cost of compliance with the OPA and
the FWPCA have not historically been material to our operations, but there can be no
assurance that changes in federal, state or local water pollution control programs will
not materially adversely affect us in the future. Although no assurances can be given,
we believe that compliance with existing permits and compliance with foreseeable new
permit requirements will not have a material adverse effect on our financial condition
or results of operations.
    
    Solid Waste.Parallel generates non-hazardous solid waste that fall under
the requirements of the Federal Resource Conservation and Recovery Act and comparable
state statues. The EPA and the states in which we operate are considering the adoption
of stricter disposal standards for the type of non-hazardous waste we generate. The
Resource Conservation and Recovery Act also govern the generation, management, and disposal of hazardous wastes. At present, we are not required to comply with a
substantial portion of the Re-
 (18)




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source 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.
    
    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 cleaning 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.
  
 ITEM 1A. RISK FACTORS
 Risks Related to Our Business
 The volatility of the oil and natural gas industry may have an adverse impact on our operations.
  
    
    the level of oil and natural gas prices, expectations about future oil and natural
gas prices and the ability of international cartels to set and maintain production
levels and prices;
    
    the cost of exploring for, producing and transporting oil and natural gas;
    
    the level and price of foreign oil and natural gas transportation;
    
    available pipeline and other oil and natural gas transportation capacity;
    
    weather conditions;
    
    international political, military, regulatory and economic conditions;
    
    the level of consumer demand;
    
    the price and the availability of alternative fuels;
    
    the effect of worldwide energy conservation measures; and
    
    the ability of oil and natural gas companies to raise capital.
 (19)




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
    
    impair our financial condition, liquidity, ability to finance planned capital
expenditures and results of operations;
    
    reduce the amount of oil and natural gas that we can produce economically;
    
    cause us to delay or postpone some of our capital projects;
    
    reduce our revenues, operating income and cash flow; and
    
    reduce the carrying value of our oil and natural gas properties.
  We must replace oil and natural gas reserves that we produce. Failure to replace reserves may
negatively affect our business.
  We are subject to uncertainties in reserve estimates and future net cash flows.
    
    
    actual prices we receive for oil and natural gas;
    
    the amount and timing of actual production;
    
    supply and demand of oil and natural gas;
    
    limits of increases in consumption by natural gas purchasers; and
    
    changes in governmental regulations or taxation.
  (20)




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Competition in the oil and natural gas industry is intense, and many of our competitors have
greater financial, technological and other resources than we do.
  
    
    seeking to acquire desirable producing properties or new leases for future exploration;
    
    marketing our oil and natural gas production;
    
    integrating new technologies; and
    
    seeking to acquire the equipment and expertise necessary to develop and operate our properties.
  We do not control all of our operations and development projects.
    
    
    timing and amount of capital expenditures;
    
    expertise and financial resources;
    
    inclusion of other participants in drilling wells; and
    
    use of technology.
  Our business involves many operating risks, which may result in substantial losses, and insurance
may be unavailable or inadequate to protect us against these risks.
  
    
    fires;
 (21)




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##### Table of Contents




    
    natural disasters;
    
    explosions;
    
    pressure forcing oil or natural gas out of the wellbore at a dangerous velocity
coupled with the potential for fire or explosion;
    
    weather;
    
    failure of oilfield drilling and service tools;
    
    changes in underground pressure in a formation that causes the surface to collapse or crater;
    
    pipeline ruptures or cement failures;
    
    environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases; and
    
    availability of needed equipment at acceptable prices, including steel tubular products.
  
    
    injury or loss of life;
    
    damage to and destruction of property, natural resources and equipment;
    
    pollution and other environmental damage;
    
    regulatory investigations and penalties;
    
    suspension of our operations; and
    
    repair and remediation costs.
  The oil and natural gas industry is capital intensive.
    
    
    our proved reserves;
    
    the level of oil and natural gas we are able to produce from existing wells;
    
    the prices at which oil and natural gas are sold; and
    
    our ability to acquire, locate and produce new reserves.
   (22)




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There are risks in acquiring producing properties, including difficulties in integrating acquired
properties into our business, additional liabilities and expenses associated with acquired
properties, diversion of management attention, increasing the scope, geographic diversity and
complexity of our operations and incurrence of additional debt.
    The marketability of our natural gas production depends on facilities that we typically do not own
or control.
  We are subject to many restrictions under our revolving credit facility.
   If we default under our revolving credit facility, the lenders could foreclose on, and acquire
control of, substantially all of our assets.
  (23)




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##### Table of Contents



Our producing properties are geographically concentrated.
  Derivative activities create a risk of financial loss.
  
    
    the counterparties to our future contracts fail to perform under the contract; or
    
    a sudden, unexpected event materially impacts oil or natural gas prices.
  We are subject to complex federal, state and local laws and regulations that could adversely affect
our business.
  
    
    discharge permits for drilling operations;
    
    drilling bonds;
    
    spacing of wells;
    
    unitization and pooling of properties;
    
    environmental protection;
    
    reports concerning operations; and
    
    taxation.
  
    
    personal injuries;
    
    property damage;
    
    oil spills;
    
    discharge of hazardous materials;
 (24)




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
    
    reclamation costs;
    
    remediation and clean-up costs; and
    
    other environmental damages.
  Declining oil and natural gas prices may cause us to record ceiling test write-downs.
    Terrorist activities may adversely affect our business.
  We are highly dependent upon key personnel.
    Part of our business is seasonal in nature.
  (25)




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Our Oil and Natural gas Operations Are Subject to Many Inherent Risks
   
    
    encountering unusual or unexpected formations and pressures;
    
    explosions, blowouts and fires;
    
    pipe and tubular failures and casing collapses;
    
    environmental pollution; and
    
    personal injuries.
    Failure to maintain effective internal controls could have a material adverse effect on our
operations.
  Restrictive debt covenants could limit our growth and our ability to finance our operations, fund
our capital needs, respond to changing conditions and engage in other business activities that may
be in our best interests.
  
    
    dispose of assets;
    
    incur additional indebtedness;
    
    restrictions on all retained earnings and net income for payment of dividends on our common stock;
    
    create liens on our assets;
    
    enter into specified investments or acquisitions;
    
    repurchase, redeem or retire our capital stock or other securities;
 (26)




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##### Table of Contents




    
    merge or consolidate, or transfer all or substantially all of our assets and the assets of our subsidiaries;
    
    engage in specified transactions with subsidiaries and affiliates; or
    
    engage in other specified corporate activities.
  We do not pay dividends on our common stock.
  Changes in control may be discouraged.
    
    
    restrictions on dividends on common stock and other series of preferred stock if
dividends on any new series of preferred stock have not been paid;
    
    dilution of the voting power of common stock and other series of preferred stock to
the extent that a new series of preferred stock has voting rights, or to the extent
that any new series of preferred stock is convertible into common stock;
    
    dilution of the equity interest of common stock and other series of preferred
stock; and
 (27)




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
    
    limitation on the right of holders of common stock and other series of preferred
stock to share in Parallels assets upon liquidation until satisfaction of any
liquidation preference attributable to any new series of preferred stock.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  
 ITEM 2. PROPERTIES
 General
  Producing Wells and Acreage
  Producing Wells
    
    
    AcreageOil(1)
    
    
    Gas
    
    
    Developed
    
    
    UndevelopedGross
    
    
    Net(2)
    
    
    Gross
    
    
    Net(2)
    
    
    Gross
    
    
    Net(3)
    
    
    Gross
    
    
    Net(3)Texas
    
    
    621
    
    
    
    313.8
    
    
    
    104
    
    
    
    36.50
    
    
    
    59,603
    
    
    
    36,565
    
    
    
    37,028
    
    
    
    9,221Colorado
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,080
    
    
    
    14,080New Mexico
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    3.39
    
    
    
    3,197
    
    
    
    367
    
    
    
    145,591
    
    
    
    44,076Utah
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183,397
    
    
    
    147,257Total
    
    
    621
    
    
    
    313.8
    
    
    
    122
    
    
    
    39.89
    
    
    
    62,800
    
    
    
    36,932
    
    
    
    380,096
    
    
    
    214,634
 
 (1)
    
    Does not include 366 wells that were shut in or temporarily abandoned as of December
31, 2005.(2)
    
    Net wells are computed by multiplying the number of gross wells by our working interest in
the gross wells.(3)
    
    Parallels net acres are computed by multiplying the number of gross acres by our working
interest.    Title to Properties
  (28)




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##### Table of Contents



Oil and Natural Gas Reserves
    Proved Developed
    
    
    Proved Developed
    
    
    Proved
    
    
    TotalProducing
    
    
    Non-Producing
    
    
    Undeveloped
    
    
    Proved(in thousands)Oil (MBbls)
    
    
    13,355
    
    
    
    259
    
    
    
    7,578
    
    
    
    21,192Gas (MMcf)
    
    
    15,959
    
    
    
    1,287
    
    
    
    7,991
    
    
    
    25,237MBOE
    
    
    16,015
    
    
    
    474
    
    
    
    8,910
    
    
    
    25,399
       
 ITEM 3.LEGAL PROCEEDINGS
  (29)




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (30)




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PART II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
 Market Information
  Price Per ShareHigh
    
    
    
    
    
    Low2003First Quarter
    
    $
    3.10
    
    
    
    
    
    
    $
    2.51Second Quarter
    
    $
    4.03
    
    
    
    
    
    
    $
    2.40Third Quarter
    
    $
    3.86
    
    
    
    
    
    
    $
    3.15Fourth Quarter
    
    $
    4.49
    
    
    
    
    
    
    $
    3.192004First Quarter
    
    $
    4.67
    
    
    
    
    
    
    $
    3.60Second Quarter
    
    $
    5.35
    
    
    
    
    
    
    $
    3.83Third Quarter
    
    $
    5.68
    
    
    
    
    
    
    $
    4.38Fourth Quarter
    
    $
    5.60
    
    
    
    
    
    
    $
    4.832005First Quarter
    
    $
    6.30
    
    
    
    
    
    
    $
    6.02Second Quarter
    
    $
    7.87
    
    
    
    
    
    
    $
    7.52Third Quarter
    
    $
    11.75
    
    
    
    
    
    
    $
    11.24Fourth Quarter
    
    $
    15.29
    
    
    
    
    
    
    $
    14.60
   Dividends
  (31)




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##### Table of Contents



Equity Compensation Plans
  (a)
    
    
    (b)
    
    
    (c)Number of securitiesWeightedaverage
    
    
    remaining available forexercise
    
    
    future issuance underNumber of securities to be
    
    
    price of
    
    
    equity compensationissued upon exercise of
    
    
    outstanding
    
    
    plans (excludingoutstanding options,
    
    
    options,
    
    
    securities reflected inPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    column (a))Equity compensation
plans
approved by security
holders(1)
    
    
    1,216,346
    
    
    $
    5.29
    
    
    
    101,016Equity compensation
plans
not approved by security
holders
    
    
    436,708
    (2)
    
    $
    4.08
    
    
    
    Total
    
    
    1,653,054
    
    
    $
    4.97
    
    
    
    101,016
 
 (1)
    
    Includes the following plans: 2004 Non-Employee Director Stock Grant Plan; 1992
Stock Option Plan; 1997 Non-employee Directors Stock Option Plan; 1998 Stock Option
Plan and; 2001 Non-employee Directors Stock Option Plan.(2)
    
    These shares include an aggregate of 200,000 shares of common stock underlying
stock options granted in June, 2001 to non-officer employees pursuant to Parallels
Employee Stock Option Plan. The Employee Stock Option Plan is the only equity
compensation plan in effect that was adopted without approval of our stockholders.
Directors and officers of Parallel are not eligible to participate in this plan. A
description of the material features of this plan can be found under the caption
Employee Stock Option Plan on page 70. The total number of shares shown also
includes 136,708 shares of common stock underlying a stock purchase warrant we
issued to an investment banking firm in November, 2001 and 100,000 shares of common
stock underlying a stock purchase warrant we issued to the same investment banking
firm in December, 2003. These warrants were issued under financial advisory
services agreements with the investment banking firm, and not under employee or
director compensation plans. All of the warrants contain customary provisions
providing for adjustments of the exercise price and the number and type of
securities issuable upon exercise of the warrants if any one or more of certain
specified events occur. The warrants also grant to the holder certain registration
rights for the securities issuable upon exercise of the warrants. Sale of Unregistered Securities
   (32)




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Repurchase of Equity Securities
  
 ITEM 6. SELECTED FINANCIAL DATA
   (33)




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    
    2003

    
    
    2002(1)
    
    
    2001(2)(in thousands, except per share and per unit data)(restated)Consolidated Income Statements Data:Operating revenues
    
    $
    66,150
    
    
    $
    35,837
    
    
    
    $
    33,855
    
    
    $
    12,106
    
    
    $
    17,840Operating expenses
    
    $
    33,085
    
    
    $
    23,571
    
    
    
    $
    21,138
    
    
    $
    11,250
    
    
    $
    28,405Income (loss) before cumulative effect
of change in accounting principle
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    
    $
    7,664
    
    
    $
    18,701
    
    
    $
    (4,708
    )Net income (loss)
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    
    $
    7,602
    
    
    $
    18,701
    
    
    $
    (4,708
    )Cumulative preferred stock dividend
    
    $
    (271
    )
    
    $
    (572
    )
    
    
    $
    (580
    )
    
    $
    (585
    )
    
    $
    (585
    )Net income (loss) available to common stockholders
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    
    $
    7,022
    
    
    $
    18,116
    
    
    $
    (5,292
    )Net income (loss) per common share before cumulative
effect of change in accounting principleBasic
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    
    $
    0.33
    
    
    $
    0.88
    
    
    $
    (0.26
    )Diluted
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    
    $
    0.31
    
    
    $
    0.79
    
    
    $
    (0.26
    )Weighted average common stock and common stock
equivalents outstandingBasic
    
    
    32,253
    
    
    
    25,323
    
    
    
    
    21,264
    
    
    
    20,680
    
    
    
    20,458Diluted
    
    
    32,253
    
    
    
    25,688
    
    
    
    
    24,175
    
    
    
    23,549
    
    
    
    20,458Cash
dividends  common stock
    
    $
    
    
    
    $
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheet Data:Total assets
    
    $
    253,008
    
    
    $
    170,671
    
    
    
    $
    118,343
    
    
    $
    102,351
    
    
    $
    41,760Total liabilities
    
    $
    163,506
    
    
    $
    110,677
    
    
    
    $
    57,111
    
    
    $
    56,852
    
    
    $
    15,446Long-term debt, less current maturities
    
    $
    100,000
    
    
    $
    79,000
    
    
    
    $
    39,750
    
    
    $
    45,604
    
    
    $
    9,600Total stockholders equity
    
    $
    89,502
    
    
    $
    59,994
    
    
    
    $
    61,232
    
    
    $
    45,499
    
    
    $
    26,314Consolidated Statement of Cash Flow Data:Cash provided by (used in)
Operating activities
    
    $
    37,118
    
    
    $
    18,156
    
    
    
    $
    19,493
    
    
    $
    1,528
    
    
    $
    13,383Investing activities
    
    $
    (84,949
    )
    
    $
    (69,518
    )
    
    
    $
    (15,494
    )
    
    $
    (30,277
    )
    
    $
    (11,357
    )Financing activities
    
    $
    49,468
    
    
    $
    38,765
    
    
    
    $
    1,567
    
    
    $
    37,210
    
    
    $
    (676
    )Operating Data:Product SalesOil (Bbls)
    
    
    923
    
    
    
    729
    
    
    
    
    629
    
    
    
    131
    
    
    
    138Gas (Mcf)
    
    
    3,592
    
    
    
    2,690
    
    
    
    
    3,356
    
    
    
    2,670
    
    
    
    3,266BOE
    
    
    1,522
    
    
    
    1,177
    
    
    
    
    1,188
    
    
    
    576
    
    
    
    682Average sales priceOil (per Bbl)
    
    $
    51.78
    
    
    $
    39.05
    
    
    
    $
    29.11
    
    
    $
    24.59
    
    
    $
    24.80Gas (per Mcf)
    
    $
    8.54
    
    
    $
    5.85
    
    
    
    $
    5.40
    
    
    $
    3.33
    
    
    $
    4.41Proved reservesOil (Bbls)
    
    
    22,091
    
    
    
    18,916
    
    
    
    
    12,084
    
    
    
    10,271
    
    
    
    916Gas (Mcf)
    
    
    25,417
    
    
    
    16,825
    
    
    
    
    16,271
    
    
    
    15,633
    
    
    
    13,947
 
 (1)
    
    Results include a $31.0 million gain attributable to equity in income of First
Permian, L.P. Results also include noncash charges of $717,000 on the sale of stock we
owned in Energen Corporation, $509,000 for the change in fair value of derivatives and
$440,000 for the change in fair market value of our crude oil swaps.(2)
    
    Results include noncash charges of $2.2 million in the fiscal quarter ended
September 30, 2001 and $14.6 million in the fourth quarter ended December 31, 2001, in
each case related to the impairment of oil and natural gas properties incurred in 2001
and primarily a result of a decrease in year-end reserves and lower oil and natural gas
prices. (34)




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview and Strategy
   
    
    focuses on projects having less geological risk;
    
    emphasizes acquisition, exploitation, development and enhancement activities;
    
    includes the utilization of horizontal and fracture stimulation technologies on certain types of reservoirs;
    
    focuses on acquiring producing properties; and
    
    expands the scope of operations by diversifying our exploratory and development
efforts, both in and outside of our current areas of operation.
   
    
    the prices we receive for the oil and natural gas we produce;
    
    the results of reprocessing and reinterpreting our 3-D seismic data;
    
    the results of our drilling activities;
    
    the costs of obtaining high quality field services;
    
    our ability to find and consummate acquisition opportunities; and
    
    our ability to negotiate and enter into work to earn arrangements, joint venture or
other similar agreements on terms acceptable to us.
 (35)




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##### Table of Contents



Operating Performance
  
    
    seasonal demand;
    
    weather;
    
    hurricane conditions in the Gulf of Mexico;
    
    availability of pipeline transportation to end users;
    
    proximity of our wells to major transportation pipeline infrastructures; and
    
    world oil prices.
  
    
    production expenses;
    
    overhead requirements; and
    
    costs of capital.
  
    
    cash flow from operations;
    
    sales of our equity securities;
    
    bank borrowings; and
    
    industry joint ventures.
    (36)




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##### Table of Contents



Results of Operations
    Years Ended December 31,2005
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    2003(in thousands except per unit data)Production VolumesOil (Bbls)
    
    
    923
    
    
    
    
    
    
    
    729
    
    
    
    
    
    
    
    629Natural gas (Mcf)
    
    
    3,592
    
    
    
    
    
    
    
    2,690
    
    
    
    
    
    
    
    3,356BOE
    
    
    1,522
    
    
    
    
    
    
    
    1,177
    
    
    
    
    
    
    
    1,188Sales PriceOil (per Bbl)(1)
    
    $
    51.78
    
    
    
    
    
    
    $
    39.05
    
    
    
    
    
    
    $
    29.11Natural gas (per Mcf)(1)
    
    $
    8.54
    
    
    
    
    
    
    $
    5.85
    
    
    
    
    
    
    $
    5.40BOE Price(1)
    
    $
    51.57
    
    
    
    
    
    
    $
    37.55
    
    
    
    
    
    
    $
    30.66BOE Price(2)
    
    $
    43.46
    
    
    
    
    
    
    $
    30.45
    
    
    
    
    
    
    $
    28.50Operating RevenuesOil
    
    $
    47,800
    
    
    
    
    
    
    $
    28,455
    
    
    
    
    
    
    $
    18,300Effect of oil hedges
    
    
    (12,139
    )
    
    
    
    
    
    
    (7,458
    )
    
    
    
    
    
    
    (1,659
    )Natural gas
    
    
    30,690
    
    
    
    
    
    
    
    15,735
    
    
    
    
    
    
    
    18,121Effect of natural gas hedges
    
    
    (201
    )
    
    
    
    
    
    
    (895
    )
    
    
    
    
    
    
    (907
    )66,150
    
    
    
    
    
    
    
    35,837
    
    
    
    
    
    
    
    33,855Operating ExpensesLease operating expense
    
    
    9,947
    
    
    
    
    
    
    
    7,373
    
    
    
    
    
    
    
    6,458Production taxes
    
    
    4,102
    
    
    
    
    
    
    
    2,108
    
    
    
    
    
    
    
    1,946General and administrative:General and administrative
    
    
    4,289
    
    
    
    
    
    
    
    3,123
    
    
    
    
    
    
    
    3,019Public reporting
    
    
    2,423
    
    
    
    
    
    
    
    2,255
    
    
    
    
    
    
    
    1,325Depreciation and depletion
    
    
    12,044
    
    
    
    
    
    
    
    8,712
    
    
    
    
    
    
    
    8,39032,805
    
    
    
    
    
    
    
    23,571
    
    
    
    
    
    
    
    21,138Operating income
    
    $
    33,345
    
    
    
    
    
    
    $
    12,266
    
    
    
    
    
    
    $
    12,717
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. (37)




---



##### Table of Contents



Critical Accounting Policies and Practices
 Full Cost and Impairment of Assets.
  Depletion.
 Proved Reserve Estimates.
   Use of Estimates.
 Derivatives.
  (38)




---



##### Table of Contents



Years Ended December 31, 2005 and December 31, 2004
  Oil and Gas RevenuesRevenues(1)
    
    
    Production2005
    
    
    2004
    
    
    2005
    
    
    2004(restated)Oil (Bbls)
    
    
    54
    %
    
    
    59
    %
    
    
    61
    %
    
    
    62
    %Natural gas (Mcf)
    
    
    46
    %
    
    
    41
    %
    
    
    39
    %
    
    
    38
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes the effects of derivative transactions accounted for as
hedges. See (Financial Statement Restatement and Note 18 to the
Consolidated Financial Statements.  Year Ended December 31,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(in thousands except per unit data)Production VolumesOil (Bbls)
    
    
    923
    
    
    
    729
    
    
    
    194
    
    
    
    27
    %Natural gas (Mcf)
    
    
    3,592
    
    
    
    2,690
    
    
    
    902
    
    
    
    34
    %BOE
    
    
    1,522
    
    
    
    1,177
    
    
    
    345
    
    
    
    29
    %Sales PriceOil (per Bbl)(1)
    
    $
    51.78
    
    
    $
    39.05
    
    
    $
    12.73
    
    
    
    33
    %Natural gas (per Mcf)(1)
    
    $
    8.54
    
    
    $
    5.85
    
    
    $
    2.69
    
    
    
    46
    %BOE price(1)
    
    $
    51.57
    
    
    $
    37.55
    
    
    $
    14.02
    
    
    
    37
    %BOE price(2)
    
    $
    43.46
    
    
    $
    30.45
    
    
    $
    13.01
    
    
    
    43
    %Operating RevenuesOil
    
    $
    47,800
    
    
    $
    28,455
    
    
    $
    19,345
    
    
    
    68
    %Effect of oil hedges
    
    
    (12,139
    )
    
    
    (7,458
    )
    
    
    4,681
    
    
    
    63
    %Natural gas
    
    
    30,690
    
    
    
    15,735
    
    
    
    14,955
    
    
    
    95
    %Effect of natural gas hedges
    
    
    (201
    )
    
    
    (895
    )
    
    
    (694
    )
    
    
    (78
    )%Total
    
    $
    66,150
    
    
    $
    35,837
    
    
    $
    30,313
    
    
    
    85
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.  (39)




---



##### Table of Contents



Costs
and Expenses
 Year Ended December 31,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)Lease operating expense
    
    $
    9,947
    
    
    $
    7,373
    
    
    $
    2,574
    
    
    
    35
    %Production taxes
    
    
    4,102
    
    
    
    2,108
    
    
    
    1,994
    
    
    
    95
    %General and administrative:General and administrative
    
    
    4,289
    
    
    
    3,123
    
    
    
    1,166
    
    
    
    37
    %Public reporting
    
    
    2,423
    
    
    
    2,255
    
    
    
    168
    
    
    
    7
    %Total general and administrative
    
    
    6,712
    
    
    
    5,378
    
    
    
    1,334
    
    
    
    25
    %Depreciation and depletion
    
    
    12,044
    
    
    
    8,712
    
    
    
    3,332
    
    
    
    38
    %Total
    
    $
    32,805
    
    
    $
    23,571
    
    
    $
    9,234
    
    
    
    39
    %
     (40)




---



##### Table of Contents



Other income (expense)Year Ended December 31,
    
    
    Increase
    
    
    % Increase2005
    
    
    2004
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)Change in fair market value of derivative instruments
    
    $
    (31,669
    )
    
    $
    (5,726
    )
    
    $
    25,943
    
    
    
    453
    %Gain (loss) on ineffective portion of hedges
    
    
    (137
    )
    
    
    (240
    )
    
    
    (103
    )
    
    
    (43
    )%Interest and other income
    
    
    167
    
    
    
    189
    
    
    
    (22
    )
    
    
    (12
    )%Interest expense
    
    
    (4,780
    )
    
    
    (2,732
    )
    
    
    2,048
    
    
    
    75
    %Other expense
    
    
    (191
    )
    
    
    (324
    )
    
    
    (133
    )
    
    
    (41
    )%Total
    
    $
    (36,610
    )
    
    $
    (8,833
    )
    
    $
    27,777
    
    
    
    314
    %
      (41)




---



##### Table of Contents



Years Ended December 31, 2004 and December 31, 2003
  Oil
and Gas Revenues
 Revenues(1)
    
    
    Production2004
    
    
    2003
    
    
    2004
    
    
    2003Oil (Bbls)
    
    
    59
    %
    
    
    49
    %
    
    
    62
    %
    
    
    53
    %Natural gas (Mcf)
    
    
    41
    %
    
    
    51
    %
    
    
    38
    %
    
    
    47
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes hedge transactions  Year Ended December 31,
    
    
    Increase
    
    
    % Increase2004
    
    
    2003
    
    
    (Decrease)
    
    
    (Decrease)(in thousands except per unit data)Production Volumes
Oil (Bbls)
    
    
    729
    
    
    
    629
    
    
    
    100
    
    
    
    16
    %Natural gas (Mcf)
    
    
    2,690
    
    
    
    3,356
    
    
    
    (666
    )
    
    
    (20
    )%BOE
    
    
    1,177
    
    
    
    1,188
    
    
    
    (11
    )
    
    
    (1)
    %Sales Price
Oil (per Bbl)(1)
    
    $
    39.05
    
    
    $
    29.11
    
    
    $
    9.94
    
    
    
    34
    %Natural gas (per Mcf)(1)
    
    $
    5.85
    
    
    $
    5.40
    
    
    $
    0.45
    
    
    
    8
    %BOE price(1)
    
    $
    37.55
    
    
    $
    30.66
    
    
    $
    6.89
    
    
    
    22
    %BOE price(2)
    
    $
    30.45
    
    
    $
    28.50
    
    
    $
    1.95
    
    
    
    7
    %Operating Revenues
Oil
    
    $
    28,455
    
    
    $
    18,300
    
    
    $
    10,155
    
    
    
    55
    %Effect of oil hedges
    
    $
    (7,458
    )
    
    $
    (1,659
    )
    
    $
    5,799
    
    
    
    350
    %Natural gas
    
    $
    15,735
    
    
    $
    18,121
    
    
    $
    (2,386
    )
    
    
    (13
    )%Effect of natural gas hedges
    
    $
    (895
    )
    
    $
    (907
    )
    
    $
    (12
    )
    
    
    (1)
    %Total
    
    $
    35,837
    
    
    $
    33,855
    
    
    $
    1,982
    
    
    
    6
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions.   (42)




---



##### Table of Contents



Cost and Expenses
 Year Ended December 31,
    
    
    Increase
    
    
    % Increase2004
    
    
    2003
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)Lease operating expense
    
    $
    7,373
    
    
    $
    6,458
    
    
    $
    915
    
    
    
    14
    %Production taxes
    
    
    2,108
    
    
    
    1,946
    
    
    
    162
    
    
    
    8
    %General and administrative:General and administrative
    
    
    3,123
    
    
    
    3,019
    
    
    
    104
    
    
    
    3
    %Public reporting
    
    
    2,255
    
    
    
    1,325
    
    
    
    930
    
    
    
    70
    %Total general and administrative
    
    
    5,378
    
    
    
    4,344
    
    
    
    1,034
    
    
    
    24
    %Depreciation and depletion
    
    
    8,712
    
    
    
    8,390
    
    
    
    322
    
    
    
    4
    %Total
    
    $
    23,571
    
    
    $
    21,138
    
    
    $
    2,433
    
    
    
    12
    %
    (43)




---



##### Table of Contents



Other income (expense)
 Year Ended December 31,
    
    
    Increase
    
    
    % Increase2004
    
    
    2003
    
    
    (Decrease)
    
    
    (Decrease)(dollars in thousands)(restated)Change in fair market value of derivative instruments
    
    $
    (5,726
    )
    
    $
    (22
    )
    
    $
    5,704
    
    
    
    25,927
    %Gain (loss) on ineffective portion of hedges
    
    
    (240
    )
    
    
    191
    
    
    
    (431
    )
    
    
    (226)
    %Interest and other income
    
    
    189
    
    
    
    116
    
    
    
    73
    
    
    
    63
    %Interest expense
    
    
    (2,732
    )
    
    
    (2,048
    )
    
    
    684
    
    
    
    33
    %Other expense
    
    
    (324
    )
    
    
    (259
    )
    
    
    65
    
    
    
    25
    %Total
    
    $
    (8,833
    )
    
    $
    (2,022
    )
    
    $
    6,811
    
    
    
    337
    %
    Capital Resources and Liquidity
    Year ended December 31,2005
    
    
    2004
    
    
    2003(in thousands)Operating activities
    
    $
    37,118
    
    
    $
    18,156
    
    
    $
    19,493Investing activities
    
    $
    (84,949
    )
    
    $
    (69,518
    )
    
    $
    (15,494
    )Financing activities
    
    $
    49,468
    
    
    $
    38,765
    
    
    $
    1,567
 (44)




---



##### Table of Contents



Credit Facilities
  Revolving Credit Facility
      (45)




---



##### Table of Contents



Second Lien Term Loan Facility
 1 2
       Preferred Stock
  
    
    required us to pay dividends of $.60 per annum, semi-annually on June 15 and
December 15 of each year;
    
    was convertible into common stock at any time, at the option of the holder, into
2.8751 shares of common stock at an initial conversion price of $3.50 per share,
subject to adjustment in certain events;
    
    was redeemable at our option, in whole in part, for $10 per share, plus accrued
dividends;
    
    had no voting rights, except as required by applicable law, and except that as long
as any shares of preferred stock remain outstanding, the holders of a majority of the
outstanding shares of the preferred stock may vote on any proposal to change any
provision of the preferred stock which materially and adversely affects the rights,
preferences or privileges of the preferred stock;
 (46)




---



##### Table of Contents




    
    was senior to the common stock with respect to dividends and on liquidation,
dissolution or winding up of Parallel;
    
    had a liquidation value of $10 per share, plus accrued and unpaid dividends.
  Commodity Price Risk Management Transactions and Effects of Derivative Instruments
      Future Capital Requirements
  
    
    internally generated cash flows;
    
    availability of borrowing under our revolving credit facility;
    
    availability supply and services;
    
    additional sources of funding; and
    
    future drilling successes.
 (47)




---



##### Table of Contents



Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  Obligation Due in PeriodContractual Cash Obligations
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    After 5 years
    
    
    Total(in thousands)Revolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    50,000
    
    
    $
    
    
    
    $
    50,000Second Lien Term Loan Agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Office Lease (Dinero Plaza)
    
    
    193
    
    
    
    204
    
    
    
    210
    
    
    
    216
    
    
    
    36
    
    
    
    
    
    
    
    859Andrews and Snyder Field Offices (1)
    
    
    23
    
    
    
    23
    
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    (1
    )
    
    
    88Asset Retirement Obligations(2)
    
    
    214
    
    
    
    28
    
    
    
    35
    
    
    
    101
    
    
    
    254
    
    
    
    1,863
    
    
    
    2,495Derivative Obligations
    
    
    16,607
    
    
    
    13,471
    
    
    
    11,852
    
    
    
    112
    
    
    
    92
    
    
    
    
    
    
    
    42,134Total
    
    $
    17,037
    
    
    $
    13,726
    
    
    $
    12,111
    
    
    $
    443
    
    
    $
    100,396
    
    
    $
    1,863
    
    
    $
    145,576
 
 (1)
    
    The Snyder field office lease remains in effect until the termination of our trade
agreement with a third party working interest owner in the Diamond M project. The
Andrews field office lease expires in December 2007. The lease cost for these two
office facilities are billed to nonaffiliated third party working interest owners
under our joint operating agreements with these third parties.(2)
    
    Asset retirement obligations of oil and natural gas assets, excluding salvage value and
accretion.    Outlook
  
    
    internally generated cash from operations;
    
    proceeds from bank borrowings; and
    
    proceeds from sales of equity securities.
  
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and natural gas; and
    
    our ability to acquire, locate and produce new reserves.
 (48)




---



##### Table of Contents




    
    increased bank borrowings;
    
    sales of Parallels securities;
    
    sales of non-core properties; or
    
    other forms of financing.
  Inflation
  Recent Accounting Pronouncements
  Share-Based Payment. Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees.
  Accounting Changes and Error Corrections, Accounting Changes"
 (49)




---



##### Table of Contents



ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  Interest Rate Sensitivity as of December 31, 2005
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Total(dollars in thousands)Variable rate debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    100,000
    
    
    $
    100,000Revolving Credit Facility (secured)
Average interest rate
    
    
    6.40
    %
    
    
    6.40
    %
    
    
    6.40
    %
    
    
    6.40
    %
    
    
    6.40
    %Term Loan (Second Lien)
Average interest rate
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    9.00
    %
    
    
    9.00
    %
    (50)




---



##### Table of Contents



EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    
    
    
    
    
    
    
    
    at December 31,Amounts
    
    
    Fixed Interest Rates
    
    
    2005($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2006 thru December 31, 2006(1)
    
    $
    10
    
    
    
    4.05
    %
    
    $
    69January 1, 2006 thru December 31, 2006
    
    $
    90
    
    
    
    4.41
    %
    
    
    299January 1, 2007 thru December 31, 2007
    
    $
    100
    
    
    
    4.62
    
    
    
    118January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    
    (111
    )January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (110
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (94
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    171
 
 (1)
    
    Designated as a cash flow hedge. Commodity Price Sensitivity as of December 31, 2005
     Put Options.
 Collars.
 (51)




---



##### Table of Contents



HoustonNyMex
    
    
    
    
    
    
    Ship Channel
    
    
    WAHABarrels
    
    
    Oil Prices
    
    
    MMBtu of
    
    
    Gas Prices
    
    
    Gas Prices
    
    
    Fair MarketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Floor
    
    
    Cap
    
    
    Value($in thousands)January 1, 2006 thru December 31, 2006
    
    
    289,800
    
    
    $
    48.22
    
    
    $
    75.83
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,122
    )April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    428,000
    
    
    $
    7.50
    
    
    $
    13.90
    
    
    $
    
    
    
    $
    
    
    
    
    52April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    
    
    
    $
    
    
    
    $
    9.00
    
    
    $
    14.55
    
    
    
    181January 1, 2007 thru December 31, 2007
    
    
    219,000
    
    
    $
    52.50
    
    
    $
    83.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    230April 1, 2007 thru October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    $
    
    
    
    $
    
    
    
    
    (145
    )January 1, 2008 thru December 31, 2008
    
    
    109,800
    
    
    $
    55.00
    
    
    $
    76.50
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    153January 1, 2009 thru December 31, 2009
    
    
    91,250
    
    
    $
    55.00
    
    
    $
    73.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    126January 1, 2010 thru December 31, 2010
    
    
    76,000
    
    
    $
    55.00
    
    
    $
    71.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    113Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (412
    )
 Commodity Swaps.
  Barrels of
    
    
    Nymex Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2006 thru December 20, 2006(1)
    
    
    265,500
    
    
    $
    23.04
    
    
    $
    (10,457
    )January 1, 2006 thru December 31, 2006
    
    
    182,500
    
    
    $
    36.35
    
    
    
    (4,806
    )January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    (13,327
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (11,741
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (40,331
    )
 
 (1)
    
    Designated as a cash flow hedge.  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  (52)




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 Resignation of KPMG LLP
     Engagement of BDO Seidman, LLP
   
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  (53)




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Managements Report on Internal Control Over Financial Reporting
    Internal Control Integrated Framework,
   (54)




---



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Changes in Internal Controls
  (55)




---



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Internal ControlIntegrated Framework .
       Internal ControlIntegrated Framework
 (56)




---



##### Table of Contents



Internal ControlIntegrated Framework
  
 
 ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  DirectorName
    
    Age
    
    Since
    
    Position with CompanyThomas R. Cambridge(1)
    
    70
    
    1985
    
    Chairman of the Board of DirectorsLarry C. Oldham(1)
    
    52
    
    1979
    
    Director, President and Chief Executive OfficerDewayne E. Chitwood(2)(3)(4)
    
    69
    
    2000
    
    DirectorMartin B. Oring(1)(2)(3)(4)
    
    60
    
    2001
    
    DirectorRay M. Poage(1)(2)(3)(4)
    
    58
    
    2003
    
    DirectorJeffrey G. Shrader(1)(2)(4)
    
    55
    
    2001
    
    DirectorDonald E. Tiffin
    
    48
    
    
    
    Chief Operating OfficerEric A. Bayley
    
    57
    
    
    
    Vice President of Corporate EngineeringJohn S. Rutherford
    
    46
    
    
    
    Vice President of Land and AdministrationSteven D. Foster
    
    50
    
    
    
    Chief Financial Officer
 
 (1)
    
    Member of Hedging and Acquisition Committee(2)
    
    Member of Compensation Committee(3)
    
    Member of Audit Committee(4)
    
    Member of Corporate Governance and Nominating Committee   (57)




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Consulting Arrangements
  Corporate Governance
 (58)




---



##### Table of Contents




    
    the Audit Committee;
    
    the Corporate Governance and Nominating Committee;
    
    the Compensation Committee; and
    
    the Hedging and Acquisitions Committee.
 Audit Committee
  www.plll.com
  Corporate Governance and Nominating Committee
 www.plll.com
  
    
    a statement that the writer is a stockholder and is proposing a candidate for
consideration by the committee;
    
    the name of and contact information for the candidate;
    
    a statement of the candidates age, business and educational experience;
 
 (59)




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##### Table of Contents




    
    information sufficient to enable the committee to evaluate the candidate;
    
    a statement detailing any relationship between the candidate and any joint interest
owners, customer, supplier or competitor of Parallel;
    
    detailed information about any relationship or understanding between the proposing
stockholder and the candidate; and
    
    a statement that the candidate is willing to be considered and willing to serve as
a Director if nominated and elected.
 Compensation Committee
  Hedging and Acquisitions Committee
  Code of Ethics
 www.plll.com
 Requests should be directed to:Manager of Investor RelationsParallel Petroleum Corporation1004 N. Big Spring, Suite 400Midland, Texas 79701Telephone: (432) 684-3727
 (60)




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##### Table of Contents



Stockholder Communications with Directors
   
    
    if you request, forward the communication to the other Directors;
    
    request that management handle the inquiry directly, for example where it is a
request for information about the company or it is a stock-related matter; or
    
    not forward the communication to the other Directors or management if it is
primarily commercial in nature or if it relates to an improper or irrelevant topic.
 Director Attendance at Annual Meetings
  (61)




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Summary of Annual Compensation
 Compensation TableLong-Term CompensationAnnual Compensation
    
    Awards
    
    PayoutsOther
    
    Restricted
    
    Securities
    
    
    
    
    
    AllAnnual
    
    Stock
    
    Underlying
    
    LTIP
    
    OtherName and
    
    
    
    
    
    Salary
    
    Bonus
    
    Compensation
    
    Awards
    
    Options/
    
    Payouts
    
    CompensationPrincipal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)(2)
    
    ($)
    
    SAR (#)
    
    ($)
    
    ($)T. R. Cambridge
    
    
    2005
    
    
    $
    120,000
    
    
    $
    60,000
    
    
    $
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Chairman of the Board
    
    
    2004
    (1)
    
    $
    110,000
    
    
    $
    10,000
    
    
    $
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    02003
    
    
    $
    110,000
    
    
    $
    25,000
    
    
    $
    
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0L. C. Oldham
    
    
    2005
    
    
    $
    275,000
    
    
    $
    201,525
    
    
    $
    35,381
    (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,500
    (4)President , Chief
Executive
    
    
    2004
    
    
    $
    250,000
    
    
    $
    11,019
    
    
    $
    27,183
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    15,000Officer and Director
    
    
    2003
    
    
    $
    191,000
    
    
    $
    61,391
    
    
    $
    22,802
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    11,460D. E. Tiffin
    
    
    2005
    
    
    $
    241,667
    
    
    $
    138,917
    
    
    $
    24,522
    (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,500
    (6)Chief Operating Officer
    
    
    2004
    
    
    $
    220,000
    
    
    $
    10,015
    
    
    $
    23,560
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    13,5602003
    
    
    $
    171,140
    
    
    $
    44,391
    
    
    $
    17,464
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    10,268E. A. Bayley
    
    
    2005
    
    
    $
    153,667
    
    
    $
    51,417
    
    
    $
    21,248
    (7)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,220
    (8)Vice President
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,101
    
    
    $
    24,500
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,4002003
    
    
    $
    110,000
    
    
    $
    23,391
    
    
    $
    16,470
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,600J. S. Rutherford
    
    
    2005
    
    
    $
    153,667
    
    
    $
    51,417
    
    
    $
    22,525
    (9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,220
    (10)Vice President
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,062
    
    
    $
    23,357
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,4002003
    
    
    $
    110,000
    
    
    $
    23,391
    
    
    $
    15,763
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    6,600S. D. Foster
    
    
    2005
    
    
    $
    154,542
    
    
    $
    76,417
    
    
    $
    28,182
    (11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,273
    (12)Chief Financial Officer
    
    
    2004
    
    
    $
    140,000
    
    
    $
    7,033
    
    
    $
    27,983
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    $
    8,760
 
 (1)
    
    Mr. Cambridges position as Chief Executive Officer ceased on January 1, 2004 when Mr.
Oldham became Chief Executive Officer. (62)




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##### Table of Contents



(2)
    
    Under rules of the Securities and Exchange Commission, the dollar value of perquisites and
personal benefits may be excluded from this column if the aggregate amount of such
compensation is the lesser of either $50,000 or 10% of the total annual salary and bonus
reported for the named executive officers. However, for 2005 and 2004 we have identified the
following amounts:
 Mr.
    
    
    Mr.
    
    
    Mr.
    
    
    Mr.
    
    
    Mr.
    
    
    Mr.Cambridge
    
    
    Oldham
    
    
    Tiffin
    
    
    Bayley
    
    
    Rutherford
    
    
    FosterPersonal use of club memberships
(a)2005
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,150
    
    
    $
    2,5012004
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    113
    
    
    $
    3,672
    
    
    $
    4,407Personal use of company car
(b)2005
    
    
    $
    
    
    
    $
    3,338
    
    
    $
    
    
    
    $
    4,075
    
    
    $
    2,544
    
    
    $
    2004
    
    
    $
    
    
    
    $
    2,507
    
    
    $
    
    
    
    $
    6,189
    
    
    $
    3,107
    
    
    $
    Car allowance2005
    
    
    $
    
    
    
    $
    
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6,0002004
    
    
    $
    
    
    
    $
    
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    
    
    
    $
    6,000Personal income tax preparation
and financial planning services2005
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2004
    
    
    $
    
    
    
    $
    3,588
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Personal use of office space
(c)2005
    
    
    $
    
    
    
    $
    1,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Personal use of charter aircraft
(d)2005
    
    
    $
    
    
    
    $
    7,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    The value of personal use of club memberships was determined by
multiplying monthly dues by a fraction equal to actual personal expenses divided
by total expenses. All employees reimbursed us for their personal expenses.(b)
    
    Personal use of a company car is based on the lease value method published
by the Internal Revenue Service for fringe benefits.(c)
    
    Includes personal use of office space by Mr. Oldhams wife for charitable,
civic and personal activities. The value is determined by multiplying the number
of square feet in the office by the cost per square foot paid by Parallel under
its lease agreement covering its executive offices.(d)
    
    Includes air travel costs associated with Mr. Oldhams wife accompanying
him on business trips. The amount shown is equal to what the cost would have
been for non-refundable roundtrip commercial airfare. (3)
    
    These amounts include insurance premiums for nondiscriminatory group life, medical,
disability, long-term care and dental insurance as follows: $22,990 for 2005; $21,088 for
2004; and $19,697 for 2003.
 (4)
    
    This amount represents Parallels contribution to Mr. Oldhams individual retirement account
maintained under the 408(K) simplified employee pension plan/individual retirement account for
2003 and 2004 and 401(K) retirement account for 2005.
 (5)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability
and dental insurance as follows: $18,522 for 2005; $17,560 for 2004; and $16,964 for 2003.
 (6)
    
    This amount represents Parallels contribution to Mr. Tiffins individual retirement account
maintained under the 408(K) simplified employee premium plan/individual retirement account for
2003 and 2004 and 401(K) retirement account for 2005.
 (7)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical,
disability, long-term care and dental insurance as follows: $17,173 for 2005; $18,198 for
2004; and $16,470 for 2003.
 (8)
    
    This amount represents Parallels contribution to Mr. Bayleys individual retirement account
maintained under the 408(K) simplified employee pension plan/individual retirement account for
2003 and 2004 and 401(K) retirement account for 2005.
 (9)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical, disability
and dental insurance as follows: $17,831 for 2005; $16,578 for 2004; and $15,763 for 2003.
 (10)
    
    This amount represents Parallels contribution to Mr. Rutherfords individual retirement
account maintained under the 408(K) simplified employee premium plan/individual retirement
account for 2003 and 2004 and 401(K) retirement account for 2005.
 (11)
    
    This amount includes insurance premiums for nondiscriminatory group life, medical,
disability, long-term care and dental insurance as follows: $19,681 for 2005 and $17,576 for
2004.
 (63)




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##### Table of Contents



(12)
    
    This amount represents Parallels contribution to Mr. Fosters individual retirement account
maintained under the 408(K) simplified employee premium plan/individual retirement account for
2004 and 401(K) retirement account for 2005.
 Stock Options
   
 Number of Securities Underlying
    
    Value of UnexercisedShares Acquired
    
    Value
    
    Unexercised Options at Fiscal
    
    intheMoney Optionson
    
    Realized
    
    YearEnd (#)
    
    at Fiscal YearEnd ($)(2)Name
    
    Exercise
    
    ($)(1)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableT.R. Cambridge
    
    
    0
    
    
    
    0
    
    
    
    300,000
    
    
    
    0
    
    
    
    3,926,000
    
    
    
    0L.C. Oldham
    
    
    309,000
    
    
    
    4,409,320
    
    
    
    46,000
    
    
    
    45,000
    
    
    
    616,860
    
    
    
    541,800E. A. Bayley
    
    
    40,000
    
    
    
    449,480
    
    
    
    125,000
    
    
    
    0
    
    
    
    1,539,500
    
    
    
    0J.S. Rutherford
    
    
    65,000
    
    
    
    581,630
    
    
    
    93,750
    
    
    
    0
    
    
    
    1,131,688
    
    
    
    0D.E. Tiffin
    
    
    50,000
    
    
    
    766,500
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0S.D. Foster
    
    
    35,000
    
    
    
    440,150
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 
 (1)
    
    The value realized is equal to the fair market value of a share of common stock on
the date of exercise, less the exercise price of the stock options exercised.(2)
    
    The value of unexercised in-the-money options is equal to the fair market value
of a share of common stock at fiscal year-end ($17.01 per share), based on the last
sale price of Parallels common stock, less the exercise price. Change of Control Arrangements
 Stock Option Plans
  
    
    Parallel is not the surviving entity in a merger or consolidation;
    
    Parallel sells, leases or exchanges all or substantially all of its assets;
    
    Parallel is to be dissolved and liquidated;
    
    any person or group acquires beneficial ownership of more than 50% of Parallels common stock; or
    
    in connection with a contested election of directors, the persons who were
directors of Parallel before the election cease to constitute a majority of the Board
of Directors.
  
    
    accelerate the time at which options may be exercised;
 (64)




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##### Table of Contents




    
    require optionees to surrender some or all of their options and pay to each
optionee the change of control value;
    
    make adjustments to the options to reflect the change of control; or
    
    permit the holder of the option to purchase, instead of the shares of common stock
as to which the option is then exercisable, the number and class of shares of stock or
other securities or property which the optionee would acquire under the terms of the
merger, consolidation or sale of assets and dissolution if, immediately before the
merger, consolidation or sale of assets or dissolution, the optionee had been the
holder of record of the shares of common stock as to which the option is then
exercisable.
  
    
    the per share price offered to Parallels stockholders in a merger, consolidation,
sale of assets or dissolution transaction;
    
    the price per share offered to Parallels stockholders in a tender offer or
exchange offer where a change of control takes place; or
    
    if a change of control occurs, other than from a tender or exchange offer, the fair
market value per share of the shares into which the options being surrendered are
exercisable, as determined by the Committee.
 Incentive and Retention Plan
   
    
    an acquisition of Parallel by way of purchase, merger, consolidation,
reorganization or other business combination, whether by way of tender offer or
negotiated transaction, as a result of which Parallels outstanding securities are
exchanged or converted into cash, property and/or securities not issued by Parallel;
    
    a sale, lease, exchange or other disposition by Parallel of all or substantially all of its assets;
    
    the stockholders of Parallel approving a plan or proposal for the liquidation or dissolution of Parallel; or
    
    any combination of any of the foregoing.
   (65)




---



##### Table of Contents




    
    the payment of a one-time performance bonus to eligible officers and employees upon
the occurrence of a corporate transaction; or
    
    a one time retention payment upon a change of control of Parallel. A change of
control is generally defined as the acquisition of beneficial ownership of 60% or more
of the voting power of Parallels outstanding voting securities by any person or group
of persons, or a change in the composition of the Board of Directors of Parallel such
that the individuals who, at the effective date of the plan, constitute the Board of
Directors.
        
    
    designate the officers and employees of Parallel and its subsidiaries who
participate in the plan, in addition to the Executive Group;
    
    maintain records and data necessary for proper administration of the plan;
    
    adopt rules of procedure and regulations necessary for the proper and efficient administration of the plan;
    
    enforce the terms of the plan and the rules and regulations it adopts;
 
 (66)




---



##### Table of Contents




    
    employ agents, attorneys, accountants or other persons; and
    
    perform any other acts necessary or appropriate for the proper management and administration of the plan.
  Non-Officer Severance Plan
  Compensation of Directors
 Stock
  Cash
  
    
    $375 per meeting for service on the Compensation Committee, with the Chairman of
the Compensation Committee being entitled to receive an additional fee of $2,500 per
year;
    
    $375 per meeting for service on the Audit committee, with the Chairman of the Audit
Committee being entitled to receive an additional fee of $5,000 per year and each
other Audit Committee member receiving $2,500 per year;
    
    $375 per meeting for service on the Corporate Governance and Nominating Committee,
with the Chairman of the Corporate Governance and Nominating Committee being entitled
to receive an additional fee of $2,500 per year; and
    
    $375 per meeting for service on the Hedging and Acquisitions Committee, with the
Chairman of the Hedging and Acquisition Committee being entitled to receive an
additional fee of $2,500 per year.
  (67)




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##### Table of Contents



Options
  2004 Non-Employee Director Stock Grant Plan
        Stock Option Plans
 1992 Stock Option Plan.
  (68)




---



##### Table of Contents



1997 Nonemployee Directors Stock Option Plan.
     1998 Stock Option Plan.
    (69)




---



##### Table of Contents



2001 Nonemployee Directors Stock Option Plan.
     Employee Stock Option Plan.
      Section 408(k) Retirement Plan
    (70)




---



##### Table of Contents



st
  Section 401(k) Retirement Plan
       (71)




---



##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Name and Address
    
    Amount and Nature
    
    Percentof
    
    of
    
    ofBeneficial Owner
    
    Beneficial Ownership(1)
    
    Class(2)Thomas R. Cambridge
    
    
    1,041,545
    (3)
    
    
    2.96
    %2201 Civic Circle, Suite 216
Amarillo, Texas 79109Dewayne E. Chitwood
    
    
    1,374,894
    (4)
    
    
    3.93
    %400 Pine St., Suite 700
Abilene, Texas 79601Larry C. Oldham
    
    
    889,590
    (5)
    
    
    2.55
    %1004 N. Big Spring, Suite 400
Midland, Texas 79701Martin B. Oring
    
    
    223,787
    (6)
    
    
    *10817 Grande Blvd.
West Palm Beach, Florida 33417Ray M. Poage
    
    
    78,189
    (7)
    
    
    *4711 Meandering Way
Colleyville, Texas 76034Jeffrey G. Shrader
    
    
    133,121
    
    
    
    *801 S. Filmore, Suite 600
Amarillo, Texas 79105Eric A. Bayley
    
    
    203,490
    (8)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701John S. Rutherford
    
    
    166,300
    (9)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Donald E. Tiffin
    
    
    63,265

(10)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Steven D. Foster
    
    
    46,000
    (11)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701All Executive Officers and Directors
    
    
    4,220,181
    (12)
    
    
    13.57
    %as a Group (10 persons)
 (72)




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##### Table of Contents



*
    
    Less than one percent.(1)
    
    Unless otherwise indicated, all shares of common stock are held directly with sole
voting and investment powers.(2)
    
    Securities not outstanding, but included in the beneficial ownership of each
such person, are deemed to be outstanding for the purpose of computing the percentage
of outstanding securities of the class owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the class owned by any
other person. Shares of common stock that may be acquired within sixty days upon
exercise of outstanding stock options and warrants or upon conversion of preferred
stock are deemed to be outstanding.(3)
    
    Includes 741,545 shares of common stock held indirectly through Cambridge
Collateral Services, Ltd., a limited partnership of which Mr. Cambridge and his wife
are the general partners. Also included are 300,000 shares of common stock underlying
presently exercisable stock options held by Mr. Cambridge.(4)
    
    Includes 1,246,773 shares of common stock held directly by Wes-Tex Drilling
Company, L.P., a limited partnership. In his capacity as president, chief executive
officer and a manager of Wes-Tex Holdings, LLC, the general partner of Wes-Tex
Drilling Company, L.P., Mr. Chitwood may be deemed to have shared voting and
investment powers with respect to such shares. Also included are 20,000 shares of
common stock held by the Estate of Myrle Greathouse (the Estate). Mr. Chitwood is
the executor (but not a beneficiary) of the Estate, and in his capacity as executor,
Mr. Chitwood may also be deemed to have shared voting and investment powers with
respect to the shares of common stock beneficially owned by the Estate. However, Mr.
Chitwood disclaims beneficial ownership of all shares of common stock held by Wes-Tex
Drilling Company, L.P., and the Estate. Also included are 100,000 shares of common
stock underlying presently exercisable stock options held by Mr. Chitwood.(5)
    
    Includes 400,000 shares of common stock held indirectly through Oldham
Properties, Ltd., a limited partnership. Also included are 46,000 shares of common
stock underlying presently exercisable stock options held by Mr. Oldham.(6)
    
    Of the total number of shares shown, 24,000 shares are held directly by Mr.
Orings wife; 100,000 shares may be acquired by Mr. Oring upon exercise of stock
options held by Mr. Oring; and 91,666 shares may be acquired upon exercise of a stock
purchase warrant.(7)
    
    Includes 50,000 shares that may be acquired upon exercise of a presently
exercisable stock option.(8)
    
    Includes 125,000 shares of common stock underlying presently exercisable
stock options. A total of 6,790 shares of common stock are held indirectly by Mr.
Bayley through individual retirement accounts and Parallels 408(K) Plan.(9)
    
    Includes 93,750 shares of common stock underlying presently exercisable stock
options. Also included are 7,550 shares held indirectly by Mr. Rutherford through his
408(k) Plan.(10)
    
    Of the total number of shares shown 9,350 shares are held indirectly through
Mr. Tiffins individual retirement account.(11)
    
    Includes 400 shares of common stock held directly by Mr. Fosters wife and
9,000 shares held in his 408(K) Plan.(12)
    
    Includes 1,505,416 shares of common stock underlying stock options and
warrants that are presently exercisable or that become exercisable within sixty days
and 628,569 shares of common stock that may be acquired upon conversion of 220,000
shares of preferred stock. Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  (73)




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##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
   (74)




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##### Table of Contents



Types of Fees
    
    2005
    
    
    2004(dollars in thousands)Audit fees
    
    $
    383
    (1)
    
    $
    564
    (2)Audit-related fees
    
    
    
    
    
    
    Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    $
    383
    
    
    $
    564
 
 (1)
    
    Such amount includes $160,000 for professional services
in connection with the audit of the internal control over
financial reporting with Section 404 of the Sarbanes-Oxley
of 2002. This amount includes associated expenses in the
amount of approximately $20,000.(2)
    
    Such amount includes $320,000 for
professional services in connection with the audit of the
internal control over financial reporting under Section 404
of the Sarbanes-Oxley of 2002. This amount includes
associated expenses in the amount of approximately $41,000.    (75)




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the Registrants Form 8-K,
dated October 9, 2000, as filed with the Securities and Exchange Commission on October 10,
2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 4.3 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the Registrant (Incorporated by
reference to Exhibit No. 4.4 of the Registrants Statement on Form S-3, No. 333-119725 filed
on October 13, 2004)4.5
    
    Form of Indenture relating to subordinated debt securities of the Registrant (Incorporated by
reference to Exhibit No. 4.5 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)
 (76)




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##### Table of Contents



No.
    
    Description of Exhibit4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the Registrants Form 10-K for the fiscal year
ended December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between the Registrant and
Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S. Rutherford granting 2,394
Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869
Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr. Rutherford
(Incorporated by reference to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated September 23, 2004 and filed with the Securities and Exchange Commission
on September 29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by reference to Exhibit 10.1
of the Registrants Form 8-K Report dated June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C. (Incorporated by reference to
Exhibit 10.2 of the Registrants Form 8-K Report dated June 30, 1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First Permian, L.L.C. dated as
of May 31, 2000 (Incorporated by reference to Exhibit 10.16 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian, L.L.C., Parallel
Petroleum Corporation, Baytech, Inc., and Bank One, Texas, N.A. (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 8-K Report dated June 30, 1999)10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian, L.L.C., parallel
Petroleum Corporation and Bank One, Texas, N.A. (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 8-K Report dated June 30, 1999)10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among First Permian, L.L.C., Bank
One, Texas, N.A., and Bank One Capital Markets, Inc. (Incorporated by reference to Exhibit
10.22 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant and First American
Bank, SSB (Incorporated by reference to Exhibit 10.25 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among JMC Exploration, Inc.,
Arkoma Star L.L.C., Parallel, L.P. and Texland Petroleum, Inc. (Incorporated by reference to
Exhibit 10.1 of Form 8-K of the Registrant, dated December 20, 2002)
 (77)




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##### Table of Contents



No.
    
    Description of Exhibit10.17
    
    First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as
Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December
20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement, dated as of September 12,
2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to
Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)10.20
    
    Second Amendment and Restated Credit Agreement, dated September 27, 2004, by and among
Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB,
BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 27, 2004 and filed with the
Securities and Exchange Commission on October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)10.22
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated December 30, 2004 and
filed with the Securities and Exchange Commission on December 30, 2004)10.23
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American
Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated April 4, 2005 and filed with the
Securities and Exchange Commission on April 8, 2005)10.24
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.25
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.26
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.27
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.28
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.29
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.30
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)
 (78)




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##### Table of Contents



No.
    
    Description of Exhibit10.31
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley Gillespie & Associates, Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.
 
 *Filed herewith. (79)




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Index to the Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Financial Statements:Consolidated Balance Sheets at December 31, 2005 and 2004
    
    F-3Consolidated Statements of Operations for the years ended December 2005, 2004,
and 2003
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31,
2005, 2004 and 2003
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003
    
    F-6Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2005, 2004, and 2003
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
  F-1




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Report of Independent Registered Public Accounting Firm
 
      
  F-2




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PARALLEL PETROLEUM CORPORATION
 
 Consolidated Balance Sheets
 December 31, 2005 and 2004
 (dollars in thousands)
 2005
    
    
    2004(restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,418
    
    
    $
    4,781Accounts receivable:Oil and gas
    
    
    13,183
    
    
    
    6,642Other, net of allowance for doubtful account of $9
    
    
    877
    
    
    
    389Affiliates
    
    
    12
    
    
    
    714,072
    
    
    
    7,038Other current assets
    
    
    2,364
    
    
    
    179Deferred tax asset
    
    
    5,241
    
    
    
    2,531Total current assets
    
    
    28,095
    
    
    
    14,529Property and equipment, at cost:Oil and gas properties, full cost method (including $19,869 and $9,526 not
subject to depletion)
    
    
    303,819
    
    
    
    229,245Other
    
    
    2,404
    
    
    
    2,062306,223
    
    
    
    231,307Less accumulated depreciation, depletion and amortization
    
    
    (90,826
    )
    
    
    (78,782
    )Net property and equipment
    
    
    215,397
    
    
    
    152,525Restricted cash
    
    
    2,640
    
    
    
    2,287Investment in Westfork Pipeline Companies
    
    
    3,326
    
    
    
    595Other assets, net of accumulated amortization of $901 and $581
    
    
    3,550
    
    
    
    735$
    253,008
    
    
    $
    170,671Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    10,841
    
    
    $
    5,568Asset retirement obligations
    
    
    214
    
    
    
    150Derivative obligations
    
    
    16,607
    
    
    
    7,965Total current liabilities
    
    
    27,662
    
    
    
    13,683Revolving credit facility
    
    
    50,000
    
    
    
    79,000Term loan
    
    
    50,000
    
    
    
    Asset retirement obligations
    
    
    2,281
    
    
    
    1,982Derivative obligations
    
    
    25,527
    
    
    
    9,525Deferred tax liability
    
    
    8,036
    
    
    
    6,487Total long-term liabilities
    
    
    135,844
    
    
    
    96,994Commitments and contingencies (Note 15)Stockholders equity:Series A preferred stock  par value $0.10 per share, authorized 50,000 shares
    
    
    
    
    
    
    Preferred stock  $0.60 cumulative convertible preferred stock  par value
of $0.10 per share, (liquidation preference of $10 per share) authorized
10,000,000 shares, issued and outstanding 0 and 950,000
    
    
    
    
    
    
    95Common stock  par value $0.01 per share, authorized 60,000,000
shares, issued and outstanding 34,748,916 and 25,439,292
    
    
    347
    
    
    
    254Additional paid-in capital
    
    
    78,699
    
    
    
    48,328Retained earnings
    
    
    16,899
    
    
    
    18,759Accumulated other comprehensive loss
    
    
    (6,443
    )
    
    
    (7,442
    )Total stockholders equity
    
    
    89,502
    
    
    
    59,994$
    253,008
    
    
    $
    170,671
  F-3




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Operations
 Years ended December 31, 2005, 2004, 2003
 (dollars in thousands, except per share data)
 2005
    
    
    2004
    
    
    2003(restated)Oil and natural gas revenues:Oil and natural gas sales
    
    $
    66,150
    
    
    $
    35,837
    
    
    $
    33,855Cost and expenses:Lease operating expense
    
    
    9,947
    
    
    
    7,373
    
    
    
    6,458Production taxes
    
    
    4,102
    
    
    
    2,108
    
    
    
    1,946General and administrative
    
    
    6,712
    
    
    
    5,378
    
    
    
    4,344Depreciation, depletion and amortization
    
    
    12,044
    
    
    
    8,712
    
    
    
    8,390Total costs and expenses
    
    
    32,805
    
    
    
    23,571
    
    
    
    21,138Operating income
    
    
    33,345
    
    
    
    12,266
    
    
    
    12,717Other income (expense), net:Change in fair market value of derivative instruments
    
    
    (31,669
    )
    
    
    (5,726
    )
    
    
    (22
    )Gain (loss) on ineffective portion of hedges
    
    
    (137
    )
    
    
    (240
    )
    
    
    191Interest and other income
    
    
    167
    
    
    
    189
    
    
    
    116Interest expense
    
    
    (4,780
    )
    
    
    (2,732
    )
    
    
    (2,048
    )Other expense
    
    
    (102
    )
    
    
    (324
    )
    
    
    (259
    )Equity in loss of Westfork Pipeline Companies
    
    
    (89
    )
    
    
    
    
    
    
    Total other income (expense), net
    
    
    (36,610
    )
    
    
    (8,833
    )
    
    
    (2,022
    )Income (loss) before income taxes
    
    
    (3,265
    )
    
    
    3,433
    
    
    
    10,695Income tax benefit (expense), deferred
    
    
    1,676
    
    
    
    (1,162
    )
    
    
    (3,031
    )Income (loss) before cumulative effect of change in
accounting principle
    
    
    (1,589
    )
    
    
    2,271
    
    
    
    7,664Cumulative effect on prior years of a change in
accounting principle,
net of tax of $32
    
    
    
    
    
    
    
    
    
    
    (62
    )Net income (loss)
    
    
    (1,589
    )
    
    
    2,271
    
    
    
    7,602Cumulative preferred stock dividend
    
    
    (271
    )
    
    
    (572
    )
    
    
    (580
    )Net income (loss) available to common
stockholders
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    $
    7,022Net income (loss) per common share:Basic
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.33Diluted
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.31
  F-4




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##### Table of Contents



(amounts in thousands)
 AccumulatedPreferred stock
    
    
    Common stock
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    shares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    Loss
    
    
    equityBalance,January 1, 2003
    
    
    975
    
    
    $
    97
    
    
    
    21,143
    
    
    $
    212
    
    
    $
    35,152
    
    
    $
    10,038
    
    
    $
    
    
    
    $
    45,499Common stock issued for cash
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    40
    
    
    
    12,080
    
    
    
    
    
    
    
    
    
    
    
    12,120Preferred stock converted
    
    
    (15
    )
    
    
    (1
    )
    
    
    43
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    157Options exercised, including income tax benefit of $19
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    98Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721
    )
    
    
    (3,721
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,602
    
    
    
    
    
    
    
    7,602Dividends on preferred stock
($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    (580
    )Balance,December 31, 2003
    
    
    960
    
    
    
    96
    
    
    
    25,217
    
    
    
    253
    
    
    
    47,544
    
    
    
    17,060
    
    
    
    (3,721
    )
    
    
    61,232Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Preferred stock converted
    
    
    (10
    )
    
    
    (1
    )
    
    
    27
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Options exercised, including income tax benefit of $177
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    1
    
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    523Deferred stock offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    169Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,721
    )
    
    
    (3,721
    )Net income  restated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,271
    
    
    
    
    
    
    
    2,271Dividends on preferred stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (572
    )
    
    
    
    
    
    
    (572
    )Balance,December 31, 2004 - restated
    
    
    950
    
    
    
    95
    
    
    
    25,439
    
    
    
    254
    
    
    
    48,328
    
    
    
    18,759
    
    
    
    (7,442
    )
    
    
    59,994Common stock issued, net of transaction costs
    
    
    
    
    
    
    
    
    
    
    5,750
    
    
    
    58
    
    
    
    27,686
    
    
    
    
    
    
    
    
    
    
    
    27,744Common stock issued for services
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Preferred stock converted
    
    
    (950
    )
    
    
    (95
    )
    
    
    2,714
    
    
    
    27
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    Cashless exercise of warrants
    
    
    
    
    
    
    
    
    
    
    120
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised, including income tax benefit of $44
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    7
    
    
    
    2,241
    
    
    
    
    
    
    
    
    
    
    
    2,248Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    278Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    999
    
    
    
    999Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,589
    )
    
    
    
    
    
    
    (1,589
    )Dividends on preferred stock ($0.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Balance,December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    34,749
    
    
    $
    347
    
    
    $
    78,699
    
    
    $
    16,899
    
    
    $
    (6,443
    )
    
    $
    89,502
  F-5




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Cash Flows
 Years ended December 31, 2005, 2004 and 2003
 (in thousands)
 2005
    
    
    2004
    
    
    2003(restated)Cash flows from operating activities:Net income (loss)
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,602Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    12,044
    
    
    
    8,712
    
    
    
    8,390Accretion of asset retirement obligation
    
    
    112
    
    
    
    92
    
    
    
    139Deferred income taxes
    
    
    (1,676
    )
    
    
    1,162
    
    
    
    3,031Change in fair market value of derivative instruments
    
    
    31,669
    
    
    
    5,726
    
    
    
    22(Gain) loss on ineffective portion of hedges
    
    
    137
    
    
    
    240
    
    
    
    (191
    )Common stock issued in lieu of cash for directors fees
    
    
    99
    
    
    
    99
    
    
    
    Stock option expense
    
    
    278
    
    
    
    169
    
    
    
    98Stock-based financial advisory services
    
    
    
    
    
    
    
    
    
    
    157Cumulative effect on prior years of a change in
accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    62Equity in loss of Westfork Pipeline Companies
    
    
    89
    
    
    
    
    
    
    
    Changes in assets and liabilities:Other assets, net
    
    
    (823
    )
    
    
    163
    
    
    
    167Restricted cash
    
    
    (274
    )
    
    
    
    
    
    
    Increase in accounts receivable
    
    
    (7,034
    )
    
    
    (2,112
    )
    
    
    (783
    )(Increase) decrease in other current assets
    
    
    (1,187
    )
    
    
    31
    
    
    
    (132
    )Increase in accounts payable and accrued liabilities
    
    
    5,273
    
    
    
    1,603
    
    
    
    931Net cash provided by operating activities
    
    
    37,118
    
    
    
    18,156
    
    
    
    19,493Cash flows from investing activities:Additions to oil and gas properties
    
    
    (77,351
    )
    
    
    (67,911
    )
    
    
    (14,930
    )Restricted cash
    
    
    (79
    )
    
    
    (2,287
    )
    
    
    Proceeds from disposition of oil and gas properties
    
    
    3,028
    
    
    
    1,625
    
    
    
    64Additions to other property and equipment
    
    
    (342
    )
    
    
    (647
    )
    
    
    (331
    )Settlements of derivative instruments
    
    
    (5,022
    )
    
    
    
    
    
    
    Purchase of derivative instruments
    
    
    (2,363
    )
    
    
    
    
    
    
    Investment in Westfork Pipeline Companies
    
    
    (2,820
    )
    
    
    (298
    )
    
    
    (297
    )Net cash used in investing activities
    
    
    (84,949
    )
    
    
    (69,518
    )
    
    
    (15,494
    )Cash flows from financing activities:Net borrowing (payments) on revolving line of credit
    
    
    (29,000
    )
    
    
    39,250
    
    
    
    (10,000
    )Deferred financing costs
    
    
    (1,253
    )
    
    
    (429
    )
    
    
    (28
    )Borrowings from term loan
    
    
    50,000
    
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    2,248
    
    
    
    523
    
    
    
    55Proceeds (net) from common stock issued
    
    
    27,744
    
    
    
    
    
    
    
    12,120Payment of preferred stock dividend
    
    
    (271
    )
    
    
    (572
    )
    
    
    (580
    )Deferred stock offering costs
    
    
    
    
    
    
    (7
    )
    
    
    Net cash provided by financing activities
    
    
    49,468
    
    
    
    38,765
    
    
    
    1,567Net increase (decrease) in cash and cash equivalents
    
    
    1,637
    
    
    
    (12,597
    )
    
    
    5,566Cash and cash equivalents at beginning of year
    
    
    4,781
    
    
    
    17,378
    
    
    
    11,812Cash and cash equivalents at end of year
    
    $
    6,418
    
    
    $
    4,781
    
    
    $
    17,378Non-cash financing and investing activities:Oil and gas properties asset retirement obligation
    
    $
    251
    
    
    $
    338
    
    
    $
    1,075Other Transactions:Interest paid
    
    $
    5,422
    
    
    $
    1,708
    
    
    $
    2,048
  F-6




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##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Comprehensive Income (Loss)
 Years ended December 31, 2005, 2004 and 2003
 (dollars in thousands)
 2005
    
    
    2004
    
    
    2003(restated)Net income (loss)
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,602Other comprehensive income (loss):Unrealized losses on derivatives
    
    
    (10,980
    )
    
    
    (14,357
    )
    
    
    (8,336
    )Reclassification adjustment for losses
on derivatives included in net income
    
    
    12,494
    
    
    
    8,719
    
    
    
    2,699Change in fair value of cash flow hedges
    
    
    1,514
    
    
    
    (5,638
    )
    
    
    (5,637
    )Income tax benefit, deferred
    
    
    (515
    )
    
    
    1,917
    
    
    
    1,916Total other comprehensive income (loss)
    
    
    999
    
    
    
    (3,721
    )
    
    
    (3,721
    )Total comprehensive income (loss)
    
    $
    (590
    )
    
    $
    (1,450
    )
    
    $
    3,881
 F-7




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##### Table of Contents



(1)
    
    Organization, Business and Summary of Significant Accounting Policies
 (a)
    
    Basis of ConsolidationThe accompanying financial statements present the consolidated accounts of Parallel
Petroleum Corporation, a Delaware Corporation, and its wholly owned subsidiaries, Parallel
L.P. and Parallel, L.L.C (collectively the Company or Parallel). All significant
inter-company account balances and transactions have been eliminated. The Company accounts
for its interests in oil and gas joint ventures and working interests using the
proportionate consolidation method. Under this method, the Company records its
proportionate share of assets, liabilities, revenues and expenses.(b)
    
    Nature of OperationsThe Companys focus is on the acquisition, development and exploitation of long-lived oil
and natural gas reserves and, to a lesser extent, exploration for new oil and natural gas
reserves. The Companys business activities are currently carried out primarily in Texas
and New Mexico. The Companys activities are focused in the Permian Basin of west Texas and
New Mexico, the Fort Worth Basin of north Texas and the onshore Gulf Coast area of south
Texas. The Company is actively evaluating, leasing, drilling and preparing to drill new
projects located in the Cotton Valley Reef trend of east Texas and the Uinta Basin of Utah.(c)
    
    Concentration of Credit RiskFinancial instruments that potentially expose the Company to concentrations of credit risk
consist primarily of unsecured accounts receivable from unaffiliated working interest
owners and crude oil and natural gas purchasers. A substantial portion of Parallels oil
and natural gas reserves are located in the Permian Basin and the Company may be
disproportionally exposed to the impact of delays or interruptions of production from these
wells due to mechanical problems, damages to the current producing reservoirs and
significant governmental regulation, including any curtailment of production or
interruption of transportation of oil or gas produced from the wells.(d)
    
    Property and EquipmentOil and gas properties:The Company uses the full cost method of accounting for its oil and gas producing
activities. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs, are
capitalized.Management and service fees received for contractual arrangements, if any, are treated as
reimbursement of costs, offsetting the costs incurred to provide those services.
Specifically, from time to time, the Company serves as operator of its oil and gas
properties in which it owns an interest. Under operating agreements naming the Company as
operator, the Company is reimbursed for certain specified direct charges and overhead
charges. Amounts received in reimbursement for drilling activities are applied as a
reduction to Parallels capital costs, and amounts received in reimbursement for producing
activities are applied to reduce the Companys general and administrative expenses.Depletion is provided using the unit-of-production method based upon estimates of proved
oil and 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. Once the assessment of unproved properties is complete
and when major development projects are evaluated, the costs previously excluded from
amortization are transferred to the full cost pool and amortization begins.If the net investment in oil and gas properties in a cost center, as adjusted for asset
retirement obligations, exceeds an amount equal to the sum of (1) the standardized measure
of discounted future net cash flows from proved
 F-8




---



##### Table of Contents



Other Property and Equipment:
   (e)
    
    Income TaxesThe Company accounts for federal income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. Under
the liability method, the effect on previously recorded deferred tax assets and liabilities
resulting from a change in tax rates is recognized in earnings in the period in which the
change is enacted.(f)
    
    InvestmentsInvestments in affiliated companies with a 20% to 50% ownership interest are accounted for
on the equity basis and, accordingly, net income includes the Companys proportionate share
of their income or loss.(g)
    
    Stock-Based CompensationParallel accounts for its stock based compensation using the prospective method under
Statement of Financial Accounting Standards No. 123(SFAS 123). Under this method, the
fair values of all options granted since 2003 have been reflected as compensation expense
over the periods in which the services are rendered. The following table sets forth the pro
forma amounts of net income and net income per share that would have resulted if Parallel
had expensed all of its stock based compensation under the fair value recognition provision
of SFAS No. 123.
 F-9




---



##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003(in thousands, except per share data)(restated)Net income (loss)
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,602Add:Stock-based
compensation expense
for employees
included in reported
net income, net of
related tax effects
of $95, $57 and $33
    
    
    183
    
    
    
    112
    
    
    
    65Less:Total stock-based
employee compensation
expense determined
under fair value
method for all
awards, net of
related tax effects
    
    
    (610
    )
    
    
    (408
    )
    
    
    (620
    )Pro forma net income
    
    $
    (2,016
    )
    
    $
    1,975
    
    
    $
    7,047Earnings (loss) per share:Basic  as reported
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.33Basic  pro forma
    
    $
    (0.07
    )
    
    $
    0.06
    
    
    $
    0.30Diluted  as reported
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.31Diluted  pro forma
    
    $
    (0.07
    )
    
    $
    0.05
    
    
    $
    0.27
   Year ended December 31,2005
    
    
    2003Weighted average grant-date price
    
    $
    7.67
    
    
    $
    1.36Expected volatility
    
    
    48
    %
    
    
    45.3
    %Expected dividends
    
    
    0.00
    %
    
    
    0.00
    %Expected term (in years)
    
    
    8
    
    
    
    8Risk free rate
    
    
    4.12
    %
    
    
    3.7
    %
 F-10




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##### Table of Contents



(h)
    
    Environmental ExpendituresThe Company is subject to extensive federal, state and local environmental laws and
regulations. These laws regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit. Expenditures that
relate to an existing condition caused by past operations and that have no future economic
benefits are expensed.Liabilities for expenditures of a noncapital nature are recorded when environmental
assessment and or remediation is probable, and the costs can be reasonably estimated. Such
liabilities are generally undiscovered unless the timing of cash payments for the liability
or component are fixed or reliably determinable.(i)
    
    Earnings Per ShareBasic earnings per share excludes any dilutive effects of 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 are computed similar to basic earnings per share; however, diluted earnings per share
reflect the assumed conversion of all potentially dilutive securities.
 F-11




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##### Table of Contents



2005
    
    

2004
    
    
    2003(in thousands except
per share data)(restated)Basic EPS Computation:Numerator-Net income (loss) before cumulative effect of a change in accounting principle
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,664Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (62
    )(1,589
    )
    
    
    2,271
    
    
    
    7,602Preferred stock dividend
    
    
    (271
    )
    
    
    (572
    )
    
    
    (580
    )Net income (loss) available to common stockholders
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    $
    7,022Denominator-Weighted average common shares outstanding
    
    
    32,253
    
    
    
    25,323
    
    
    
    21,264Basic earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.33Diluted EPS Computation:Numerator-Net income (loss) before cumulative effect of a change in accounting principle
    
    $
    (1,589
    )
    
    $
    2,271
    
    
    $
    7,664Cumulative effect of a change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (62
    )(1,589
    )
    
    
    2,271
    
    
    
    7,602Preferred stock dividend
    
    
    (271
    )
    
    
    (572
    )
    
    
    Net income (loss) available to common stockholders
    
    $
    (1,860
    )
    
    $
    1,699
    
    
    $
    7,602Denominator -Weighted average common shares outstanding
    
    
    32,253
    
    
    
    25,323
    
    
    
    21,264Employee stock options
    
    
    
    
    
    
    289
    
    
    
    150Warrants
    
    
    
    
    
    
    76
    
    
    
    20Preferred stock
    
    
    
    
    
    
    
    
    
    
    2,741Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    32,253
    
    
    
    25,688
    
    
    
    24,175Diluted earnings (loss) per share
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.31
  (j)
    
    Use of Estimates in the Preparation of Consolidated Financial StatementsPreparation of the accompanying Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements and the reported amounts of revenues and expenses during
the reporting period. The oil and gas reserve estimates, and the related future net cash flows
derived from those reserves, are used in the determination of depletion expense and the
full-cost ceiling test and are inherently imprecise. Actual results could differ from those
estimates.
 F-12




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##### Table of Contents



(k)
    
    Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all demand deposits,
money market accounts and certificates of deposit purchased with an original maturity of
three months or less to be cash equivalents.(l)
    
    Restricted CashRestricted cash as of December 31, 2005, includes cash held in escrow for the Harris San
Andres purchase (see Note 3) aggregating approximately $2.3 million and monies placed in a
certificate of deposit for a drilling bond of approximately $300,000. As of December 31,
2004, $2.1 million in cash was held in escrow for the Carm-Ann San Andres purchase.(m)
    
    ReclassificationsCertain reclassifications have been made to 2003 and 2004 amounts to conform to the 2005
presentation.(n)
    
    Derivative Financial InstrumentsDerivative financial instruments, utilized to manage or reduce commodity price risk related
to the Companys production and interest rate risk related to the Companys long-term debt,
are accounted for under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and for Hedging Activities", and related interpretations and amendments. Under
this Statement, derivatives are carried on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the statement of operations when the hedged item affects
earnings. If the derivative is not designated as a hedge, changes in the fair value are
recognized in other expense. Ineffective portions of changes in the fair value of cash flow
hedges are also recognized in other expense.(o)
    
    Revenue RecognitionOil and natural gas revenues are recorded using the sales method, whereby the Company
recognizes oil and natural gas revenue based on the amount of oil and gas sold to
purchasers. For the period ended December 31, 2005, 2004 and 2003, the Company did not have
any oil or gas imbalances recorded. The Company does not recognize revenues until they are
realized or realizable and earned. Revenues are considered realized or realizable and
earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred
or services have been rendered; (iii) the sellers price to the buyer is fixed or
determinable; and, (iv) collectibility is reasonably assured.
  2005
    
    
    2004
    
    
    2003(in thousands)Oil revenue
    
    $
    47,800
    
    
    $
    28,455
    
    
    $
    18,300Effects of oil hedge
    
    
    (12,139
    )
    
    
    (7,458
    )
    
    
    (1,659
    )Gas revenue
    
    
    30,690
    
    
    
    15,735
    
    
    
    18,121Effects of natural gas hedge
    
    
    (201
    )
    
    
    (895
    )
    
    
    (907
    )$
    66,150
    
    
    $
    35,837
    
    
    $
    33,855
 F-13




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##### Table of Contents



(p)
    
    Recent Accounting PronouncementsIn December 2004, the Financial Accounting Standard Board (FASB) issued SFAS No. 123(R),
Share-Based Payment.SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring that the
compensation cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123(R) covers a wide range of share-based compensation
arrangements, including share options, restricted share plans, performance-based awards,
share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS
123, Accounting for Stock-Based Compensation,and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees.SFAS 123, as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the guidance in APB Opinion
No. 25, as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities (other than
those filing as small business issuers) were required to apply SFAS 123(R) as of the first
interim or annual reporting period that begins after June 15, 2005. In April 2005, the
Securities and Exchange Commission adopted a rule that amended the required application
date of SFAS 123(R) from interim or annual reporting periods beginning after June 15, 2005,
to the beginning of the entitys next fiscal year. The Company will be required to apply
SFAS 123(R) effective January 1, 2006. The Company plans to use the modified prospective
transition method, under which the Company will record as compensation expense over the
requisite service period the fair value of all new options and previously granted options
for which the requisite service had not been rendered as of January 1, 2006. The Company
estimates that the adoption of SFAS 123(R), related to options outstanding as of December
31, 2005, will result in compensation expense of approximately $900,000, $600,000,
$400,000, $200,000, $80,000 and $5,000 for 2006, 2007, 2008, 2009, 2010 and 2011,
respectively, based on the Companys estimates of the fair value of those options.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,a
replacement of APB Opinion No. 20 and FASB SFAS No. 3, which changes the requirements for
the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies
to all voluntary changes in accounting principles and also to changes required by an
accounting pronouncement that does not contain specific transition provisions. SFAS No. 154
carries forward without change the guidance contained in APB Opinion No. 20, Accounting
Changes,for reporting the correction of an error in previously issued financial
statements and a change in accounting estimate. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
The Company adopted SFAS No. 154, effective January 1, 2006, and the adoption could have a
material impact on its financial position and results of operations if the Company has an
accounting change.
 (2)
    
    Fair Value of Financial InstrumentsThe carrying amount of cash, accounts receivable, accounts payable, and accrued liabilities
approximates fair value because of the short maturity of these instruments.The carrying amount of long-term debt approximates fair value because the Companys current
borrowing rate is based on a variable market rate of interest. The Company also has derivative
instruments which are described in Footnote 6.
 F-14




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##### Table of Contents



(3)
    
    Oil and Gas PropertiesThe following table reflects capitalized costs related to the oil and gas properties as of
December 31:
 2005
    
    
    2004(in thousands)Proved properties
    
    $
    283,950
    
    
    $
    219,719Unproved properties, not subject to depletion
    
    
    19,869
    
    
    
    9,526303,819
    
    
    
    229,245Accumulated depletion
    
    
    (89,202
    )
    
    
    (77,623
    )$
    214,617
    
    
    $
    151,622
  Leasehold
    
    
    Geological andYear Incurred
    
    Costs
    
    
    Geophysical
    
    
    Total(in thousands)2005
    
    $
    11,374
    
    
    $
    750
    
    
    $
    12,1242004
    
    
    5,697
    
    
    
    718
    
    
    
    6,4152003 and prior
    
    
    944
    
    
    
    386
    
    
    
    1,330$
    18,015
    
    
    $
    1,854
    
    
    $
    19,869
    F-15




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##### Table of Contents



2005
    
    
    2004
    
    
    2003(in thousands)Proved property acquisition costs
    
    $
    23,763
    
    
    $
    39,763
    
    
    $
    2,209Unproved property acquisitions costs
    
    
    11,743
    
    
    
    7,400
    
    
    
    3,831Exploration
    
    
    15,455
    
    
    
    6,794
    
    
    
    3,240Development
    
    
    26,390
    
    
    
    13,954
    
    
    
    5,650$
    77,351
    
    
    $
    67,911
    
    
    $
    14,930
    (4)
    
    Other AssetsBelow are the components of other assets as of December 31, 2005 and 2004:
 December 31,2005
    
    
    2004(in thousands)Bank fees, net of accumulated amortization
    
    $
    1,675
    
    
    $
    702Prepaid drilling(1)
    
    
    1,125
    
    
    
    Fair value of purchased oil and natural gas puts
    
    
    738
    
    
    
    Other
    
    
    12
    
    
    
    33$
    3,550
    
    
    $
    735
 
 (1)
    
    This represents the long-term portion of prepaid drilling costs to be
transferred to property, plant and equipment as work is performed. F-16




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##### Table of Contents



(5)
    
    Asset Retirement ObligationOn January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligations.
SFAS 143 requires companies to recognize a liability for the present value of all legal
obligations associated with the retirement of tangible long-lived assets and to capitalize an
equal amount as part of the cost of the related oil and gas properties.The adoption of SFAS 143 required the Company to record a non-cash expense, net of tax, of
approximately $62,000 as a cumulative effect of change in accounting principle in the first
quarter of 2003, as well as a non-current liability of approximately $1.5 million and an
addition to oil and gas properties of approximately $1.5 million. The following table
summarizes the Companys asset retirement obligation transactions.
 2005
    
    
    2004
    
    
    2003(in thousands)Beginning asset retirement obligation
    
    $
    2,132
    
    
    $
    1,701
    
    
    $
    1,469Additions related to new properties
    
    
    367
    
    
    
    886
    
    
    
    345Deletions related to property disposals
    
    
    (116
    )
    
    
    (547
    )
    
    
    (252
    )Accretion expense
    
    
    112
    
    
    
    92
    
    
    
    139Ending asset retirement obligation
    
    $
    2,495
    
    
    $
    2,132
    
    
    $
    1,701
  (6)
    
    Derivative InstrumentsThe Company enters into derivative contracts to provide a measure of stability in the cash
flows associated with the Companys oil and gas production and interest rate payments and to
manage exposure to commodity price and interest rate risk. The Companys objective is to lock
in a range of oil and gas prices and to limit variability in its cash interest payments. In
addition, the Companys revolving credit facility and second lien term loan facility require
the Company to maintain derivative financial instruments which limit the Companys exposure to
fluctuating commodity prices covering at least 50% of the Companys estimated monthly
production of oil and natural gas extending 24 months into the future.The Company designated all of its interest rate swaps, commodity collars and commodity swaps
entered into in 2002 and 2003 as cash flow hedges (hedges). The effective portion of the
unrealized gain or loss on cash flow hedges is recorded in other comprehensive income (loss)
until the forecasted transaction occurs. During the term of a cash flow hedge, the effective
portion of the change in the fair value of the derivatives is recorded in stockholders equity
as other comprehensive income (loss) and then transferred to oil and gas revenues when the
production is sold and interest expense as the interest accrues. Ineffective portions of
hedges (changes in fair value resulting from changes in realized prices that do not match the
changes in the hedge or reference price) are recognized in other expense as they occur.As of December 31, 2005 and 2004, the Company had recorded unrealized losses of $9.8 million
and $11.3 million, respectively, related to its derivative instruments designated as hedges,
which represented the estimated aggregate fair values of the Companys open hedge contracts as
of that date. The unrealized losses are presented in stockholders equity in the Consolidated
Balance Sheets as accumulated other comprehensive loss of approximately $6.4 million, net of
income taxes of approximately $3.3 million at December 31, 2005 and approximately $7.4
million, net of income taxes of approximately $3.8 million at December 31, 2004. During the
twelve month period ending December 31,
2006, the Company expects all of the $6.4 million in accumulated comprehensive loss to be
charged to earnings. In addition, the Company recorded unrealized losses related to the
ineffective portion of derivative instruments accounted for as hedge contracts aggregating
approximately $137,000 for the year ended December 31, 2005, and approximately $240,000 for
the year ended December 31, 2004.
 F-17




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##### Table of Contents



Interest Rate Sensitivity
  Interest Rate Swaps.
   F-18




---



##### Table of Contents



EstimatedNotional
    
    
    Weighted Average
    
    
    Fair Market ValuePeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates
    
    at December 31, 2005($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2006 thru December 31, 2006(1)
    
    $
    10
    
    
    
    4.05
    %
    
    $
    69January 1, 2006 thru December 31, 2006
    
    $
    90
    
    
    
    4.41
    %
    
    
    299January 1, 2007 thru December 31, 2007
    
    $
    100
    
    
    
    4.62
    %
    
    
    118January 1, 2008 thru December 31, 2008
    
    $
    100
    
    
    
    4.86
    %
    
    
    (111
    )January 1, 2009 thru December 31, 2009
    
    $
    50
    
    
    
    5.06
    %
    
    
    (110
    )January 1, 2010 thru October 31, 2010
    
    $
    50
    
    
    
    5.15
    %
    
    
    (94
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    171
 
 (1)
    
    Designated as a cash flow hedge. Commodity Price Sensitivity
  Put Options.
 Collars.
  HoustonNyMex
    
    
    
    
    
    
    Ship Channel
    
    
    WAHABarrels
    
    
    Oil Prices
    
    
    MMBtu of
    
    
    Gas Prices
    
    
    Gas Prices
    
    
    Fair MarketPeriod of Time
    
    of Oil
    
    
    Floor
    
    
    Cap
    
    
    Natural Gas
    
    
    Floor
    
    
    Cap
    
    
    Floor
    
    
    Cap
    
    
    Value($ in thousands)January 1, 2006 thru December 31, 2006
    
    
    289,800
    
    
    $
    48.22
    
    
    $
    75.83
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,122
    )April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    428,000
    
    
    $
    7.50
    
    
    $
    13.90
    
    
    $
    
    
    
    $
    
    
    
    
    52April 1, 2006 thru October 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    
    
    
    $
    
    
    
    $
    9.00
    
    
    $
    14.55
    
    
    
    181January 1, 2007 thru December 31, 2007
    
    
    219,000
    
    
    $
    52.50
    
    
    $
    83.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    230April 1, 2007 thru October 31, 2007
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    214,000
    
    
    $
    6.00
    
    
    $
    11.05
    
    
    $
    
    
    
    $
    
    
    
    
    (145
    )January 1, 2008 thru December 31, 2008
    
    
    109,800
    
    
    $
    55.00
    
    
    $
    76.50
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    153January 1, 2009 thru December 31, 2009
    
    
    91,250
    
    
    $
    55.00
    
    
    $
    73.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    126January 1, 2010 thru December 31, 2010
    
    
    76,000
    
    
    $
    55.00
    
    
    $
    71.00
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    113Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (412
    )
 F-19




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##### Table of Contents



Commodity Swaps.
  Barrels of
    
    
    Nymex Oil
    
    
    Fair MarketPeriod of Time
    
    Oil
    
    
    Swap Price
    
    
    Value($ in thousands)January 1, 2006 thru December 20, 2006(1)
    
    
    265,500
    
    
    $
    23.04
    
    
    $
    (10,457
    )January 1, 2006 thru December 31, 2006
    
    
    182,500
    
    
    $
    36.35
    
    
    
    (4,806
    )January 1, 2007 thru December 31, 2007
    
    
    474,500
    
    
    $
    34.36
    
    
    
    (13,327
    )January 1, 2008 thru December 31, 2008
    
    
    439,200
    
    
    $
    33.37
    
    
    
    (11,741
    )Total fair market value
    
    
    
    
    
    
    
    
    
    $
    (40,331
    )
 
 (1)
    
    Designated as a cash flow hedge.  (7)
    
    Equity Investment and Property AcquisitionsThrough 2005, the Company has invested approximately $3.4 million in three partnerships 
Westfork Pipeline I, Westfork Pipeline II, and Westfork Pipeline V, to construct pipelines on
its leaseholds in the Barnett Shale area. These investments are recorded as an equity
investment in the accompanying consolidated balance sheet. The Companys ownership share of
the partnerships is the same as its working interest in the leaseholds in the area. In 2005,
transmission of natural gas commenced on Westfork Pipeline I. The partnerships are currently
acquiring the necessary easements and permits for the Westfork Pipeline II and V.As discussed in Note 3, the Company made several acquisitions of oil and natural gas
properties during 2005 and 2004. The following table presents unaudited, pro forma operating
results as if these property purchases had been made on January 1, 2005 and 2004. The pro
forma results have been prepared for comparative purposes only. The pro formas are not
intended to represent what actual results would have been if the acquisitions had been made on
those dates and these pro forma amounts are not indicative of future results.
 F-20




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##### Table of Contents



2005
    
    
    2004Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalPLLL
    
    
    Harris(1)
    
    
    Pro Forma
    
    
    PLLL
    
    
    Fullerton
    
    
    Carm Ann
    
    
    Harris(1)
    
    
    Pro Forma(in thousands, except per share data)
    
    
    (in thousands, except per share data)(restated)Oil and gas revenue
    
    $
    66,150
    
    
    $
    6,817
    
    
    $
    72,967
    
    
    $
    35,837
    
    
    $
    3,484
    
    
    $
    2,311
    
    
    $
    6,063
    
    
    $
    47,695Operating income
    
    $
    33,345
    
    
    $
    4,607
    
    
    $
    37,952
    
    
    $
    12,266
    
    
    $
    1,876
    
    
    $
    587
    
    
    $
    3,629
    
    
    $
    18,358Net income available
to common stockholders
    
    $
    (1,860
    )
    
    $
    1,189
    
    
    $
    (671
    )
    
    $
    1,699
    
    
    $
    785
    
    
    $
    (28
    )
    
    $
    930
    
    
    $
    3,386Net incomeper common share:Basic
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    0.04
    
    
    $
    0.14Diluted
    
    $
    (0.06
    )
    
    $
    0.04
    
    
    $
    (0.02
    )
    
    $
    0.07
    
    
    $
    0.02
    
    
    $
    
    
    
    $
    0.04
    
    
    $
    0.13
 
 (1)
    
    Does not include the Harris San Andres Field, Andrews and Gaines Counties, Texas
purchased in January, 2006. (8)
    
    Credit FacilitiesThe Company has two separate credit facilities. The Companys Third Amended and Restated
Credit Agreement (or the Revolving Credit Agreement), dated as of December 23, 2005, with a
group of bank lenders provides a revolving line of credit having a borrowing base limitation
of $125.0 million at December 31, 2005. The total amount that the Company can borrow and have
outstanding at any one time is limited to the lesser of $350.0 million or the borrowing base
established by the lenders. At December 31, 2005, the principal amount outstanding under the
Companys revolving credit facility was $50.0 million, and $490,000 was reserved for the
Companys letters of credit. The second credit facility (or the Second Lien Agreement) is a
five year term loan facility provided to the Company under a Second Lien Term Loan Agreement,
dated as of November 15, 2005, with a group of banks and other lenders. At December 31, 2005,
the Companys term loan under the second lien agreement was fully funded in the principal
amount of $50.0 million, which was outstanding on that same date.The credit facilities have varying interest rates and consist of the following banks base
rate and LIBOR tranches at December 31:
 2005
    
    
    2004(in thousands)Revolving
Facility note payable to banks, Agent banks base lending rate of 7.25%
    
    $
    
    
    
    $
    5,000Libor No. 1 at 6.73% (resetting January 3, 2005)
    
    
    
    
    
    
    55,000Libor No. 2 at 7.29% (resetting May 23, 2005)
    
    
    
    
    
    
    19,000Libor Tranche at 6.40% (resetting March 23, 2006)
    
    
    50,000
    
    
    
    Term Loan (Second Lien) payable to banks,
Libor Tranche at 9.0% (resetting March 21, 2006)
    
    
    50,000
    
    
    
    Total notes payable to banks
    
    $
    100,000
    
    
    $
    79,000
 F-21




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##### Table of Contents



Revolving Credit Facility
         Second Lien Term Loan Facility
 1 2
   F-22




---



##### Table of Contents



(9)
    
    Income TaxesThe Companys income tax provision is classified as follows:
 Years ended December 31,2005
    
    
    2004
    
    
    2003(in thousands)(restated)Income tax (benefit) expense, all deferred
    
    $
    (1,676
    )
    
    $
    1,162
    
    
    $
    3,031Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (32
    )Income tax (benefit) expense, deferred related to
loss/gain on derivatives in other comprehensive loss
    
    
    515
    
    
    
    (1,917
    )
    
    
    (1,916
    )Total income tax provision (benefit)
    
    $
    (1,161
    )
    
    $
    (755
    )
    
    $
    1,083
  Year ended December 31,2005
    
    
    2004
    
    
    2003(in thousands)(restated)Income tax (benefit) expense at statutory rate
    
    $
    (1,110
    )
    
    $
    1,167
    
    
    $
    3,700Statutory depletion
    
    
    (443
    )
    
    
    (29
    )
    
    
    (96
    )State tax, net of federal benefit(1)
    
    
    16
    
    
    
    6
    
    
    
    (594
    )Nondeductible expenses and other
    
    
    (139
    )
    
    
    18
    
    
    
    21Income tax expense
    
    $
    (1,676
    )
    
    $
    1,162
    
    
    $
    3,031
 
 (1)
    
    The state tax benefit in 2003 resulted from a reversal of a prior year estimate. F-23




---



##### Table of Contents



2005
    
    
    2004(in thousands)Current:Deferred tax assets:Fair market value losses on derivatives expected
to be settled within one year
    
    $
    5,241
    
    
    $
    2,531Noncurrent:Deferred tax assets:Net operating loss carryforwards, state and federal
    
    $
    3,734
    
    
    $
    4,196Statutory depletion carryforwards
    
    
    2,462
    
    
    
    2,019Alternative minimum tax credit carryforward
    
    
    154
    
    
    
    118Fair market value losses on derivatives not expected
to be settled within one year
    
    
    9,331
    
    
    
    3,417Asset retirement obligations
    
    
    149
    
    
    
    110Other
    
    
    64
    
    
    
    39Total noncurrent deferred tax assets
    
    
    15,894
    
    
    
    9,899Deferred tax liabilities:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion
    
    
    (23,930
    )
    
    
    (16,386
    )Total deferred tax liabilities
    
    
    (23,930
    )
    
    
    (16,386
    )Net noncurrent deferred income tax liability
    
    $
    (8,036
    )
    
    $
    (6,487
    )
  Net operating
    
    
    AMTloss
    
    
    operating loss(in thousands)2019
    
    $
    2,619
    
    
    $
    3,0192021
    
    
    4,576
    
    
    
    4,4982022
    
    
    44
    
    
    
    442023
    
    
    8
    
    
    
    3322024
    
    
    3,718
    
    
    
    3,806$
    10,965
    
    
    $
    11,699
  F-24




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##### Table of Contents



(10)
    
    Equity TransactionsPreferred StockOn June 6, 2005, outstanding shares of the Companys 6% Convertible Preferred Stock, $0.10 par
value per share were converted to common stock. Under terms of the Preferred Stock Agreement,
all of the holders of the Convertible Preferred Stock elected to convert their shares into
shares of the Companys common stock based on the original contractual conversion rate of
$10.00 divided by $3.50. The holders of the Preferred Stock received approximately 2.8571
shares of common stock of the Company for each share of Preferred Stock.Sale of Equity SecuritiesOn February 9, 2005, the Company sold 5,750,000 shares of its common stock, $.01 par value per
share, pursuant to a public offering at a price of $5.27 per share. Gross cash proceeds were
$30.3 million, and net proceeds were approximately $27.7 million. The common shares were
issued under Parallels $100.0 million Universal Shelf Registration Statement on Form S-3
which became effective in November 2004. The proceeds were used to reduce the amount
outstanding under the revolving credit facility.
 (11)
    
    Stock Compensation, Warrants and RightsThe Company awards both incentive stock options and nonqualified stock options to selected key
employees, officers, and directors. The options are awarded at an exercise price equal to the
closing price of the Companys common stock on the date of grant. These options vest over a
period of two to ten years with a ten-year exercise period. As of December 31, 2005, options
expire beginning in 2006 and extending through 2015. Options to purchase a total of 17,500
shares of common stock remain available for grant.
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##### Table of Contents



Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2005
    
    
    December 31, 2004
    
    
    December 31, 2003Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weighted
    
    
    Number of
    
    
    Weightedshares
    
    
    average price
    
    
    shares
    
    
    average price
    
    
    shares
    
    
    average priceStock options:Outstanding at beginning of year
    
    
    1,918,750
    
    
    $
    3.71
    
    
    
    2,138,150
    
    
    $
    3.65
    
    
    
    2,338,750
    
    
    $
    2.71Options granted
    
    
    200,000
    
    
    
    12.27
    
    
    
    
    
    
    
    
    
    
    
    180,000
    
    
    
    2.96Options exercised
    
    
    (714,000
    )
    
    
    (3.15
    )
    
    
    (174,400
    )
    
    
    (3.00
    )
    
    
    (30,600
    )
    
    
    (1.82
    )Options cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,000
    )
    
    
    (4.97
    )Options expired
    
    
    
    
    
    
    
    
    
    
    (45,000
    )
    
    
    (4.29
    )
    
    
    (250,000
    )
    
    
    (3.94
    )Outstanding at end of year
    
    
    1,404,750
    
    
    $
    5.22
    
    
    
    1,918,750
    
    
    $
    3.71
    
    
    
    2,138,150
    
    
    $
    3.65Exercisable at end of year
    
    
    1,159,750
    
    
    $
    4.01
    
    
    
    1,776,250
    
    
    $
    3.50
    
    
    
    1,785,650
    
    
    $
    3.85Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    8.71
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    1.64
 AverageRemaining
    
    
    Fair MarketLife
    
    
    Value(in thousands)Stock options outstanding
as of 12/31/2005
    
    
    6.2
    
    
    $
    19,981Currently exercisable
as of 12/31/2005
    
    
    5.0
    
    
    $
    17,073
  Options outstanding
    
    Options exercisableNumber
    
    Weighted
    
    
    
    
    
    NumberOutstanding at
    
    average
    
    Weighted
    
    exercisable at
    
    WeightedRange of
    
    December 31,
    
    remaining
    
    average
    
    December 31,
    
    averageexercise prices
    
    2005
    
    contractual life
    
    exercise price
    
    2005
    
    exercise price$1.81 - $3.60
    
    
    481,000
    
    
    5 years
    
    
    2.92
    
    
    
    481,000
    
    
    
    2.92$4.09 - $5.50
    
    
    723,750
    
    
    5 years
    
    
    4.80
    
    
    
    678,750
    
    
    
    4.79$12.27
    
    
    200,000
    
    
    10 years
    
    
    12.27
    
    
    
    
    
    
    $
    1,404,750
    
    
    
    
    
    
    
    
    
    
    
    1,159,750
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##### Table of Contents



(a)
    
    Stock WarrantsThe Company has 300,030 warrants outstanding at December 31, 2005, 2004, and 2003, which
were issued as part of the Companys initial public offering in 1980. Each warrant allows
the holder to buy one share of common stock for $6.00. The warrants are exercisable for a
30 day period commencing on the date a registration statement covering exercise is declared
effective. The warrants contain antidilution provisions 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. The Company also has an additional 136,708 warrants outstanding
at December 31, 2005, and 275,000 outstanding as of December 31, 2004 and 2003 issued as
partial payment for services rendered for financial and investment advice in 2001. The
warrants have an exercise price equal to the average of the last bid and asked price of the
Companys common stock on the effective date of the issuance of the warrants and have a
term of five years from date of issuance and a vesting period of one year. The warrants
have an exercise price of $2.95 per share and contain a provision for cashless exercise.
The expense related to these warrants in the amount of $99,000 was recorded in other
expenses in 2001 and was based on the estimated fair value on the date of grant using the
Black-Scholes option pricing model.The Company has 100,000 warrants outstanding at December 31, 2005, 2004 and 2003, which
were issued as partial payment for services rendered for financial and investment advice
for the Companys private placement offering in December, 2003. The warrants have an
exercise price equal to the average of the last bid and asked price of the Companys common
stock on the effective date of the issuance of the warrants and have a term of five years
from date of issuance and vesting period of one year. The warrants have an exercise price
of $3.98 per share and contain a provision for cashless exercise. The fair value related to
these warrants in the amount of $157,000 was recorded in other expenses in 2003 and was
based on the estimated fair value on the date of grant using the Black-Scholes option
pricing model.(b)
    
    Stock RightsOn October 5, 2000, the board of directors declared a dividend of one Stock Right for each
outstanding share of the Companys common stock. If a person acquires 15% or more of the
Companys common stock or a tender offer or exchange offer is made for 15% or more of the
common stock, each Stock Right will entitle the holder to purchase from the Company one
one-thousandth of a share of Series A Preferred Stock, par value $0.10 per share, at an
exercise price of $26.00 per one one-thousandth of a share, subject to adjustment.Initially, the Stock Rights attach to all common stock certificates representing shares
then outstanding, and no separate Stock Rights certificates will be distributed. The Stock
Rights separate from the common stock upon the earlier of (1) ten business days following a
public announcement that a person or group of affiliated or associated persons has acquired
or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of common stock or (2) ten business days (or such later date as the board of
directors shall determine) following the commencement of a tender or exchange offer that
would result in a person or group beneficially owning 15% or more of such outstanding shares of common stock. The date the Stock Rights separate is referred to as the
distribution date.Under certain circumstances the Stock Rights entitle the holders to buy the Companys stock
at a 50% discount. In the event that (1) the Company is the surviving corporation in a
merger or other business combination with an entity that owns 15% or more of the Companys
outstanding stock; (2) any person shall acquire beneficial ownership of 15% of the
Companys outstanding stock; or, (3) there is any type of recapitalization of the Company
that results in an increase by more than 1% the proportionate share of equity securities of
the Company owned by a person who owns 15% or more of the Companys outstanding stock, each
Stock Right holder will have the option to buy for the purchase price common stock of the
Company having a value equal to two times the purchase price of the Stock Right.Under certain circumstances the Stock Rights entitle the holders to buy shares of the
acquirers common stock at a 50% discount. In the event that, at any time after a person
has acquired 15% or more of the Companys common stock, (1) the Company enters into a
merger or other business combination transaction in which the Company is
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##### Table of Contents



not the surviving corporation; (2) the Company is the surviving corporation in a
transaction in which all or part of the common stock is exchanged for cash, property or
securities of any other person; or, (3) more than 50% of the assets, cash flow or earning
power of the Company is sold, each right holder will have the option to buy for the
purchase price stock of the acquiring company having a value equal to two times the
purchase price of the Stock Right.The Stock Rights are not exercisable until the distribution date and will expire at the
close of business on October 5, 2010, unless earlier redeemed by the Company for $0.001 per
Stock Right.
 (c)
    
    Non-Employee Director Stock Grant PlanEffective July 1, 2004, the Company began paying an annual retainer fee to each
non-employee Director in the form of shares of the Companys common stock. Under the 2004
Non-Employee Director Stock Grant Plan, each non-employee Director is entitled to receive
an annual retainer fee in the form of shares of common stock having a value of $25,000. The
            shares of stock are automatically granted on the first day of July in each year. The actual
number of shares received is determined by dividing $25,000 by the average daily closing
price of the common stock on the Nasdaq Stock Market for the ten consecutive trading days
commencing fifteen trading days before the first day of July of each year. On July 1, 2005,
and in accordance with the terms of the plan, the Company issued a total of 11,596 shares
of common stock to four non-employee Directors as follows: Jeffrey G. Shrader  2,899
shares; Dewayne E. Chitwood  2,899 shares; Martin B. Oring  2,899 shares; and Ray M.
Poage  2,899 shares. The Company has 83,510 remaining shares of common stock to issue to
directors under this arrangement.
 (12)
    
    Related Party TransactionsAn entity owned by Thomas R. Cambridge, the Companys Chairman of the board of directors, is
the owner and acted as the Companys agent in performing the routine day to day operations on
two wells. In 2005, 2004 and 2003 the Company was billed approximately $20,000, $15,000 and
$51,000, respectively, for the Companys pro rata share of lease operating and drilling
expenses and received approximately $161,000, $165,000 and $198,000 in 2005, 2004, and 2003
respectively, in oil and gas revenues related to these wells. These two wells were acquired in
1984.An entity, of which Mr. Cambridge is the President, owned interests in certain wells that are
administered by the Company. During 2005 the Company charged approximately $2,000 for lease
operating expenses and paid approximately $6,000 in oil and gas revenues related to these
wells.Dewayne E. Chitwood, a Director of the Company, also serves as director of an entity which
owned 110,000 shares of preferred stock of the Company. In addition, a Foundation, where Mr.
Chitwood is the Chairman of the board of directors of the Foundation; and a Trust where he is
Trustee, owned a total of 55,000 shares each of preferred stock of the Company. These shares
of preferred stock of the Company were purchased in 1998 at a price of $10 per share on the
same terms as all other unaffiliated purchasers. On June 6, 2005 the 110,000 and the 55,000
shares of preferred stock were converted to 314,285 and 157,142 shares of common stock,
respectively.An entity, in which Mr. Chitwood is an officer of the managing general partner, owned
interests in certain wells that are operated by the Company. During 2005, 2004 and 2003 the
Company charged approximately $4,000, $14,000 and $23,000, respectively, for lease operating
expenses and paid approximately $8,000, $48,000, and $74,000, respectively, in oil and gas
revenues related to these wells. In 2005 the Company paid to the entity approximately $140,000
in payment of net proceeds attributable to its pro rata share from the sale in which it owed
an interest.In December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, Parallels
Chief Operating Officer, received a 3% working interest from an unaffiliated third party in
the Diamond M Project in Scurry County, Texas for services rendered in connection with
assembling the project. In August, 2002, shortly after his employment with Parallel, and due
to the personal financial exposure in the Diamond M Project and to prevent the interest from
being acquired by a third party, Mr. Tiffin assigned two-thirds of his ownership interest in
the project to Parallel at no cost, leaving him with a 1% working interest. Parallel acquired
its initial interest in the Diamond M Project in December, 2001. During 2005, the Company
charged approximately $81,000 for capital expenditures and lease operating expenses and paid
approximately $55,000 in oil and gas revenues related to this project.
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##### Table of Contents



(13)
    
    Statements of Cash FlowsNo Federal income taxes were paid in 2005, 2004 and 2003.The Company made interest payments of approximately $5.4 million, $1.7 million, and $2.0
million in 2005, 2004 and 2003, respectively.At December 31, 2005, 2004 and 2003, there were $2.5 million, $741,000 and $600,000,
respectively, of property additions accrued in accounts payable.(14)
    
    Major CustomersThe following purchasers accounted for 10% or more of the Companys oil and gas sales for the
years ended December 31:
 2005
    
    2004
    
    2003Company A
    
    
    14
    %
    
    
    22
    %
    
    
    30
    %Company B
    
    
    12
    %
    
    
    
    
    
    
    Company C
    
    
    40
    %
    
    
    43
    %
    
    
    33
    %
 (15)
    
    Commitments and ContingenciesOn December 30, 2005, the Company was named as a defendant in a lawsuit filed in the 352nd
Judicial District Court of Tarrant County, Texas, Cause No. 352-215616-05, AFE Oil and Gas,
L.L.C. (aka AFE Oil and Gas, LLC) v. Premium Resources II, L.P., Premium Resources, Inc.,
Danay Covert, Nick Morris, William D. Middleton, Dale Resources, L.L.C., and Parallel
Petroleum, Inc.In this suit, the plaintiff alleges breach of fiduciary duty, fraud and conspiracy to defraud,
breach of contract, constructive trust, suit to remove cloud from title, declaratory judgment,
alter ego, and statutory fraud and seeks recovery of an unspecified amount of actual damages,
special damages, consequential damages, exemplary damages, attorneys fees, pre-judgment and
post-judgment interest and costs. Generally, the plaintiff alleges that it owns a 5.5%
overriding royalty interest in certain oil and gas properties known as the Square Top LP and
the West Fork LP leases located in Tarrant County, Texas. The plaintiff alleges that the
defendants (other than Dale Resources and Parallel) wrongfully and intentionally allowed these
original oil and gas leases to terminate, causing the termination of plaintiffs overriding
royalty interest in each lease. The plaintiff further alleges that the defendants (other than
Dale Resources and Parallel) failed to drill wells necessary to maintain the original leases
in force and that after the original leases were allowed to terminate, the defendants (other
than Dale Resources and Parallel) then acquired new oil and gas leases covering these same oil
and gas properties, which were subsequently assigned to Dale Resources. Thereafter, Dale
Resources allegedly assigned a portion of these new leases to Parallel.In addition to seeking unspecified monetary damages, the plaintiff also seeks to impose a
constructive trust for its benefit on the new oil and natural gas leases and seeks a judicial
declaration that either (1) the plaintiff is the owner of an overriding royalty interest in
the new leases or that (2) the original leases and plaintiffs interest in the original leases
are still in effect. The plaintiff also claims that the new leases constitute a cloud on
plaintiffs title and seeks to have that cloud removed. Based on Parallels present
understanding of this case, Parallel believes that it has substantial defenses to the
plaintiffs claims and intends to vigorously assert these defenses. However, if the plaintiff
is awarded an interest in the new leases, then Parallel could potentially become liable for
the payment to plaintiff of the portion of production proceeds attributable to plaintiffs
interest received by Parallel. On the other hand, if the plaintiff prevails on its claim that
the original leases are still in effect, Parallels interest in the new leases could become
subject to forfeiture. Based on the information known to date, Parallel has not established a
reserve for this matter.The Company is currently a defendant in one other lawsuit. The Company does not believe the
ultimate outcome of this lawsuit will have a material adverse effect on its financial
condition or results of options. The is Company is not
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##### Table of Contents



aware of any other threatened litigation and has not been a party to any bankruptcy,
receivership, reorganization, adjustment or similar proceeding.Prior to January 1, 2005, the Company had established a simplified employee pension plan
(SEP) covering all salaried employees of the Company. The employees could voluntarily
contribute a portion of their eligible compensation, not to exceed $13,000, to the SEP. In
addition to this annual salary deferral limit, employees who had reached the age of 50 or
older during the calendar year could have elected to take advantage of a catch-up salary
deferral contribution. Eligible participants could have increased their salary deferral by
$3,000 for the year 2004. The Company made discretionary contributions to the SEP; however,
total contributions could not exceed $41,000 per employee. During 2004 and 2003, the Company
contributed an aggregate of approximately $133,000 and $106,000, respectively, to the SEP.On January 1, 2005 the Company established a 401(k) Plan and Trust for eligible employees.
Employees may not participate in the SEP with the establishment of the 401(k) Plan and Trust.
During 2005, the Company contributed an aggregate of approximately $168,000 to the 401(k)
Plan.The Company leases office space under a non-cancelable operating lease expiring in 2010.
Future annual payments under this operating lease are approximately $188,000, $199,000,
$205,000, $210,000 and $35,000 for the years ending December 31, 2006 thru February 28, 2010,
respectively. Rental expense under the Companys current and former lease totaled
approximately $162,000, $127,000, and $130,000 for the years ended December 31, 2005, 2004 and
2003, respectively.The Company leases two field offices and storage facilities. These two facilities are located
in Andrews and Snyder, Texas. The Andrews office is under a non-cancelable commercial lease
expiring in 2007 and the Snyder office ends upon the expiration or termination of a trade
agreement with the prior operator. Future annual payments under these lease agreements total
approximately $23,000 for 2006 and 2007 and $14,000 for 2008 thru 2010. Rental expense under
these two leases totaled approximately $23,000, $15,000 and $2,400 for the year ended December
31, 2005, 2004 and 2003, respectively.The Company has an Incentive and Retention Plan which provides for the payment to eligible
officers and employees a one time performance bonus and retention payment upon the occurrence
of a change of control as defined in the Plan. Because of the uncertainty of the occurrence of
a change of control or corporate transaction within the meaning of the plan, the amount of
these bonuses is undeterminable. Although the amount of the bonus is undeterminable at this
time, if the Plan was calculated using the December 31, 2005, stock price of $17.01 per share,
the Plan would have a balance of approximately $17.7 million.In January 2006, the Company adopted a Non-officer Employee Severance Plan for the purpose of
providing the Companys non-officer employees with an incentive to remain employed by with the
Company. This Plan provides for a one-time severance payment to the non-officer employees
equal to one year of their then current base salary upon the occurrence of a change of
control within the meaning of the Plan. Based on the aggregate non-officer base salaries in
effect as of December 31, 2005, the total severance amount payable under the plan would have
been approximately $2.5 million.(16)
    
    Supplemental Oil and Gas Reserve Data (Unaudited)The Company has presented the reserve estimates utilizing an oil price of $56.09, $40.59 and
$30.63 per Bbl and a gas price of $8.68, $5.65 and $5.45 per Mcf as of December 31, 2005, 2004
and 2003, respectively. Information for oil is presented in barrels (Bbl) and for gas in
thousands of cubic feet (Mcf).The estimates of the Companys proved natural gas reserves and related future net cash flows
that are presented in the following tables are based upon estimates made by independent
petroleum engineering consultants.The Companys reserve information was prepared by independent petroleum engineering
consultants as of December 31, 2005, 2004 and 2003. The Company cautions that there are many
inherent uncertainties in estimating proved reserve quantities, projecting future production
rates, and timing of development expenditures. Accordingly, these estimates are likely to
change as future information becomes available. Proved oil and gas reserves are the estimated
quantities of crude oil and natural gas which geological and engineering data demonstrate with
reasonable certainty to
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##### Table of Contents



be recoverable in future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those reserves expected to be recovered through
existing wells, with existing equipment and operating methods.A summary of changes in reserve balances is presented below:
 Total proved
    
    Proved developedBBL
    
    MCF
    
    BBL
    
    MCF(in thousands)Reserves as of December 31, 2002
    
    
    10,271
    
    
    
    15,633
    
    
    
    8,263
    
    
    
    11,202Extensions and discoveries
    
    
    1,412
    
    
    
    1,811
    
    
    
    283
    
    
    
    1,811Revisions of previous estimates
    
    
    1,030
    
    
    
    2,183
    
    
    
    1,027
    
    
    
    2,409Production
    
    
    (629
    )
    
    
    (3,356
    )
    
    
    (629
    )
    
    
    (3,356
    )Reserves as of December 31, 2003
    
    
    12,084
    
    
    
    16,271
    
    
    
    8,944
    
    
    
    12,066Purchase of reserves in place
    
    
    4,982
    
    
    
    1,432
    
    
    
    3,057
    
    
    
    733Sale of reserves in place
    
    
    (18
    )
    
    
    (467
    )
    
    
    (18
    )
    
    
    (468
    )Extensions and discoveries
    
    
    1,159
    
    
    
    4,661
    
    
    
    338
    
    
    
    3,840Revisions of previous estimates
    
    
    1,438
    
    
    
    (2,382
    )
    
    
    1,618
    
    
    
    (323
    )Production
    
    
    (729
    )
    
    
    (2,690
    )
    
    
    (729
    )
    
    
    (2,690
    )Reserves as of December 31, 2004
    
    
    18,916
    
    
    
    16,825
    
    
    
    13,210
    
    
    
    13,158Purchase of reserves in place
    
    
    2,299
    
    
    
    456
    
    
    
    619
    
    
    
    122Sale of reserves in place
    
    
    (14
    )
    
    
    (66
    )
    
    
    (14
    )
    
    
    (205
    )Extensions and discoveries
    
    
    944
    
    
    
    13,106
    
    
    
    69
    
    
    
    8,502Revisions of previous estimates
    
    
    (30
    )
    
    
    (1,492
    )
    
    
    653
    
    
    
    (739
    )Production
    
    
    (923
    )
    
    
    (3,592
    )
    
    
    (923
    )
    
    
    (3,592
    )Reserves as of December 31, 2005
    
    
    21,192
    
    
    
    25,237
    
    
    
    13,614
    
    
    
    17,246
 The following is a standardized measure of the discounted net future cash flows and
changes applicable to proved oil and gas reserves required by Statement of Financial
Accounting Standards No. 69, Disclosures about Oil and Gas Producing Activities(SFAS No. 69).
The future cash flows are based on estimated oil and 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 2005, the average sales price received by the Company for its oil was approximately
$51.78 (unhedged) per Bbl, as compared to $39.05 in 2004; while the average sales price for
the Companys gas was approximately $8.54 (unhedged) per Mcf in 2005, as compared to $5.85 per
Mcf in 2004.The standardized measure of discounted future net cash flows, in managements opinion, should
be examined with caution. The basis for this table is the reserve studies prepared by
independent petroleum engineering consultants, which contain imprecise estimates of quantities
and rates of production of reserves. Revisions of previous year estimates can have a
significant impact on these results. Also, exploration costs in one year may lead to
significant discoveries in later years and may significantly change previous estimates of
proved reserves and their valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily indicative of the fair value of the Companys proved oil and
gas properties.Future income tax expense was computed by applying statutory rates less the effects of tax
credits for each period presented to the difference between pre-tax net cash flows relating to
the Companys proved reserves and the tax basis of proved properties and available net
operating loss and percentage depletion carryovers.
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Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
 December 31,2005
    
    
    2004
    
    

2003Future cash inflows
    
    $
    1,407,153
    
    
    $
    862,945
    
    
    $
    458,723Future costs:Production
    
    
    (361,563
    )
    
    
    (260,312
    )
    
    
    (149,548
    )Development
    
    
    (36,335
    )
    
    
    (25,131
    )
    
    
    (15,485
    )Future income taxes
    
    
    (249,621
    )
    
    
    (137,765
    )
    
    
    (66,757
    )Future net cash flows
    
    
    759,634
    
    
    
    439,737
    
    
    
    226,93310% annual discount for estimated timing of cash flows
    
    
    (398,844
    )
    
    
    (233,328
    )
    
    
    (110,667
    )Standardized measure of discounted future net cash
flows
    
    $
    360,790
    
    
    $
    206,409
    
    
    $
    116,266
 Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves  (in thousands)
 December 31,2005
    
    
    2004
    
    
    2003Increase (decrease):Purchases of minerals in place
    
    $
    29,354
    
    
    $
    47,727
    
    
    $
    Extensions and discoveries and improved recovery,
net of future production and development costs
    
    
    40,702
    
    
    
    18,984
    
    
    
    9,556Accretion of discount
    
    
    26,625
    
    
    
    14,779
    
    
    
    12,293Net change in sales prices net of production costs
    
    
    135,242
    
    
    
    45,572
    
    
    
    10,832Changes in estimated future development costs
    
    
    (10,886
    )
    
    
    (8,641
    )
    
    
    (6,948
    )Revisions of quantity estimates
    
    
    (4,518
    )
    
    
    13,022
    
    
    
    13,520Net change in income taxes
    
    
    (52,181
    )
    
    
    (28,319
    )
    
    
    (8,204
    )Sales, net of production costs
    
    
    (47,974
    )
    
    
    (26,356
    )
    
    
    (25,451
    )Changes of production rates (timing)
    
    
    38,017
    
    
    
    13,375
    
    
    
    11,052Net increase
    
    
    154,381
    
    
    
    90,143
    
    
    
    16,650Standardized measure of discounted future net cash flows:Beginning of year
    
    
    206,409
    
    
    
    116,266
    
    
    
    99,616End of year
    
    $
    360,790
    
    
    $
    206,409
    
    
    $
    116,266
 F - 32




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##### Table of Contents



(17)
    
    Selected Quarterly Financial Data (Unaudited)
 QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth(in thousands, except per share data)2005
    
    (restated)
    
    
    (restated)
    
    
    (restated)Oil and gas revenues
    
    $
    10,414
    
    
    $
    12,263
    
    
    $
    21,837
    
    
    $
    21,636Total costs and expenses
    
    
    7,048
    
    
    
    7,060
    
    
    
    8,836
    
    
    
    9,861Operating income
    
    
    3,366
    
    
    
    5,203
    
    
    
    13,001
    
    
    
    11,775Net income
    
    $
    (10,704
    )
    
    $
    (1,246
    )
    
    $
    1,989
    
    
    $
    8,372Net income available to common stockholders
    
    $
    (10,847
    )
    
    $
    (1,374
    )
    
    $
    1,989
    
    
    $
    8,372Net income
(loss) per common share  basic
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    0.24Net income
(loss) per common share  diluted
    
    $
    (0.38
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    0.242004
    
    
    
    
    
    
    
    
    
    (restated)
    
    (restated)Oil and gas revenues
    
    $
    8,001
    
    
    $
    7,917
    
    
    $
    7,745
    
    
    $
    12,174Total costs and expenses
    
    
    5,306
    
    
    
    5,675
    
    
    
    5,774
    
    
    
    6,816Operating income
    
    
    2,695
    
    
    
    2,242
    
    
    
    1,971
    
    
    
    5,358Net income (loss)
    
    $
    1,482
    
    
    $
    1,103
    
    
    $
    (1,868
    )
    
    $
    1,554Net income (loss) available to common stockholders
    
    $
    1,339
    
    
    $
    959
    
    
    $
    (2,010
    )
    
    $
    1,411Net income per share:Net income
(loss) per common share  basic
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    (0.08
    )
    
    $
    0.06Net income
(loss) per common share  diluted
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    (0.08
    )
    
    $
    0.05
 Detailed disclosures concerning restated quarterly financial statements are contained in
Footnote 18.(18)
    
    RestatementThis annual report on Form 10-K for the year ended December 31, 2005 includes detailed
disclosures relative to the restatement of consolidated financial statements for the year
2004, the third and fourth fiscal quarters in 2004, and the first three fiscal quarters of
2005.During the course of our preparation of the Companys December 31, 2005 10K, we identified
errors with respect to the Companys use of hedge accounting for certain transactions under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended (FAS 133). Specifically, the Company determined that its
documentation of the relationship of hedged items and the derivative instruments being
employed and designated as hedges was insufficient when compared to the documentation
requirements in SFAS 133 for derivative instruments entered into during periods subsequent to June 30, 2004, and that
accounting for derivative instruments entered into during periods subsequent to June 30, 2004
as cash flow hedges was, therefore, inappropriate.
 F - 33




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##### Table of Contents



Effects of the Restatement
 The restatement also impacted or made changes to the following financial statement footnotes;
Note 1, 6, 7, 9, 17 and added Note 18 Restatement.The following tables set forth the effects of the restatement relating to the derivatives
transactions on the affected line items within the Companys previously reported Consolidated
Statements of Operations for the periods shown below:
 As of December 31, 2004As previouslyreported
    
    As restated(in thousands)Consolidated Balance Sheets data:Retained earnings
    
    $
    22,073
    
    
    $
    18,759Accumulated other comprehensive loss, net of tax
    
    
    (10,756
    )
    
    
    (7,442
    )
 December 31, 2004As previouslyreported
    
    
    As restated(in thousands)Consolidated Statement of Operations data:Change in fair market value of derivative instruments
    
    
    
    
    
    
    (5,726
    )Gain (loss) on ineffective portion of hedges
    
    
    (945
    )
    
    
    (240
    )Total other income (expense), net
    
    
    (3,812
    )
    
    
    (8,833
    )Income before income taxes
    
    
    8,454
    
    
    
    3,433Income tax benefit (expense), deferred
    
    
    (2,869
    )
    
    
    (1,162
    )Income (loss) before cumulative effect of
change in accounting principle
    
    
    5,585
    
    
    
    2,271Net income
    
    
    5,585
    
    
    
    2,271Net income available to common stockholders
    
    
    5,013
    
    
    
    1,699Net income per common share:Basic
    
    $
    0.20
    
    
    $
    0.07Diluted
    
    $
    0.20
    
    
    $
    0.07
 F - 34




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##### Table of Contents



Year EndedDecember 31, 2004As previouslyreported
    
    
    As restated(in thousands)Consolidated Statement of Stockholders Equity data:Decrease in value of cash flow hedges
    
    $
    (7,035
    )
    
    $
    (3,721
    )Net income
    
    
    5,585
    
    
    
    2,271Balance, December 31:Retained earnings
    
    
    22,073
    
    
    
    18,759Accumulated other comprehensive loss
    
    
    (10,756
    )
    
    
    (7,442
    )
    As of March 31, 2005
    
    As of June 30, 2005
    
    As of September 30, 2005As previously
    
    
    
    
    
    As previously
    
    
    
    
    
    As previouslyreported
    
    As restated
    
    reported
    
    As restated
    
    reported
    
    As restated(in thousands)(unaudited)Condensed Consolidated Balance Sheet data:Other current assets
    
    
    104
    
    
    
    264
    
    
    
    225
    
    
    
    190
    
    
    
    437
    
    
    
    434Total current assets
    
    
    15,739
    
    
    
    15,899
    
    
    
    18,107
    
    
    
    18,072
    
    
    
    27,993
    
    
    
    27,990Other assets, net of accumulated
amortization
    
    
    687
    
    
    
    829
    
    
    
    612
    
    
    
    774
    
    
    
    828
    
    
    
    575Total assets
    
    
    173,824
    
    
    
    174,126
    
    
    
    190,877
    
    
    
    191,004
    
    
    
    210,899
    
    
    
    210,643Derivative
obligation  current
    
    
    15,827
    
    
    
    15,987
    
    
    
    16,322
    
    
    
    16,449
    
    
    
    18,811
    
    
    
    18,808Total current liabilities
    
    
    21,950
    
    
    
    22,110
    
    
    
    23,823
    
    
    
    23,950
    
    
    
    28,500
    
    
    
    28,497Derivative
obligation  long term
    
    
    24,107
    
    
    
    24,249
    
    
    
    27,209
    
    
    
    27,209
    
    
    
    31,861
    
    
    
    31,608Total long-term liabilities
    
    
    77,848
    
    
    
    77,990
    
    
    
    93,107
    
    
    
    93,107
    
    
    
    106,248
    
    
    
    105,995Retained earnings
    
    
    21,523
    
    
    
    7,912
    
    
    
    22,705
    
    
    
    6,538
    
    
    
    31,292
    
    
    
    8,527Accumulated other comprehensive loss
    
    
    (24,067
    )
    
    
    (10,599
    )
    
    
    (25,626
    )
    
    
    (9,459
    )
    
    
    (32,229
    )
    
    
    (9,464
    )Total liabilities and stockholders equity
    
    
    173,824
    
    
    
    174,126
    
    
    
    190,877
    
    
    
    191,004
    
    
    
    210,899
    
    
    
    210,643
 F - 35




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##### Table of Contents



As of September 30, 2004
    
    As of December 31, 2004As previously
    
    
    
    
    
    As previouslyreported
    
    As restated
    
    reported
    
    As restated(in thousands)
    
    (in thousands)(unaudited)Condensed Consolidated Balance Sheets data:Retained earnings
    
    
    20,263
    
    
    
    17,348
    
    
    
    22,073
    
    
    
    18,759Accumulated other comprehensive loss
    
    
    (13,187
    )
    
    
    (10,272
    )
    
    
    (10,756
    )
    
    
    (7,442
    )
 Quarter EndedMarch 31, 2005
    
    
    June 30, 2005
    
    
    September 30, 2005As previously
    
    
    
    
    
    
    As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Consolidated Statements of
Operations data:Loss on hedging and derivatives
    
    
    (3,212
    )
    
    
    (2,555
    )
    
    
    (3,645
    )
    
    
    (2,741
    )
    
    
    (5,565
    )
    
    
    (3,664
    )Total revenues
    
    
    9,757
    
    
    
    10,414
    
    
    
    11,359
    
    
    
    12,263
    
    
    
    19,936
    
    
    
    21,837Operating income
    
    
    2,649
    
    
    
    3,366
    
    
    
    4,241
    
    
    
    5,203
    
    
    
    11,039
    
    
    
    13,001Change in fair market value of
derivatives
    
    
    
    
    
    
    (17,633
    )
    
    
    
    
    
    
    (6,065
    )
    
    
    
    
    
    
    (9,388
    )Gain (loss) on ineffective
portion of hedges
    
    
    (2,276
    )
    
    
    (710
    )
    
    
    (1,235
    )
    
    
    (150
    )
    
    
    2,864
    
    
    
    404Interest expense
    
    
    (1,138
    )
    
    
    (1,173
    )
    
    
    (796
    )
    
    
    (868
    )
    
    
    (950
    )
    
    
    (1,060
    )Total other income (expense), net
    
    
    (3,475
    )
    
    
    (19,577
    )
    
    
    (2,025
    )
    
    
    (7,077
    )
    
    
    1,944
    
    
    
    (10,014
    )Income (loss) before income taxes
    
    
    (826
    )
    
    
    (16,211
    )
    
    
    2,216
    
    
    
    (1,874
    )
    
    
    12,983
    
    
    
    2,987Income tax benefit (expense),
deferred
    
    
    276
    
    
    
    5,507
    
    
    
    (763
    )
    
    
    628
    
    
    
    (4,396
    )
    
    
    (998
    )Net income (loss)
    
    
    (550
    )
    
    
    (10,704
    )
    
    
    1,453
    
    
    
    (1,246
    )
    
    
    8,587
    
    
    
    1,989Net income (loss) available
to common stockholders
    
    
    (693
    )
    
    
    (10,847
    )
    
    
    1,325
    
    
    
    (1,374
    )
    
    
    8,587
    
    
    
    1,989Net income (loss) per common
share:Basic
    
    $
    (0.02
    )
    
    $
    (0.38
    )
    
    $
    0.04
    
    
    $
    (0.04
    )
    
    $
    0.25
    
    
    $
    0.06Diluted
    
    $
    (0.02
    )
    
    $
    (0.38
    )
    
    $
    0.04
    
    
    $
    (0.04
    )
    
    $
    0.25
    
    
    $
    0.06
 F - 36




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##### Table of Contents



Quarter EndedSeptember 30, 2004
    
    
    December 31, 2004As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated(in thousands)(unaudited)Consolidated Statements of Operations data:Change in fair market value of derivative instruments
    
    
    
    
    
    
    (4,417
    )
    
    
    
    
    
    
    (1,309
    )Gain (loss) on ineffective portion of hedges
    
    
    57
    
    
    
    57
    
    
    
    (1,009
    )
    
    
    (304
    )Total other income (expense), net
    
    
    (467
    )
    
    
    (4,884
    )
    
    
    (2,470
    )
    
    
    (3,074
    )Income (loss) before income taxes
    
    
    1,504
    
    
    
    (2,913
    )
    
    
    2,888
    
    
    
    2,284Income tax benefit (expense), deferred
    
    
    (457
    )
    
    
    1,045
    
    
    
    (935
    )
    
    
    (730
    )Net income (loss) before cumulative effect of
change in accounting principle
    
    
    1,047
    
    
    
    (1,868
    )
    
    
    1,953
    
    
    
    1,554Net income (loss)
    
    
    1,047
    
    
    
    (1,868
    )
    
    
    1,953
    
    
    
    1,554Net income (loss) available to common stockholders
    
    
    905
    
    
    
    (2,010
    )
    
    
    1,810
    
    
    
    1,411Net income (loss) per common share:Basic
    
    $
    0.04
    
    
    $
    (0.08
    )
    
    $
    0.07
    
    
    $
    0.06Diluted
    
    $
    0.04
    
    
    $
    (0.08
    )
    
    $
    0.07
    
    
    $
    0.05
   Year-to-DateMarch 31, 2005
    
    
    June 30, 2005
    
    
    September 30, 2005As previously
    
    
    
    
    
    
    As previouslyreported
    
    
    As restated
    
    
    reported
    
    
    As restated
    
    
    As previously
    
    
    As restated(in thousands)(unaudited)Condensed Consolidated Statement of Cash
Flows data:Net income (loss)
    
    
    (550
    )
    
    
    (10,704
    )
    
    
    903
    
    
    
    (11,950
    )
    
    
    9,490
    
    
    
    (9,961
    )Deferred income tax expense (benefit)
    
    
    (276
    )
    
    
    (5,507
    )
    
    
    487
    
    
    
    (6,135
    )
    
    
    4,883
    
    
    
    (5,137
    )Change in fair value of derivatives
    
    
    
    
    
    
    16,951
    
    
    
    
    
    
    
    22,126
    
    
    
    
    
    
    
    29,662Settlements on derivatives
    
    
    
    
    
    
    682
    
    
    
    
    
    
    
    1,570
    
    
    
    
    
    
    
    3,424Loss on ineffective portion of hedges
    
    
    2,276
    
    
    
    710
    
    
    
    3,511
    
    
    
    860
    
    
    
    647
    
    
    
    456Other assets, net
    
    
    48
    
    
    
    48
    
    
    
    123
    
    
    
    123
    
    
    
    (93
    )
    
    
    186(Increase) decrease in other current assets
    
    
    75
    
    
    
    75
    
    
    
    (46
    )
    
    
    (11
    )
    
    
    (258
    )
    
    
    61Net cash provided by operating activities
    
    
    3,775
    
    
    
    4,457
    
    
    
    9,811
    
    
    
    11,416
    
    
    
    19,112
    
    
    
    23,134Settlements on derivatives
    
    
    
    
    
    
    (682
    )
    
    
    
    
    
    
    (1,570
    )
    
    
    
    
    
    
    (3,424
    )Purchase of derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (598
    )Net cash used in investing activities
    
    
    (4,398
    )
    
    
    (5,080
    )
    
    
    (21,686
    )
    
    
    (23,291
    )
    
    
    (34,680
    )
    
    
    (38,702
    )
 F - 37




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##### Table of Contents



PARALLEL PETROLEUM CORPORATIONMarch 16, 2006
    
    By:
    
    /s/ Larry C. OldhamLarry C. OldhamPresident and Chief Executive OfficerMarch 16, 2006
    
    By:
    
    /s/ Steven D. FosterSteven D. FosterChief Financial Officer
 S - 1




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##### Table of Contents



/s/ Thomas R. Cambridge

Thomas R. Cambridge
    
    Chairman of the Board of Directors
    
    March 16, 2006/s/ Larry C. Oldham

Larry C. Oldham
    
    President and Chief Executive Officer
(Principal Executive Officer)
    
    March 16, 2006/s/ Steven D. Foster

Steven D. Foster
    
    Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 16, 2006/s/ Dewayne E. Chitwood

Dewayne E. Chitwood
    
    Director
    
    March 16, 2006/s/ Martin B. Oring

Martin B. Oring
    
    Director
    
    March 16, 2006/s/ Ray M. Poage

Ray M. Poage
    
    Director
    
    March 16, 2006/s/ Jeffrey G. Shrader

Jeffrey G. Shrader
    
    Director
    
    March 16, 2006
 S - 2




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##### Table of Contents



No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 3 of the Registrants Form 8-K,
dated October 9, 2000, as filed with the Securities and Exchange Commission on October 10,
2000)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 4.3 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2000)4.4
    
    Form of Indenture relating to senior debt securities of the Registrant (Incorporated by
reference to Exhibit No. 4.4 of the Registrants Statement on Form S-3, No. 333-119725 filed
on October 13, 2004)4.5
    
    Form of Indenture relating to subordinated debt securities of the Registrant (Incorporated by
reference to Exhibit No. 4.5 of the Registrants Registration Statement on Form S-3, No.
333-119725 filed on October 13, 2004)4.6
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.7
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.8
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.8):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)




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##### Table of Contents



No.
    
    Description of Exhibit10.2
    
    Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the Registrants Form 10-K for the fiscal year
ended December 31, 1995)10.3
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.4
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 1998)10.5
    
    Form of Incentive Award Agreements, dated December 12, 2001, between the Registrant and
Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S. Rutherford granting 2,394
Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869
Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr. Rutherford
(Incorporated by reference to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2001)10.6
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.7
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.8
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated September 23, 2004 and filed with the Securities and Exchange Commission
on September 29, 2004)10.9
    
    Certificate of Formation of First Permian, L.L.C. (Incorporated by reference to Exhibit 10.1
of the Registrants Form 8-K Report dated June 30, 1999)10.10
    
    Limited Liability Company Agreement of First Permian, L.L.C. (Incorporated by reference to
Exhibit 10.2 of the Registrants Form 8-K Report dated June 30, 1999)10.11
    
    Amended and Restated Limited Liability Company Agreement of First Permian, L.L.C. dated as
of May 31, 2000 (Incorporated by reference to Exhibit 10.16 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)10.12
    
    Credit Agreement, dated June 30, 1999, by and among First Permian, L.L.C., Parallel
Petroleum Corporation, Baytech, Inc., and Bank One, Texas, N.A. (Incorporated by reference to
Exhibit 10.6 of the Registrants Form 8-K Report dated June 30, 1999)10.13
    
    Limited Guaranty, dated June 30, 1999, by and among First Permian, L.L.C., parallel
Petroleum Corporation and Bank One, Texas, N.A. (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 8-K Report dated June 30, 1999)10.14
    
    Second Restated Credit Agreement, dated October 25, 2000, among First Permian, L.L.C., Bank
One, Texas, N.A., and Bank One Capital Markets, Inc. (Incorporated by reference to Exhibit
10.22 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000)10.15
    
    Loan Agreement, dated as of January 25, 2002, between the Registrant and First American
Bank, SSB (Incorporated by reference to Exhibit 10.25 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2001)10.16
    
    Purchase and Sale Agreement, dated as of November 27, 2002, among JMC Exploration, Inc.,
Arkoma Star L.L.C., Parallel, L.P. and Texland Petroleum, Inc. (Incorporated by reference to
Exhibit 10.1 of Form 8-K of the Registrant, dated December 20, 2002)10.17
    
    First Amended and Restated Credit Agreement, dated December 20, 2002, by and among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to Exhibit 10.2 of Form 8-K of the
Registrant, dated December 20, 2002)




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##### Table of Contents



No.
    
    Description of Exhibit10.18
    
    Guaranty dated December 20, 2002, between Parallel, L.L.C. and First American Bank, SSB, as
Agent (Incorporated by reference to Exhibit 10.3 of Form 8-K of the Registrant, dated December
20, 2002)10.19
    
    First Amendment to First Amended and Restated Credit Agreement, dated as of September 12,
2003, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, Western National Bank, and BNP Paribas (Incorporated by reference to
Exhibit 10.29 of Form 10-Q of the Registrant for the quarter ended September 30, 2003)10.20
    
    Second Amendment and Restated Credit Agreement, dated September 27, 2004, by and among
Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American Bank, SSB,
BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference to Exhibit
10.1 of the Registrants Form 8-K Report dated September 27, 2004 and filed with the
Securities and Exchange Commission on October 1, 2004)10.21
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)10.22
    
    First Amendment to Second Amended and Restated Credit Agreement, dated as of December 27,
2004, by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First
American Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by
reference to Exhibit 10.1 of the Registrants Form 8-K Report dated December 30, 2004 and
filed with the Securities and Exchange Commission on December 30, 2004)10.23
    
    Second Amendment to Second Amended and Restated Credit Agreement, dated as of April 1, 2005,
by and among Parallel Petroleum Corporation, Parallel, L.P., Parallel, L.L.C., First American
Bank, SSB, BNP Paribas, Citibank, F.S.B. and Western National Bank (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated April 4, 2005 and filed with the
Securities and Exchange Commission on April 8, 2005)10.24
    
    Third Amendment to Second Amended and Restated Credit Agreement (Incorporated by reference
to Exhibit 10.1 of the Registrants Form 8-K Report dated October 4, 2005 and filed with the
Securities and Exchange Commission on October 20, 2005)10.25
    
    Purchase and Sale Agreement, dated as of October 14, 1005, among Parallel, L.P., Lynx
Production Company, Inc., Elton Resources, Inc., Cascade Energy Corporation, Chelsea Energy,
Inc., William P. Sutter, Trustee, William P. Sutter Trust, J. Leroy Bell, E. L. Brahaney,
Brent Beck, Cavic Interests, LLC and Stanley Talbott (Incorporated by reference to Exhibit
10.2 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.26
    
    Ancillary Agreement to Purchase and Sale Agreement, dated October 14, 2005, between
Parallel, L.P. and Lynx Production Company, Inc. (Incorporated by reference to Exhibit 10.3 of
the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities and
Exchange Commission on October 20, 2005)10.27
    
    Guarantee of Parallel, L.P., dated October 13, 2004 (Incorporated by reference to Exhibit
10.4 of the Registrants Form 8-K Report dated October 14, 2005 and filed with the Securities
and Exchange Commission on October 20, 2005)10.28
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.29
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.30
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the




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##### Table of Contents



No.
    
    Description of ExhibitRegistrants Form 8-K Report, dated November 15, 2005, as filed with the Securities and
Exchange Commission on November 21, 2005)10.31
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)21
    
    Subsidiaries (Incorporated by reference to Exhibit No. 21 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley Gillespie & Associates, Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.
 
 * Filed herewith.