SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10 - K

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

                  For the fiscal year ended December 31, 1999

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

                For the transition period from ______ to ______.


                      Commission File Number: 0 - 13305


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

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


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


       Registrant's Telephone Number, Including Area Code: (915) 684-3727


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


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


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

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


                                    Yes x           No



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

     The aggregate  market value of voting and non-voting  common equity held by
non-affiliates  of the Registrant as of March 15, 2000 was  approximately  $50.8
million, based on the last sale price of the common stock on the same date.

     At March 15, 2000 there were 20,331,858 shares of common stock outstanding.

<PAGE>                                  i

                                    FORM 10-K

                         PARALLEL PETROLEUM CORPORATION

                                TABLE OF CONTENTS


 Item No.                                                                  Page

                                     PART I

Item    1.              Business                                              1
Item    2.              Properties                                           16
Item    3.              Legal Proceedings                                    19
Item    4.              Submission of Matters to a Vote
                           of Security Holders                               19

                                     PART II

Item    5.              Market for Registrant's Common Equity and
                           Related Stockholder Matters                       20
Item    6.              Selected Financial Data                              22
Item    7.              Management's Discussion and Analysis of
                           Financial Condition and Results of Operations     23
Item    7A.             Quantitative and Qualitative Disclosures
                           About Market Risk                                 34
Item    8.              Financial Statements and Supplementary Data          35
Item    9.              Changes in and Disagreements with
                           Accountants on Accounting and Financial
                           Disclosure                                        35

                                    PART III

Item    10.             Directors and Executive Officers of the Registrant   36
Item    11.             Executive Compensation                               38
Item    12.             Security Ownership of Certain Beneficial Owners
                           and Management                                    44
Item    13.             Certain Relationships and Related Transactions       46


                                     PART IV

Item    14.             Exhibits, Financial Statement Schedules,
                           and Reports on Form 8-K                           47

<PAGE>                           ii

                           Forward-Looking Statements


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

         .  risks associated with the drilling of wells;

         .  competition;

         .  future capital requirements and availability of financing;

         .  fluctuations in prices of oil and gas;

         .  governmental regulations;

         .  geological concentration of our reserves; and

         .  general economic conditions.

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

<PAGE>
                                       1



                                     PART I




ITEM 1. BUSINESS



General

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

         .   the onshore gulf coast area of south Texas; and

         .   the Permian Basin of west Texas.


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

     As you  read  this  report,  it is  important  for  you to  understand  our
relationship with First Permian,  L.L.C., a Delaware limited liability  company.
On June 25, 1999, we joined with three other companies and formed First Permian,
which acquired oil and gas properties from Fina Oil and Chemical Company. If you
will turn to page 4 of this report,  you will find  detailed  information  about
First Permian and its  acquisition of properties  under the heading  Significant
Developments  in 1999.  Unless we state that the  information  about Parallel in
this report includes  Parallel's 35% membership  interest in First Permian,  you
should  keep  in  mind  that   references  to  Parallel,   we,  our  or  similar
terminologies exclude First Permian.

     Proved Reserves as of December 31, 1999

     At December 31, 1999, our estimated proved reserves were  approximately 1.0
million Bbls of oil and 17.3 Bcf of natural gas. The present value of our pretax
future  net  revenues,  discounted  at 10%,  was  approximately  $25.5  million.
Approximately  74% of our proved reserves are natural gas and  approximately 70%
are categorized as proved developed reserves.

     As of December 31, 1999, an  independent  engineering  firm  estimated that
First Permian had total proved  reserves of 29.2 million Bbl of oil and 23.4 Bcf
of  natural  gas.  Based  on our 35%  interest  in First  Permian's  oil and gas
reserves,  this  represented 10.2 million Bbl of oil and 8.2 Bcf of natural gas,
net to Parallel's interest.

     The  First  Permian  properties   complement  our  existing  Permian  Basin
production and reserves.  The properties are long-lived  with low decline rates,
which  helps  offset  the  higher  decline  rates  of our  reserve  base  in the
Yegua/Frio/Wilcox  gas trend in south Texas.  At December 31, 1999,  the reserve
life of First Permian's  properties  (total estimated proved reserves divided by
the prior 12 months production) was approximately 35 years. This compares with a
reserve  life  of  our  existing   proved  reserves  at  December  31,  1999  of
approximately 6 years. At December 31, 1999, the reserve life of our properties,
after including our 35% share of First Permian's oil and gas reserves, increased
to approximately 16 years.
<PAGE>
                                       2


     During 1999, we participated  in drilling 18 gross (5 net)  exploratory and
development  wells.  Thirteen gross (3.3 net) wells were  productive and 5 gross
(1.7 net) wells were dry holes.

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

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

Business Strategies

     Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings by:

     . using 3-D seismic and other advanced  technologies to conduct exploratory
       activities;

     . investing in high-potential exploration prospects;

     . acquiring producing properties we believe can add incremental value;

     . exploiting our existing producing properties;

     . emphasizing cost controls; and

     . positioning for opportunity.


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

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

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

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

<PAGE>
                                       3


     Because of intense competition among independent oil and gas producers,  we
must  be  able  to  react  quickly  to  available  exploration  and  acquisition
opportunities.  We attempt to position for these  opportunities  by maintaining:

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

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

     .    a small staff that can respond  quickly to exploration and acquisition
          opportunities.


     The  steps we use to implement our business strategies include:

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

     .    known geological and reservoir characteristics;

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

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


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

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

     .    reduce drilling risks;

     .    lower finding costs; and

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


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

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

     Serving  as  Geophysical  Operator.  We prefer to serve as the  geophysical
     operator of exploratory  projects located in areas where we have experience
     using  3-D  seismic  technology.  By  doing  so,  we  control  the  design,
     acquisition,  processing  and  interpretation  of 3-D surveys  and, in most
     cases,  determine  drilling locations and well depths. The integrity of 3-D

<PAGE>
                                      4

     seismic analysis in our projects is assured by emphasizing quality controls
     throughout the data acquisition, processing and interpretation phases.

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

Significant Developments in 1999

     On June 25,  1999,  we joined  with three other oil and gas  companies  and
formed First Permian,  L.L.C., a Delaware limited liability company,  to acquire
oil and gas properties from Fina Oil and Chemical  Company.  The acquired assets
included oil and gas reserves and associated  assets in producing fields located
in the Permian Basin of west Texas.

     On June 30, 1999,  First Permian entered into a Merger  Agreement with Fina
Oil and Chemical Company. Under terms of the Merger Agreement,  Fina transferred
all of the oil and gas properties to a wholly owned subsidiary of Fina which was
then merged into First Permian.  Upon  completing  the merger,  and after giving
effect to the purchase price adjustments required by the Merger Agreement, First
Permian  paid to Fina  cash  in the  aggregate  amount  of  approximately  $92.0
million.

     The  purchase was  financed,  in part,  with the proceeds of the  revolving
credit facility provided by Bank One, Texas, N.A. to First Permian.  On June 30,
1999, Parallel and Baytech entered into a credit agreement with Bank One, Texas,
N.A.  providing for a $110.0 million  revolving credit  facility.  The principal
amount  of the  initial  loan  from  Bank  One  was  $74.0  million.  Parallel's
obligation is limited to a guaranty of $10.0 million of the bank borrowings.

     Additional  financing for the cash merger was obtained through subordinated
debt  borrowings,  which  included an $8.0 million  loan from Tejon  Exploration
Company and an additional $8.0 million loan from Mansefeldt Investment.

     Parallel and Baytech are the managers of First  Permian and at December 31,
1999  each  owned  a 35%  membership  interest.  Tejon  Exploration,  Mansefeldt
Investment and affiliates of Mansefeldt owned the remaining 30% interest at that
same date.

     Senior Secured Loans - First Permian

     The purchase price was financed,  in part, with the proceeds of a revolving
credit  facility  provided  by Bank  One,  Texas,  N.A.  to First  Permian.  The
principal  amount of the  initial  loan from Bank One was $74.0  million.  Under
terms of a Credit Agreement, dated June 30, 1999, among First Permian, Parallel,
Baytech and Bank One, as amended and restated on August 16, 1999,  the principal
amount outstanding under the revolving credit facility bears interest,  at First
Permian's election, at Bank One base rate plus 1.50% or the Eurodollar rate plus
3.25% until such time as the  subordinated  unsecured  loans described below are
paid in full.  When  these  subordinated  loans  have  been  paid in  full,  the
revolving credit facility will bear interest at First Permian's election at Bank
One's  base rate plus a margin  ranging  from .25% to .75%,  depending  upon the
outstanding  principal balance of the borrowings under the Credit Agreement,  or
the Eurodollar rate plus a margin ranging fr 2.00% to 2.50%,  depending upon the
outstanding principal balance of the borrowings under the Credit Agreement.  The
revolving  credit  facility  provides for revolving loans subject to a borrowing
base  and a  monthly  commitment  reduction  amount  of  $250,000.  The  monthly
commitment  reduction  commences  on October 1, 1999 and  continues  with a like
reduction on the first day of each following  month.  The borrowing base and the
monthly commitment reduction amount may be redetermined by Bank One on January 1
and July 1 of each  year or at other  times  requested  by  First  Permian.  All
outstanding  principal under the revolving credit facility is due and payable on
July 1, 2002.  Interest is payable on the last day of each month.  The revolving
credit facility is subject to an unused commitment fee of .50% on the unadvanced

<PAGE>
                                       5

portion of the borrowing base amount.  The loan is secured by substantially  all
of the oil and gas  properties  First Permian  acquired from Fina.  Parallel and
Baytech each guaranteed $10.0 million of the loans from Bank One.

     Subordinated Unsecured Loans - First Permian

     In addition to the $74.0  million  loan from Bank One,  First  Permian also
borrowed  $8.0 million  from each of Tejon  Exploration  Company and  Mansefeldt
Investment Corporation.  Under terms of an Intercreditor  Agreement,  dated June
30,  1999,  among  First  Permian,  Bank  One,  Tejon  Exploration  Company  and
Mansefeldt  Investment  Corporation,  the loans made by Tejon and Mansefeldt are
subordinate in all respects to the senior loans made by Bank One.

     The loans  made by Tejon  Exploration  Company  and  Mansefeldt  Investment
Corporation are unsecured.  Each  subordinated loan required a principal payment
of $2.5 million on December 31, 1999. On December 31, 1999,  principal  payments
in the  aggregate  amount  of $8.5  million  were made by First  Permian  on the
subordinated loans. In January 2000, First Permian made an additional  principal
payment in the amount of $3.2 million.  As of March 15 2000, the total amount of
outstanding  subordinated  debt was $4.3  million,  which is payable on June 30,
2000.

     During 1999,  First Permian  approved a plan to dispose of selected noncore
oil and gas  properties.  In December 1999 and January 2000,  First Permian sold
certain  properties  and  received  net cash  proceeds  of  approximately  $20.6
million,  which  were used to reduce  First  Permian's  outstanding  senior  and
subordinated debt.

     In conjunction with the reduction of the subordinated  debt, the members of
First Permian  entered into an agreement  that  increased each of Parallel's and
Baytech's  interest  from 22.5% to 35%,  effective  December  31,  1999.  Tejon,
Mansefeldt, and affiliates of Mansefeldt own the remaining 30% interest.

     Principal payments on the  subordinated  loans can only be made with:

     .    the net cash proceeds from the issuance of equity  securities by First
          Permian;

     .    advances under the Credit  Agreement to the extent  attributable to an
          increase in the borrowing base above $74.0 million;

     .    proceeds  from sales of assets of First Permian with the prior written
          consent of Bank One,  after Bank One  determines a new borrowing  base
          (after giving effect to the sale of assets); or

     .    any other  source of payment  with the prior  written  consent of Bank
          One.

     Each principal payment on the subordinated loans can only be made if:

     .    the full payment of all amounts then due and payable  under the Credit
          Agreement have been made or provided for in accordance with the Credit
          Agreement; and

     .    no event of default  has  occurred  or would occur as a result of such
          payment.

     All unpaid  principal  and accrued  but unpaid  interest as of July 1, 2000
will be  deemed  to be  principal  and will be paid in  twenty  equal  quarterly
payments of principal on March 31, June 30, September 30 and December 31 of each
year commencing September 30, 2000. Any payments of principal or interest on the
subordinated  loans after June 30, 2000 may only be made with the prior  written
consent of Bank One.  Tejon and  Mansefeldt  may,  at their  option and with the
agreement  of First  Permian,  irrevocably  convert  any claims they have to the
subordinated loans to an equity interest in First Permian.

<PAGE>
                                       6
     Interest on the unpaid balance of the subordinated  loans accrues from June
30,  1999 until the earlier of the date of payment or June 30, 2000 at the prime
rate of interest  charged by Bank One. After June 30, 2000,  interest accrues at
the lowest prime rate of interest as published in the Money Rates Section of the
Wall Street Journal.

     Interest  on the  subordinated  loans is payable  monthly in arrears on the
last day of each month, commencing July 31, 1999 and ending June 30, 2000.

     Simultaneous Sale of Acquired Properties - First Permian

     In  addition  to the  loans  made to  First  Permian  by Bank  One,  Tejon,
Mansefeldt  and MDJ  Minerals,  L.L.P.,  a Texas limited  liability  partnership
controlled by Tejon and Mansefeldt,  entered into a Purchase and Sale Agreement,
dated June 30, 1999,  with First  Permian.  Under terms of the Purchase and Sale
Agreement,  First Permian sold certain oil and gas mineral  interests  that were
simultaneously  acquired by it in the merger.  First Permian sold the properties
to MDJ Minerals,  L.L.P. for the cash purchase price of $5.0 million.  A portion
of the sales  proceeds  were used by First  Permian in  payment of the  purchase
price of the properties acquired from Fina under the merger.

Exploration and Development Activities in 1999

     The scope of our exploration and development  activities is affected by oil
and gas prices. Our 1999 capital  expenditures were approximately 77% lower than
our  capital  expenditures  in 1998,  primarily  because of a  reduction  in our
drilling  activities caused by low oil and gas prices in 1998 and the first part
of 1999.  Additionally,  capital  expenditures for 3-D seismic acquisition costs
were significantly lower in 1999 because we completed and funded most of our 3-D
seismic activities in 1998. Although oil prices began increasing in mid-1999, we
are still recovering from a protracted period of low oil and gas prices.

     Gulf Coast Area of South Texas

     During 1999, our principal exploration and development activities continued
to be  concentrated  in  south  Texas.  Our  activities  were  conducted  in the
Yegua/Frio/Wilcox gas trend in the onshore gulf coast areas in Dewitt,  Jackson,
Lavaca,  Victoria and Wharton Counties.  This trend has been our primary area of
activity since 1993.

     We  participated in drilling 18 wells in 1999, all of which were drilled in
the gulf coast area of south Texas. The following table shows the results of our
1999 drilling activity in the Yegua/Frio/ Wilcox gas trend of south Texas.

<TABLE>

                           1999 Drilling Activity
                        Yegua/Frio/Wilcox Gas Trend

                                        No. of
          Target       Depth Range      Wells
        Formation        (feet)        Drilled    Productive    Dry
        ------------------------------------------------------------
        <S>          <C>              <C>           <C>        <C>
        Yegua        6,300 - 13,000      3            2          1
        Frio         6,400 -  8,400     15           11          4
        Wilcox      13,200 - 17,500      0            0          0
                                      ----         ----       ----
        Total                           18           13          5
                                      ====         ====       ====

</TABLE>

     At March 1, 2000, we owned  interests in 84 gross (23.9 net) wells in south
Texas.

<PAGE>
                                       7


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

     .    3-D seismic surveys;

     .    options to acquire oil and gas leasehold interests; and

     .    undivided working interests in oil and gas leases.


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

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

     Permian Basin of West Texas

     Before  entering the gulf coast area of south Texas in 1993,  our principal
activities were focused on acquiring  producing  properties in the Permian Basin
of west Texas.  These  properties  produce  primarily crude oil. At December 31,
1999, we were the operator of all our Permian Basin properties.

     We emphasize an ongoing  program of  enhancement,  remedial and development
drilling  activities  on our  Permian  Basin  properties  when oil prices are at
levels to support these activities.  In 1999, because of cash flow restrictions,
we limited our capital expenditures on our Permian Basin properties primarily to
those activities necessary to maintain optimum well performance.

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

     .    recompleting existing wellbores;

     .    restimulating producing reservoirs;

     .    identifying potential infill drilling locations;

     .    making  mechanical  improvements  to surface  facilities  and downhole
          equipment; and

     .    reviewing  the  practicality  of applying new drilling and  production
          technologies that could either improve recovery potential or result in
          the discovery of a new reservoir.


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

     .    shutting-in temporarily uneconomic properties;
<PAGE>
                                       8


     .    plugging wells we believe to be permanently impaired or depleted;

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

     .    selling properties to third parties.


     During the fourth  quarter of 1999, we sold our 100% working  interest (82%
net revenue interest) in the Chenot Gas Field, Pecos County, Texas. Net proceeds
from the sale were  approximately  $675,000  and were  used to repay  borrowings
under our revolving credit facility.

Drilling and Acquisition Costs

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

<TABLE>


                                                         Year Ended December 31,
                                          ------------------------------------------------
                                             1999       1998      1997     1996     1995
                                           -------    -------   -------  -------  -------
                                                              (in thousands)

<S>                                        <C>        <C>        <C>       <C>     <C>
     Transfers from (to) undeveloped
        leases held for sale (1)           $ (2,128)  $     -  $      -  $    60  $   197

     Proved property acquisition costs           42        89       918    3,839      372

     Unproved property acquisition costs      1,979     6,034     7,710      369      841

     Exploration costs                        1,856     8,556     9,604    8,669    1,519

     Development costs                          639     3,873     4,877    3,963      889
                                           --------  --------  --------  -------  -------
                                           $  2,388  $ 18,552  $ 23,109  $16,900  $ 3,818
                                           ========  ========  ========  =======  =======
</TABLE>

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

(1)  Reflects costs  associated  with assets  classified as being held for sale.
     The actual amount spent on capital expenditures during 1999, excluding this
     transfer, was approximately $4.5 million.


Oil and Natural Gas Prices are Volatile

     Industry  conditions started  deteriorating  during the latter part of 1997
and  continued  throughout  1998 and  into  early  1999,  primarily  because  of
declining  oil  prices.  Natural  gas prices  also  declined  during this period
because of warm weather conditions, which reduced demand.

     Our  profitability  and cash  flows are highly  dependent  on the prices we
receive for our oil and natural gas.  Oil and natural gas prices have  continued
to improve  since mid -1999 but the effects of 18 months of low prices  continue
to affect capital availability.

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

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

<PAGE>
                                      9


     .    weather conditions;

     .    the supply of foreign oil;

     .    the level of product demand;

     .    worldwide economic conditions; and

     .    the price and availability of alternative fuels.


     The average  prices we received  for the oil and natural gas we produced in
1999, 1998 and 1997 are shown in the following table:

<TABLE>

                                          Average Price Received for the
                                             Year Ended December 31,
                                          -------------------------------
                                            1999         1998      1997
                                           ------       ------    ------
                 <S>                      <C>           <C>       <C>

                   Oil (Bbl).............. $ 17.32      $12.49     $19.88

                   Natural gas (Mcf)...... $  2.27      $ 2.04     $ 2.70
</TABLE>


     The  average  price we  received  for our oil sales at March  15,  2000 was
approximately  $28.00  per Bbl.  At the same  date,  the  average  price we were
receiving  for our  natural  gas was  $2.75  per  Mcf.  At  December  31,  1999,
approximately 74% of our daily production was natural gas and 26% was oil. There
is  substantial  uncertainty  regarding  future  oil and gas  prices  and we can
provide no assurance that prices will remain at current levels.

Part of Our Business is Seasonal in Nature

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

Our Oil and Gas Operations Are Subject to Many Inherent Risks

     Oil and gas  drilling  activities  and  production  operations  are  highly
speculative  and involve a high degree of risk.  These  operations are marked by
unprofitable  efforts  because of dry holes and wells that do not produce oil or
gas in sufficient  quantities to return a profit.  The success of our operations
depends,  in part,  upon the ability of our management and technical  personnel.
There is no assurance  that our oil and gas drilling or  acquisition  activities
will be  successful,  that any  production  will be  obtained,  or that any such
production, if obtained, will be profitable.

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

     .    encountering unusual or unexpected formations and pressures;

     .    explosions, blowouts and fires;

     .    pipe and tubular failures and casing collapses;


<PAGE>
                                      10


     .    environmental pollution; and

     .    personal injuries.


     We  maintain  general  liability  insurance  and obtain  insurance  against
blowouts on a well-by-well  basis. We do not carry insurance  against  pollution
risks.  If we sustain an  uninsured  loss or  liability,  our ability to operate
could be materially adversely affected.

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

Executive Officers of Parallel

     At March 15, 2000,  Parallel's  executive officers were Thomas R. Cambridge
and Larry C. Oldham.

     Mr.  Cambridge,  age 64, is the Chief Executive Officer and Chairman of the
Board of Directors of Parallel. He is an independent petroleum geologist engaged
in the exploration for,  development and production of oil and natural gas. From
1970 until 1990, such activities were carried out primarily  through Cambridge &
Nail Partnership, a Texas general partnership.  Since 1990, such activities have
been carried out through Cambridge  Production,  Inc., a Texas corporation.  Mr.
Cambridge has served a Director of Parallel  since  February  1985; as President
during the period  from  October  1985 to October  1994;  and as Chairman of the
Board of Directors and Chief Executive Officer since October 1985. He received a
Bachelors  degree in  geology  from the  University  of  Nebraska  in 1958 and a
Masters of Science degree in 1960.

     Mr. Oldham,  age 46, is a founder of Parallel.  He has served as an officer
and  Director  since  Parallel's  formation  in 1979.  He  served  as  Executive
Vice-President  until  October  1994 when he became  President.  He  received  a
Bachelor of Business  Administration  degree from West Texas State University in
1975. Mr. Oldham is a member of the Permian Basin Landman's Association.

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

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

Employees

     At March 15, 2000,  Parallel had seven full time  employees.  Mr. Thomas R.
Cambridge, the Chief Executive Officer and Chairman of the Board of Directors of
Parallel,  serves  in the  capacity  of a  consultant,  and  not as a  full-time
employee.  Parallel also retains independent land,  geological,  geophysical and
engineering  consultants  and  expects  to  continue  to do so  in  the  future.
Additionally, Parallel retains seven contract pumpers on a month-to-month basis.

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

Wells Drilled

     The following  table shows  certain  information  concerning  the number of
gross and net wells we drilled during the  three-year  period ended December 31,
1999.

<PAGE>
                                       11

<TABLE>


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

  1999              11.0      2.50    5.0     1.70     2.0      .80       .0       .00
  1998               9.0      2.16    8.0     1.71     4.0     1.16      2.0       .45
  1997              19.0      4.45   17.0     4.08     7.0     6.54      1.0       .20

</TABLE>

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

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

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


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

     At March 15, 2000, we were  participating in the completion of 3 gross (.48
net) gas wells in Wharton and Victoria,  Counties,  Texas.  At that same date, 3
gross (.80 net) gas wells in Victoria,  Dewitt and Jackson Counties,  Texas were
waiting on completion.

Volumes, Prices and Lifting Costs

     The  following  table  shows  certain  information  about  our  production,
including  the volumes of oil and gas we produced,  the average sales prices per
Mcf of gas and Bbl of oil produced, and the average production, or lifting, cost
per EBO for the three-year period ended December 31, 1999.

<TABLE>


                                     Year Ended December 31,
                         ----------------------------------------------
                               1999          1998              1997
                           -----------    ----------        ----------
<S>                        <C>           <C>                <C>

Net Production
    Oil (Bbls)               163,696        185,474           175,246
    Gas (Mcf)              2,708,516      3,275,882         3,383,190
    EBO(1)                   615,115        731,454           739,111

Average Sales Price
    Oil (per Bbl)             $17.32         $12.49            $19.88
    Gas (per Mcf)             $ 2.27         $ 2.04            $ 2.70
    EBO                       $14.59         $12.31            $17.07

Average Production
    (lifting) Cost per EBO    $ 3.83         $ 3.33            $ 4.29

Operating Margin
    per EBO(2)                $10.76         $ 8.98            $12.78

Depletion per EBO             $ 8.30         $ 8.07            $ 5.29

</TABLE>

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

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

(2)  Operating margin is determined by deducting the average production cost per
     EBO from the average  sales price per EBO.

<PAGE>
                                       12

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

Markets and Customers

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

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

<TABLE>

                                                1999           1998         1997
                                                ----           ----         ----
<S>                                            <C>             <C>          <C>

EOTT Energy Operating Limited Partnership         5%            11%          12%

Cox & Perkins Exploration, Inc.                  14%            24%          53%

Allegro Investments, Inc.                        27%            22%           -

Brayton Operating Corp.                          26%            18%           -

</TABLE>


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

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

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

Office Facilities

     Our corporate offices consist of approximately  5,776 square feet of leased
space in Midland,  Texas.  Our current rental rate is $3,851 per month until May
31, 2001, when the lease expires.

Competition

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

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

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

     .    drilling rigs and related equipment to explore for such reserves; and
<PAGE>
                                       13


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


Oil and Gas Regulations

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

     .    price controls;

     .    taxes; and

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


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

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

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

     .    the unitization or pooling of oil and gas properties;

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

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


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

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


<PAGE>
                                       14


significant regulatory uncertainty remains, Order 636 may ultimately enhance our
ability to market and  transport  our gas,  although  it may also  subject us to
greater competition.

     Sales of oil we produce are not  regulated  and are made at market  prices.
The  price  we  receive  from  the  sale  of oil is  affected  by  the  cost  of
transporting the product to market.  Effective January 1, 1995, FERC implemented
regulations  establishing  an  indexing  system  for  transportation  rates  for
interstate  common carrier oil  pipelines,  which,  generally,  would index such
rates to  inflation,  subject  to  certain  conditions  and  limitations.  These
regulations could increase the cost of transporting oil by interstate pipelines,
although the most recent adjustment generally decreased rates. These regulations
have generally been approved on judicial  review.  We are unable to predict with
certainty  what  effect,  if  any,  these  regulations  will  have  on  us.  The
regulations  may,  over time,  tend to increase  transportation  costs or reduce
wellhead prices for oil.

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

Environmental Regulations

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

     .    require prior governmental authorization for certain activities;

     .    limit or prohibit activities because of protected areas or species;

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

     .    provide significant penalties for noncompliance.


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

     .    containment or cleanup;

     .    personal injury;

     .    property damage; and

     .    penalties  assessed  or  other  claims  sought  for  natural  resource
          damages.
<PAGE>
                                       15



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

     .    Water.  The Oil Pollution  Act, or OPA, was enacted in 1990 and amends
          provisions  of the  Federal  Water  Pollution  Control Act of 1972 and
          other  statutes as they pertain to prevention of and response to major
          oil spills. The OPA subjects owners of facilities to strict, joint and
          potentially  unlimited  liability  for removal costs and certain other
          consequences  of an oil  spill,  where  such  spill is into  navigable
          waters,  or along  shorelines.  In the event of an oil spill into such
          waters, substantial liabilities could be imposed upon Parallel. States
          in which Parallel operates have also enacted similar laws. Regulations
          are  currently  being  developed  under the OPA and similar state laws
          that may also impose additional regulatory burdens on Parallel.

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

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

     .    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 hazard  substances  found at the site.  CERCLA also authorizes the
          EPA and,  in some  instances,  third  parties  to act in  response  to
          threats to the public health or the environment and to seek to recover
          from the  responsible  classes of persons the costs they incur. In the
          course of our ordinary operations, we may have managed substances that
          may fall within CERCLA's definition of a hazardous  substance.  We may
          be jointly and  severally  liable  under CERCLA for all or part of the
          costs  required to clean up sites where we disposed of or arranged for
          the disposal of these substances.  This potential liability extends to
          properties that we owned or operated,  as well as to properties  owned

<PAGE>
                                       16



          and  operated  by others at which  disposal  of  Parallel's  hazardous
          substances occurred.

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

ITEM 2. PROPERTIES

General

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

Producing Wells and Acreage


     We have presented the following  table to provide you with a summary of the
producing oil and gas wells and the developed and  undeveloped  acreage in which
we owned an interest at December  31,  1999.  We have not  included in the table
acreage in which our  interest  is  limited  to  options  to  acquire  leasehold
interests, royalty or similar interests.

<TABLE>

                          Producing Wells                     Acreage
              ------------------------------------  ---------------------------------
                     Oil                  Gas          Developed      Undeveloped
              ------------------   ---------------  ----------------  ---------------
               Gross     Net (1)    Gross  Net (1)   Gross    Net (2)  Gross   Net (2)
               -----     -------    -----  -------   -----    -------  -----   -------
<S>            <C>       <C>        <C>    <C>       <C>      <C>      <C>     <C>

Texas            77       60.5        98    36.25    37,829    25,109  59,201   10,239

New Mexico        -          -         -        -         -         -  11,357      340

Oklahoma          -          -         1      .25         -         -       -        -
                ---       ----       ---    -----    ------    ------  ------   ------
     Total       77       60.5        99    36.50    37,829    25,109  70,558   10,579
                ===       ====       ===    =====    ======    ======  ======   ======

</TABLE>
-----------------
(1)  Net wells are  computed  by  multiplying  the number of gross  wells by our
     working interest in the gross wells.

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

     In addition to the interests we own in developed and  undeveloped  acreage,
at December 31, 1999 we also owned options to acquire interests in an additional
12,479 gross (1,247 net) acres in Texas.

<PAGE>
                                       17

     At December  31,  1999,  we were  operating 77 wells in which we also owned
interests.  Approximately 44% of the discounted present value of our oil and gas
reserves  at  December  31,  1999 is  attributable  to wells  operated by us. As
operator, we supervise the drilling,  completion and production of wells and the
further development of surrounding properties.

     The  operator of a well has  significant  control over its location and the
timing of its drilling.  In addition,  the operator of a well receives fees from
other working  interest owners as reimbursement  for general and  administrative
expenses for operating the wells.

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

Title to Properties

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

Oil and Gas Reserves

     Our oil  and  gas  reserves  were  estimated  as of  December  31,  1999 by
Williamson Petroleum Consultants, Inc., Midland, Texas.

     At December 31, 1999, excluding our 35% interest in First Permian's oil and
gas reserves,  our estimated proved reserves were approximately 1.0 million Bbls
of oil and 17.3 Bcf of gas, or 3.9 million EBOs.

     The   information  in  the  following   table  provides  you  with  certain
information regarding our proved reserves at December 31, 1999.

<PAGE>
                                       18

<TABLE>


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


Oil (Bbls)                                                         588,738               419,071            1,007,809

Gas (Mcf)                                                       12,685,389             4,598,323           17,283,712

Future Net Revenues (before income taxes)                     $ 28,839,778         $  10,698,131         $ 39,537,909

Present Value of Future Net Revenues (before income taxes)    $ 20,899,986         $   4,599,010         $ 25,498,996

</TABLE>

     For  additional  information  concerning  our estimated  proved oil and gas
reserves,  you should  read  Note15 in the  Financial  Statements.  See Item 8 -
Financial Statements and Supplementary Data.

     The   information  in  the  following   table  provides  you  with  certain
information  regarding our 35% interest in First  Permian's  proved  reserves at
December 31, 1999.

<TABLE>

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

Oil (Bbls)                                                       5,948,916             4,277,388           10,226,304

Gas (Mcf)                                                        7,764,555               425,957            8,190,512

Future Net Revenues (before income taxes)                     $ 85,681,495          $ 68,436,103         $154,117,598

Present Value of Future Net Revenues (before income taxes)    $ 42,935,227          $ 30,734,215         $  73,669,442

</TABLE>

     For additional  information  concerning our 35% interest in First Permian's
reserves,  you should  read Note 14 in the  Financial  Statements.  See Item 8 -
Financial Statements and Supplementary Data.

     The  reserve  data in  this  report  represent  estimates  only.  Reservoir
engineering is a subjective process.  There are numerous  uncertainties inherent
in estimating our oil and natural gas reserves and their estimated values.  Many
factors are beyond our control.  Estimating underground accumulations of oil and
natural gas cannot be measured in an exact  manner.  The accuracy of any reserve
estimate is a function of the quality of available data and of  engineering  and
geological  interpretation  and  judgment.  As a result,  estimates of different
engineers often vary. In addition, estimates of reserves are subject to revision
by the  results  of  drilling,  testing  and  production  after the date of such
estimates.   Consequently,  reserve  estimates  are  often  different  from  the
quantities  of  oil  and  natural  gas  that  are  ultimately   recovered.   The
meaningfulness  of such  estimates is highly  dependent upon the accuracy of the
assumptions upon which they were based.

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

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

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

<PAGE>
                                       19

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


ITEM 3. LEGAL PROCEEDINGS


     From time to time, we are a party to ordinary routine litigation incidental
to our business. We are not currently a party to any pending litigation,  and we
are not  aware  of any  threatened  litigation.  We have not been a party to any
bankruptcy, receivership, reorganization, adjustment or similar proceeding.


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


     We did not  submit  any  matter to a vote of our  stockholders  during  the
fourth quarter of 1999.

<PAGE>
                                       20


                                     PART II


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


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

<TABLE>

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

                1997

                        First quarter        $5.81            $4.31
                        Second quarter       $5.50            $3.88
                        Third quarter        $6.88            $4.38
                        Fourth quarter       $7.25            $5.25

                1998

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

                1999

                        First quarter        $1.87            $1.00
                        Second quarter       $2.34            $1.25
                        Third quarter        $3.00            $1.75
                        Fourth quarter       $2.53            $1.37
</TABLE>


     The last sale  price of our  common  stock on March 15,  2000 was $2.50 per
share, as reported on the Nasdaq National Market.

     As of March 15,  2000,  there  were  approximately  2,100  stockholders  of
record.

     We have not paid, and do not intend to pay in the foreseeable  future, cash
dividends on our common stock.  The revolving  credit  facility we have with our
bank lender  prohibits  the payment of  dividends  on the common  stock.  Our 6%
convertible  preferred  stock also contains  provisions  which  restrict us from
paying dividends or making distributions on our common stock if all dividends on
the  preferred  stock  have not been paid in full.  Any  dividends  that are not
declared and paid will  accumulate a all  accumulated  dividends must be paid in
full  before  dividends  may be paid to  holders  of common  stock.  The  credit
facility allows us to pay dividends on our outstanding shares of preferred stock
as long as we are not in  default  under the terms of the credit  facility.  The
holders of the preferred  stock are entitled,  as and when declared by the Board
of  Directors,  to  receive  an  annual  dividend  of $.60  per  share,  payable
semi-annually  on  June  15 and  December  15 of each  year.  See  "Management's
Discussion and Analysis of Financial Condition and Results of Operations Capital
Resources and Liquidity" on page 31.

<PAGE>
                                       21

     On November 19, 1999, we completed  the private sale of 2.0 million  shares
of our common  stock.  In addition to sales made  directly by  Parallel,  Everen
Securities,  Inc.,  Netherland  Securities,  Inc.  and Philip  Proctor  acted as
placement agents. The common stock was sold to 22 accredited investors and eight
unaccredited  investors  at a price  of  $1.60  per  share.  Commissions  in the
aggregate amount of $30,000 were paid to the placement agents, which represented
5% of the proceeds from the sales of stock placed by the placement  agents.  The
common stock was sold in reliance on the exemptions from registration under Rule
506 of  Regulation  D and Section 4(2) of the  Securities  Act. The net proceeds
from the sale were approximately $3.1 million.  Of this amount, $1.6 million was
applied to the  reduction of bank debt and $1.5 million was added to our working
capital.

<PAGE>
                                       22


ITEM 6. SELECTED HISTORICAL FINANCIAL DATA

     In the table below, we provide you with selected historical financial data.
We have  prepared this  information  using the audited  financial  statements of
Parallel for the five-year  period ended December 31, 1999. It is important that
you read this data along with our financial  statements and related  notes,  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  under Item 7 below.  The selected  financial  data provided are not
necessarily  indicative  of  our  future  results  of  operations  or  financial
performance.

<TABLE>


                                                                 Year Ended December 31,
                                       ---------------------------------------------------------------------
                                           1999(1)        1998(2)        1997          1996         1995
                                       ------------   ------------  ------------  ------------  ------------
<S>                                    <C>            <C>           <C>           <C>           <C>

Operating revenues                     $  8,974,041   $  9,001,582  $ 12,614,242  $ 14,167,470  $  4,713,748

Operating expenses                     $ 10,173,995   $ 24,056,923  $  7,968,146  $  6,945,168  $  3,518,163

Net income (loss)                      $ (2,450,457)  $(12,995,910) $  2,743,930  $  4,330,654  $    137,080

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

Net income (loss) available to
   common stockholders                 $ (3,059,520)  $(13,272,622) $  2,743,930  $  4,330,654  $    137,080

Net income (loss) per common share

   Basic                               $       (.16)  $       (.73) $        .15  $        .29  $        .01

   Diluted                             $       (.16)  $       (.73) $        .15  $        .28  $        .01

Cash  dividends - common stock         $          -   $          -  $         -   $         -   $         -

Weighted average common shares
   and common stock equivalents
   outstanding:

   Basic                                 18,549,214     18,300,998    17,862,792    14,957,404    14,860,332

   Diluted                               18,549,214     18,300,998    18,640,990    15,693,258    15,395,777

Present value of proved oil and gas
   reserves discounted at 10%
   (before estimated federal
   income taxes)                       $ 25,498,996   $ 26,822,980  $ 46,419,580  $ 67,015,980  $ 25,890,050

Working capital                        $    (71,647)  $    128,813  $ (2,162,139) $    351,517  $    639,299

Total assets                           $ 43,264,070   $ 46,564,782  $ 49,855,532  $ 38,098,169  $ 23,914,698

Total liabilities                      $ 17,463,967   $ 20,839,642  $ 20,736,779  $ 13,380,034  $ 13,079,285

Long-term debt, less current
   maturities                          $ 12,300,000   $ 18,035,889  $ 12,182,610  $  8,521,391  $ 11,674,625

Total stockholders' equity             $ 25,800,103   $ 25,725,140  $ 29,118,753  $ 24,718,135  $ 10,835,413

</TABLE>

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

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

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

<PAGE>
                                       23


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


     The  following  discussion is intended to assist you in  understanding  our
financial  position and results of  operations  for each year in the  three-year
period ended  December 31, 1999.  You should read the following  discussion  and
analysis in conjunction with our financial statements and the related notes.

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

Basis of Presentation

     We account for our  interest in First  Permian  using the equity  method of
accounting.  Under the equity method of accounting,  we record our investment in
First Permian at cost on the balance sheet.  This is increased or reduced by our
proportionate share of First Permian's income or loss, which is presented as one
amount in the statements of operations. Our 35% share of First Permian's oil and
gas reserves is presented  separately under our oil and gas reserve  information
in Note 14 to the Financial Statements.

     From June 30, 1999 until  December 30, 1999,  we owned a 22.5 % interest in
the assets,  liabilities and operating results of First Permian. On December 31,
1999, our interest in First Permian increased to 35% and since that date we have
owned an equivalent interest in the assets,  liabilities,  operating results and
oil and gas reserves of First Permian.

     Our  results  for the year ended  December  31, 1999 do not include our pro
rata  interest  in the  assets,  liabilities,  revenues  and  expenses  of First
Permian.  Instead,  our  interest  is  reported  in a line  item  on the  income
statement entitled "equity in earnings of First Permian".  Our pro rata share of
oil and gas reserves is presented in a separate table.

General

     Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings by:

     .    using 3-D  seismic  and other  advanced  technologies  to conduct  our
          exploratory and development activities;

     .    investing in high-potential exploration prospects;

     .    acquiring properties that we believe add incremental value;

     .    exploiting our existing producing properties;

     .    emphasizing cost controls; and

     .    positioning for opportunity.


<PAGE>
                                       24

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

     We undertake  projects  only when we believe the project has the  potential
for initial  cash flow  adequate to return the  project's  capital  expenditures
within a short period of time,  generally less than 36 months.  We also endeavor
to maximize the present value of our projects by accelerating  production of our
reserves  consistent  with prudent  reservoir  management and prevailing  energy
prices.

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

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

     .    seasonal demand;

     .    weather;

     .    hurricane conditions in the Gulf of Mexico;

     .    availability of pipeline transportation to end users;

     .    proximity   of   our   wells   to   major   transportation    pipeline
          infrastructures; and

     .    to a lesser extent, world oil prices.


     Additional factors influencing our overall operating performance include:

     .    production expenses;

     .    overhead requirements; and

     .    costs of capital.


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

     .    sales of our equity securities, and

     .    bank borrowings.


<PAGE>
                                       25


     Because of the  sustained  deterioration  in prices we received for the oil
and gas we  produced in 1998 and the first part of 1999,  the  capital  normally
available to us from our cash flow and bank  borrowings  has been  significantly
reduced.

     The  protracted  period of low oil and gas  prices  and a  decrease  in our
drilling  activity,  which has adversely affected our ability to add new oil and
gas reserves,  has resulted in a reduction in our available  borrowing  capacity
under  our  revolving  credit  facility.  For  more  information  regarding  our
borrowing  arrangements,  see Capital Resources and Liquidity  beginning on page
31.

     Our oil and gas producing  activities are accounted for using the full cost
method of  accounting.  Under this  accounting  method,  we capitalize all costs
incurred in connection  with the  acquisition of oil and gas properties and with
the  exploration  and  development  of oil and gas reserves.  See Note 11 to the
Financial  Statements.  These costs include lease acquisition costs,  geological
and   geophysical   expenditures,   cost  of  drilling   both   productive   and
non-productive  wells and overhead expenses directly related to land acquisition
and exploration and development  activities.  Proceeds from the  dispositions of
oil and gas properties  are accounted for as a reduction in  capitalized  costs,
with no gain or loss  recognized  unless  such  disposition  involves a material
change  in  reserves,  in which  case the  gain or loss is  recognized.  Certain
directly identifiable  internal costs of property  acquisition,  exploration and
development  activities are  capitalized.  In 1999,  internal costs  capitalized
totaled $508,883 compared with $527,500 in 1998 and $461,537 in 1997.

     Depletion of capitalized  costs is calculated using the  unit-of-production
method  based  upon  estimates  of  proved  oil  and gas  reserves.  Oil and gas
production  is converted  to a common unit of  measurement  based upon  relative
energy content of each  commodity.  Costs from unproved  properties are excluded
from depletion until  evaluated.  Under the full cost method of accounting,  net
capitalized  costs  of  oil  and  gas  properties,  or  the  full  cost  ceiling
limitation,  are not to exceed  their  related  estimated  future  net  revenues
discounted  at 10%,  and  lower of cost or  estimated  fair  value  of  unproved
properties, net of tax considerations.

     Depletion per  equivalent  unit of production  EBO was $8.30 in 1999 versus
$8.07  in 1998  and  $5.29  in 1997.  The  increase  per EBO was a  result  of a
combination of factors including:

     .    a decline in  Parallel's  reserve  base during  1999 due to  decreased
          drilling activity, which affected our ability to add new reserves;

     .    an increase in  Parallel's  net  depletable  basis,  as a result of an
          impairment   charge  to  the  full  cost  pool   related  to  unproved
          properties; and

     .    the effect of unsuccessful  drilling efforts,  which increase the cost
          pool but add no units of production.

Results of Operations

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

     .    reserve base;

     .    sources of production;

     .    product mix (oil versus gas volumes); and

     .    the prices we receive for our oil and gas production.


<PAGE>
                                       26


     Year-to-year or other periodic comparisons of the results of our operations
can be difficult and may not fully and accurately  describe our  condition.  The
following table shows selected  operating data for each of the three years ended
December 31, 1999, 1998 and 1997.

<TABLE>


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

Production and prices:

   Oil (Bbls)                                   163,696       185,474       175,246
   Natural gas (Mcf)                          2,708,516     3,275,882     3,383,190
   EBO (Bbls)                                   615,115       731,454       739,111
   Oil price (per Bbl)                        $   17.32     $   12.49     $   19.88
   Gas price (per Mcf)                        $    2.27     $    2.04     $    2.70
   Ratio of oil to gas price                     7.63/1        6.12/1        7.36/1
   Increase (decrease) in production
      volumes over prior year                     (16%)          (1%)         (11%)

Results of operations per EBO:

   Oil and gas revenues                       $   14.59     $   12.31     $  17.07
   Costs and expenses:
      Production costs                             3.83          3.33         4.29
      General and administrative                   1.31          1.23         1.13
      Provision for losses on trade receivables     .14            -            -
      Depreciation, depletion and amortization     8.49          8.16         5.36
      Impairment of oil and gas properties         2.77         20.17           -
                                              ---------     ---------      -------
             Total costs and expenses             16.54         32.89        10.78
                                              ---------     ---------      -------
    Operating income (loss)                       (1.95)       (20.58)        6.29
    Equity interest in earnings of
       First Permian, L.L.C.                       0.32             -            -
    Interest expense, net                         (2.39)        (1.89)       (1.09)
    Other income, net                               .03           .46          .03
                                              ---------     ---------      -------
        Pretax income (loss) per EBO          $   (3.99)    $  (22.01)     $  5.23
                                              =========     =========      =======
</TABLE>

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

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

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

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

<PAGE>
                                       27


<TABLE>
                                                Year Ended December 31,
                                            ----------------------------------
                                            1999(1)        1998(2)        1997
                                            ------         -------       -----

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

Oil and gas revenues                        100.0%         100.0%        100.0%

Costs and expenses:
   Production costs                          26.2           27.0          25.1

   General and administrative                 8.9            9.5           6.6

   Provision for loss on trade receivables    1.0             .5             -

   Depreciation, depletion and
      amortization                           58.2           66.3          31.4

   Impairment of oil and gas properties      19.0          163.9             -
                                           ------         ------         -----
        Total costs and expenses            113.3          267.2          63.1
                                           ------         ------         -----
Operating income (loss)                     (13.3)        (167.2)         36.9

Equity in earnings of
   First Permian, L.L.C.                      2.2              -             -

Interest expense, net                       (16.4)         (15.3)         (6.4)

Other income, net                              .2            3.8            .2
                                           ------         ------         -----
Pretax income (loss)                        (27.3)        (178.7)         30.7

Income tax (expense) benefit                    -           34.4          (8.9)
                                           ------         ------         -----
Net income (loss)                           (27.3)%       (144.3)%        21.8%
                                           ======         ======         =====

</TABLE>
-----------------

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

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

Years Ended December 31, 1999 and December 31, 1998

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

     Production.  On an equivalent barrel basis, 1999 production totaled 615,115
EBO compared with 731,454 EBO in 1998.  The decrease in production was primarily

<PAGE>
                                       28


due to normal production  declines associated with producing wells and decreased
drilling  activity in 1999,  which  affected  our ability to replace oil and gas
produced during the year.

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

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

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

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

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

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

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

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

<PAGE>
                                       29


     Our effective tax rate for 1999 was 0% versus 19% in 1998.  You should read
Note 5 of the Financial  Statements on page F-13, included in Item 8 - Financial
Statements  and  Supplementary  Data,  for further  discussion of our income tax
provisions and benefits.

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

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

     Operating  cash flow for 1999  decreased  approximately  $149,269 or 3%, to
$4,478,043  compared with $4,627,312 for the year ended December 31, 1998. Other
sources of funds  included  net  proceeds of $17,188  from the exercise of stock
options, net proceeds of $3,117,295,  excluding offering costs, from the private
placement of common stock, net proceeds from property sales totaling  $1,111,525
and bank borrowings under our credit facility.

Years Ended December 31, 1998 and December 31, 1997

     Oil  and Gas  Revenues.  Our  total  oil and gas  revenues  for  1998  were
$9,001,582, a decrease of $3,612,660, or approximately 29%, from $12,614,242 for
1997.  The decrease in revenues for 1998,  compared to 1997, is related to a 28%
decline in the average prices we received for our oil and natural gas production
volumes, and, to a lesser degree, a 1% decline in production volumes.

     Production.  On an equivalent barrel basis, 1998 production totaled 731,454
EBO  compared  with  739,111  EBO in 1997,  a 1%  decline,  resulting  from a 3%
decrease in natural gas  production.  The decrease in natural gas production was
primarily due to normal production  declines associated with producing wells and
decreased  drilling  activity in 1998,  which limited our ability to replace oil
and gas we produced during the year.

     Production Costs. The decrease in production costs for 1998,  compared with
1997,  was primarily the result of adding lower cost oil and gas  production,  a
decrease in the accrual of ad valorem taxes and, to a lesser degree,  a decrease
in production volumes. Production costs decreased $736,576 or 23%, to $2,434,658
for the twelve  months ended  December 31, 1998,  from  $3,171,234  for the same
period of 1997. Production costs as a percentage of revenues increased primarily
because of lower oil and gas prices.  Average production costs per EBO decreased
23% to $3.33 for the twelve months ended  December 31, 1998 compared to $4.29 in
the same period of 1997.

     General and Administrative  Expenses.  General and administrative  expenses
increased  $61,381 or 7% to $899,016 for the year ended December 31, 1998,  from
$837,635 for the same period of 1997. The increase in general and administrative
expenses was primarily  related to salary and benefit  adjustments and increased
franchise taxes. General and administrative expenses as a percentage of revenues
increased to 10.0% for the year ended December 31, 1998 versus 6.6% for the same
period  in 1997.  This  increase  is  primarily  a result of the low oil and gas
prices we received in 1998, which reduced revenues.

     Depreciation,  Depletion and Amortization  Expense.  DD&A expenses for 1998
increased  $2,006,944,  or 51% to  $5,966,221  from  $3,959,277  for 1997.  This
increase was a result of a combination of factors that included:

     .    production of 731,454 EBO;

<PAGE>
                                       30


     .    reserve  additions  of  1,539,000  EBO;
     .    a 23% decrease in our proved  reserves  from  6,985,333 EBO in 1997 to
          6,060,534  EBO in  1998  due to low  commodity  prices  and  reservoir
          performance;
     .    a downward revision of 1,732,000 EBO, due to property  performance and
          low oil and gas  prices;  and
     .    an  increase  in our full  cost  pool  related  to the  impairment  of
          unproved properties.

     DD&A expense as a percentage of revenues increased primarily because of the
impairment charge,  which increased the DD&A rate to $8.16 per EBO from $5.36 in
1997, and lower oil and gas prices, which reduced revenues.

     Impairment of Oil and Gas Properties. During the fourth quarter of 1998, we
recognized a noncash  impairment  charge of  $14,757,028,  or $12,269,834 net of
tax, related to our oil and gas reserves and unproved properties. The impairment
of oil and gas assets was  primarily  the result of the effect of  significantly
lower  oil and  natural  gas  prices on both  proved  and  unproved  oil and gas
properties. We did not recognize an impairment in 1997.

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

     At December 31, 1998,  oil and natural gas prices were much lower  compared
with 1997 year-end  prices,  resulting in an impairment  charge to the full cost
carrying value of our oil and gas properties.  In response to the decline in oil
prices and the softening of natural gas prices, in the third quarter of 1998, we
postponed the development of certain unproved  properties and instead focused on
projects that were lower risk with the potential to add significant reserves. We
determined  that it was likely,  because oil prices were at the lowest levels in
decades and  natural  gas prices had also  declined,  that the  postponement  of
developing  certain  unproved  properties  had caused a decline in the  carrying
values of such properties. Therefore, we included the lower of cost or market of
certain unproved properties in our full cost pool for the ceiling test.

     The ceiling  test was computed  using the net present  value of reserves at
December  31, 1998 based on prices of $10.50 per Bbl of oil and $2.00 per Mcf of
natural gas. The prices used to compute the ceiling test in 1997 were $17.00 per
Bbl and $2.60 per Mcf.

     Net Interest Expense.  Net interest expense  increased  $573,944 or 71%, to
$1,378,332  for the year ended  December  31, 1998,  from  $804,388 for the same
period of 1997. This increase was principally a result of an increase in average
borrowings from our revolving line of credit  facility.  Borrowings were used to
conduct 3-D seismic  acquisition  and  drilling  activities  in the  Yegua/Frio/
Wilcox gas trend. Additionally, cash flows generated from operations declined as
a result of lower oil and gas prices, which necessitated  additional  borrowings
to fund capital expenditures.

     Income Tax Benefit  (Expense).  For the year ended  December 31,  1998,  we
recognized a tax benefit of $3,100,027, which includes a $2,530,196 deferred tax
valuation charge to reduce the carrying value of our deferred tax assets. During
the fourth quarter of 1998, we reviewed our deferred tax assets and, in light of
the current  economic  conditions in the oil and gas  industry,  the outlook for
future commodity  prices,  and our operational  results in 1998, we believe that
some of our net operating losses may expire unused.  Therefore, we established a
valuation  allowance  against  them.  We  recognized  tax  expense  in  1997  of
$1,122,450.

     Our effective tax rate for 1998 was approximately 19% versus 29% in 1997.

     Net Income (Loss) and Operating Cash Flow. Our net loss,  before  preferred
stock dividends,  was $12,995,910 for the year ended December 31, 1998, compared
with net income of  $2,743,930  for the year ended  December 31, 1997.  The 1998

<PAGE>
                                       31

loss was primarily caused by a fourth quarter 1998 noncash  impairment charge to
oil and gas properties totaling  $14,757,028,  the result of significantly lower
oil and gas prices at year-end  1998.  Other  factors  contributing  to the loss
included:

     .    a 51% increase in DD&A  expenses,  again a result of the low commodity
          price  environment  and an impairment  charge to unproved  properties,
          which  increased  the full cost pool;
     .    a  71%  increase  in  net  interest  expense  due  to  increased  bank
          borrowings;
     .    a 28% decrease in the average  price we received  for our  production;
          and
     .    1% decline in production volumes.

     Factors  contributing  to the  net  loss  were  partially  offset  by a 23%
decrease  in 1998  lease  operating  expenses  when  compared  with  1997  lease
operating expenses.

     Operating cash flow for 1998 decreased approximately  $3,198,345 or 41%, to
$4,627,312  compared with $7,825,657 for the year ended December 31, 1997. Other
sources of funds  included net  proceeds of $166,625  from the exercise of stock
options,  net proceeds of  $9,352,215,  excluding  offering  costs and preferred
stock dividends,  from private placements of preferred stock and bank borrowings
of $5,853,279 under our credit facility.

Capital Resources and Liquidity

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

     Our  primary  sources  of  cash  during  1999  were  funds  generated  from
operations,  proceeds  from the sale of  noncore  oil and gas  properties,  bank
borrowings  and a private  placement of common stock.  Funds were used primarily
for  exploration  and  development  expenditures,   dividend  payments  and  the
repayment of borrowings under our bank credit facility.

     On December 27, 1999,  our loan agreement with the bank was restated in its
entirety.  The loan agreement,  as restated,  currently provides for a revolving
credit facility under which we can borrow up to the lesser of (a) $30,000,000 or
(b) the  borrowing  base then in effect.  When we entered into the restated loan
agreement,  we were required to make monthly principal payments in the amount of
$300,000. After giving effect to these principal payments, the total outstanding
principal  amount of our bank  borrowings was  $15,965,889 at December 31, 1999.
The borrowing  base under the restated loan  agreement was also  established  at
$15,965,889.  The borrowing base reduces  automatically  each month, which means
that we are required to make a principal payment in the same amount by which the
borrowing base is reduced. Under this requirement, we made principal payments in
the total amount of $600,000 in the months of January and  February,  2000.  The
borrowing base will continue to reduce  automatically at the rate of $300,000.00
per month,  beginning  March 1, 2000.  The borrowing base and the borrowing base
reduction amount are required to be redetermined by the bank on February 1, 2000
and on May 1 and November 1 of each year,  beginning May 1, 2000.  Our borrowing
base is currently under review for redetermination.

     Unless the bank increases the borrowing base or we repay some or all of our
indebtedness to the bank, we cannot borrow additional funds from the bank at the
present time.

     Our obligations to the bank are secured by substantially all of our oil and
gas properties. Borrowings under the loan agreement were incurred to finance our
property acquisition, 3-D seismic surveys, enhancement and drilling activities.

     The loan agreement  contains various  restrictive  covenants and compliance
requirements, including:


<PAGE>
                                       32


     .    maintaining certain financial ratios;

     .    limiting additional indebtedness; and

     .    prohibiting the payment of dividends on our common stock.


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

     .    interpretation and processing of 3-D seismic survey data;

     .    lease option exercises;

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

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

     .    other drilling expenditures and acquisition opportunities; and

     .    general corporate purposes.


     At December 31, 1999,  we had 974,500  shares of 6%  convertible  preferred
stock outstanding. The preferred stock:

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

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

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

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

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

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

Future Capital Requirements

     Our capital  expenditure  budget for 2000 is highly dependent on future oil
and gas  prices  and  the  availability  of  other  sources  of  funding.  These
expenditures will be governed by the following factors:

<PAGE>
                                       33

     .    internally generated cash flows;

     .    availability of borrowing under our current credit facility;

     .    additional sources of financing; and

     .    future drilling successes.


     In 2000,  we  intend  to drill  lower  risk  prospects  that  could  have a
meaningful  effect on our reserve base and cash flows. In selected cases, we may
elect to reduce our  interests in higher risk,  higher impact  projects.  We may
also sell  certain  non-core  producing  properties  to raise  funds for capital
expenditures.

Outlook

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

     .    internally generated cash from operations;

     .    proceeds from bank borrowings; and

     .    proceeds from sales of equity securities.


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

     .    our proved reserves,

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

     .    the prices at which we sell oil and gas; and

     .    our ability to acquire, locate and produce new reserves.

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

     .    increased bank borrowings;

     .    sales of Parallel's securities;

     .    sales of non-core properties; or

     .    other forms of financing.

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


<PAGE>
                                       34

Trends and Prices

     Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty,  seasonal,
political  and other  factors  beyond our control.  We are unable to  accurately
predict  domestic or worldwide  political events or the effects of other factors
on the prices we receive for our oil and gas. Historically,  we have not entered
into  transactions  to hedge against  changes in oil and gas prices,  but we may
elect to enter  into  hedging  transactions  in the  future to  protect  against
fluctuations in oil and gas prices.

     During 1999, the average sales price we received for our oil production was
approximately $17.32 per Bbl, as compared with $12.49 in 1998, while the average
sales  price for our gas was  approximately  $2.27 per Mcf in 1999,  as compared
with $2.04 per Mcf in 1998. At March 15, 2000,  we were  receiving an average of
$28.00 per Bbl for our oil production and $2.75 per Mcf for our gas production.

Year 2000 Issues

     We have not incurred any computer  failures or problems related to the Year
2000  issue.  However,  we have no  assurance  that  our  business  partners  or
governmental  agencies or other key third  parties have not  incurred  Year 2000
issues that may  ultimately  affect us. We are continuing to monitor our systems
to identify and rectify any Year 2000 issues that may occur in the future.

Inflation

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

Recent Accounting Prenouncements

     In June 1998, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards No. 133 "Accounting for Derivative
Instruments and Hedging  Activities ("FAS 133") which establishes  standards for
derivative  instruments  including certain  derivative  instruments  embedded in
other  contracts,  and for  hedging  activities.  It  requires  that  an  entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial  position and measure those  instruments at fair value. It establishes
conditions  under  which  a  derivative  may  be  designated  as  a  hedge,  and
establishes  standards for reporting  changes in the fair value of a derivative.
FAS 133, as amended by FAS 137, is  required  to be  implemented  for all fiscal
quarters of all fiscal years  beginning  after June 15, 2000.  Early adoption is
permitted.  As of December 31, 1999, we had not entered into any contracts  that
would need to be disclosed under FAS 133.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk and Interest Rate Sensitivity

     We do not have or trade in derivative  financial  instruments and we do not
have firmly  committed  sales  transactions.  We have not entered  into  hedging

<PAGE>
                                       35

arrangements   and  do  not  have  any  delivery   commitments.   While  hedging
arrangements reduce exposure to losses as a result of unfavorable price changes,
they also limit the ability to benefit from favorable market price changes.

     Our major market risk exposure is in the pricing  applicable to our oil and
natural gas production.  Realized  pricing is primarily driven by the prevailing
domestic  price for crude oil and spot prices  applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have  been  volatile  and  unpredictable.  Pricing  volatility  is  expected  to
continue. Oil prices ranged from a monthly low of $12.18 per barrel to a monthly
high of $17.32 per barrel  during  1999.  Natural gas prices we received  during
1999 ranged  from a monthly low of $1.85 per Mcf to a monthly  high of $2.27 per
Mcf. A  significant  decline  in the  prices of oil or natural  gas could have a
material adverse effect on our financial condition and results of operations.

     Our only financial instrument sensitive to changes in interest rates is our
bank debt. Our annual  interest costs in 2000 will fluctuate based on short-term
interest  rates.  As the interest rate is variable and reflects  current  market
conditions,  the carrying  value  approximates  the fair value.  The table below
shows  principal  cash flows and  related  weighted  average  interest  rates by
expected  maturity dates.  Weighted average interest rates were determined using
weighted  average  interest paid and accrued in December,  1999. You should read
Note  3  to  the  Financial  Statements  and  Supplementary  Data,  for  further
discussion of our debt that is sensitive to interest rates.

<TABLE>

                                      2000     2001      Total     Fair Value
                                   --------  -------    -------   -----------
                                       (in 000's, except interest rates)
<S>                                <C>        <C>       <C>       <C>

Variable rate debt:

   Revolving Facility (secured)   $3,666     $12,300     $15,966     $15,966
      Average interest rate        8.75%       8.75%

</TABLE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


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


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


         None.

<PAGE>
                                       36

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



     The Directors  and executive  officers of Parallel at March 15, 2000 are as
follows:

<TABLE>

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

Thomas R. Cambridge             64                      1985            Chairman of the Board of Directors and Chief Executive
                                                                        Officer

Larry C. Oldham                 46                      1979            President, Treasurer and Director

Ernest R. Duke(1)(2)            73                      1980            Director

Myrle Greathouse(1)             77                      1993            Director

Charles R. Pannill(2)           74                      1982            Director
</TABLE>

_______________

(1)  Member of Audit Committee
(2)  Member of Compensation Committee


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

     Mr.  Oldham,  a founder of Parallel,  has served as an officer and Director
since its  formation  in 1979.  Before  Parallel's  formation,  Mr.  Oldham  was
employed by  Dorchester  Gas  Corporation  during the period 1976 to 1979 and by
KPMG Peat  Marwick LLP during 1975 and 1976.  Mr.  Oldham  became  President  of
Parallel in October 1994,  serving as Executive Vice President before that time.
He is a member of the Permian Basin Landman's Association. Mr. Oldham received a
Bachelor of Business  Administration  degree from West Texas State University in
1975.

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

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

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

<PAGE>
                                       37


     Directors  hold office until the annual meeting of  stockholders  following
their election or appointment  and until their  respective  successors have been
duly elected or appointed.

     Officers are  appointed  annually by the Board of Directors to serve at the
Board's  discretion  and until their  respective  successors  in office are duly
appointed.

     There are no family  relationships  between any of Parallel's  Directors or
officers.

Key Employees

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

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

     Rebecca A. Burrell, Manager of Accounting, has been a full-time employee of
Parallel since January 1985. Ms. Burrell graduated from Jacksonville  College in
1974 with a degree in accounting and has worked in oil and gas accounting  since
1978.

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

     John S. Rutherford,  Manager of  Land/Administration,  has been employed by
Parallel  since October  1993.  From May 1991 to October  1993,  Mr.  Rutherford
served as a consultant to Parallel,  devoting  substantially  all of his time to
Parallel's  business.  Mr. Rutherford  graduated from Oral Roberts University in
1982 with a degree in Education and in 1986, he graduated from Baylor University
with a  Master's  degree in  Business  Administration.  From April 1988 to April
1991, Mr.  Rutherford  was a Vice  President in the energy  lending  division of
Chase Bank of Texas, N.A., Midland, Texas.

Consulting Arrangements

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

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the  Securities  Exchange Act of 1934 requires  Parallel's
Directors and officers to file periodic reports with the SEC. These reports show
the  Directors'  and  officers'  ownership,  and the  changes in  ownership,  of
Parallel's  common  stock and other equity  securities.  To our  knowledge,  all
Section 16(a) filing  requirements  have been complied with during 1999,  except
that  Charles R.  Pannill,  a  director,  did not timely  file one Form 4 Report
covering one transaction in December 1999.

<PAGE>
                                       38

ITEM 11. EXECUTIVE COMPENSATION


Summary of Annual Compensation

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

<TABLE>

                            Summary Compensation Table

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



T.R. Cambridge,        1999   $ 77,755    $ 1,000  $    900              0           50,000        0           0
  Chief Executive
  Officer and          1998   $ 73,631    $   500  $    900              0           50,000        0           0
  Chairman of
  the Board            1997   $ 70,686    $ 1,000  $    825              0          100,000        0           0
  of Directors

L.C. Oldham,           1999   $125,000    $ 1,000  $    20,221(1)        0       100,000        0           $  5,771(2)
  President,
  Treasurer            1998   $112,923    $   500  $    23,150(1)        0       100,000        0           $  5,139(2)
  and Director
                       1997   $104,297    $ 1,000  $    16,620(1)        0       100,000        0           $  6,695(2)

</TABLE>
--------------

(1)  Such amount includes insurance premiums for  nondiscriminatory  group life,
     medical,  disability  and dental  insurance  as  follows:  $18,534 in 1999;
     $17,445 for 1998; and $11,532 for 1997.

(2)  For 1997,  such  amount  includes  $3,129  contributed  by  Parallel to Mr.
     Oldham's   individual   retirement  account  maintained  under  the  408(k)
     simplified  employee  pension  plan/individual  retirement  account and the
     reimbursement  to Mr.  Oldham of $3,566  for  income  tax  preparation  and
     planning.  For 1998, such amount includes $3,388 contributed by Parallel to
     Mr.  Oldham's  retirement  account and the  reimbursement  to Mr. Oldham of
     $1,751 for income tax preparation  and planning.  The amount shown for 1999
     includes  Parallel's  contribution  of  $3,750 to Mr.  Oldham's  retirement
     account and reimbursement of $2,021 for income tax preparation.


Stock Options

     Parallel  uses  stock  options  as  part  of the  overall  compensation  of
Directors,  officers and employees. We have included summary descriptions of our
stock  option  plans so you can review the types of options we have  granted and
the significant features of our stock options.


<PAGE>
                                       39

     In the following  table, we show certain  information with respect to stock
options granted in 1999 to the named executive officers.


<TABLE>

                                      Option/Sar Grants in Last Fiscal Year

                                                 Individual Grants
                                 -----------------------------------------------------
                                                Percent of
                                                  Total                                    Potential Realizable
                                   Number of     Options                                     Value at Assumed
                                  Securities    Granted to                                 Annual Rates of Stock
                                  Underlying    Employees       Exercise or               Price Appreciation for
                                   Options          in          Base Price  Expiration          Option Term (1)
     Name                         Granted (#)   Fiscal Year       ($/Sh)      Date          5%($)          10%($)
----------------                 -----------   ------------     ----------- ----------    -----------------------
<S>                               <C>          <C>              <C>          <C>          <C>          <C>

T. R. Cambridge                  50,000 (2)        16.13%           $1.82    10-28-09      $   57,330  $  114,690

L.C. Oldham                     100,000 (3)        32.25%           $1.813    6-23-09      $  114,219  $  288,267

</TABLE>

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

(1)  These  amounts  are  calculated  based  on the  indicated  annual  rates of
     appreciation  and annual  compounding  from the date of grant to the end of
     the option  term.  Actual  gains,  if any, on stock  option  exercises  are
     dependent on the future  performance  of the common stock and overall stock
     market conditions. There is no assurance that the amounts reflected in this
     table will be achieved.

(2)  A nonqualified  stock option to purchase  50,000 shares of common stock was
     granted to Mr.  Cambridge  on  October  28,  1999  pursuant  to  Parallel's
     Non-employee Directors' Stock Option Plan. The option is exercisable in two
     equal annual installments, commencing October 28, 2000.

(3)  On June 23, 1999, an incentive  stock option to purchase  100,000 shares of
     common  stock was granted to Mr.  Oldham  pursuant to the 1998 Stock Option
     Plan.  The  option  is  exercisable  in  two  equal  annual   installments,
     commencing June 23, 2000.

     The following table shows certain  information about stock option exercises
in 1999 and the value of unexercised stock options held by Parallel's  executive
officers at December 31, 1999.
<TABLE>


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

                                                                                     Value of
                                       Number of Securities Underlying              Unexercised
                                        Unexercised Options at Fiscal           in-the-Money Options
                  Shares         Value                Year-End (#)                 at Fiscal Year-End ($) (1)
                Acquired on    Realized    ----------------------------------    -----------------------------------
     Name        Exercise         ($)       Exercisable        Unexercisable       Exercisable        Unexercisable
--------------  -----------    --------     -----------        -------------       -----------        -------------
<S>             <C>            <C>          <C>                <C>                 <C>                <C>


T.R. Cambridge        0            0        225,000              75,000             $       0(2)         $    0(2)

L. C. Oldham          0            0        437,000             210,000             $ 220,903            $    0(3)

</TABLE>

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


(1)  The value of in-the  money  options is equal to the fair market  value of a
     share of common stock at fiscal year-end ($1.6875 per share),  based on the
     last sale price of Parallel's common stock, less the exercise price.

(2)  At December  31, 1999,  the  exercise  price of all the options held by Mr.
     Cambridge  exceeded  $1.6875,  the fair market value of our common stock on
     that date.

(3)  The exercise prices of all of Mr. Oldham's  unexercisable  options exceeded
     the fair market value of our common stock on December 31, 1999.


<PAGE>
                                       40

Change of Control Arrangements

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

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

     .    Parallel sells,  leases or exchanges all or  substantially  all of its
          assets;

     .    Parallel is to be dissolved and liquidated;

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

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


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

     .    accelerate the time at which options may be exercised;

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

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

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


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

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

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

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


Compensation of Directors

     Parallel's   non-employee  Directors  each  receive  $1,000  for  attending
meetings  of the Board of  Directors  and $500 for  attending  meetings of Board
committees that they serve on. Under these arrangements,  during 1999, Ernest R.

<PAGE>
                                       41

Duke received $8,500,  Myrle  Greathouse  received $7,500 and Charles R. Pannill
received  $8,000.   All  Directors  are  reimbursed  for  expenses  incurred  in
connection with attending meetings.

     Parallel's  1992 Stock Option Plan  provides for the granting of a one-time
stock  option to  purchase  25,000  shares of common  stock to each  person  who
becomes a non-employee  director after March 1, 1992. No options were granted in
1999 under this plan.

     Directors   who  are  not  employees  of  Parallel  are  also  eligible  to
participate  in the  Non-Employee  Directors  Stock Option Plan.  On October 28,
1999,  Messrs.  Duke,  Greathouse  and  Pannill  were each  granted an option to
purchase 25,000 shares of common stock.  Mr.  Cambridge was granted an option to
purchase 50,000 shares of common stock.  All of the options were granted with an
exercise price of $1.82 per share,  the fair market value of the common stock on
the date of grant.  The options are exercisable  with respect to one-half of the
shares on October 28, 2000, and one-half on October 28, 2001. The options expire
on October 28, 2009.

Stock Option Plans

     1983 Incentive  Stock Option Plan. In May 1984, our  stockholders  approved
and adopted the 1983 Incentive  Stock Option Plan.  Stock options  granted under
the 1983 Plan are intended to be "incentive stock options" within the meaning of
the Internal Revenue Code which,  generally,  provides the optionee with certain
favorable tax benefits. Although the 1983 Plan expired by its own terms in 1993,
incentive  stock  options to  purchase  247,000  shares of common  stock  remain
outstanding.  The 1983 Plan is administered by the Compensation Committee of the
Board of Directors.  Under the terms of the 1983 Plan, all employees of Parallel
were eligible to  participate.  The 1983 Plan authorized the granting of options
to purchase a total of 750,000 shares of common stock. All options granted under
the 1983 Plan were granted with  exercise  prices equal to the fair market value
of the common stock on the date of grant. All options expire,  in any event, ten
years after the date of grant.

     1992 Stock Option Plan. In May 1992, our stockholders  approved and adopted
the 1992  Stock  Option  Plan.  The  1992  Plan  provides  for  granting  to key
employees,  including  officers  and  Directors  who are also key  employees  of
Parallel,  and  Directors  who are not  employees,  options to purchase up to an
aggregate of 750,000 shares of common stock. Options granted under the 1992 Plan
to  employees  may be either  incentive  stock  options or options  which do not
constitute  incentive stock options.  Options granted to non-employee  Directors
will not be incentive stock options.

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

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

     An option may be granted in exchange for an  individual's  right and option
to  purchase  shares of common  stock  pursuant  to the terms of a prior  option
agreement.  An  agreement  that grants an option in exchange  for a prior option
must  provide  for the  surrender  and  cancellation  of the prior  option.  The
purchase  price of common stock issued under an option granted in exchange for a
prior option is determined by the Compensation Committee and may be equal to the
price for which the optionee could have  purchased  common stock under the prior
option.

<PAGE>
                                       42

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

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

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

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

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

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

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

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

     Other Option Grants.  The Board of Directors granted a non-qualified  stock
option to Mr.  Cambridge in October 1993 under the general  corporate  powers of
Parallel. Upon recommendation of the Board's Compensation  Committee,  the Board
granted the option to Mr.  Cambridge to purchase  100,000 shares of common stock
at an exercise  price of $3.9375 per share,  the fair market value of the common
stock on the date of grant.  The option is not  transferable,  except by will or
the laws of descent and distribution. The option expires in October, 2003.

Retirement Plan

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

<PAGE>
                                       43

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

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

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

     Parallel currently makes matching  contributions to employee accounts in an
amount equal to the contribution made by each employee, not to exceed,  however,
6% of each  employee's  salary during any calendar year.  During 1999,  Parallel
contributed   an  aggregate  of  $14,338  to  the  accounts  of  seven  employee
participants. Of this amount, $3,750 was allocated to Mr. Oldham's account.

<PAGE>
                                       44


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



     This table  shows  information  as of March 15,  2000 about the  beneficial
ownership of common  stock by: (1) each person  known by us to own  beneficially
more than five  percent of our  outstanding  common  stock;  (2) each  executive
officer of Parallel;  (3) each  Director of Parallel;  and (4) all of Parallel's
executive officers and Directors as a group.

<TABLE>

          Name and Address             Amount and Nature
                of                            of                          Percent of
         Beneficial Owner             Beneficial Ownership (1)             Class (2)
        ------------------            ------------------------            ----------
        <S>                           <C>                                 <C>


   Thomas R. Cambridge                 979,545      (3)                       4.77%
   2201 Civic Circle, Suite 216
   Amarillo, Texas  79109

   Ernest R. Duke                      282,473      (4)                       1.39%
   P.O. Box 1919
   Midland, Texas  79702


   Myrle Greathouse                  1,656,557       (5)                      7.88%
   P.O. Box 379
   Abilene, Texas  79604


   Larry C. Oldham
   One Marienfeld Place, Suite 465    747,090       (6)                       3.59%
   Midland, Texas  79701


   Charles R. Pannill                  91,995       (7)                         *
   3416 Acorn Run
   Fort Worth, Texas  76019


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


   Dian Graves Owen                 1,281,856       (9)                       6.13%
   400 Pine, Suite 1000
   Abilene, Texas 79601


   Julia Jones Matthews             1,942,856       (9)                       9.05%
   400 Pine, Suite 900
   Abilene, Texas 79601


   Dodge Jones Foundation           1,371,428      (10)                       6.44%
   400 Pine, Suite 900
   Abilene, Texas 79601


   All Executive Officers           3,757,660      (11)                      17.24 %
   and Directors
   as a Group (5 persons)


</TABLE>


   __________________
   *   Less than one percent.

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

<PAGE>
                                       45


(2)  Securities not outstanding but included in the beneficial ownership of each
     such person are deemed to be  outstanding  for the purpose of computing the
     percentage of outstanding  securities of the class owned by such person but
     are  not  deemed  to be  outstanding  for  the  purpose  of  computing  the
     percentage of the class owned by any other person.

(3)  Includes  212,500 shares of common stock underlying  presently  exercisable
     stock options.

(4)  Includes  47,500 shares of common stock  underlying  presently  exercisable
     stock  options.  Also  included  are  74,395  shares  held by Duke and Cain
     Partnership,  a general  partnership  in which Mr.  Duke is a partner,  and
     20,000  shares  held in the name of Mr.  Duke's  wife.  Mr. Duke has shared
     voting and investment powers with respect to such shares.

(5)  Includes  932,488 shares of common stock held directly by Wes-Tex  Drilling
     Company,  a  corporation,  and 314,285  shares of common  stock that may be
     acquired by Wes-Tex upon  conversion of 110,000  shares of preferred  stock
     held by Wes-Tex.  Mr.  Greathouse is the chairman of the board of directors
     and sole  shareholder  of Wes-Tex and,  accordingly,  has shared voting and
     investment  powers  with  respect to such  shares.  See note 8 below.  Also
     included are 72,500 shares of common stock underlying presently exercisable
     stock  options,  and 1,000 shares held by a 22-member  investment  club, of
     which Mr. Greathouse is a member, and as to which Mr. Greathouse has shared
     voting and investment powers. The Greathouse Charitable Remainder Trust and
     the Greathouse  Foundation may each acquire  157,142 shares of common stock
     upon  conversion of 55,000 shares of preferred  stock held by each of them.
     Such  shares of common  stock are  included  in the total  number of shares
     shown in the table.  However, Mr. Greathouse disclaims beneficial ownership
     of  all  314,284  shares  of  common  stock  that  may be  acquired  by The
     Greathouse Charitable Remainder Trust and the Greathouse Foundation.

(6)  Includes  457,000 shares of common stock underlying  presently  exercisable
     stock options.

(7)  Includes  47,500 shares of common stock  underlying  presently  exercisable
     stock  options.  Also  included  are 1,300  shares  held by Mr.  Pannill as
     custodian  for the benefit of two minor  grandchildren  and as to which Mr.
     Pannill disclaims beneficial ownership.

(8)  Mr.  Greathouse,  a Director of  Parallel,  is the chairman of the board of
     directors and sole  stockholder of Wes-Tex  Drilling  Company.  Wes-Tex has
     shared voting and investment powers with respect to such shares. See note 5
     above.

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

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

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

(12) Includes  837,000 shares of common stock underlying  presently  exercisable
     stock options and 628,569  shares of common stock that may be acquired upon
     conversion of 220,000 shares of preferred stock.

<PAGE>
                                       46

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     From  time to time,  Wes-Tex  Drilling  Company,  a  corporation,  acquires
undivided  interests  in oil and gas  leasehold  acreage  from our  company  and
participates  with us and other interest  owners in the drilling and development
of such  acreage.  Myrle  Greathouse,  a director  and the sole  shareholder  of
Wes-Tex,  is  also  a  Director  of  Parallel.  Wes-Tex  participates  in  these
operations under standard form operating agreements on the same or similar terms
afforded by  Parallel to  nonaffiliated  third  parties.  We invoice all working
interest owners,  including Wes-Tex, on a monthly basis,  without interest,  for
their pro rata share of lease  acquisition,  drilling  and  operating  expenses.
During 1999,  we billed  Wes-Tex  $33,922 for its  proportionate  share of lease
operating expenses incurred on properties we operate. The largest amount owed to
us by  Wes-Tex  at any one time  during  1999 for its  share of lease  operating
expenses  was $3,760.  At December  31,  1999,  Wes-Tex owed us $3,118 for these
expenses.  During 1999,  we disbursed  $36,790 to Wes-Tex in payment of revenues
attributable  to Wes-Tex's  pro rata share of the proceeds from sales of oil and
gas produced from properties in which Wes-Tex and Parallel owned interests.

     During  1999,  Cambridge  Production,  Inc.,  a  corporation  owned  by Mr.
Cambridge,  served as  operator  of two wells on oil and gas  leases in which we
also owned an interest. Generally, the operator of a well is responsible for the
day to day  operations  on the lease,  overseeing  production,  employing  field
personnel,  maintaining  production and other records,  determining the location
and timing of drilling of wells,  administering  gas  contracts,  joint interest
billings, revenue distribution,  making various regulatory filings, reporting to
working  interest owners and other matters.  During 1999,  Cambridge  Production
billed  us  $33,766  for our pro  rata  share of lease  operating  expenses  and
drilling and workover expenses.  We paid $31,287 to Cambridge  Production during
1999, which included amounts  remaining unpaid and owed to Cambridge  Production
at the end of 1998. The largest  amount we owed Cambridge  Production at any one
time during 1999 was $11,565.  At December  31, 1999,  no amounts were due to us
from Cambridge Production.  Cambridge Production's billings to Parallel are made
monthly on the same basis as all other working interest owners in the wells. Our
pro rata  share of oil and gas sales  during  1999 from the  wells  operated  by
Cambridge  Production  was  $197,325.  At December 31, 1999,  we owed  Cambridge
Production $2,479.

     During 1999, we paid $22,968 to First Permian for  reimbursement of general
and administrative  expense.  First Permian paid $85,019 to us for reimbursement
of general and  administrative  expense.  At December  31,  1999,  we owed First
Permian $2,702. At that same date, First Permian owed us $1,110.

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

<PAGE>
                                       47

                                     PART IV




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


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

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

(b)  No reports on Form 8-K were filed by  Parallel  during the last  quarter of
     its fiscal year ended December 31, 1999.

(c)  Exhibits:


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

3.1    Certificate of Incorporation of Registrant  (Incorporated by reference to
       Exhibit  3.1 of Form 10-K of the  Registrant  for the  fiscal  year ended
       December 31, 1998.)



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



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


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



10.1   1983 Incentive  Stock Option Plan  (Incorporated  by reference to Exhibit
       10.2 to Form S-l of the Registrant  (File No.  2-92397) as filed with the
       Securities  and  Exchange  Commission  on July 26,  1984,  as  amended by
       Amendments  No.  1 and 2 on  October  5,  1984,  and  October  25,  1984,
       respectively.)



10.2   1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1 to Form
       S-8 of the  Registrant  (File No.  33-57348) as filed with the Securities
       and Exchange Commission on January 25, 1993.)

<PAGE>
                                       48

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

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



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



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



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



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



*10.8   Restated Loan Agreement, dated December 27, 1999, between the Registrant
        and Bank One, Texas, N.A.



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



10.10   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.)



10.11   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.)



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



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



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

<PAGE>
                                       49


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

10.15   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.)



10.16   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.)



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



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



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



*23.1   Consent of Independent Auditors



*23.2   Consent of Independent Petroleum Engineers



*23.3   Consent of Independent Petroleum Engineers



*27     Financial Data Schedule


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

 *    Filed herewith.


<PAGE>
                                       F-1




                         PARALLEL PETROLEUM CORPORATION

                       Index to the Financial Statements



                                                                      Page

Independent Auditors' Report                                          F-2

Financial Statements:

        Balance Sheets at December 31, 1999 and 1998                  F-3

        Statements of Income for the years ended
                December 31, 1999, 1998, and 1997                     F-4

        Statements of Stockholders' Equity for the
                years ended December 31, 1999, 1998 and 1997          F-5

        Statements of Cash Flows for the years ended
                December 31, 1999, 1998 and 1997                      F-6

        Notes to Financial Statements                                 F-7




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


<PAGE>
                                       F-2

                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Stockholders
Parallel Petroleum Corporation:


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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Parallel Petroleum Corporation
as of December 31, 1999 and 1998, and the results of their  operations and their
cash flows for each of the years in the  three-year  period  ended  December 31,
1999, in conformity with generally accepted accounting principles.



                                            KPMG LLP


Midland, Texas
February 9, 2000

<PAGE>
                                       F-3


                         PARALLEL PETROLEUM CORPORATION

                                 Balance Sheets

                           December 31, 1999 and 1998
<TABLE>

              Assets                                     1999           1998
              ------                                     ----           ----

<S>                                                      <C>            <C>

Current assets:
     Cash and cash equivalents                     $ 1,276,417     $ 1,178,819
     Accounts receivable:
          Oil and gas                                1,312,923       1,432,659
          Others, net of allowance for doubtful
               accounts of $157,187 in 1999 and
               $71,358 in 1998                         314,911         247,740
          Affiliate                                     20,658          11,844
                                                   -----------     -----------
                                                     1,648,492       1,692,243
     Other assets                                       39,677          61,504
     Assets held for sale                            2,127,734              --
                                                   -----------     -----------

               Total current assets                  5,092,320       2,932,566
                                                   -----------     -----------

Property and equipment, at cost:
     Oil and gas properties, full cost
        method (Note 11)                            65,136,783      65,565,466
     Other                                             289,720         287,586
                                                   -----------     -----------
                                                    65,426,503      65,853,052
     Less accumulated depreciation
        and depletion                              (27,502,855)    (22,279,355)
                                                   -----------     -----------

               Net property and equipment           37,923,648      43,573,697
                                                   -----------     -----------

Investment in First Permian, LLC (Note 14)             201,311              --
Other assets, net of accumulated amortization
   of $141,428 in 1999 and $86,917 in 1998              46,791          58,519
                                                   -----------     -----------

                                                   $43,264,070     $46,564,782
                                                   ===========     ===========

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

Current liabilities:
     Current maturities of long-term
        debt (Note 3)                              $ 3,665,889   $          --
Accounts payable and accrued liabilities:
     Trade                                           1,495,376       2,803,539
     Affiliate                                           2,702             214
                                                   -----------     -----------
                                                     1,498,078       2,803,753

               Total current liabilities             5,163,967       2,803,753
                                                   -----------     -----------
Long-term debt, excluding current
   maturities (Note 3)                              12,300,000      18,035,889

Stockholders' equity:
     Preferred stock - $.60 cumulative
        convertible preferred stock - par value
        of $.10 per share, (aggregate liquidation
        preference of $10) authorized 10,000,000
        shares, issued and outstanding 974,500
        in 1999 and 1998                                97,450          97,450
     Common stock - par value of $.01 per share,
        authorized 60,000,000 shares, issued and
        outstanding 20,331,858 in 1999 and
        18,306,858 in 1998                             203,319         183,069
     Additional paid-in surplus                     34,847,141      32,341,971
     Retained deficit                               (9,347,807)     (6,897,350)
                                                   -----------     -----------

               Total stockholders' equity           25,800,103      25,725,140

Contingencies
                                                   -----------     -----------
                                                   $43,264,070     $46,564,782
                                                   ===========     ===========
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-4


                         PARALLEL PETROLEUM CORPORATION

                              Statements of Income

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>

                                                               1999              1998           1997
                                                               ----              ----           ----
<S>                                                            <C>               <C>            <C>

Oil and gas revenues                                      $ 8,974,041       $ 9,001,582     $12,614,242
                                                          -----------      ------------     -----------
Costs and expenses:
     Lease operating expense                                2,353,732         2,434,658       3,171,234
     General and administrative                               805,934           855,788         837,635
     Provision for losses on trade receivables                 85,829            43,228              --
     Depreciation and depletion                             5,223,500         5,966,221       3,959,277
     Impairment of oil and gas properties                   1,705,000        14,757,028              --
                                                          -----------       ------------    -----------

          Total costs and expenses                         10,173,995        24,056,923       7,968,146
                                                          -----------       ------------    -----------

          Operating income (loss)                          (1,199,954)      (15,055,341)      4,646,096
                                                          -----------       ------------    -----------

Other income (expense), net:
     Equity in earnings of First Permian, LLC (Note 14)       197,811                --              --
     Interest income                                           65,333             2,771           8,984
     Other income                                              26,847           395,683          33,512
     Interest expense                                      (1,534,540)       (1,381,103)       (813,372)
     Other expense                                             (5,954)          (57,947)         (8,840)
                                                          -----------      ------------     -----------

           Total other expense, net                        (1,250,503)       (1,040,596)       (779,716)
                                                          -----------      ------------     -----------

Income (loss) before income taxes                          (2,450,457)      (16,095,937)      3,866,380

Income tax (expense) benefit                                       --         3,100,027      (1,122,450)
                                                          -----------      ------------     -----------

               Net income (loss)                          $(2,450,457)     $(12,995,910)    $ 2,743,930
                                                          ===========      ============     ===========

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

Net income (loss) available to common stockholders        $(3,059,520)     $(13,272,622)    $ 2,743,930
                                                          ===========      ============     ===========
Net income (loss) per common share:
    Basic                                                     $  (.16)           $ (.73)        $   .15
                                                              =======            ======         =======
    Diluted                                                   $  (.16)           $ (.73)        $   .15
                                                              =======            ======         =======
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-5



                         PARALLEL PETROLEUM CORPORATION

                       Statements of Stockholders' Equity

                  Years ended December 31, 1999, 1998 and 1997



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

Balance,
     January 1, 1997          17,406,358     174,063           -            -    21,189,442      3,354,630        24,718,135

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

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

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

Balance,
     December 31, 1997        18,114,358     181,144           -            -    22,839,049      6,098,560        29,118,753

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

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

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

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

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

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

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

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

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

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

                              ----------    --------     -------      -------   -----------      ----------     ------------
Balance,
    December 31, 1999         20,331,858    $203,319     974,500      $97,450   $34,847,141     $(9,347,807)    $ 25,800,103
                              ==========    ========     =======      =======   ===========     ===========     ============

</TABLE>

See accompanying notes to financial statements.


<PAGE>
                                       F-6


                         PARALLEL PETROLEUM CORPORATION

                            Statements of Cash Flows

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>

                                                            1999             1998          1997
                                                            ----             ----            ----
<S>                                                        <C>               <C>            <C>

Cash flows from operating activities:
     Net income (loss)                                  $(2,450,457)    $(12,995,910)  $ 2,743,930
     Adjustments to reconcile net income (loss) to
        net cash provided by operating activities:
         Depreciation and depletion                       5,223,500        5,966,221     3,959,277
         Equity in income from investment                  (197,811)               -             -
         Deferred income taxes                                   -       (3,100,027)    1,079,864
         Impairment of oil and gas properties             1,705,000       14,757,028             -
         Provision for losses on trade receivables           85,829           43,228             -
     Other, net                                              11,728            9,077         5,715
     Changes in assets and liabilities:
         Decrease (increase) in accounts receivables        (42,078)         838,743       467,014
         Decrease (increase) in prepaid expenses and other   21,827          (24,321)      (29,643)
         Increase (decrease) in accounts payable and
            accrued liabilities                            (951,667)         123,421       (67,078)
         Income tax payable                                       -                -        30,521
                                                        -----------      -----------   -----------

              Net cash provided by
                 operating activities                     3,405,871        5,617,460     8,189,600
                                                        -----------      -----------   -----------

Cash flows from investing activities:
    Additions to oil and gas property                    (4,896,081)     (21,237,837)  (20,441,094)
     Proceeds from disposition of oil and gas property    1,111,525          683,592     7,580,820
     Additions to other property and equipment                    -          (62,582)      (75,450)
     Proceeds from disposition of other property
        and equipment                                             -          208,918             -
     Investment in First Permian, LLC                        (3,500)               -             -
                                                        -----------      -----------   -----------

              Net cash used in
                 investing activities                    (3,788,056)     (20,407,909)  (12,935,724)
                                                        -----------      -----------   -----------

Cash flows from financing activities:
    Borrowings from bank line of credit                     780,000       18,182,279    16,330,000
    Payments on bank line of credit                      (2,850,000)     (12,329,000)  (12,668,781)
    Proceeds from exercise of options and warrants           17,188          166,625     1,640,485
    Stock offering costs                                    (82,705)        (116,072)            -
    Proceeds from common stock issuance                   3,200,000                -             -
    Proceeds from preferred stock issuance                        -        9,744,999             -
    Payments of preferred stock dividend                   (584,700)        (276,712)            -
                                                        -----------      -----------   -----------

              Net cash provided by
                 financing activities                       479,783       15,372,119     5,301,704
                                                        -----------      -----------   -----------

              Net increase (decrease) in cash
                 and cash equivalents                        97,598          581,670       555,580

Beginning cash and cash equivalents                       1,178,819          597,149        41,569
                                                        -----------      -----------   -----------

Ending cash and cash equivalents                        $ 1,276,417      $ 1,178,819   $   597,149
                                                        ===========      ===========   ===========
</TABLE>

See accompanying notes to financial statements.

<PAGE>
                                       F-7

                         PARALLEL PETROLEUM CORPORATION

                         Notes to Financial Statements

                        December 31, 1999, 1998 and 1997


(1)  Summary of Significant Accounting Policies
     ------------------------------------------

     Nature of Operations
     --------------------

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

     Concentration of Credit Risk
     ----------------------------

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

     Property and Equipment
     ----------------------

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

     Depletion is  provided  using  the  unit-of-production  method  based  upon
          estimates of proved oil and gas reserves  with oil and gas  production
          being  converted to a common unit of measure based upon their relative
          energy   content.   Investments  in  unproved   properties  and  major
          development   projects  are  not  amortized   until  proved   reserves
          associated  with the projects can be  determined  or until  impairment
          occurs.  If the results of an assessment  indicate that the properties
          are impaired, the amount of the impairment is added to the capitalized
          costs to be amortized.

     In   addition, the capitalized costs are subject to a "ceiling test", which
          basically limits such costs to the aggregate of the "estimated present
          value",  discounted  at a  10-percent  interest  rate  of  future  net
          revenues,  net of income tax effects,  from proved reserves,  based on
          current economic and operating  conditions,  plus the lower of cost or
          fair market value of unproved properties.

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

<PAGE>
                                       F-8


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

          capitalized  costs and proved oil and gas reserves,  in which case the
          gain or loss is recognized in income.  Abandonments  of properties are
          accounted  for as  adjustments  of  capitalized  costs  with  no  loss
          recognized.

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

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

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

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

          Investments
          -----------

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

          Revenue Recognition
          -------------------

          The  Company  uses the  sales  method  of  accounting  for  crude  oil
               revenues.  To the extent that crude oil is produced but not sold,
               the oil in tanks is not recorded as  inventory  on the  financial
               statements.  The oil in tanks at December 31, 1999, 1998 and 1997
               was not material.

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

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

          The  Company  is  subject  to  extensive  Federal,   state  and  local
               environmental  laws  and  regulations.   These  laws,  which  are
               constantly changing, regulate the discharge of materials into the

<PAGE>
                                       F-9

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

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

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

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

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

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

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

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

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

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

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


<PAGE>
                                       F-10

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          Reclassifications
          -----------------

          Certain reclassifications  have been made to the 1998 and 1997 amounts
               to conform to the 1999 presentation.

(2)       Fair Value of Financial Instruments
          -----------------------------------

          The  carrying amount of cash, accounts  receivable,  accounts payable,
               and accrued  liabilities  approximates  fair value because of the
               short maturity of these instruments.

          The  carrying amount of long-term debt approximates fair value because
               the  Company's  current  borrowing  rate does not differ from the
               existing rate on the Company's long-term debt balance.

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

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

<TABLE>

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


     Revolving Facility note payable to bank, at
        bank's base lending rate plus .25%
        (8.75% at December 31, 1999)                    $ 15,965,889     $ 16,623,889
     Development Facility note payable to bank,
        at bank's base lending rate plus 5.5%
        (13% at December 31, 1998)                                -         1,412,000
                                                        ------------     ------------
     Less:  current maturities                             3,665,889               -
                                                        ------------     ------------
                                                        $ 12,300,000     $ 18,035,889
                                                        ============     ============
</TABLE>


          On   December 27, 1999, the Company restated its note agreement with a
               bank  ("Revolving  Facility").  Pursuant  to  the  restated  note
               agreement,  the Company may borrow  $30,000,000 or the "borrowing
               base" then in effect.  The  borrowing  base in effect at December
               31,  1999 was  $15,965,889.  The  borrowing  base is reduced by a
               monthly  commitment  reduction of $300,000  beginning  January 1,
               2000.  The borrowing  base and monthly  commitment  reduction are
               subject  to  redetermination  on or about  February  1,  2000 and
               thereafter every six months on May 1 and November 1 of each year,
               or  at  such  other  times  as  the  bank   elects.   The  latest
               redetermination date was on December 27, 1999. Indebtedness under
               the Revolving  Facility matures July 1, 2001. The note is secured
               by  substantially  all of the Company's  oil and gas  properties.
               Commitment  fees of .25% per annum on the difference  between the
               commitment  and the  average  daily  amount  outstanding  are due
               quarterly.

<PAGE>
                                       F-11


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



          The  unpaid  principal  balance  for  the  Revolving   Facility  bears
               interest  at the  election  of the Company at a rate equal to (i)
               the  bank's  base  lending  rate  plus  .25% or (ii)  the  bank's
               Eurodollar  rate  plus a  margin  of  3.0%.  Interest  is due and
               payable monthly.

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

          Scheduled  maturities  of  long-term  debt at December 31, 1999 are as
               follows:

                          2000               $ 3,665,889
                          2001                12,300,000
                                             -----------
                                             $15,965,889
                                             ===========

(4)       Stock Options and Warrants

          At   the election of the board of directors,  the Company  awards both
               incentive  stock  options  and  nonqualified   stock  options  to
               selected key employees  and officers.  The options are awarded at
               an exercise  price based on the  closing  price of the  Company's
               common  stock on the date of  grant,  a  two-year  and  four-year
               vesting schedule and a ten-year  exercise period.  As of December
               31, 1999, options expire beginning in the year-ended December 31,
               2001 through  2009.  Exercise of the  nonqualified  stock options
               resulted in a deferred tax effect of $6,375,  $83,457 and $16,203
               for  the  years  ended   December  31,   1999,   1998  and  1997,
               respectively.

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

<TABLE>

                                          1999            1998            1997
                                          ----            ----            ----

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

Net income (loss)                    $(3,107,170)   $ (13,452,020)   $ 2,464,487
Basic net income (loss) per share         $ (.17)         $  (.74)         $ .14
Diluted net income (loss) per share       $ (.17)         $  (.74)         $ .13

</TABLE>

          The  pro forma net income  (loss) and pro forma net income  (loss) per
               share amounts noted above are not likely to be  representative of
               the pro forma amounts to be reported in future  years.  Pro forma
               adjustments  in future  years will include  compensation  expense

<PAGE>
                                       F-12


               associated   with   options   granted   beginning  in  1995  plus
               compensation  expense  associated  with any  options  awarded  in
               subsequent  years.  As a  result,  such  pro  forma  compensation
               expense  is likely to be higher  than the levels  experienced  in
               1999, 1998 and 1997.

          Under FAS 123, the fair value of each stock  option grant is estimated
               on the date of grant using the Black-Scholes option pricing model
               with the following  weighted average  assumptions used for grants
               in 1999, 1998 and 1997:


                                           1999         1998         1997
                                           ----         ----         ----

          Risk-free interest rate          5.98         5.61         6.41
          Expected life                 8 years      7 years      7 years
          Expected volatility               .74          .71          .55

          A    summary of the  Company's  stock  option plans as of December 31,
               1999,  1998 and 1997, and changes during the years ended on those
               dates is presented below:

<TABLE>

                                             For the year ended        For the year ended      For the year ended
                                              December 31, 1999         December 31, 1998       December 31, 1997
                                          ------------------------   ---------------------- ------------------------
                                                         Weighted                 Weighted                Weighted
                                           Number         Average      Number      Average    Number        Average
                                          of Shares        Price      of Shares    Price     of Shares       Price
                                          ----------     ----------   ----------- ---------- -----------  -----------

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

Stock options:
    Outstanding at beginning of year      1,541,750       $   3.46     1,364,250    $ 3.06    1,207,250      $ 1.82
         Options granted                    435,000           1.29       370,000      3.60      485,000        4.41
         Options exercised                  (25,000)          (.69)     (192,500)     (.87)    (323,000)       (.44)
         Options canceled                         -              -             -         -       (5,000)      (4.53)
                                         ----------       --------     ---------    ------    ---------      ------
Outstanding at end of year                1,951,750       $   3.13     1,541,750    $ 3.46    1,364,250      $ 3.06
                                         ==========       ========     =========    ======    =========      ======

Exercisable at end of year                1,200,500       $   3.35       816,750    $ 2.97      775,500      $ 2.08
                                         ==========       ========     =========    ======    =========      ======

Weighted average fair value
    of options granted during
    the year                                $  1.40                       $ 2.58                 $ 2.80
                                            =======                       ======                 ======


</TABLE>

          The following table summarizes  information  about the Company's stock
              options outstanding at December 31, 1999:
<TABLE>


                              Options Outstanding                                            Options Exercisable
                   ----------------------------------------------------------   ----------------------------------------
                          Number         Weighted Average        Weighted             Number                 Weighted
   Range of           Outstanding at         Remaining            Average          Exercisable at             Average
Exercise Prices     December 31, 1999     Contractual Life     Exercise Price     December 31, 1999      Exercise Price
---------------     -----------------    -----------------     --------------    ------------------      --------------
<S>                 <C>                  <C>                   <C>               <C>                     <C>

  $.64 - $ .69          150,000              3 years               $  .64              150,000                 $  .64
 $1.03 - $1.82          558,000              4 years               $ 1.68              123,000                 $ 1.18
 $3.19 - $5.50        1,243,750              9 years               $ 3.46              927,500                 $ 4.07
                      ---------                                                      ---------
                      1,951,750                                                      1,200,500
                      =========                                                      =========

</TABLE>

<PAGE>
                                       F-13

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

          Stock Warrants

          In   connection  with a common stock  offering in 1996, an underwriter
               received a five-year warrant to purchase 125,000 shares of common
               stock at an exercise  price of $5.10 per share.  At December  31,
               1999,  no  shares  have been  purchased  in  connection  with the
               five-year warrant.

          In   connection  with  a  private   placement   offering  in  1994,  a
               broker-dealer  responsible  for  introducing  the  Company to the
               Company's  principal placement agent received a five-year warrant
               to purchase 64,415 shares of common stock at a price of $2.75 per
               share.  As of December 31 1999 and 1998,  50,000 shares have been
               purchased in connection with the five-year warrant.

          The  Company has  outstanding  at December 31, 1999 and 1998,  300,000
               warrants.  Each  warrant  allows  the  holder to buy one share of
               common stock for $6.00.  The warrants  were issued as part of the
               Company's initial public offering in 1980 and are exercisable for
               a 30 day period  commencing on the date a registration  statement
               covering  exercise is declared  effective.  The warrants  contain
               antidilution   provisions  and  in  the  event  of   liquidation,
               dissolution,  or winding up of the  Company,  the holders are not
               entitled to participate in the assets of the Company.

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

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

<TABLE>

                                                                     Year ended
                                                                     December 31,
                                                       ---------------------------------------
                                                           1999            1998          1997
                                                           ----            ----          ----
          <S>                                              <C>             <C>           <C>

          Income tax expense (benefit) at statutory
              rate                                     $  (833,156)    $ (5,472,619)  $ 1,314,570
          Change in valuation allowance for deferred
              tax assets                                 1,718,284        2,530,196            -
          Adjustment to deferred tax liability for
              changes in estimates                        (649,920)              -             -
          Statutory depletion                             (237,047)        (171,803)     (241,274)
          Nondeductible expenses and other                   1,839           14,199        49,154
                                                       -----------     ------------   -----------
              Income tax expense (benefit)             $        -      $ (3,100,027)  $ 1,122,450
                                                       ===========     ============   ===========

</TABLE>

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

<PAGE>
                                       F-14

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)

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

<TABLE>

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

             Noncurrent
             ----------

          Deferred tax assets:
            Net operating loss carryforwards         $ 7,217,369          $ 5,309,428
            Statutory depletion carryforwards          1,190,146              953,099
                                                     -----------          -----------
              Total deferred tax assets                8,407,515            6,262,527

              Less valuation allowance                (4,248,480)          (2,530,196)
                                                     -----------          -----------
              Net deferred tax assets                  4,159,035            3,732,331
                                                     -----------          -----------

          Deferred tax liabilities:
             Equity income in First Permian, LLC         187,568                   -
             Property and equipment, principally due
              to differences in basis, expensing
              of intangible drilling costs for tax
              purposes and depletion                   3,971,467            3,732,331
                                                     -----------          -----------
              Total deferred tax liabilities           4,159,035            3,732,331
                                                     -----------          -----------
              Net noncurrent deferred income
                 tax liability                       $        -           $        -
                                                     ===========          ===========
</TABLE>


          A    valuation  allowance is provided  when it is more likely than not
               that  some  portion  of  the  deferred  tax  assets  will  not be
               realized.  Due to the uncertainty of future  commodity prices and
               based on management's  intention to continue its drilling program
               (generating  intangible  drilling  costs which are  projected  to
               create future losses for tax  purposes),  it does not appear more
               likely than not that the Company  will be able to utilize all the
               available carryforwards prior to their ultimate expiration.

<PAGE>
                                       F-15


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          As   of December 31, 1999,  the Company had  investment tax credit and
               net  operating  loss   carryforwards  for  regular  tax  purposes
               available  to reduce  future  taxable  income and tax  liability,
               respectively. These carryforwards expire as follows:

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

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


          2000                   $        -        $ 15,000       $        -
          2001                       498,000         24,000                -
          2002                       421,000             -                 -
          2003                       138,000             -                 -
          2004                       257,000             -                 -
          2005                        69,000             -                 -
          2006                     1,011,000             -                 -
          2007                       792,000             -                 -
          2008                     1,596,000             -          1,733,000
          2009                     2,170,000             -          1,974,000
          2013                     8,658,000             -          8,191,000
          2014                     5,616,000             -          5,274,000
                                 -----------       --------       -----------
                                 $21,226,000       $ 39,000       $17,172,000
                                 ===========       ========       ===========
</TABLE>

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

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

<TABLE>

                                         1999            1998          1997
                                         ----            ----          ----
         <S>                             <C>            <C>            <C>

         Purchaser A                      5%              11%           12%
         Purchaser B                     14%              24%           53%
         Purchaser C                     27%              22%            -
         Purchaser D                     26%              18%            -
</TABLE>

<PAGE>
                                       F-16

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

          Effective  September  1, 1988,  the Company  established  a simplified
               employee  pension plan  covering  all  salaried  employees of the
               Company. The employees voluntarily  contribute a portion of their
               eligible  compensation,   not  to  exceed  $7,000,  adjusted  for
               inflation   beginning  in  1988,  to  the  plan.   The  Company's
               contribution, including the employees contribution, cannot exceed
               the lesser of $30,000 or 15% of  compensation.  During 1999, 1998
               and 1997,  the  Company  contributed  an  aggregate  of  $14,338,
               $11,632 and $12,709,  respectively,  of which $3,750,  $3,388 and
               $3,129, respectively, was allocated to a Director of the Company.
               The Company has no obligation to make contributions to the plan.

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

          During 1999, 1998 and 1997,  $2,127,734,  $0, and $0 were  transferred
               from  oil  and  gas   properties   to   assets   held  for  sale,
               respectively.    These   transfers   are   considered    non-cash
               transactions.

          No   Federal  taxes were paid in 1999,  1998 and 1997,  as a result of
               net operating losses or loss carryforwards.

          The  Company made  interest  payments of  $1,534,023,  $1,349,786  and
               $794,079 in 1999, 1998 and 1997, respectively.

          At   December 31, 1999 and 1998, there were $1,489,870 and $1,868,241,
               respectively, of property additions accrued in accounts payable.

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


          Common Stock

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

          Preferred Stock

          On   April 8, 1998,  the  Company  completed  a private  placement  of
               600,000  shares  of its  $.60  Cumulative  Convertible  Preferred
               Stock,  $.10  par  value  per  share  ("Old  Preferred   Stock").
               Cumulative dividends of $.60 per share were payable semi-annually
               on June  15 and  December  15 of each  year.  Each  share  of Old

<PAGE>
                                       F-17

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


               Preferred Stock was convertible at the option of the holder, into
               1.5625 shares of common stock at an initial  conversion  price of
               $6.40  per  share,  subject  to  adjustment  in  certain  events.
               Proceeds  received,  net of related expenses,  were approximately
               $5,919,000. The net proceeds from the sale of Old Preferred Stock
               were  used to  reduce  the  indebtedness  outstanding  under  the
               Company's loan agreement.

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

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

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

          During 1999,  the Company paid to, and received  from,  First Permian,
               LLC $22,968  and  $85,019,  respectively,  for  reimbursement  of
               general and  administrative  expenses.  At December 31, 1999, the
               Company had an account  receivable from and an account payable to
               First Permian LLC of $1,110 and $2,702, respectively.

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

          During  1999  and  1998,  the  Company  was  charged  $0  and  $2,900,
               respectively,  for drilling services and lease operating expenses
               by entities in which certain Directors are majority owners. These
               Directors  and their  companies  own  interests in certain  wells
               operated  by the  Company.  During  1999 and  1998,  the  Company
               charged $114,000 and $97,000,  respectively,  for lease operating
               expenses  and  drilling  costs  and  paid  $68,000  and  $62,000,
               respectively,  in oil and gas revenues to these  related  parties
               related to these wells.

          An   entity in which the Chief  Executive  Officer and Chairman of the
               Board is the owner acted as the Company's agent in performing the
               routine day to day operations of certain wells. In 1999 and 1998,
               the Company was billed $34,000 and $70,000, respectively, for the
               Company's pro rata share of lease operating and drilling expenses
               and   received   $197,000   and   $218,000   in  1999  and  1998,
               respectively, in oil and gas revenues related to these wells.


<PAGE>
                                       F-18


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

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

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


<TABLE>

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

          Proved properties          $ 52,795,570          $ 48,945,738
          Unproved properties          12,341,213            16,619,728
                                     ------------          ------------
                                       65,136,783            65,565,466
          Accumulated depletion       (27,296,752)          (22,122,758)
                                     ------------           -----------

                                     $ 37,840,031          $ 43,442,708
                                     ============          ============

</TABLE>

          Certain directly  identifiable internal costs of property acquisition,
               exploration  and  development  activities are  capitalized.  Such
               costs  capitalized  in  1999,  1998 and  1997  totaled  $508,883,
               $527,500 and $461,537, respectively.

          Depletion per equivalent unit of production (BOE) was $8.30, $8.07 and
               $5.29 for 1999, 1998 and 1997, respectively.

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

<TABLE>

                                                  1999          1998            1997
                                                  ----          ----            ----
          <S>                                     <C>            <C>             <C>

          Transfers to assets held for sale   $ (2,127,734)  $        -       $        -
          Proved property acquisition costs         41,768        88,747          917,883
          Unproved property acquisition costs    1,978,964     6,034,025        7,710,358
          Exploration                            1,855,948     8,555,741        9,604,035
          Development                              638,845     3,873,168        4,877,240
                                              ------------   -----------      -----------
                                              $  2,387,791   $18,551,681      $23,109,516
                                              ============   ===========      ===========
</TABLE>
<PAGE>
                                       F-19

                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



(12)      Impairment of Oil and Gas Properties

          As   a result of a ceiling test calculation,  which limits capitalized
               costs, net of related deferred tax liability, to the aggregate of
               the estimated  present value,  discounted at 10-percent of future
               net  revenues  from  proved  reserves  plus lower of cost or fair
               market value of unproved  properties,  the Company  recognized an
               impairment of approximately $1,705,000 and $14,757,000 related to
               its oil and gas properties during 1999 and 1998, respectively.

(13)      Earnings per Share

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

<TABLE>

                                                               1999          1998         1997
                                                               ----          ----         ----
         <S>                                                  <C>           <C>             <C>

          Numerator:
              Net income (loss)                          $ (2,450,457)  $(12,995,910) $ 2,743,930
              Preferred stock dividend                       (609,063)      (276,712)          -
                                                         ------------   ------------  -----------
              Net income (loss) and numerator for
                 basic and diluted net income (loss)
                 per share available to common
                 stockholders                            $ (3,059,520)  $(13,272,622) $ 2,743,930
                                                         ============   ============  ===========
          Denominator:
              Weighted average common shares for
                 basic earnings (loss) per share           18,549,214     18,300,998   17,862,792

          Effect of dilutive securities:
              Employee stock options                              -               -       765,403
              Warrants                                            -               -        12,795
                                                          ===========   ============  ===========

          Weighted average common shares for
              diluted earnings (loss) per share
              assuming conversions                         18,549,214     18,300,998   18,640,990
                                                          ===========   ============  ===========

         Basic net earnings (loss) per share                  $  (.16)      $   (.73)    $   0.15
                                                              =======       ========     ========
         Diluted net earnings (loss) per share                $  (.16)      $   (.73)    $   0.15
                                                              =======       ========     ========

</TABLE>
<PAGE>
                                       F-20


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)



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

(14)      Equity Investment
          -----------------

          On   June 30, 1999,  the Company  acquired a 22.5% interest for $2,250
               in First  Permian,  LLC  ("First  Permian"),  a Delaware  limited
               liability  company.  First  Permian is owned by the  Company  and
               three other parties. On December 31, 1999, the Company's interest
               in First Permian increased to 35% for an additional investment of
               $1,250  as a result  of First  Permian  meeting  certain  payment
               requirements under its subordinated notes.

          On   June 25, 1999,  First  Permian and Fina Oil and Chemical  Company
               ("Fina")  entered into a Merger  Agreement in which First Permian
               purchased oil and gas properties  located in the Permian Basin of
               west Texas for $96,125,000.  Under the Merger Agreement,  the oil
               and gas  properties  were  conveyed  to  Nash  Oil  Company,  LLC
               ("Nash"), a newly formed Delaware Limited Liability Company and a
               wholly-owned  subsidiary of Fina.  Effective June 30, 1999, First
               Permian and Nash were merged with the surviving limited liability
               company being First Permian, LLC.

          The  purchase was financed  primarily with a bank credit  facility for
               $74,000,000,  subordinated notes totaling $16,000,000 and sale of
               minerals for $5,000,000. The credit facility is collateralized by
               substantially  all of First  Permian's oil and gas properties and
               further  guaranteed  by the  Company for  $10,000,000  and by one
               other party for an additional $10,000,000.

<PAGE>
                                       F-21


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          The  following  summarizes selected audited financial  information for
               First Permian, LLC as of December 31, 1999:

<TABLE>
                       Assets
                       ------
          <S>                                                 <C>
          Current assets:
              Cash and cash equivalents                         $ 4,476,669
              Accounts receivable                                 4,653,020
              Prepaids                                               25,311
              Assets held for sale                                2,300,000
                                                                -----------
                  Total current assets                           11,455,000
                                                                -----------
          Property and equipment, at cost:
              Oil and gas properties, full cost method           71,967,245
              Other property                                        252,453
                                                                -----------
                                                                 72,219,698
              Less accumulated depletion and depreciation        (2,974,973)
                                                                -----------
                   Net property and equipment                    69,244,725

          Other non-current assets, net of accumulated
             amortization of $223,800                             1,064,113
                                                                -----------
                                                                $81,763,838
                                                                ===========

              Liabilities and Members' Equity
              -------------------------------
          Current liabilities:
              Current maturities of long-term debt              $ 3,000,000
              Accounts payable and accrued liabilities-trade      5,848,150
              Liability for commodity swap                          576,000
                                                                -----------
                   Total current liabilities                      9,424,150
                                                                -----------
          Long-term debt, net of current maturities              63,950,000
          Notes payable to related parties                        7,500,000

          Members' equity and issuable warrants                     889,688
                                                                -----------

                                                                $81,763,838
                                                                ===========

          Revenues                                              $14,627,611
          Cost and expenses                                       8,825,266
                                                                -----------
              Operating income                                    5,802,345

          Other expense, net                                     (4,923,183)
                                                                -----------
          Net income                                            $   879,162
                                                                ===========
</TABLE>

<PAGE>
                                       F-22


          The  Company  accounts for its investment in First Permian,  LLC using
               the  equity  method  and has  recorded  equity  in  income  as of
               December 31, 1999 for $197,811.

          The  following  summarizes the Company's 35% interest in First Permian
               LLC's unaudited oil and gas reserve data (in thousands):

                          Changes in Reserve Balances

<TABLE>

                                                       Total Proved              Proved Developed
                                                  -----------------------     -------------------------
                                                      BBL          MCF           BBL            MCF
                                                    -------      -------       ------         ------

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

Reserves as of June 30, 1999 (date of inception)       _              _             _                _
        Purchase of reserves in place              10,521          9,360         6,249            8,934
        Sales of reserves in place                 (1,162)          (533)       (1,162)            (533)
        Revisions of previous estimates             1,115           (180)        1,110             (180)
        Production                                   (248)          (457)         (248)            (457)
                                                   ------         ------        ------           ------
Reserves as of December 31, 1999                   10,226          8,190         5,949            7,764
                                                   ======         ======        ======           ======
</TABLE>


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

       Period June 30, 1999 (date of inception) through December 31, 1999
<TABLE>
          <S>                                                         <C>

          Future cash flows                                           $ 238,996
          Future costs:
              Production                                                (71,878)
              Development                                               (13,001)
                                                                      ---------
          Future net cash flows                                         154,117
          10% annual discount for estimated timing of cash flows        (80,448)
                                                                      ---------
          Standardized measure of discounted net cash flows           $  73,669
                                                                      =========
</TABLE>

<PAGE>
                                       F-23


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

       Period June 30, 1999 (date of inception) through December 31, 1999

<TABLE>
          <S>                                                <C>
          Increase (decrease):
              Sales of minerals in place                      $  (6,612)
              Purchase of minerals in place                      51,125
              Changes in estimated future development costs        (337)
              Revisions of prices and costs                      32,266
              Sales, net of production costs                     (2,773)
                                                              ---------
                   Net increase                                  73,669
          Standardized measure of discounted net cash flows:
                   Beginning of year                                 _
                                                              ---------
                   End of year                                $  73,669
                                                              =========
</TABLE>

<PAGE>
                                       F-24


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


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

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

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

<TABLE>

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

          Reserves as of January 1, 1997          1,641        32,554     1,395         27,346
              Sales of reserves in place           (461)       (2,779)     (461)        (2,779)
              Extensions and discoveries          1,063        14,477       243          9,623
              Revisions of previous estimates      (174)      (10,319)     (164)       (10,478)
              Production                           (175)       (3,385)     (176)        (3,384)
                                                 ------        ------    ------         ------
          Reserves as of December 31, 1997        1,894        30,548       837         20,328
              Extensions and discoveries            281         7,554       210          5,634
              Revisions of previous estimates      (265)       (8,806)       (9)        (3,614)
              Production                           (186)       (3,275)     (185)        (3,276)
                                                 ------        ------    ------         ------
          Reserves as of December 31, 1998        1,724        26,021       853         19,072
              Sales of reserves in place             _           (241)       _            (241)
              Extensions and discoveries             28         2,167        28          1,910
              Revisions of previous estimates      (580)       (7,903)     (128)        (5,296)
              Production                           (164)       (2,760)     (164)        (2,760)
                                                 ------        ------    ------         ------

          Reserves as of December 31, 1999        1,008        17,284       589         12,685
                                                 ======        ======    ======         ======

</TABLE>

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

          During 1999,  the average sales price  received by the Company for its
               oil was  approximately  $17.32 per Bbl,  as compared to $12.49 in
               1998,  while the average  sales price for the  Company's  gas was
               approximately $2.27 per Mcf in 1999, as compared to $2.04 per Mcf
               in 1998. At March 15, 2000, the price received by the Company for
               its oil production was approximately $28 per Bbl, while the price
               received  by  the  Company,  at  that  same  date,  for  its  gas
               production was approximately $2.75 per Mcf.
<PAGE>
                                       F-25


                         PARALLEL PETROLEUM CORPORATION

                  Notes to Financial Statements - (Continued)


          The  standardized  measure of  discounted  future net cash  flows,  in
               management's opinion,  should be examined with caution. The basis
               for this table are the reserve  studies  prepared by  independent
               petroleum  consultants,  which  contain  imprecise  estimates  of
               quantities  and rates of  production  of  reserves.  Revisions of
               previous year  estimates  can have a significant  impact on these
               results.  Also,  exploration  costs  in  one  year  may  lead  to
               significant  discoveries  in later  years  and may  significantly
               change previous estimates of proved reserves and their valuation.
               Therefore, the standardized measure of discounted future net cash
               flow is not  necessarily  a "best  estimate" of the fair value of
               the Company's proved oil and gas properties.


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

<TABLE>

                                                              December 31,
                                                   ----------------------------------
                                                     1999         1998         1997
                                                   --------      --------    --------
          <S>                                     <C>            <C>         <C>

          Future cash flows                        $ 62,967      $ 70,141    $111,549
          Future costs:
              Production                            (18,632)      (20,706)    (28,352)
              Development                            (4,797)       (5,740)     (6,269)
                                                   --------      --------    --------
          Future net cash flows before income
              taxes                                  39,538        43,695      76,928
          Future income taxes                            _             _       (8,891)
                                                   --------      --------    --------
          Future net cash flows                      39,538        43,695      68,037
          10% annual discount for estimated timing
              of cash flows                         (14,039)      (16,872)    (21,982)
                                                   --------      --------    --------

          Standardized measure of discounted net
              cash flows                           $ 25,499      $ 26,823    $ 46,055
                                                   ========      ========    ========
</TABLE>
<PAGE>
                                       F-26




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

<TABLE>

                                                           Years ended December 31,
                                                   --------------------------------------
                                                      1999          1998            1997
                                                    -------       -------          ------
          <S>                                     <C>               <C>             <C>

          Increase (decrease):
              Sales of minerals in place           $   (238)    $       -       $  (6,491)
              Extensions and discoveries and
                 improved recovery, net of
                 future production and development
                 costs                                3,067          8,916         25,530
              Accretion of discount                   2,682          4,642          6,701
              Net change in sales prices net
                 of production costs                 11,882        (16,036)       (18,293)
              Changes in estimated future
                 development costs                      789            664            (51)
              Revisions of quantity estimates       (13,371)        (8,325)       (13,333)
              Net change in income taxes                 _             365          9,300
              Sales, net of production costs         (6,620)        (6,588)        (9,443)
              Changes of production rates (timing)
                 and other                              485         (2,870)        (5,214)
                                                   --------     ----------      ---------
                 Net decrease                        (1,324)       (19,232)       (11,294)

          Standardized measure of discounted
              future net cash flows:
                   Beginning of year                 26,823         46,055         57,349
                                                   --------     ----------      ---------
                   End of year                     $ 25,499     $   26,823      $  46,055
                                                   ========     ==========      =========

</TABLE>





<PAGE>

                                   SIGNATURES


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


                                        PARALLEL PETROLEUM CORPORATION

March 28, 2000                          By:/s/ Thomas R. Cambridge
                                        ------------------------------
                                        Thomas R. Cambridge, Chief
                                        Executive Officer and
                                        Chairman of the Board of
                                        Directors

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



/s/ Thomas R. Cambridge            Chief Executive Officer        March 28, 2000
-----------------------            and Chairman of the
 Thomas R. Cambridge               Board of Directors
                                   (Principal Executive
                                   Officer)


/s/ Larry Oldham                   President and Treasurer        March 28, 2000
-----------------------            (Principal Financial and
Larry C. Oldham                    Accounting Officer)


-----------------------            Director                       March 28, 2000
Ernest R. Duke



/s/ Myrle Greathouse               Director                       March 28, 2000
-----------------------
Myrle Greathouse



/s/ Charles R. Pannill             Director                       March 28, 2000
-----------------------
Charles R. Pannill

<PAGE>
                                       1



                               INDEX TO EXHIBITS


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

3.1     Certificate of Incorporation of Registrant (Incorporated by reference to
        Exhibit  3.1 of Form 10-K of the  Registrant  for the fiscal  year ended
        December 31, 1998.)

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

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

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

10.1    1983 Incentive Stock Option Plan  (Incorporated  by reference to Exhibit
        10.2 to Form S-l of the Registrant  (File No. 2-92397) as filed with the
        Securities  and  Exchange  Commission  on July 26,  1984,  as amended by
        Amendments  No. 1 and 2 on  October  5,  1984,  and  October  25,  1984,
        respectively.)

10.2    1992 Stock  Option Plan  (Incorporated  by  reference to Exhibit 28.1 to
        Form  S-8 of the  Registrant  (File  No.  33-57348)  as  filed  with the
        Securities and Exchange Commission on January 25, 1993.)

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

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

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

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

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

*10.8   Restated Loan Agreement, dated December 27, 1999 ,between the Registrant
        and Bank One, Texas, N.A.

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

10.10   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.)
<PAGE>
                                       2


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

10.11   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.)

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

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

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

10.15   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.)

10.16   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.)

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

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

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

*23.1   Consent of Independent Auditors

*23.2   Consent of Independent Petroleum Engineers

*23.3   Consent of Independent Petroleum Engineers

*27     Financial Data Schedule

-----------------
* Filed herewith.
<PAGE>

                                  EXHIBIT 10.8



                                    RESTATED
                                 LOAN AGREEMENT


                            DATED DECEMBER 27, 1999


                                 by and between


                         PARALLEL PETROLEUM CORPORATION
                                  as Borrower,


                                      AND


                             BANK ONE, TEXAS, N.A.
                                   as Lender


<PAGE>                                 i

                               TABLE OF CONTENTS


                                                                     Page No.
                                                                     --------
ARTICLE I                                                                1
Definitions                                                              1
        1.1     Certain Defined Terms                                    1
        1.2     Other Definitional Provisions                            8

ARTICLE II                                                               8
        Revolving Loan                                                   8
        2.1     Revolving Commitment                                     8
        2.2     Manner of Borrowing                                      9
        2.3     Commitment Fee                                           9
        2.4     Note                                                    10
        2.5     Principal Payments                                      10
        2.6     Interest Rate; Interest Payments                        10
`       2.7     Capital Adequacy                                        11
        2.8     Prepayments                                             11
        2.9     Manner and Application of Payments                      12
        2.10    Rate Elections                                          12
        2.11    Increased Cost of Eurodollar Portion                    13
        2.12    Availability                                            13
        2.13    Funding Losses                                          14
        2.14    Taxes                                                   14

ARTICLE III                                                             15
Borrowing Base and Required Prepayments Under Note                      15
        3.1     Borrowing Base                                          15
        3.2     Redeterminations of Borrowing Base and
                Monthly Automatic Borrowing Base Reduction              15
        3.3     Standards for Redetermination                           16
        3.4     Borrowing Base Redetermination Fee                      16
        3.5     Mandatory Increase in Collateral or Prepayment
                of Principal of the Note                                16
        3.6     Monthly Automatic Borrowing Base Reduction and
                Prepayment of Principal of the Note                     16

ARTICLE IV                                                              16
Security and Assignment                                                 16

ARTICLE V                                                               17
Conditions Precedent                                                    17
        5.1     Renewal                                                 17
        5.2     All Advances                                            18

<PAGE>                                 ii

ARTICLE VI                                                              18
Representations and Warranties                                          18
        6.1     Existence and Authority                                 18
        6.2     Powers                                                  19
        6.3     Financial Statements                                    19
        6.4     Liabilities                                             19
        6.5     Litigation                                              19
        6.6     Taxes                                                   19
        6.7     Purpose of Loan                                         19
        6.8     Properties; Liens                                       20
        6.9     Material Agreements                                     20
        6.10    ERISA                                                   21
        6.11    Location of Records                                     21
        6.12    Permits and Franchises, Etc.                            21
        6.13    Subsidiaries                                            21
        6.14    Hazardous Wastes and Substances                         21
        6.15    Public Utility Holding Company Act                      22
        6.16    General                                                 22
        6.17    Year 2000 Compliance                                    22

ARTICLE VII                                                             22
Affirmative Covenants                                                   22
        7.1     Financial Statements and Other Information              22
        7.2     Taxes                                                   24
        7.3     Discharge of Contractual Obligations                    24
        7.4     Legal Status                                            24
        7.5     Maintenance and Evidence of Priority of Bank Liens      24
        7.6     Insurance                                               25
        7.7     Reimbursement of Fees and Expenses                      25
        7.8     Indemnification                                         25
        7.9     Curing of Defects                                       26
        7.10    Inspection and Visitation                               26
        7.11    Notices                                                 26
        7.12    Bank Lien on Other Assets                               26
        7.13    Compliance                                              26
        7.14    Compliance with Environmental laws                      27
        7.15    Use of Proceeds                                         27
        7.16    Deposit Accounts                                        27
        7.17    Title Curative                                          27
        7.18    Year 2000 Compliance                                    27

ARTICLE VIII                                                            27
Negative Covenants                                                      27
        8.1     Liens                                                   28

<PAGE>                              iii

        8.2     Indebtedness                                            29
        8.3     ERISA Compliance                                        29
        8.4     Investments                                             29
        8.5     Mergers, Consolidations                                 30
        8.6     Dividends and Distributions                             30
        8.7     Transactions with Affiliates                            30
        8.8     Accounting Method and Fiscal Year                       30
        8.9     Nature of Business                                      30
        8.10    Disposition of Assets                                   30
        8.11    Current Ratio                                           31
        8.12    Leases                                                  31
        8.13    Net Worth                                               31
        8.14    Debt Service Ratio                                      31
        8.15    Derivatives                                             31

ARTICLE IX                                                              31
Default and Remedies                                                    31
        9.1     Events of Default                                       31
        9.2     Remedies                                                33

ARTICLE X                                                               33
Miscellaneous                                                           33
        10.1    Survival of Representations and Warranties              33
        10.2    Communications                                          33
        10.3    Non-Waiver                                              34
        10.4    Strict Compliance                                       34
        10.5    Cumulative Rights                                       35
        10.6    Governing Law                                           35
        10.7    Choice of Forum; Consent to Service of Process
                and Jurisdiction                                        35
        10.8    Usury Savings Clause                                    35
        10.9    Enforceability                                          36
        10.10   Binding Effect                                          36
        10.11   No Third Party Beneficiary                              36
        10.12   Delegation by Lender                                    36
        10.13   Setoff                                                  36
        10.14   Additional Documents                                    37
        10.15   Counterparts                                            37
        10.16   Amendments                                              37
        10.17   headings                                                37
        10.18   Conflicts                                               37
        10.19   entirety                                                37
        10.21   Participations                                          37
        10.22   Notice of Final Agreement                               38

<PAGE>                                    iv

                Exhibit 2.2             -       Request for Advance
                Exhibit 2.4             -       Promissory Note
                Exhibit 2.10            -       Form of Rate Election
                Schedule 5.1            -       Closing Documents
                Schedule 6.9            -       Material Agreements
                Exhibit 7.1             -       Compliance Certificate

<PAGE>
                                       1


                                    RESTATED
                                 LOAN AGREEMENT

     THIS RESTATED LOAN AGREEMENT  (this  "Agreement") is entered into this 27th
day of December, 1999 by and between PARALLEL PETROLEUM CORPORATION,  a Delaware
corporation  ("Borrower");  and  BANK  ONE,  TEXAS,  N.A.,  a  national  banking
association ("Lender").


                                    Recitals

     A. Borrower and Lender entered into that certain Loan Agreement  dated July
1, 1996,  as amended by First  Amendment to Loan  Agreement  dated  February 14,
1997,  by Second  Amendment to Loan  Agreement  dated March 30,  1998,  by Third
Amendment to Loan Agreement dated September 1, 1998, and by Fourth  Amendment to
Loan  Agreement  dated  October  16,  1998  (as  so  amended,  the  "Prior  Loan
Agreement").

     B. Pursuant to the Prior Loan Agreement, Borrower executed and delivered to
Lender  that  certain  promissory  note  dated  July 1,  1996,  in the  original
principal  amount of  $30,000,000  payable  to the order of Lender  (the  "Prior
Note").

     C. Borrower has requested that Lender amend certain provisions of the Prior
Loan  Agreement  and that Lender renew the  indebtedness  evidenced by the Prior
Note,  which  Lender  has  agreed to do  subject  to the  terms  and  conditions
contained  herein.  The parties  hereto agree that this  Agreement  replaces the
Prior Loan  Agreement  and that this  Agreement  and the other Loan Papers shall
govern the terms of the loans made hereunder in their entirety and shall control
over the Prior Loan Agreement.

                                    Agreement

     NOW THEREFORE,  in  consideration  of the premises and the mutual covenants
herein contained and other good and valuable consideration,  it is hereby agreed
between the parties as follows:


                                    ARTICLE I
                                   Definitions

     1.1  Certain  Defined  Terms.  For  the  purposes  of this  Agreement,  the
following  terms  shall have the  respective  meanings  assigned to them in this
section or in the section or recital referred to below:

<PAGE>
                                       2

     "Adjusted   Eurodollar  Rate"  means,   with  respect  to  each  particular
Eurodollar  Portion and the associated  Eurodollar Rate and Reserve  Percentage,
the rate per annum calculated by Lender (rounded upwards,  if necessary,  to the
next higher 1/100th of 1%) determined on a daily basis pursuant to the following
formula:

                        AER     =       ER + EM
                                        1.00 - RP

                        AER     =       Adjusted Eurodollar Rate
                        ER      =       Eurodollar Rate
                        RP      =       Reserve Percentage
                        EM      =       Eurodollar Margin

The Adjusted  Eurodollar Rate shall change as the associated  Reserve Percentage
changes.

     "Advance"  means any  disbursement to or on behalf of Borrower under any of
the Loan Papers, including,  without limitation,  all amounts advanced under the
Prior Note or the Note.

     "Agreement": the preamble.

     "Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation,  including, without limitation,  Rights in any of the Collateral
created  in  favor  of  Lender,  whether  by  mortgage,  pledge,  hypothecation,
assignment, transfer or other granting or creation of Liens.

     "Base Rate" means the  fluctuating  per annum rate of interest from time to
time in effect equal to the rate of interest as publicly  announced by Lender as
its  "Prime  Rate."  Such rate is set by Lender as a general  rate of  interest,
taking  into  account  such  factors  as Lender may deem  appropriate,  it being
understood  that  many of  Lender's  commercial  or other  loans  are  priced in
relation  to such  rate,  that it is not  necessarily  the  lowest  or best rate
actually charged to any customer and that Lender may make various  commercial or
other  loans at rates of  interest  having  no  relationship  to such  rate.  If
Lender's  Prime  Rate  changes  after the date  hereof,  the Base Rate  shall be
automatically  increased or decreased,  as the case may be, without prior notice
to  Borrower  from  time to  time as of the  effective  time of each  change  in
Lender's Prime Rate.

     "Base Rate Portion" means that portion of the unpaid  principal  balance of
the Revolving Loan which is not made up of Eurodollar Portions.

     "Borrower": the preamble.

     "Borrowing Base": Section 3. 1.

     "Borrowing Base Redetermination Fee": Section 3.4.

<PAGE>
                                       3


     "Business Day" means a day on which  commercial banks are open for business
with the public in the State of Texas.  Any  Business Day in any way relating to
Eurodollar  Portions  (such as the day on  which a  Eurodollar  Interest  Period
begins  or  ends)  must  also be a day on  which,  in the  judgment  of  Lender,
significant  transactions  in Dollars are  carried  out in the London  interbank
market.

     "Cash Flow" means  Borrower's Net Income for the most recent fiscal quarter
of  Borrower,  less  preferred  dividends  paid by  Borrower  during such fiscal
quarter,  plus  depreciation,  depletion and other non-cash  charges of Borrower
during such fiscal quarter determined on an unconsolidated basis.

     "Claims": Section 7.8.

     "Collateral": Article IV.

     "Commitment Fee": Section 2.3.

     "Current  Assets" of any person  shall  mean,  as of any date,  the current
assets that would be reflected on an unconsolidated balance sheet of such person
prepared as of such date in conformity with GAAP.

     "Current Liabilities" of any person shall mean, as of any date, the current
liabilities that would be reflected on an  unconsolidated  balance sheet of such
person prepared as of such date in conformity with GAAP.

     "Current  Ratio" means,  as of any date,  the ratio of  Borrower's  Current
Assets (including., for purposes of this calculation,  unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note).

     "Debt  Service  Ratio"  means,  as of the end of  each  fiscal  quarter  of
Borrower in which the Total Monthly  Automatic  Borrowing  Base  Reductions  are
greater  than  zero,  the ratio of  Borrower's  Cash  Flow to the Total  Monthly
Automatic  Borrowing  Base  Reductions,  and means as of the end of each  fiscal
quarter  of  Borrower  in which  the  Total  Monthly  Automatic  Borrowing  Base
Reductions are zero, the ratio of Borrower's Cash Flow to  one-twentieth  (1/20)
of the then outstanding principal balance of the Note.

     "Deed of Trust" means one or more mortgages, deeds of trust, assignments of
production and security  agreements and financing  statements in favor of Lender
encumbering  every  interest of Borrower in every oil and gas property  owned by
Borrower and selected by Lender to be encumbered as security for the Obligation,
including,   without  limitation,   any  such  property  consisting  of  royalty
interests,  overriding royalty interests and/or  reversionary rights relating to
either  developed  or  undeveloped  leasehold  acreage,  it  being  specifically
recognized  that if any such  interest  selected is in a state where a mortgage,
deed of trust,  assignment  of  production  and security  agreement or financing

<PAGE>
                                       4

statement is, or may be,  ineffective,  a document  appropriate  for use in that
state shall be required.

     "Derivatives" means, foreign exchange transactions and commodity,  currency
and interest rate swaps, floors, caps, collars,  forward sales,  options,  other
similar  transactions  and  combinations  of the  foregoing,  including  without
limitation, Rate Management Transactions.

     "Dollars" and "$" mean lawful money of the United States of America.

     "ERISA": Section 6.10.

     "Eurodollar  Interest  Period"  means,  with  respect  to  each  particular
Eurodollar  Portion, a period of thirty (30), sixty (60) or ninety (90) days, as
specified in the Rate Election  applicable  thereto,  beginning on and including
the date  specified in such Rate Election  (which must be a Business  Day),  and
ending  thirty (30),  sixty (60) or ninety (90) days  thereafter,  provided that
each Eurodollar  Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next  succeeding  Business Day (unless such next
succeeding  Business  Day is in the next  calendar  month,  in which  case  such
Eurodollar Interest Period shall end on the immediately preceding Business Day).
No Eurodollar  Interest  Period may be elected for any Eurodollar  Portion which
would extend past the Revolving Maturity Date.

     "Eurodollar  Margin" means, with respect to each Eurodollar  Portion of the
Revolving Loan, three percent (3%).

     "Eurodollar  Portion" means any portion of the unpaid principal  balance of
the Revolving Loan which Borrower designates as such in a Rate Election.

     "Eurodollar Rate" means, with respect to each particular Eurodollar Portion
for any  Interest  Period  therefor,  the rate of  interest  per  annum at which
deposits in immediately  available and freely transferrable funds in Dollars are
offered to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business
Days prior to the first day of each  Interest  Period)  in the London  interbank
market for delivery on the first day of such Interest  Period in an amount equal
to or comparable to the principal amount of the Eurodollar Portion to which such
Interest Period  relates.  Each  determination  of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding.

     "Event of Default": Section 9.1.

     "GAAP"  shall mean  those  generally  accepted  accounting  principles  and
practices  that are  recognized  as such by the American  Institute of Certified
Public  Accountants  acting  through its Accounting  Principles  Board or by the
Financial  Accounting  Standards  Board  (or  any  other  appropriate  board  or
committee thereof),  applied on a basis consistent with that of prior periods so
as to properly reflect the financial  condition,  results of operations and cash
flows of a person,  except that any accounting principle or practice required to
be changed by the said Accounting Principles

<PAGE>
                                       5

Board or Financial  Accounting  Standards Board (or any other board or committee
thereof) in order to continue as a generally  accepted  accounting  principle or
practice  may so be  changed  and when so  changed  shall  constitute  generally
accepted accounting principles in accordance with the terms hereof.

     "Highest Lawful Rate" means the maximum  nonusurious  rate of interest (or,
if the context so requires,  an amount  calculated  at such rate) that Lender is
allowed to contract for, charge,  take,  reserve or receive under applicable law
after taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Papers.

     "Interest  Period"  means,  with  respect to any  Eurodollar  Portion,  the
related Eurodollar Interest Period.

     "Investments": Section 8.4.

     "Lender": the preamble.

     "Lien" means any lien, mortgage,  security interest, charge, or encumbrance
of any kind, including,  without limitation,  the Rights of a vendor, lessor, or
similar party under any  conditional  sales  agreement or other title  retention
agreement or lease substantially equivalent thereto, any production payment, and
any  other  Right  of,  or  arrangement  with,  any  creditor  to have his claim
satisfied out of any property or assets, or the proceeds therefrom, prior to the
general creditors of the owner thereof.

     "Loan Papers" means (i) this Agreement,  (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and other
agreements, documents,  certificates,  letters and instruments ever delivered or
executed pursuant to, or in connection with, this Agreement,  as any of the same
may  hereafter  be  amended,   supplemented  or  restated  (including,   without
limitation,  the Note  and the Deed of  Trust),  (iii)  any and all  agreements,
documents  and  instruments  ever  delivered  or  executed  pursuant  to,  or in
connection  with,  Rate  Management  Transactions,  and (iv) any and all  future
renewals and extensions or restatements of, or amendments or supplements to, all
or any part of the foregoing.

     "Margin  Regulations"  means, as applicable,  Regulations G, U and X of the
Board of  Governors  of the  Federal  Reserve  System,  as from  time to time in
effect.

     "Material Adverse Change" means any set of circumstances or events that (i)
will or could  reasonably  be  expected  to have  any  adverse  effect  upon the
validity,  performance,  or  enforceability  of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial  condition or
business  operations of Borrower,  (iii) will or could reasonably be expected to
impair the ability of Borrower  to fulfill its  obligations  under the terms and
conditions of the Loan Papers,  or (iv) will or could  reasonably be expected to
cause an Event of Default.

<PAGE>
                                       6


     "Material  Agreement"  of any  person  means any  material  written or oral
agreement,  contract,  commitment,  or  understanding  to which such person is a
party,  by which such person is directly or  indirectly  bound,  or to which any
asset of such person may be subject, which is not cancelable by such person upon
30 days or less notice without  liability for further payment other than nominal
penalty.

     "Mineral Interests" means Rights, estates,  titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and all
extensions, amendments,  ratifications, and subleases thereof or thereunder) and
any mineral  interests,  royalty and overriding  royalty  interests,  production
payment and net profits  interests,  mineral fee interests,  and rights therein,
including, without limitation, any reversionary or carried interests relating to
the foregoing, together with Rights, titles, and interests created by or arising
under the terms of any unitization,  communitization,  and pooling agreements or
arrangements, and all properties, rights, and interests covered thereby, whether
arising by contract,  by order,  or by operation of law,  which now or hereafter
include all or any part of the foregoing.

     "Monthly Automatic Borrowing Base Reduction": Section 3.6.

     "Net Income"  means  Borrower's  unconsolidated  net income,  determined in
accordance with GAAP.

     "Net  Worth"  means,  as  of  any  date,  an  amount  equal  to  Borrower's
unconsolidated stockholders' equity, as determined in accordance with GAAP.

     "Note": Section 2.4(a).

     "Obligation"  means all present and future  indebtedness,  obligations  and
liabilities,  and all renewals and extensions thereof, or any part thereof,  now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper  (including,  without  limitation,  amounts  owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower  and any and all  obligations,  contingent  or  otherwise,  whether now
existing  or  hereafter  arising,  of  Borrower  to Lender  arising  under or in
connection with Rate Management Transactions),  or otherwise,  together with all
interest  accruing thereon and reasonable costs,  expenses,  and attorneys' fees
incurred in the enforcement or collection  thereof,  whether such  indebtedness,
obligations,   and  liabilities  are  direct,   indirect,   fixed,   contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.

     "Prior Loan Agreement": Recital A.

     "Prior Note": Recital B.

     "Rate Election" has the meaning given it in Section 2.10.

<PAGE>
                                       7


     "Rate Management Transaction" means any transaction (including an agreement
with respect  thereto) now existing or hereafter  entered into between  Borrower
and Lender which is a rate swap, basis swap, forward rate transaction, commodity
swap,  commodity  option,  equity or equity  index swap,  equity or equity index
option, bond option,  interest rate option,  foreign exchange  transaction,  cap
transaction,  floor  transaction,   collar  transaction,   forward  transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar  transaction  (including  any option with respect to any of
these  transaction)  or any combination  thereof,  whether linked to one or more
interest rates,  foreign  currencies,  commodity prices,  equity prices or other
financial measures.

     "Regulation D" means  Regulation D of the Board of Governors of the Federal
Reserve System, as from time to time in effect.

     "Reserve  Percentage"  means,  on any day with  respect to each  particular
Eurodollar Portion in a Tranche, the maximum reserve requirement,  as determined
by Lender  (including  without  limitation  any basic,  supplemental,  marginal,
emergency or similar  reserves),  expressed as a decimal and rounded to the next
higher.  0 1 of I %,  which  would then apply to Lender  under  Regulation  D or
successor  regulations issued from time to time by the Board of Governors of the
Federal Reserve System with respect to "Eurocurrency  liabilities" (as such term
is defined in  Regulation D) equal in amount to Lender's  Eurodollar  Portion in
such Tranche, were Lender to have any such "Eurocurrency  liabilities".  If such
reserve  requirement shall change after the date hereof,  the Reserve Percentage
shall be automatically  increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.

     "Revolving Commitment": Section 2.1(a).

     "Revolving Loan" means a loan or loans made under the Revolving  Commitment
pursuant to Section 2.1(a).

     "Revolving  Maturity  Date"  means July 1,  2001.

     "Rights" means rights, remedies, powers, privileges and benefits.

     "Subsidiary"  means  any  corporation  fifty  percent  (50%) or more of the
Voting Shares of which is owned, directly or indirectly, by Borrower.

     "Taxes" has the meaning given it in Section 2.14.

     "Total Monthly  Automatic  Borrowing Base Reductions"  means the sum of the
Monthly  Automatic  Borrowing  Base  Reductions  during the most  recent  fiscal
quarter of Borrower,  excluding  $65,889.22  of the  scheduled  February 1, 2000
Monthly Automatic Borrowing Base Reduction.

     Tranche" has the meaning given it in Section 2.10.

<PAGE>                                    8

     "Voting Shares" of any  corporation or other entity shall mean  outstanding
shares of capital  stock or other  ownership  interests  of any class or classes
(however designated) having ordinary voting power for the election of at least a
majority of the members of the Board of Directors (or other  governing  body) of
such  corporation  or other entity,  other than shares having such power only by
reason of the happening of a contingency.

     1.2 Other Definitional Provisions.

          (a) All terms defined in this Agreement shall have the above described
     meanings when used in any other Loan Paper or in any certificate, report or
     other document made or delivered  pursuant to this  Agreement,  unless same
     shall otherwise expressly require.

          (b) Terms used herein in the singular shall import the plural and vice
     versa.

          (c) Terms not  specifically  defined  herein  shall have the  meanings
     accorded them under GAAP,  customary oil and gas industry  practices or the
     Texas Uniform Commercial Code, as appropriate.

          (d) The words "hereof,"  "herein,"  "hereto,"  "hereunder" and similar
     terms when used in this Agreement  shall refer to this Agreement as a whole
     and not to any particular provision of this Agreement.


                                   ARTICLE II
                                 Revolving Loan

     2.1 Revolving Commitment.

          (a)  Subject  to the terms and  conditions  hereof,  during the period
     beginning  on the date hereof and ending on the  Revolving  Maturity  Date,
     Lender agrees to extend to Borrower a revolving  line of credit which shall
     not exceed at any time outstanding the lesser of (i)  $30,000,000,  or (ii)
     the  Borrowing  Base from time to time in effect (such lesser  amount being
     referred to herein as the"Revolving Commitment").  Subject to the foregoing
     limitations and the requirements set forth herein and i Note,  Borrower may
     borrow,  repay,  and reborrow  hereunder during the period beginning on the
     date hereof and ending on the Revolving Maturity Date.  Notwithstanding any
     other provisions of this Agreement, no Advance shall be required to be made
     hereunder if any Event of Default has occurred and is continuing.

          (b) Borrower may at any time prior to the Revolving Maturity Date upon
     at least one (1)  Business  Day's  notice in writing  to Lender  reduce (in
     $100,000 integer multiples) or terminate the Revolving  Commitment.  If the
     Revolving Commitment is reduced, Lender shall thereafter have no obligation
     to make any Advance that would result in the Revolving  Loan  exceeding the
     Revolving  Commitment  as  so  reduced;  if  the  Revolving  Commitment  is
     terminated,  no  further  Advance  shall  be made  pursuant  to  Agreement.
     Notwithstanding anything to the contrary contained herein, (i) once reduced

<PAGE>
                                       9



     or terminated,  the Revolving Commitment may not be increased or reinstated
     except upon the mutual written  agreement of Borrower and Lender;  and (ii)
     Borrower  shall not reduce the  Revolving  Commitment  to an amount that is
     less than the  outstanding  balance of the Revolving  Loan on the effective
     date of such reduction.

     2.2 Manner of Borrowing.

          (a) Each request by Borrower to Lender for an Advance  shall be in the
     form of Exhibit 2.2 hereto and shall specify the  aggregate  amount of such
     requested  Advance and the requested  date of such Advance.  Borrower shall
     furnish  to Lender  each  request  for  Advance  not later  than 10:00 a.m.
     Midland,  Texas  time,  (i) one (1)  Business  Day  prior to the  requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Base  Rate  Portions,  and (ii)  three (3) days  prior t  requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Eurodollar  Portions;  provided  that,  any Advance to be made as a
     Eurodollar Portion shall require, in addition, a Rate Election as set forth
     in Section  2.10.  Subject to Section  2.10,  each Advance  shall be in the
     minimum  amount of  $50,000  or the  unadvanced  portion  of the  Revolving
     Commitment, whichever is less.

          (b) Upon fulfillment of all applicable conditions set forth in Section
     5.2 hereof (and assuming the prior satisfaction of all conditions  pursuant
     to Section 5.1 hereof),  Lender  shall  before 2:00 o'clock p.m.  (Midland,
     Texas time) on the requested borrowing date, pay or deliver each Advance to
     or upon the order of Borrower at the principal  banking office of Lender in
     Midland, Texas in immediately available funds.

     2.3 Commitment  Fee. In addition to the payments  provided for in the Note,
Borrower shall pay to Lender a revolving  credit loan commitment fee at the rate
of one-quarter percent (1 /4%) per annum on the difference between the Revolving
Commitment  and the average daily amount of the Revolving Loan for each calendar
quarter (or portion thereof) during which the Revolving Commitment is in effect.
Such fee shall be payable on the first (1st) day of the second  month  following
each such calendar quarter,  beginning February 1, 2000. The parties acknowledge
and agree that the commitment  fees payable  hereunder are bona fide  commitment
fees and are intended as  reasonable  compensation  to Lender for  committing to
make funds available to Borrower as described herein and for no other purpose.

     Upon the effective  date of a change in the Revolving  Commitment  (whether
due to a reduction of the Revolving  Commitment pursuant to Section 2. 1 (b), or
a change in the  Borrowing  Base  pursuant to Section 3.2 or Section  3.6),  the
commitment  fee payable  pursuant to this Section 2.3 shall be calculated on the
basis  of the  amount  of the  Revolving  Commitment,  as so  changed.  Upon the

<PAGE>
                                       10



effective  date  of a  termination  or  reduction  of the  Revolving  Commitment
(pursuant to Section 2. 1 (b)),  Borrower  shall have no further  liability  for
such commitment fee (except for that portion of the quarter prior to termination
of the Revolving Commitment).

     2.4 Note.

          (a) The  Advances  made by Lender  under the  Revolving  Loan shall be
     evidenced by a promissory note (the "Note"), which shall be (i) dated as of
     the date hereof, (ii) in the principal amount of $30,000,000,  and (iii) in
     the form of Exhibit  2.4 hereto  with  blanks  appropriately  completed  in
     conformity  herewith.  Notwithstanding  the principal amount of the Note as
     stated on the face thereof,  the amount of principal  actually owing on the
     Note at any given time shall be the  aggregate of all Advances  theretofore
     made to Borrower under the Revolving  Loan,  less all payments of principal
     theretofore actually received by Lender and applied to the Note.

          (b) It is  expressly  agreed that the Note is given,  to the extent of
     $15,965,889.22,  in renewal and rearrangement, but not in extinguishment or
     novation, of the unpaid principal balance of the Prior Note.

     2.5 Principal Payments.  The principal of the Note shall be due and payable
on the Revolving  Maturity Date, unless earlier due in whole or in part pursuant
to the  mandatory  prepayment  requirements  of Section 3.5,  Section 3.6 or the
other terms hereof.

     2.6 Interest Rate,  Interest Payments.  The unpaid principal balance of the
Note shall bear  interest  from time to time and  interest  on the Note shall be
payable, as follows:

          (a)  Borrower  agrees to pay  interest on the Note  calculated  on the
     basis  of the  actual  days  elapsed  in a year  consisting  of 365 or,  if
     appropriate,  366 days with respect to the unpaid  principal amount of each
     Base Rate Portion  during the term of the Note until  maturity  (whether by
     acceleration or otherwise), at a varying rate per annum equal to the lesser
     of (i) the  Highest  Lawful  Rate,  or (ii) the Base Rate plus  one-quarter
     percent (1/4%).  Subject to the provisions of this Agreement an prepayment,
     the principal of the Note  representing Base Rate Portions shall be due and
     payable as  specified  in Section 2.5 hereof and the interest in respect of
     each Base Rate Portion shall be due and payable  monthly on the I st day of
     each month,  commencing  January 1, 2000.  Past due  principal  and, to the
     extent  permitted  by law,  past due  interest in respect to each Base Rate
     Portion, shall bear interest,  payable on demand, at a rate per annum equal
     to the Highest Lawful Rate.

          (b) Borrower agrees to pay interest  calculated on the basis of a year
     consisting of 360 days with respect to the unpaid  principal amount of each
     Eurodollar  Portion during the term of the Note until maturity  (whether by
     acceleration or otherwise), at a varying rate per annum equal to the lesser
     of (i) the Highest Lawful Rate, or (ii) the applicable  Adjusted Eurodollar
     Rate  during  the  related  Eurodollar  Interest  Period.  Subject  to  the
     provisions of this  Agreement with respect to prepayme the principal of the
     Note  representing  Eurodollar  Portions  shall be payable as  specified in
     Section 2.5 hereof and the interest with respect to each Eurodollar Portion
     shall be due and payable on the day which the related  Eurodollar  Interest

<PAGE>
                                       11



     Period ends.  Past due principal and, to the extent  permitted by law, past
     due interest in respect to each  Eurodollar  Portion,  shall bear interest,
     payable on demand, at a rate per annum equal to the Highest Lawful Rate.

     2.7 Capital Adequacy.  If at any time after the date hereof,  and from time
to  time,  any law,  rule,  regulation  or  treaty  now  existing  or  hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation  thereof now existing or hereafter made by any
governmental  authority,  central bank or comparable  agency  regarding  capital
adequacy,  or compliance by Lender with any request,  directive,  or requirement
now existing or hereafter imposed by any governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law),  shall  result in Lender  incurring a  reduction  in the rate of return on
Lender's capital as a consequence of Lender's  obligations  hereunder to a level
below that which Lender  otherwise  could have  achieved in an amount  deemed by
Lender to be material (and Lender may, in determining such amount,  utilize such
assumptions  and  allocations  of  costs  and  expenses  as  Lender  shall  deem
reasonable and may use any reasonable  averaging or attribution  method),  then,
Lender  may,  from time to time,  notify  Borrower  and  deliver  to  Borrower a
certificate  setting forth in reasonable  detail the  calculation  of the amount
necessary  to  compensate  Lender for the  reductions  incurred.  In such event,
Borrower  agrees that it shall,  within  thirty  (30) days,  either (i) pay such
amount to Lender,  or (ii)  renegotiate  the interest rate on the Note to a rate
mutually  acceptable to Borrower and Lender.  Failing Borrower's payment of such
amount  pursuant to clause (i) above or the  renegotiation  of the interest rate
pursuant to clause (ii) above, Borrower agrees that it shall, within ninety (90)
days thereafter, pay the Obligation in full and terminate this Agreement.

     2.8 Prepayments.  Borrower may prepay any Base Rate Portion, in whole or in
part,  without  penalty  or  premium,  provided,  however,  that  the  Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is at
any time reduced to less than $ 1,000.  No prepayment of any Eurodollar  Portion
or any part  thereof  shall be  permitted  prior to the last day of the  current
Interest Period therefor without the prior consent of Lender;  provided, that if
Lender determines that it may not lawfully maintain a Eurodollar  Portion to the
last day of the current  Interest  Period  therefor,  Borrower shall prepay such
Eurodollar  Portion  on the date  required  by Lender.  If there is a  permitted
prepayment  of any  Eurodollar  Portion  prior to the  last  day of the  current
Interest Period therefor, whether by consent or requirement of Lender (including
without limitation  pursuant to Section 3.5 or Section 3.6 hereof) or because of
acceleration  or  otherwise,  Borrower  shall,  within  fifteen (15) days of any
request by Lender,  pay to Lender any loss or expense  which Lender may incur or
sustain as a result of any such prepayment. A statement as to the amount of such
loss or expense,  prepared in good faith and in reasonable  detail by Lender and
submitted by Lender to Borrower, shall be conclusive and binding absent manifest
error in  computation.  Calculation of all amounts  payable to Lender under this
Section  2.8  shall be made as  though  Lender  shall  have  actually  funded or
committed to fund the  relevant  Eurodollar  Portion  through the purchase of an
underlying deposit in an amount equal to the amount of such portion and having a
maturity  comparable to the current Interest Period for such Eurodollar Portion;
provided,  however, that Lender may fund any Eurodollar Portion in any manner it
sees fit and the foregoing  assumption shall be utilized only for the purpose of
calculation of amounts payable under this Section 2.8.


<PAGE>
                                       12


     2.9 Manner and  Application  of Payments.  All  payments of  principal  and
interest on the Note shall be made by  Borrower  to Lender  before 1:3 0 o'clock
p.m. (Midland,  Texas time), in lawful money of the United States of America and
in immediately  available funds at Lender's principal banking office in Midland,
Texas.  In any case where a payment of principal or interest on the Note, or any
commitment or other fee, is due on a day other than a Business Day, the maturity
thereof  shall be extended to the next  succeeding  Business  Day,  but interest
shall  continue to accrue  until the payment is in fact made.  All  payments and
prepayments  on the  Obligation,  including  proceeds  from the  exercise of any
Rights  under the Loan  Papers or proceeds  of any of the  Collateral,  shall be
applied to the Obligation in the order deemed  appropriate by Lender, but Lender
shall  always  retain the right to apply  same in the  following  order:  (i) to
expenses for which Lender shall not have been  reimbursed  under the Loan Papers
and then to all  indemnified  amounts  due  Lender  under  the terms of the Loan
Papers;  (ii) to accrued  and unpaid  interest  on the Note;  (iii) to Base Rate
Portions of the Loan;  (iv) to Eurodollar  Portions of the Loan;  and (v) to the
remaining  Obligation.  Subject to the  foregoing,  payments of principal of the
Note shall be applied to the  Eurodollar  Portions  as  Borrower  shall  select;
provided,  however,  that Borrower shall select Eurodollar Portions to be repaid
subject to the terms of Section 2.8 hereof, and in a manner designed to minimize
the  consequential  loss to Lender,  if any,  resulting from such payments;  and
provided further that, if Borrower shall fail to select the Eurodollar  Portions
to which such payments are to be applied, or if an Event of Default has occurred
and is continuing at the time of such payment,  then Lender shall be entitled to
apply the  payment  to such  Eurodollar  Portions  in the  manner it shall  deem
appropriate.

     2.10 Rate  Elections.  Borrower may from time to time  designate all or any
portions of the Revolving Loan  (including any yet to be made Advances which are
to be made prior to or at the beginning of the  designated  Interest  Period but
excluding  any  portions of the  Revolving  Loan which are required to be repaid
prior to the end of the designated  Interest Period) as a "Tranche",  which term
refers to a set of Eurodollar  Portions with identical Interest Periods.  Lender
shall not be required to give effect to such election  during the continuance of
an Event of Default,  and  Borrower  may make such an election  with  respect to
already existing  Eurodollar  Portions only if such election will take effect at
or after  the  termination  of the  Interest  Period  applicable  thereto.  Each
election by Borrower of a Tranche shall:

          (a) Be made in  writing  in the form and  substance  of  Exhibit  2.10
     attached hereto, duly completed, herein called a "Rate Election";

          (b) Specify the aggregate  amount of the Revolving Loan which Borrower
     desires to designate as such Tranche,  the first day of the Interest Period
     which is to apply thereto, and the length of such Interest Period; and

          (c) Be  received  by Lender not later than 10:00 a.m.  Midland,  Texas
     time,  on the third  Business Day  preceding the first day of the specified
     Interest Period.

     Each Rate Election shall be irrevocable. Borrower may make no Rate Election
which does not specify an  Interest  Period  complying  with the  definition  of

<PAGE>
                                       13



"Eurodollar  Interest  Period" in Section 1.1, and the  aggregate  amount of the
Tranche  elected in any Rate Election  must be  $1,000,000 or a higher  integral
multiple of $100,000.  Upon the  termination of each Interest Period the portion
of the Revolving Loan within the related Tranche shall,  unless the subject of a
new Rate Election then taking  effect,  automatically  become a part of the Base
Rate Portion of the Revolving  Loan and become  subject to all provisions of the
Loan Papers  governing such Base Rate Portion.  Borrower shall have no more than
four (4) Tranches in effect at any time.

     2.11 Increased Cost of Eurodollar  Portion.  If any applicable  domestic or
foreign law,  treaty,  rule,  directive or regulation  (whether now in effect or
hereinafter   enacted   or   promulgated,   including   Regulation   D)  or  any
interpretation or administration  thereof by any governmental  authority charged
with the  interpretation  or  administration  thereof (whether or not having the
force of law):

          (a) shall  change the basis of  taxation  of payments to Lender of any
     principal,  interest,  or  other  amounts  attributable  to any  Eurodollar
     Portion of the Revolving  Loan,  or otherwise  due under this  Agreement in
     respect of any  Eurodollar  Portion of the Revolving Loan (other than taxes
     imposed on the overall net income of Lender or any lending office of Lender
     by any jurisdiction in which Lender or any such lending office is located);

          (b)  shall  change,  impose,  modify,  apply  or deem  applicable  any
     reserve,  special  deposit  or  similar  requirements  in  respect  of  any
     Eurodollar  Portion  (excluding those for which Lender is fully compensated
     pursuant to adjustments made in the definition of Adjusted Eurodollar Rate)
     or  against  assets  of,  deposits  with or for the  account  of, or credit
     extended by, Lender; or

          (c) shall  impose on Lender or the London  interbank  market any other
     condition affecting any Eurodollar Portion;

and the result of any of the  foregoing  (a) through (c) is to (1)  increase the
cost to Lender of funding  or  maintaining  any  Eurodollar  Portion,  or (2) to
reduce the amount of any sum  receivable by Lender in respect of any  Eurodollar
Portion by an amount reasonably deemed by Lender to be material; then (i) Lender
shall promptly notify  Borrower in writing of the happening of such event,  (ii)
Borrower shall  thereafter upon demand pay to Lender such  additional  amount or
amounts as will compensate Lender for such additional cost or reduction, subject
to the provisions of Section 2.13,  and (iii)  Borrower may elect,  by giving to
Lender not less than three (3) Business  Days'  notice,  to convert all (but not
less  than  all) of any such  Eurodollar  Portion  into a part of the Base  Rate
Portion, subject to the provisions of Section 2.13.

     2.12 Availability. If (a) any change in applicable laws, treaties, rules or
regulations  or  in  the   interpretation  or  administration   thereof  in  any
jurisdiction  whatsoever,  domestic  or  foreign,  shall  make  it  unlawful  or
impracticable  for  Lender to fund or  maintain  Eurodollar  Portions,  or shall
materially  restrict  the  authority  of Lender  to  purchase  or take  offshore
deposits  of  dollars  (i.e.,  "eurodollars"),  or (b)  Lender  determines  that

<PAGE>
                                       14



matching deposits appropriate to fund or maintain any Eurodollar Portion are not
available to it, or (c) Lender  determines  that the formula for calculating the
Adjusted Eurodollar Rate does not fairly reflect the cost to Lender of making or
maintaining  loans based on such rate,  then, upon notice by Lender to Borrower,
Borrower's right to elect  Eurodollar  Portions shall be suspended to the extent
and for  the  duration  of such  illegality,  impracticability,  restriction  or
condition,  and all  Eurodollar  Portions (or portions  thereof)  which are then
outstanding  or are then the  subject  of any Rate  Election  and  which  cannot
lawfully or  practicably  be  maintained or funded shall  immediately  become or
remain part of the Base Rate Portions of the Loan,  subject to the provisions of
Section 2.13.  Borrower agrees to indemnify  Lender and hold it harmless against
all costs, expenses, claims, penalties, liabilities and damages which may result
from any  such  change  in law,  treaty,  rule,  regulation,  interpretation  or
administration.

     2.13  Funding  Losses.  In  addition  to its other  obligations  hereunder,
Borrower will indemnify Lender against,  and reimburse Lender on demand for, any
loss or expense incurred or sustained by Lender,  as a result of (a) any payment
or prepayment  (whether authorized or required hereunder or otherwise) of all or
a portion  of a  Eurodollar  Portion  on a day  other  than the day on which the
applicable Interest Period ends, (b) any payment or prepayment (whether required
hereunder or  otherwise)  of the  Revolving  Loan made after the  delivery,  but
before the  effective  date, of a Rate  Election,  if such payment or prepayment
prevents such Rate Election from becoming  fully  effective,  (c) the failure of
any Advance to be made or of any Rate  Election to become  effective  due to any
condition  precedent to an Advance not being satisfied,  due to the inability of
Lender (acting  reasonably and in accordance with Section 2.12) to determine the
Adjusted Eurodollar Rate for a Eurodollar Portion, or due to any other action or
inaction of Borrower,  or (d) any  conversion  (whether  authorized  or required
hereunder or otherwise) of all or any portion of any  Eurodollar  Portion into a
Base Rate Portion on a day other than the day on which the  applicable  Interest
Period ends.

     2.14 Taxes.  All payments by Borrower of principal of, and interest on, the
Revolving Loan, and all other amounts  payable  hereunder shall be made free and
clear of and without deduction for any present or future income,  excise,  stamp
or franchise taxes and other taxes, fees, duties,  withholdings or other charges
of  any  nature  whatsoever  imposed  by any  taxing  authority,  but  excluding
franchise  taxes and taxes  imposed on or  measured  by  Lender's  net income or
receipts (such non-excluded  items being called "Taxes").  In the event that any
withholding  or deduction  from any payment to be made by Borrower  hereunder is
required  in  respect  of any Taxes  pursuant  to any  applicable  law,  rule or
regulation, then, Borrower will:

          (a) pay directly to the relevant authority the full amount required to
     be so withheld or deducted;

          (b)  promptly   forward  to  Lender  an  official   receipt  or  other
     documentation  satisfactory  to  Lender  evidencing  such  payment  to such
     authority; and

          (c) pay to Lender such additional  amount(s) as is necessary to ensure
     that the net amount actually  received by Lender will equal the full amount
     such Lender would have received had no such  withholding  or deduction been
     required.
<PAGE>
                                       15


If any Taxes are directly  asserted  against  Lender with respect to any payment
received  by Lender  hereunder,  Lender  may pay such  Taxes and  Borrower  will
promptly  pay such  additional  amounts  to  Lender  (including  any  penalties,
interest or expenses)  as is necessary in order that the net amount  received by
such  person  after  the  payment  of such  Taxes  (including  any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been  asserted.  If  Borrower  fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required  documentary  evidence,  Borrower shall indemnify  Lender for any
Taxes,  interest or penalties  that may become  payable by Lender as a result of
any such failure.


                                   ARTICLE III
               Borrowing Base and Required Prepayments Under Note

     3.1 Borrowing  Base.  The  "Borrowing  Base" is initially set at the sum of
$15,965,889.22  but shall be subject to  redetermination  as further provided in
this Article.

     3.2 Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction.  Lender shall  redetermine  the Borrowing Base and Monthly  Automatic
Borrowing   Base  Reduction  on  or  about  February  1,  2000,  and  thereafter
semi-annually,  on or about May I and November 1 of each year,  beginning May 1,
2000.  Lender may require a  redetermination  of the Borrowing  Base and Monthly
Automatic  Borrowing  Base  Reduction  at any  time in its sole  discretion.  In
addition,  Borrower may request that Lender  redetermine  the Borrowing Base and
Monthly  Automatic  Borrowing  Base  Reduction at any time, and Lender agrees to
respond to each such request  within  thirty (30) days after Lender has received
from  Borrower the requisite  information  for such  redetermination;  provided,
however,  that Borrower may request no more than one Borrowing  Base and Monthly
Automatic Borrowing Base Reduction  redetermination  during the six-month period
between each scheduled Borrowing Base  redetermination.  Promptly following each
redetermination  of the Borrowing Base or the Monthly  Automatic  Borrowing Base
Reduction,  Lender  shall  notify  Borrower  of any  change in the amount of the
Borrowing Base or the Monthly  Automatic  Borrowing Base  Reduction.  Until such
time as Lender has notified Borrower in writing of a change in the amount of the
Borrowing Base or the Monthly Automatic Borrowing Base Reduction,  the Borrowing
Base and Monthly Automatic Borrowing Base Reduction will remain unchanged.

     Borrower  shall furnish to Lender,  no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt of
notice from Lender that it has elected to make a  non-scheduled  Borrowing  Base
and Monthly Automatic Borrowing Base Reduction redetermination),  as directed by
Lender, such information as Lender may request, in form and substance acceptable
to Lender,  requisite  to Lender's  redetermination  of the  Borrowing  Base and
Monthly Automatic Borrowing Base Reduction.

<PAGE>
                                       16



     3.3 Standards for Redetermination. All Borrowing Base and Monthly Automatic
Borrowing  Base  Reduction  redeterminations  shall  be  made by  Lender  in the
exercise of its sole discretion in accordance  with its customary  practices and
standards for loans in similar amounts to borrowers similarly  situated,  at the
time and under the circumstances then prevailing.

     3.4  Borrowing  Base  Redetermination  Fee.  In  addition  to the  payments
provided  for in the Note,  Borrower  shall pay to  Lender as a  Borrowing  Base
redetermination  fee the sum of $750 at the  time  Lender  provides  the  notice
required by Section 3.2 and at any time that Borrower  requests a  non-scheduled
Borrowing Base redetermination pursuant to Section 3.2; provided,  however, that
Borrowing  Base  redetermination  fees payable by Borrower  hereunder  shall not
exceed $3 000 during any calendar year. The parties  acknowledge  and agree that
the  Borrowing  Base  redetermination  fees  payable  hereunder  are intended as
reasonable compensation to Lender for its efforts in redetermining the Borrowing
Base during the term of the Revolving Loan and for no other purpose.

     3.5 Mandatory  Increase in Collateral  or  Prel2gyment  of Principal of the
Note. In the event that the Obligation shall, at the time of notification of the
Borrowing  Base by Lender to Borrower  pursuant to Section  3.2, be in excess of
the Revolving  Commitment,  Borrower  shall,  at Borrower's  option,  either (i)
within thirty (30) days  thereafter,  by  instruments  satisfactory  in form and
substance to Lender,  provide Lender with  additional  collateral  with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, or (ii) within thirty
(30) days  thereafter,  prepay the principal of the Note  (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess.

     3.6 Monthly Automatic  Borrowing Base Reduction and Prepayment of Principal
of the Note.  The  Borrowing  Base shall  automatically  reduce by  $300,000  on
January 1, 2000,  by  $365,889.22  on February  1, 2000,  and by $300,000 on the
first day of each month thereafter  during the term of the Revolving  Commitment
(each a "Monthly  Automatic  Borrowing  Base  Reduction"),  subject to  Lender's
right, in its sole discretion,  to redetermine the Monthly  Automatic  Borrowing
Base Reduction in conjunction with a Borrowing Base redetermination  pursuant to
Section 3.2 above.  In the event that the  Obligation  shall be in excess of the
Borrowing Base on the date of any Monthly  Automatic  Borrowing Base  Reduction,
then on said date  Borrower  shall prepay the principal of the Note in an amount
equal to such excess, in addition to the payment of accrued interest on the Note
that may be due on such  date.  The  provisions  of Section  3.5 above  shall be
applicable to scheduled and non-scheduled redeterminations of the Borrowing Base
but shall not apply to a Monthly Automatic Borrowing Base Reduction.


                                   ARTICLE IV
                             Security and Assignment

     To secure full and  complete  payment and  performance  of the  Obligation,
Borrower  hereby grants and conveys to and creates in favor of Lender Bank Liens
in, to and on all of the  following  items and types of  property  (referred  to
<PAGE>
                                       17



collectively herein as the "Collateral"),  all as more particularly described in
the Loan Papers:

          (a) all present and future interest now owned or hereafter acquired by
     Borrower in the Mineral Interests identified in the Deed of Trust, together
     with all proceeds of production therefrom;

          (b)  all  present  and  future   increases,   profits,   combinations,
     reclassifications,  improvements and products of, accessions,  attachments,
     and other additions to, tools, parts and equipment used in connection with,
     and substitutes and replacements for, any of the Collateral;

          (c) all cash and noncash  proceeds and other Rights arising from or by
     virtue  of,  or from the  voluntary  or  involuntary  sale,  lease or other
     disposition  of, or  collections  with  respect to, or  insurance  proceeds
     payable with respect to, or proceeds payable by virtue of warranty or other
     claims  against  manufacturers  of, or claims against any other person with
     respect to, any of the Collateral;

          (d) all present and future  security  for the payment to Borrower  for
     any of the Collateral;

          (e) all goods which gave or will give rise to any of the Collateral or
     are evidenced, identified or represented therein or thereby; and

          (f) all certificates of title, manufacturer's statements of origin, or
     other documents,  accounts and chattel paper arising from or related to any
     of the Collateral.

     All Bank  Liens  created  in favor of Lender  pursuant  to the  Prior  Loan
Agreement are hereby ratified,  renewed and extended in favor of Lender, without
lapse or interruption of perfection or priority.


                                    ARTICLE V
                              Conditions Precedent

     5.1  Renewal.  The  obligation  of Lender to accept the Note in renewal and
rearrangement  of the Prior Note shall be subject to satisfaction of each of the
following conditions precedent:

          (a) There shall have been executed,  where appropriate,  and delivered
     by Borrower  (and/or any other  requisite  party thereto) (i) the documents
     listed on Schedule 5.1 hereto,  all of which shall be in form and substance
     satisfactory  to Lender and its counsel,  and (ii) such other  documents or
     instruments as Lender may reasonably require.

<PAGE>
                                       18



          (b) All  requirements  of notice  necessary  to perfect each Bank Lien
     shall  have  been   accomplished  or  arrangements  made  therefor  to  the
     satisfaction of Lender and its counsel.

          (c)  Lender  shall  have  received  from  Borrower's  legal  counsel a
     favorable  legal opinion in form and substance  satisfactory  to Lender and
     its counsel  respecting  the matters set forth in Section 6.1, 6.2, 6.5 and
     6.15 hereof.

          (d) No Material  Adverse  Change shall have  occurred in the financial
     condition,  assets or business  prospects of Borrower  since  September 30,
     1999.

          (e) All fees due and  payable  to Lender  and all  accrued  and unpaid
     interest on the Prior Note shall have been paid up to the date hereof.

          (f)  Borrower  shall have made  principal  payments  on the Prior Note
     reducing  the  outstanding  principal  balance  thereof to an amount not to
     exceed $15,965,889.22.

          (g)  Lender  shall  have  received  from  Borrower   acceptable  title
     information  covering not less than ninety  percent (90%) of the engineered
     value of Borrower's Mineral Interests.

     5.2 All Advances.  The  obligation of Lender to make any Advance  hereunder
shall be subject to satisfaction of each of the following conditions precedent:

          (a) An  authorized  individual  shall have  requested  such Advance in
     accordance with the requirements of Section 2.2(a) hereof.

          (b) No Event of Default  shall have  occurred that has not been waived
     in writing by Lender,  and there  shall exist no  condition  or event that,
     with the  giving of notice or lapse of time or both,  would  constitute  an
     Event of Default.

          (c) Borrower  shall have  observed,  performed  and complied  with all
     covenants, agreements, duties and obligations contained in the Loan Papers.


                                   ARTICLE VI
                         Representations and Warranties

     In order to induce Lender to enter into this Agreement, Borrower represents
and  warrants  to  Lender  as of the  date  hereof,  which  representations  and
warranties shall survive the delivery of the Note, as follows:

     6.1 Existence and Authority.  Borrower is (i) a corporation duly organized,
legally  existing and in good standing  under the laws of the State of Delaware,
and (ii) duly  qualified as a foreign  corporation  and in good  standing in the

<PAGE>
                                       19



State of Texas. Except to the extent that the failure to qualify would not cause
or  result  in  a  Material  Adverse  Change,  there  are  no  other  states  or
jurisdictions  wherein  Borrower's   operations,   transaction  of  business  or
ownership of property makes such qualification necessary.

     6.2 Powers.  Borrower is duly  authorized and empowered to create and issue
the Note and to execute and deliver  this  Agreement,  the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's  part  requisite for the due creation,  issuance and
delivery of the Note and the due  execution  and delivery of this  Agreement and
the other Loan Papers has been duly and  effectively  taken.  This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal, valid
and binding  obligations of Borrower  enforceable in accordance with their terms
(subject  to any  applicable  bankruptcy,  insolvency  or other  laws  generally
affecting the enforcement of creditors' rights).  The Loan Papers do not violate
any  provisions  of  Borrower's  articles of  incorporation  or bylaws or of any
contract, partnership or other agreement, law or regulation to which Borrower is
subject, and the same do not require the consent or approval of any other person
or  entity,   including  without   limitation,   any  regulatory   authority  or
governmental  body  of the  United  States,  of any  state  or of any  political
subdivision of the United States or of any State.

     6.3  Financial  Statements.  The  unconsolidated  financial  statements  of
Borrower for the three (3) months  ended  September  30,  l999,  which have been
delivered to Lender, are complete and correct,  have been prepared in conformity
with GAAP, and fairly present the financial  condition and results of operations
of  Borrower  as of the dates and for the periods  stated.  No Material  Adverse
Change in the financial  condition of Borrower has occurred since  September 30,
1999.

     6.4  Liabilities.   As  of  the  date  hereof,  Borrower  has  no  material
liabilities,  direct or contingent,  other than those set forth in the financial
statements of Borrower  referred to in Section 6.3 hereof.  Borrower knows of no
fact,  circumstance,  act,  condition or development  that will or could cause a
Material Adverse Change.

     6.5 Litigation. Borrower is not involved in, nor is aware of the threat of,
any  material  litigation,  nor are there any  outstanding  or unpaid  judgments
against Borrower.

     6.6  Taxes.  All tax  returns  required  to be  filed  by  Borrower  in all
jurisdictions  have  been  filed,  and all  taxes,  assessments,  fees and other
governmental  charges  upon  Borrower  or upon any of its  property,  income  or
franchises,  which are due and  payable,  have been paid,  or adequate  reserves
determined in conformity with GAAP have been provided for payment thereof.

     6.7 Purpose of Loan.  The proceeds of any Advances (a) are not and will not
be used directly or indirectly for the purpose of purchasing or carrying, or for
the  purpose of  extending  credit to others for the  purpose of  purchasing  or
carrying,  any  "margin  stock" as that term is defined in  Regulation  U of the
Board of Governors of the Federal  Reserve System,  as amended;  and (b) will be
otherwise used for lawful purposes.


<PAGE>
                                       20


     6.8 Properties; Liens.

          (a) With  regard  to the  Mineral  Interests  included  in the Deed of
     Trust,  (i)  Borrower  has good and  marketable  title to all such  Mineral
     Interests, free and clear of all Liens except Liens permitted under Section
     8.1 hereof,  and has full authority to create Bank Liens thereon;  and (ii)
     all such  Mineral  Interests  are valid,  subsisting  and in full force and
     effect,  and all rentals,  royalties  and other  amounts due and payable in
     respect thereof have been duly paid.

          (b)  Borrower  has  good  and  marketable  title  to all of its  other
     respective  properties reflected on the financial statements referred to in
     Section 6.3 hereof, and, except for the Liens permitted under Section 8. 1,
     there is no Lien on any asset of Borrower.

          (c) Subject to the Liens  permitted  under  Section 8.1 and Liens that
     neither  materially  detract  from the  marketability  of the  property nor
     impair the use of the  property,  and except as may be limited or otherwise
     affected  by  bankruptcy,   insolvency,   reorganization  or  similar  laws
     affecting  creditors'  rights  generally,  upon  execution,   delivery  and
     recording, or filing, as appropriate,  the Loan Papers will be effective to
     create  in favor of  Lender a legal,  valid and  continuing  first  Lien on
     property (real and personal,  tangible and intangible)  described  therein,
     prior and superior to all other  existing or future  Liens,  and,  upon the
     filing of the  appropriate  notice  documents,  will be enforceable as such
     against  creditors and  purchasers  from  Borrower,  and no other  filings,
     recordings  or  other  actions  are  necessary  or  desirable  in  order to
     establish,  preserve, protect and perfect such Lien in favor of Lender as a
     valid and  perfected  first Lien on such  property,  except a  continuation
     statement may be required under the Uniform Commercial Code.

          (d) None of the  Collateral  is or will be subject to a gas  balancing
     arrangement  under which a material  imbalance exists with respect to which
     imbalance  Borrower  is in an  overproduced  status and is  required to (i)
     permit  one or more  third  parties  to take a  portion  of the  production
     attributable to such  Collateral  without payment (or without full payment)
     therefor,  and/or  (ii)  make  payment  in cash in  order to  correct  such
     imbalance.

     6.9  Material  Agreements.   Except  for  the  Loan  Papers,  the  Material
Agreements  described on Schedule 6.9,  agreements,  documents  and  instruments
giving  rise  to  Mineral  Interests,  farmout  agreements,  gas  contracts  and
operating and joint operating agreements related to any Mineral Interests, there
are no Material  Agreements of Borrower.  The  performance by Borrower under any
Material  Agreement will not cause a Material  Adverse Change.  Borrower is not,
nor will the execution,  delivery and  performance  of and  compliance  with the
terms of the Loan Papers cause Borrower to be, in default (nor has any potential
default  occurred)  under any Material  Agreement,  any  agreement,  document or
instrument giving rise to Mineral Interests,  farmout agreements,  gas contracts
or any  operating  or joint  operating,  or  unitization  agreements  related to
Mineral  Interests,  other than in each case such defaults or potential defaults
which could not, individually or collectively,  cause a Material Adverse Change.
A default by Borrower under any operating or joint operating  agreement  related
to any Mineral  Interests it owns will not result in any loss or  diminution  of
any other Mineral Interests it owns.

<PAGE>
                                       21


     6.10 ERISA.  All plans  maintained by Borrower are in  compliance  with all
funding and other requirements of the Employee Retirement Income Security Act of
1974, as amended  ("ERISA"),  and none have been  terminated or have accrued any
funding deficiency for which Borrower would be liable under said statute.

     6.11 Location of Records. The records of Borrower concerning the Collateral
are kept at the following  location:  110 North Marienfeld,  Suite 465, Midland,
Texas 79701.

     6.12  Permits and  Franchises,  Etc.  Borrower  has all  rights,  licenses,
permits,  franchises,  patents, patent rights, trademarks,  trademark rights and
copyrights  that are  required  in order for it to conduct  its  business as now
conducted  without  known  conflict  with the rights of others.  Borrower is not
aware of any fact or  condition  that might  cause any of such  rights not to be
renewed in due course.

     6.13  Subsidiaries.  Borrower presently has no Subsidiary and owns no stock
or other ownership interest in any other corporation,  limited liability company
or association  other than First Permian,  LLC.  Borrower is not a member of any
general  or  limited  partnership,  joint  venture  or  association  of any type
whatsoever except  associations,  joint ventures or other relationships (a) that
are  established  pursuant to a standard  form  operating  agreement  or similar
agreement or that are partnerships for purposes of federal income taxation only,
(b) that  are not  corporations  or  partnerships  (or  subject  to the  Uniform
Partnership  Act) under  applicable  state  law,  and (c) whose  businesses  are
limited to the  exploration,  development  and  operation of oil, gas or mineral
properties  and interests  owned  directly by the parties in such  associations,
joint ventures or relationships.

     6.14 Hazardous  Wastes and  Substances.  Borrower and its properties are in
compliance with applicable state and federal  environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal  environmental  law or regulation and, except as
previously  disclosed in writing to Lender,  there has not heretofore been filed
any complaint, nor commenced any administrative  procedure,  against Borrower or
any of its  predecessors,  alleging  a  violation  of any  environmental  law or
regulation.  Except in substantial  compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored or disposed of any hazardous
waste, toxic substance,  asbestos or related material ("Hazardous Materials") on
its properties.  For the purposes of this Agreement,  Hazardous  Materials shall
include,  but  shall  not  be  limited  to,  substances  defined  as  "hazardous
substances" or "toxic  substances" in the Comprehensive  Environmental  Response
Compensation  and Liability Act of 1980,  as amended,  42 U.S.C.  9061, et seq.,
Hazardous  Materials  Transportation  Act,  49  U.S.C.  1802,  et seq.,  and the
Resource  Conservation  and  Recovery  Act,  42  U.S.C.  6901,  et  seq.,  or as
"hazardous  substances,"  "hazardous waste" or "pollutant or contaminant" in any
other, applicable federal, state or local environmental law or regulation. There
do not exist upon any property owned by Borrower any  underground  storage tanks
or facilities,  and to the knowledge of Borrower, none of such property has ever
been used for the treatment,  storage,  recycling,  or disposal of any Hazardous
Materials.


<PAGE>
                                       22


     6.15  Public  Utility  Holding-  Company  Act.  Borrower  is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding  company".or  of a  "subsidiary  company"  of a "holding  company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.

     6.16  General.  There  are no  significant  material  facts  or  conditions
relating to the Loan Papers, any of the Collateral,  or the financial  condition
or business  of  Borrower  that could,  collectively  or  individually,  cause a
Material Adverse Change and that have not been related, in writing, to Lender as
an  attachment  to this  Agreement;  and all  writings  heretofore  or hereafter
exhibited  or  delivered  to Lender by or on behalf of Borrower  are and will be
genuine and in all respects what they purport and appear to be.

     6.17  Year  2000  Compliance.  Borrower  has (i)  initiated  a  review  and
assessment  of all areas  within its business and  operations  (including  those
affected by suppliers and vendors) that could be adversely affected by the "Year
2000 Problem" (that is, the risk that computer  applications  used by it (or its
suppliers  and  vendors)  may  be  unable  to  recognize  and  perform  properly
date-sensitive  functions  involving  certain  dates prior to and any date after
December 31, 1999),  (ii) developed a plan and time line for addressing the Year
2000  Problem on a timely  basis,  and (iii) to date,  implemented  that plan in
accordance with that timetable.  Borrower  reasonably believes that all computer
applications (including those of its suppliers and vendors) that are material to
its business and operations  will on a timely basis be able to perform  properly
date-sensitive  functions  for all dates before and after  January 1, 2000 (that
is, be "Year  2000  Compliant"),  except to the  extent  that a failure to do so
could not reasonably be expected to cause a Material Adverse Change.


                                   ARTICLE VII
                              Affirmative Covenants

     As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that,  from the date hereof and until  termination  of this Agreement
and  payment in full of the  Obligation  (except as  otherwise  provided in this
Article), unless otherwise agreed to by Lender in writing:

     7.1  Financial  Statements  and Other  Information.  Borrower will promptly
furnish to Lender  copies of (i) such  information  regarding  its  business and
affairs and  financial  condition  as Lender may  reasonably  request,  and (ii)
without request, the following:

          (a) as soon as  available  and in any event  within  ninety  (90) days
     after  the end of each  fiscal  year of  Borrower,  a  consolidated  and an
     unconsolidated  balance  sheet of  Borrower  as of the close of such fiscal
     year and the related consolidated and unconsolidated  statements of income,
     cash flows and stockholders'  equity of Borrower for such year, which shall
     be audited and  accompanied by the  unqualified  opinion and report thereon
     issued by Borrower's independent public accountants;

<PAGE>
                                       23


          (b) as soon as available and in any event within  forty-five (45) days
     after the end of each  fiscal  quarter  of  Borrower,  a  consolidated  and
     unconsolidated  balance  sheet of  Borrower  as of the close of such fiscal
     quarter and the  related  consolidated  and  unconsolidated  statements  of
     income, cash flows and stockholders' equity for such fiscal quarter;

          (c) as soon as available and in any event within  forty-five (45) days
     after the end of each  fiscal  quarter of  Borrower,  a report  summarizing
     production,  gross  revenues,  expenses,  and  net  revenues  from  all  of
     Borrower's  Mineral  Interests  for such  quarter on a field by field basis
     and, if requested by Lender, on a lease by lease basis;

          (d) on or  before  March  31 of each  year,  an oil  and  gas  reserve
     evaluation  as of  the  close  of the  immediately  preceding  fiscal  year
     covering all of Borrower's  Mineral Interests under the defined  categories
     of proved developed producing,  proved developed  nonproducing,  and proved
     undeveloped,  prepared  by  independent  petroleum  engineers  selected  by
     Borrower and satisfactory to Lender;

          (e) within  forty-five  (45) days after the end of each fiscal quarter
     of Borrower,  the Compliance  Certificate in the form of Exhibit 7.1 hereto
     signed by the President or Chief Financial Officer of Borrower;

          (f) as soon as  available,  copies of all filings by Borrower with the
     Securities and Exchange Commission;

          (g)  immediately  upon  becoming  aware of the  existence  of,  or any
     material  change in the status  of, any  litigation  which  could  create a
     Material Adverse Change if determined adversely against Borrower, a written
     communication to Lender of such matter;

          (h)  immediately  upon  becoming  aware of an Event of  Default or the
     existence  of any  condition or event that  constitutes,  or with notice or
     lapse of time,  or both,  would  constitute  an Event of Default,  a verbal
     notification  to Lender  specifying  the  nature  and  period of  existence
     thereof and what action Borrower is taking or proposes to take with respect
     thereto and,  immediately  thereafter,  a written confirmation to Lender of
     such matters;

          (i)  immediately  upon becoming aware that any person has given notice
     or taken any other  action  with  respect  to a claimed  default  under any
     material  indenture,   mortgage,  deed  of  trust,  promissory  note,  loan
     agreement,  note agreement,  drilling contract,  operating or joint venture
     agreement or any other Material  Agreement or undertaking to which Borrower
     is a party, a verbal  notification to Lender specifying the notice given or
     action  taken by such  person and the nature of the  claimed  defa and what
     action  Borrower is taking or proposes to take with  respect  thereto  and,
     immediately thereafter,  a written communication to Lender of such matters;
     and

          (j)  immediately  upon  becoming  aware  of  the  commencement  of any
     material  action or  material  proceeding  against  Borrower  or any of its
     properties by any governmental agency, including,  without limitation,  the

<PAGE>
                                       24



     Internal Revenue Service,  the Environmental  Protection  Agency,  the U.S.
     Department of Energy or the Federal Energy Regulatory Commission, a written
     communication to Lender of such matter.

All financial  statements,  schedules and other financial  information delivered
hereunder  shall be prepared in  conformity  with GAAP and shall be certified as
true and  correct by the  President  or Chief  Financial  Officer of Borrower by
signature and date thereon.

     7.2  Taxes.  Borrower  will  pay and  discharge  or  cause  to be paid  and
discharged all taxes,  assessments  and  governmental  charges or levies imposed
upon it or upon  its  income  and  profits  or upon any of its  property,  real,
personal or mixed,  or upon any part  thereof,  before the same shall  become in
default,  as well as all lawful  claims for labor,  materials  and  supplies  or
otherwise,  which, if not paid,  might become a Lien upon such properties or any
part thereof;  provided that Borrower shall not be required to pay and discharge
or cause to be paid or  discharged  any such tax,  assessment,  charge,  levy or
claim contested by it in good faith by appropriate proceedings if Borrower shall
have set up adequate reserves therefor,  if required,  under GAAP; and provided,
further,  that the immediately  preceding  provision shall not apply to any Lien
imposed by the U.S.  Government  for  failure to pay  income,  payroll,  FICA or
similar  taxes,  and payment with respect to any such tax,  assessment,  charge,
levy or claim shall be made before any property of Borrower  shall be seized and
sold in satisfaction thereof.

     7.3  Discharge of  Contractual  Obligations.  Borrower  will do and perform
every act and  discharge  all of the  obligations  provided to be performed  and
discharged  under  the  Loan  Papers,  and  any and  all of the  instruments  or
documents referred to or mentioned herein at the time or times and in the manner
required.

     7.4 Legal Status. Borrower will do or cause to be done all things necessary
to  preserve,  renew and keep in full force and effect  its  existence,  rights,
licenses,  permits  and  franchises  and  comply  with all laws and  regulations
applicable to it, and, further, comply with all applicable laws and regulations,
whether now in effect or hereafter  enacted or promulgated  by any  governmental
authority   having   jurisdiction   over  any  of  its  assets  or   properties,
noncompliance with which would cause a Material Adverse Change.

     7.5  Maintenance  and  Evidence of Priority of Bank Liens.  Borrower  shall
perform such acts and duly authorize, execute,  acknowledge,  deliver, file, and
record (or cause to be filed and recorded) such additional assignments, security
agreements,   deeds  of  trust,  mortgages  and  other  agreements,   documents,
instruments  and  certificates  as  Lender  may  reasonably  deem  necessary  or
appropriate  in order to perfect and  maintain  the Bank Liens and  preserve and
protect the Rights of Lender in respect of all  present  and future  Collateral,
and cause to be  furnished  to Lender  such  opinions  of  counsel as Lender may
request  regarding the priority of Borrower's title to, and the Bank Liens upon,
the assets of Borrower, all of which opinions shall be prepared by such law firm
or firms as may be acceptable to Lender.

<PAGE>
                                       25


     7.6 Insurance.  Borrower presently  maintains and will continue to maintain
such policies of liability,  hazard, damage, business interruption and workmen's
compensation  insurance  as  are  customarily  carried  by  companies  similarly
situated.  If requested  by Lender,  any such  policies of insurance  shall show
Lender  therein as loss payee.  Upon  request by Lender,  Borrower  will furnish
Lender with  certificates  and  policies  necessary  to give  Lender  reasonable
assurance of the existence of such coverage.  Borrower agrees to notify promptly
Lender of any  termination  or other  material  change in  Borrower's  insurance
coverage,  and to provide Lender,  upon request,  with all information about the
renewal of each policy at least 15 days prior to the expiration thereof.

     7.7 Reimbursement of Fees and Expenses.  Borrower agrees to pay, on demand,
all  reasonable  out-of-pocket  fees and  expenses  incurred  by  Lender  or its
designated  representatives in connection with the negotiation,  preparation and
execution of this Agreement, all renewals hereof, the other Loan Papers or other
transactions  pursuant  hereto  or to the Loan  Papers,  as well as all costs of
filing and  recordation,  all legal and accounting  fees,  costs associated with
Borrowing  Base  redeterminations  as provided in Section 3.4,  all  inspection,
environmental  audit  and  similar  costs  related  to  the  evaluation  of  the
Collateral, all costs associated with enforcing any of Lender's Rights under the
Loan Papers  (including,  without  limitation,  costs of repossessing,  storing,
transporting,  preserving and insuring any of the  Collateral),  all court costs
associated with enforcing or defending any Rights against  Borrower or any third
party  challenging  said Rights and any other cost or expense incurred by Lender
or its designated  representatives in connection herewith or with the other Loan
Papers, together with interest at the Highest Lawful Rate per annum on each such
amount  commencing 10 days after the date notice of such expenditure is given to
Borrower by Lender until the date it is repaid to Lender.

     7.8  Indemnification.  Borrower agrees to indemnify  Lender,  its officers,
directors, shareholders,  employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities,  obligations' claims, losses, damages,
penalties,  actions,  judgments,  suits,  remedial actions,  costs,  expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that may
be imposed on,  incurred by, or asserted  against  Indemnitee  growing out of or
resulting from (i) the Loan Papers and the  transactions  and events at any time
associated therewith (including, without limitation, the enforcement of the Loan
Papers and the defense of Indemnitee's  actions and inactions in connection with
the Loan),  except to the limited extent such Claims are  proximately  caused by
Indemnitee's  gross negligence or willful  misconduct;  (ii) the presence of any
Hazardous  Materials on or under the properties covered by the Deed of Trust; or
(iii) any activity carried on or undertaken on or off the properties  covered by
the Deed of Trust,  whether  prior to or during the term  hereof and  whether by
Borrower or by any third person,  in  connection  with the  treatment,  storage,
recycling,  removal,  handling or disposal of  Hazardous  Materials  at any time
located  on or under the  properties  covered  by the Deed of Trust.  Indemnitee
shall  have the  right  to  defend  any such  Claims,  employing  its  attorneys
therefor.  While Borrower shall also be entitled to employ its own attorneys and
to  participate  in the defense of any such  Claims,  Indemnitee  shall,  if not
furnished with reasonable indemnity, have the right to compromise and adjust all
such Claims.  The covenants and conditions of this section shall at all times be
construed to be personal covenants in favor of Indemnitee and shall not run with
the lands; provided,  however, that such covenants and indemnity shall remain in

<PAGE>
                                       26

full force and effect  notwithstanding the payment in full of the Obligation and
the release,  either  partially or wholly,  of the Bank Liens or any foreclosure
thereunder.  All such Claims as may be paid by Indemnitee shall bear interest at
the Highest  Lawful  Rate per annum until paid by Borrower  and shall be part of
the  Obligation  secured by the Bank Liens.  THE PARTIES  HERETO  INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY  IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE),  WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE,  CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.

     7.9 Curing of Defects.  Borrower will promptly cure any material defects in
the  execution  and  delivery  of any  of  the  Loan  Papers,  and in any  other
instrument  or  document  referred  to  or  mentioned   herein.   Borrower  will
immediately  execute and  deliver to Lender,  upon  request,  all such other and
further instruments as may be reasonably required or desired by Lender from time
to time in compliance with or  accomplishment of the covenants and agreements of
Borrower made in the Loan Papers.

     7.10 Inspection and Visitation. Borrower will grant Lender access to all of
its books and records, as well as to all of the Collateral, and allow inspection
and  copying  of same by Lender or its  designated  representatives  at any time
during  normal  business  hours or such  other  time as  Lender  may  reasonably
request.

     7.11  Notices.  Borrower will give prompt  written  notice to Lender of any
proceedings  instituted against it by or in any federal or state court or before
any commission or other  regulatory  body,  federal,  state or local,  which, if
adversely determined, would cause a Material Adverse Change.

     7.12 Bank Lien on Other  Assets.  If  requested by Lender,  Borrower  shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements,  financing statements, pledge agreements, or
other  security  documents in favor of Lender  covering  every interest in every
asset or property  (including,  without limitation,  Mineral Interests) owned by
Borrower,  whether now owned or hereafter  acquired,  which shall become part of
the Collateral.

     7.13 Compliance. Borrower will observe and comply with:

          (a) all laws, statutes,  codes, acts, ordinances,  rules, regulations,
     directions and requirements of all federal,  state,  county,  municipal and
     other governments,  departments,  commissions, boards, courts, authorities,
     officials and officers,  domestic and foreign, where the failure to observe
     or comply would cause a Material Adverse Change; and

<PAGE>
                                       27



          (b)  all  orders,  judgments,  decrees,   injunctions,   certificates,
     franchises,  permits,  licenses and  authorizations of all federal,  state,
     county, municipal and other governments,  departments, commissions, boards,
     courts,  authorities,  officials and officers,  domestic and foreign, where
     the failure to observe or comply would cause a Material  Adverse Change and
     against  which it shall  maintain such  reserves as are  appropriate  under
     GAAP.

     7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial  compliance  with  all  state  and  federal  environmental  laws and
regulations  and Borrower  will not place nor permit to be placed any  Hazardous
Materials on any of its properties in violation of applicable  state and federal
environmental  laws.  In  the  event  Borrower  should  discover  any  Hazardous
Materials  on any of its  properties  which  could  result  in a  breach  of the
foregoing  covenant,  Borrower  shall notify  Lender within three (3) days after
such  discovery.  Borrower  shall  dispose of all material  amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C.  6901.  In the event of any notice or filing of any  complaint or
commencement  of any  administrative  hearing or procedure  against the Borrower
alleging a violation of any environmental law or regulation, Borrower shall give
notice to Lender within five (5) days after Borrower has received notice of such
notice or filing.

     7.15 Use of Proceeds.  Borrower will use the proceeds of the Revolving Loan
for  refinancing the Prior Note,  financing oil and gas  acquisitions or capital
expenditures, or working capital in Borrower's oil and gas business.

     7.16 Deposit  Accounts.  Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.

     7.17 Title Curative.  As soon as practicable after receipt by Borrower from
Lender or its  counsel  of  written  notice of  material  title  defects  Lender
reasonably requires to be cured,  Borrower shall use its best efforts to provide
such curative information, in form and substance satisfactory to Lender.

     7.18 Year 2000  Compliance.  Borrower  will  promptly  notify Lender in the
event Borrower discovers or determines that any computer application  (including
those of its  suppliers  and  vendors)  that is  material  to its  business  and
operations  will not be Year 2000  Compliant  on a timely  basis,  except to the
extent that such failure  could not  reasonably  be expected to cause a Material
Adverse Change.


                                  ARTICLE VIII
                               Negative Covenants

     As an inducement to Lender to enter into this  Agreement,  Borrower  hereby
covenants and agrees that,  from the date hereof and until  termination  of this

<PAGE>
                                       28


Agreement and payment in full of the Obligation (except as otherwise provided in
this Article), unless otherwise agreed to by Lender in writing:

     8.1 Liens.  Borrower  will not  create,  assume or suffer to exist any Lien
upon any of its  properties or assets now owned or hereafter  acquired  securing
any  indebtedness  other than the  Obligation or acquire or agree to acquire any
property  under  any  conditional   sale  agreement  or  other  title  retention
agreement, excluding, however, from the operation of this section:

          (a) deposits or pledges to secure payments of workmen's  compensation,
     unemployment insurance, old age pensions or other social security;

          (b)  deposits  or  pledges  to secure  performance  of bids,  tenders,
     contracts (other than contracts for the payment of money),  leases,  public
     or statutory  obligations,  surety or appeal  bonds,  or other  deposits or
     pledges  for  purposes of like  general  nature in the  ordinary  course of
     business;

          (c) Liens for  taxes,  assessments  or other  governmental  charges or
     levies that are not delinquent or that are in good faith being contested or
     litigated,  if such  reserve as shall be  required  by GAAP shall have been
     made  therefor,  provided,  that  this  exception  shall not allow any Lien
     imposed by the U.S. Government for failure to pay income,  payroll, FICA or
     similar taxes;

          (d) mechanics',  carriers', workmen's, repairman's or other like Liens
     arising in the ordinary course of business  securing  obligations less than
     ninety  (90)  days  from  the  date of  invoice,  and on  which  no suit to
     foreclose  has been filed,  or which are in good faith being  contested  or
     litigated,  if such  reserve as shall be  required  by GAAP shall have been
     made therefor;

          (e)  Liens  created  by or  resulting  from  any  litigation  or legal
     proceeding  that is currently  being contested in good faith by appropriate
     proceedings,  if such  reserve as shall be required by GAAP shall have been
     made therefor;

          (f) Liens,  charges and encumbrances  incidental to the conduct of its
     business  or the  ownership  of its  properties  or assets,  which were not
     incurred in  connection  with the  borrowing  of money or the  obtaining of
     advances  or credit and that do not  materially  detract  from the value of
     such  property  or assets  or  materially  impair  the use  thereof  in the
     operation of its business;

          (g) landlords'  Liens for rental not yet due and payable and which, to
     the extent the same encumbers any of the Collateral, are subordinate to the
     Bank Liens;

          (h) Liens  arising in the normal  course of business  under  operating
     agreements covering oil and gas properties and interests therein, including
     such Liens as may arise thereunder  because of the default of other parties
     to the operating agreement; or

          (i) the Bank Liens.
<PAGE>
                                       29


     8.2  Indebtedness.   Borrower  will  not  create,  assume,  incur  or  have
outstanding,  or in any  manner  become  or be  liable  directly  or  indirectly
(whether by way of guaranty or  otherwise) in respect of, any  indebtedness  for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:

          (a) the Note;

          (b) accounts payable for services furnished and for the purchase price
     of materials and supplies  acquired in the ordinary course of its business,
     not more than ninety (90) days from the date of invoice;

          (c)  indebtedness of Borrower in respect of any Derivatives  permitted
     by Section 8.15;

          (d)  indebtedness  of  Borrower  to  Lender  and the  other  financial
     institutions  which are a party to that certain  Restated Credit  Agreement
     dated August 16, 1999, among First Permian,  L.L.C.,  Lender, certain other
     financial  institutions,  Borrower  and  Baytech,  Inc.,  pursuant  to that
     certain  Limited  Guaranty  dated June  30,1999,  executed by Borrower  and
     guaranteeing  indebtedness  of First  Permian,  L.L.C.  in an amount not to
     exceed $10,000,000; and

          (e) other  indebtedness  not to exceed an aggregate amount of $100,000
     at any time outstanding.

     8.3 ERISA Compliance. Borrower will not at any time permit any plan subject
to ERISA maintained by it to (i) engage in any "prohibited  transaction" as such
term is  defined  in  Section  4975 of the  Internal  Revenue  Code of 1986,  as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section  302 of ERISA;  or (iii)  terminate  any such plan in a manner  which
could result in the  imposition  of a lien on its  property  pursuant to Section
4068 of ERISA.

     8.4  Investments.  Borrower  will not make or commit to make,  any advance,
loan,  extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment in
any  person,  or accept any item in  satisfaction  of  indebtedness  (all of the
aforesaid transactions being herein called "Investments"), except:

          (a)  Investments  in accounts,  contract  rights and chattel paper (as
     defined in the Uniform  Commercial Code), and notes receivable,  arising or
     acquired in the ordinary course of business;

          (b)  Investments  with  maturities of not more than 180 days in direct
     obligations of the United States of America, or obligations,  the principal
     and interest of which are  unconditionally  guaranteed by the United States
     of America;

          (c) certificates of deposit maintained with Lender;

<PAGE>
                                       30


          (d) Borrower's existing Investment in First Permian, L.L.C.; and

          (e) other  Investments  not to exceed  $50,000 in the aggregate at any
     time outstanding.

     8.5  Mergers,  Consolidations.  Borrower  will not (i)  amend or  otherwise
modify its  corporate  charter or otherwise  change its  structure in any manner
that  would  cause a  Material  Adverse  Change;  (ii)  form any new  subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or permit
any party to consolidate with or merge into, or acquire it.

     8.6 Dividends and  Distributions.  Neither Borrower nor any Subsidiary will
declare, 1)av or make any loans,  advances,  dividends or distributions,  of any
kind, to its stockholders or other equity owners, or make any other distribution
on  account  of, or  purchase,  acquire  or redeem or retire  any stock or other
security  issued by it,  except  that  Borrower  may pay cash  dividends  on its
outstanding  shares of 6%  Convertible  Preferred  Stock in accordance  with the
provisions of Borrower's Certificate of Designations,  Preferences and Rights of
Serial Preferred Stock - 6% Convertible  Preferred Stock dated October 19, 1998,
provided that no Event of Default  exists at the time of  declaration or payment
of such dividends and the payment of such dividends  would not cause an Event of
Default.

     8.7  Transactions   with  Affiliates.   Borrower  will  not,   directly  or
indirectly,  enter into any transaction (including, but not limited to, the sale
or  exchange  of  property  or  the  rendering  of  services)  with  any  of its
affiliates,  other than in the  ordinary  course of  business  and upon fair and
reasonable  terms no less  favorable  than Borrower could obtain or could become
entitled  to in an  arm's  length  transaction  with a  person  that  was not an
affiliate.

     8.8 Accounting Method and Fiscal Year. Borrower will not make any change in
its present  accounting  method unless such changes are required for  conformity
with GAAP.

     8.9 Nature of Business.  Borrower will not make any  substantial  change in
the nature of its businesses as now conducted.

     8.10  Disposition  of  Assets.  Borrower  will not sell,  transfer,  lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:

          (a)  equipment  that is  worthless or obsolete or which is replaced by
     equipment of equal suitability and value;

          (b) inventory that is sold in the ordinary course of business; and

          (c) interests in oil and gas leases, or portions  thereof,  so long as
     no well situated on any such lease or located on any unit containing all or
     any part thereof,  is capable (or is subject to being made capable  through

<PAGE>
                                       31


     commercially   feasible   operations)   of  producing  oil,  gas  or  other
     hydrocarbons or minerals in commercial quantities.

     8.11 Current Ratio. At all times during the term hereof, Borrower's Current
Ratio shall not be less than 1.00 to 1.

     8.12  Leases.  Borrower  shall not pay or become  liable to pay  rentals or
lease payments on any lease (excluding oil and gas leases),  sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal year.

     8.13 Net Worth.  At all times during the term hereof,  Borrower's Net Worth
shall not be less than (a) $25,000,000,  plus (b) seventy-five  percent (75%) of
the net proceeds of any equity offering by the Borrower on or after December 27,
1999,  plus (c) fifty percent  (50%) of Borrower's  Adjusted Net Income for each
fiscal quarter, if positive, and zero percent (0%) if negative,  determined on a
cumulative  basis, for the period  beginning  January 1, 2000, and ending on the
last day of the most recent fiscal  quarter as of the time in question.  As used
in this  Section  8.13,  Borrower's  Adjusted  Net Income  means for any period,
Borrower's  Net Income for such period,  provided  there shall be excluded  from
such Net Income (to the extent otherwise included therein) the cumulative effect
of a change  in  accounting  principles  and the  after-tax  net  effect  of any
non-recurring non-cash charges, including, without limitation, any charges under
Financial Accounting Standard Board Statement No. 121, as amended,  supplemented
or modified from time to time.

     8.14 Debt Service  Ratio.  At all times during the term hereof,  Borrower's
Debt Service Ratio shall not be less than 1.1 to 1.

     8.15 Derivatives.  Borrower shall not enter into any Derivatives other than
oil and/or gas price Derivatives related to bona fide hedging activities so long
as (i) the aggregate notional amounts of such Derivatives during any calculation
period  do  not  exceed  seventy-five  percent  (75%)  of  Borrower's  estimated
production  from  proved  producing  reserves  existing  as of the  date  of the
execution thereof based upon the then most current reserve  evaluation  required
pursuant to Section 7. 1 (d) above,  (ii) such  Derivatives do not contain terms
or provisions  which could require margin calls,  (iii) the  counterparty to any
such Derivatives  have a minimum rating of "A" by Standard & Poors'  Corporation
or "A3 " by Moody's  Investors  Service,  Inc., (iv) such  Derivatives are for a
term of eighteen (18) months or less, and (v) such Derivatives have the economic
effect of assuring  the receipt by Borrower of a price equal to or greater  than
that under Lender's then current pricing policy.


                                   ARTICLE IX
                              Default and Remedies

     9.1 Events of Default.  If any one or more of the following shall occur and
shall not have been  remedied  in the  period,  if any,  provided,  an "Event of
Default"  shall be deemed to have occurred  hereunder and with respect to all of
the Obligation, unless waived in writing by Lender:

<PAGE>
                                       32


          (a)  default  shall occur in the  payment  when due of the  Obligation
     including, without limitation, any principal or interest due on the Note or
     any commitment or other fee due hereunder;

          (b) any representation, warranty or statement made by Borrower herein,
     in any of the other Loan Papers or in any  certificate  furnished to Lender
     hereunder  shall be breached or shall prove to be untrue or  misleading  in
     any material respect at the time when made;

          (c)  default  shall  occur in the  performance  or  observance  of any
     covenant,  agreement, duty or obligation of Borrower contained herein or in
     any of the  other  Loan  Papers;  provided,  that  breach  of the  covenant
     contained in Sections  8.11,  8.13 or 8.14 hereof shall not  constitute  an
     Event of Default unless the same shall continue for a period of thirty (30)
     days;

          (d) Borrower  shall (i) apply for or consent to the  appointment  of a
     receiver,  trustee or liquidator  of it or of all or a substantial  part of
     its assets;  (ii) be unable, or admit in writing its inability,  to pay its
     debts as they become due;  (iii) make a general  assignment for the benefit
     of  creditors;  (iv) be  adjudicated  a  bankrupt  or  insolvent  or file a
     voluntary petition in bankruptcy;  (v) file a petition or an answer seeking
     reorganization or an arrangement with creditors or to take advantage of any
     bankruptcy  or insolvency  law; (vi) file an answer  admitting the material
     allegations  of, or consent to, or default in answering,  a petition  filed
     against it in any bankruptcy,  reorganization or insolvency proceedings; or
     (vii) take any action (corporate or otherwise) for the purpose of effecting
     any of the foregoing;

               (e) an order, judgment or decree shall be entered by any court of
          competent  jurisdiction approving a petition seeking reorganization of
          Borrower or  appointing a receiver,  trustee or liquidator of Borrower
          or of  all or a  substantial  part  of its  assets,  and  such  order,
          judgment or decree shall continue unstayed in effect for any period of
          thirty (30) consecutive days;

               (f) any Lien for failure to pay income,  payroll, FICA or similar
          taxes  shall  be  filed  by  the  U.S.  Government  or  any  agent  or
          instrumentality thereof against Borrower or any of its assets;

               (g) there shall occur any acceleration, notice of default, filing
          of suit or  notice  of  breach  by any  other  party  to any  Material
          Agreement to which Borrower is a party wherein the amount  involved or
          claimed  exceeds $ 100,000,  following the passage of any grace period
          provided for thereunder;

               (h) default  shall occur in the  payment of any  indebtedness  of
          Borrower  aggregating  $100,000 or more under any note, loan agreement
          or credit  agreement and such default shall continue for more than the
          period of grace, if any, specified  therein,  or any such indebtedness
          shall  become due before its stated  maturity by  acceleration  of the
          maturity  thereof  or shall  become  due by its terms and shall not be
          promptly paid or extended;

<PAGE>
                                       33


               (i) any final  judgment or judgments  for the payment of money in
          the amount of $100,000 or more,  in the  aggregate,  shall be rendered
          against  Borrower and shall not be satisfied  or  discharged  at least
          thirty (30) days prior to the date on which any of its assets could be
          lawfully sold to satisfy such judgment or judgments;

               (j) the good faith  belief by Lender that the prospect of payment
          or performance of the Obligation is materially  impaired,  or that the
          value of the Collateral has, or will be, materially decreased;

               (k) a  Material  Adverse  Change  has  occurred  with  respect to
          Borrower;

               (l) a majority of the individuals comprising the current Board of
          Directors  of  Borrower  shall  resign,  be  declared  incompetent  or
          otherwise be removed  (voluntarily or involuntarily) or cease to serve
          as members of the Board of Directors of Borrower; or

               (m) the occurrence or existence of any default,  event of default
          or other similar  condition or event (however  described) with respect
          to any Rate Management Transaction.

     9.2 Remedies.  Upon the  occurrence  of any Event of default,  Lender shall
have no further  obligation  to  advance  funds  under the Note,  and Lender may
declare all of the  Obligation  to be forthwith  due and payable,  whereupon the
same shall forthwith become due and payable without further presentment, demand,
protest, notice of acceleration or the intent to accelerate,  or other notice of
any kind, all of which Borrower  hereby  expressly  waives,  anything  contained
herein,  in the  Note  or in  any  of the  other  Loan  Papers  to the  contrary
notwithstanding;  provided  that any  default  under  subsections  (d) or (e) of
Section 9.1 shall result in all of the Obligation  becoming  immediately due and
payable in full without the necessity of any act by Lender. Further, Lender may,
in its  discretion.  but shall not be required to,  exercise  such Rights as are
provided it in any of the Loan Papers or at law or in equity.  Nothing contained
in this  Article  shall be  construed to limit or amend in any way the Events of
Default  enumerated  in the  Loan  Papers  or any  other  document  executed  in
connection with the transactions  contemplated  herein.  Further, in such event,
Lender  shall have all other  Rights  afforded to it with respect to Borrower or
any of the  Collateral  under any of the Loan Papers or under any applicable law
or in equity.


                                    ARTICLE X
                                  Miscellaneous

     10.1 Survival of Representations  and Warranties.  All  representations and
warranties  of  Borrower  herein,  and all  covenants,  agreements,  duties  and
obligations of Borrower herein not fully performed on or before the date of this
Agreement, shall survive such date.

     10.2 Communications.  Unless specifically provided otherwise,  whenever any
Loan Paper requires or permits any consent, approval, notice, request, or demand

<PAGE>
                                       34


from one party to another, such communication must be in writing to be effective
and  shall be deemed to have been  given on the day  actually  delivered  or, if
mailed,  on the third day (or if such third day is not a Business  Day,  then on
the next succeeding Business Day) after it is enclosed in an envelope, addressed
to the party to be notified  at the  address  stated  below,  properly  stamped,
sealed, and deposited in the appropriate official postal service.  Until changed
by notice pursuant hereto,  the address for each party for purposes hereof is as
follows:

                BORROWER:       PARALLEL PETROLEUM CORPORATION
                                110 North Marienfeld, Suite 465
                                Midland, Texas 79701

                LENDER:         BANK ONE, TEXAS, N.A.
                                2301 West Wall Street
                                Midland County
                                Midland, Texas 79701
                                Attention: Michael J. Davis

     10.3 Non-Waiver.

          (a) The acceptance by Lender at any time and from time to time of part
     payment  on the  Obligation  shall not  operate as a waiver of any Event of
     Default then existing.

          (b) No waiver by Lender of any Event of  Default  shall  operate  as a
     waiver of any other then existing or subsequent Event of Default.

          (c) No delay or  omission  by Lender  in  exercising  any Right  shall
     impair such Right or operate as a waiver  thereof,  nor shall any single or
     partial  exercise  of any such Right  preclude  other or  further  exercise
     thereof,  or the  exercise  of any other  Right  under  the Loan  Papers or
     otherwise.

          (d) No notice or demand given by Lender in any case shall operate as a
     waiver of Lender's right to take other action in the same, similar or other
     instances without such notice or demand.

          (e) No Advance  hereunder  shall  operate as a waiver by Lender of (i)
     the  representations,  warranties  and covenants of Borrower under the Loan
     Papers;  (ii) any  Event of  Default;  or (iii)  any of the  conditions  to
     Lender's obligation, if any, to make further Advances.

     10.4  Strict  Compliance.  If any  action  or  failure  to act by  Borrower
violates any covenant of Borrower  contained  herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or failure
to act would  otherwise  be  permitted  by any  covenant  (or  exception  to any
covenant) other than the covenant violated.

<PAGE>
                                       35


     10.5 Cumulative  Rights.  The Rights of Lender under the Loan Papers are in
addition to all other Rights  provided by law,  whether or not the Obligation is
due and payable and whether or not Lender has instituted any suit for collection
or other action in connection with the Loan Papers.

     10.6 Governing Law. This Agreement has been prepared, is being executed and
delivered,  and  is  intended  to be  performed,  in the  State  of  Texas.  The
substantive  laws of such state and the  applicable  federal  laws of the United
States of America  shall  govern the  validity,  construction,  enforcement  and
interpretation  of this  Agreement and the other Loan Papers,  without regard to
principles of conflicts of law, PROVIDED,  HOWEVER,  THAT THE RIGHTS PROVIDED IN
THE LOAN PAPERS WITH  REFERENCE  TO  PROPERTIES  SITUATED IN OTHER STATES MAY BE
GOVERNED BY THE LAWS OF SUCH OTHER STATES.

     10.7 Choice of Forum:  Consent to Service of Process and Jurisdiction.  Any
suit, action or proceeding against Borrower arising out of or relating to any of
the Loan Papers or any judgment entered by any court in respect thereof,  may be
brought or enforced in the courts of the State of Texas,  County of Midland,  or
in the United States courts located in the State of Texas, County of Midland, or
in the United States courts located in the State of Texas, as Lender in its sole
discretion  may  elect,   and  Borrower  hereby  submits  to  the   nonexclusive
jurisdiction  of such  courts  for the  purpose  of any  such  suit,  action  or
proceeding.  Borrower hereby  irrevocably  consents to service of process in any
suit,  action or  proceeding  in any of said  courts by the  mailing  thereof by
Lender by registered or certified mail,  postage  prepaid,  to Borrower,  at its
address set forth herein. Borrower hereby irrevocably waives any objections that
it may now or  hereafter  have to the  laying  of venue of any  suit,  action or
proceeding arising out of or relating to any of the other Loan Papers brought in
any of said courts and hereby further irrevocably waives any claim that any such
suit,  action or  proceeding  brought in any such  court has been  brought in an
inconvenient forum.

     10.8 Usury Savings Clause.  Nothing contained in this Agreement,  the Note,
any other Loan Paper or in any other Agreement or undertaking relating hereto or
to  the  Obligation  shall  be  construed  to  obligate   Borrower,   under  any
circumstances  whatsoever,  to pay  interest  at a rate in excess of the Highest
Lawful  Rate.  All sums paid  hereunder  or under the Note that are deemed to be
interest  shall be spread and prorated over the entire period for which the Note
is outstanding.  In the event that any sums received hereunder from Borrower are
at any time under applicable law deemed or held to provide a rate of interest in
excess of the  Highest  Lawful  Rate,  the  effective  rate of  interest  on the
Obligation  shall be deemed reduced to and shall be the Highest Lawful Rate, and
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances  either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the  application of these sums
as a credit against the unpaid  principal  amount of the Note,  whichever remedy
may be elected by Lender.  In  addition,  in the event that the  maturity of the
Note is accelerated by reason of the election by Lender  hereunder,  then earned
interest  may never  include  more than the amount  calculated  pursuant  to the
Highest Lawful Rate, and if unearned interest is provided for in the Note or the
other Loan  Papers,  Borrower  and any other  parties  liable on said  documents
hereby agree to accept as their sole remedy under such circumstances  either (a)
the cancellation of said unearned  interest,  or (b) if theretofore paid, either
the  return to  Borrower  or the  crediting  of said  unearned  interest  on the
principal amount due under the Note or other documents,  whichever action may be

<PAGE>
                                       36



elected  by Lender.  To the extent the  Highest  Lawful  Rate is  determined  by
reference  to the laws of the State of Texas,  same shall be the weekly  ceiling
provided for in Chapter 303 of the Texas Finance Code and in Article 5069-ID.002
of the Revised Civil Statutes of Texas,  in each case as amended,  provided that
Lender may, by notice to Borrower,  elect such other  reference as is allowed by
said statutes.

     10.9 Enforceability. If one or more of the provisions contained in the Loan
Papers shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such in validity,  illegality, or unenforceability shall not affect
any other  provision  of the Loan  Papers or any other  instrument  referred  to
herein.

     10.10  Binding  Effect.  The Loan Papers shall be binding upon and inure to
the benefit of Borrower and Lender and their respective  successors and assigns;
provided,  however,  that  Borrower  shall  not  assign  any  Rights,  duties or
obligations under the Loan Papers without the prior written consent of Lender.

     10.11 No Third Party Beneficiaries.

          (a) The parties do not intend the benefits of the Loan Papers to inure
     to any  third  party,  nor shall the Loan  Papers be  construed  to make or
     render Lender liable to any third party, including, without limitation, any
     materialman,  supplier,  contractor,  subcontractor,  purchaser,  lessor or
     lessee having a claim against Borrower.  Notwithstanding anything contained
     in the Loan  Papers,  or any  conduct or course of conduct by any or all of
     the parties  hereto,  whether  before or after  signing th Agreement or any
     other Loan Paper,  no Loan Paper shall be  construed as creating any right,
     claim  or cause of  action  against  Lender  in favor of any  third  party,
     including,  without  limitation,  any  materialman,  supplier,  contractor,
     subcontractor, purchaser, lessor or lessee having a claim against Borrower.

          (b) All  conditions  to the  obligation  of  Lender  to make  Advances
     hereunder are imposed solely and exclusively for the benefit of Lender, and
     no other  person  shall  have  standing  to  require  satisfaction  of such
     conditions  in  accordance  with their  terms or be entitled to assume that
     Lender  will make or  refuse  to make  Advances  in the  absence  of strict
     compliance  therewith,  and any or all of  such  conditions  may be  freely
     waived  in whole or in part by Lender  at any time if  Lender,  in its sole
     absolute discretion, deems it advisable to do so.

     10.12  Delegation  by  Lender.  Lender  may  perform  any of its  duties or
exercise  any of its Rights by or through its  officers,  directors,  employees,
attorneys, agents or other representatives.

     10.13 Setoff.  Borrower hereby grants to Lender (and to each participant to
whom Lender has conveyed or may hereafter  convey a  participation  in the Note)
the right of setoff to secure payment of the Obligation upon any and all moneys,
securities  or other  property of Borrower  and the proceeds  therefrom,  now or
hereafter  held or received by or in transit to, Lender or any such  participant
or any agent of Lender or such participant, from or for the account of Borrower,

<PAGE>
                                       37


whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposits (general or specific) and credits of Borrower
and any and all claims of Borrower against Lender or any such participant at any
time existing.  Notwithstanding  the foregoing,  nothing  contained herein shall
grant to Lender  the right of setoff  against  an  account  if Lender has actual
knowledge  that any person other than Borrower or any Subsidiary of Borrower has
an ownership interest in such account.

     10.14 Additional  Documents.  It is contemplated  that there may be certain
supplementary and/or corrective  mortgages,  deeds of trust, security agreements
and similar  items  prepared  by Lender to be  executed  by Borrower  subsequent
hereto,  as well as certain other  corrective and additional  documentation  not
executed  concurrently  with this  Agreement  because of the  unavailability  of
information  such as property  and  collateral  descriptions  at the time of the
execution  hereof.  Borrower  hereby agrees to cooperate with Lender and provide
such information in connection  therewith as Lender may reasonably request,  and
to execute and  deliver  such other and further  documentation  as Lender  shall
reasonably request so as to provide Lender with a Bank Lien on the Collateral.

     10.15  Counterparts.  This  Agreement  may be  executed  in any  number  of
counterparts,  each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.

     10.16  Amendments.  Neither this Agreement nor any provision  hereof may be
changed,  waived,  discharged or terminated  orally but only by an instrument in
writing signed by Borrower and Lender.

     10.17 Headings.  All headings used herein are for convenience and reference
purposes only and shall not affect the substance of this Agreement.

     10.18   Conflicts.   In  the  event  that  there  exists  any  conflict  or
inconsistency  between  the terms  hereof and the terms of any other Loan Paper,
the terms  hereof  shall  govern and  control,  provided  that the fact that any
representation,  warranty or covenant  contained  in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.

     10.19 Entirety.  This Agreement and the other Loan Papers embody the entire
agreement among the parties and supersede and supplant all prior  agreements and
understandings with respect to the matters contained herein.

     10.21 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation,  in which event each such other participant shall be entitled to
the rights and benefits  under this  Agreement and the other Loan Papers.  It is
understood and agreed that Lender may provide to  participants  and  prospective
participants  financial information and reports and data concerning Borrower and

<PAGE>
                                       38


Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement.

     10.22 Notice of Final Agreement.  THIS WRITTEN AGREEMENT AND THE OTHER LOAN
PAPERS  REPRESENT  THE  FINAL  AGREEMENT  BETWEEN  THE  PARTIES  AND  MAY NOT BE
CONTRADICTED  BY  EVIDENCE  OF  PRIOR,   CONTEMPORANEOUS,   OR  SUBSEQUENT  ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL  AGREEMENTS  BETWEEN THE
PARTIES.

        EXECUTED as of the date first above written.

                                                PARALLEL PETROLEUM CORPORATION,
                                                  a Delaware corporation


                                                By:  /S/ Larry C. Oldham
                                                     -----------------------
                                                     Larry C. Oldham
                                                     President

                                                BANK ONE, TEXAS, N.A.


                                                By:  /S/ Michael J. Davis
                                                     ----------------------
                                                     Michael J. Davis
                                                     Vice President
<PAGE>







                                   Exhibit 2.2
                               REQUEST FOR ADVANCE








TO:     Bank One, Texas, N.A.

     Pursuant to the  provisions of that certain  Restated Loan  Agreement  (the
"Loan   Agreement")  dated  December  27,  1999,   between  Parallel   Petroleum
Corporation  ("Borrower") and Bank One, Texas, N.A. ("Lender"),  Borrower hereby
requests an Advance in the amount of $_________ to be paid on  ________________,
19___.

     The  undersigned  hereby  certifies,  represents  and warrants on behalf of
Borrower that (i) as of the date hereof, and as a result of making the requested
Advance,  there  does not exist and will not  exist any Event of  Default,  (ii)
Borrower has observed,  performed and complied with all  covenants,  agreements,
duties  and   obligations   contained  in  the  Loan   Papers,   and  (iii)  the
representations and warranties  contained in the Loan Agreement and in the other
Loan Papers are true and correct in all material  respects as of the date hereof
and shall be true and  correct  upon the  making of the  Advance,  with the same
force and effect as though made on and as of the date hereof and thereof.

     Capitalized  terms used but not defined  herein  shall have the  respective
meanings ascribed thereto in the Loan Agreement.

Parallel Petroleum Corporation


By:______________________
Name:____________________
Title: __________________

<PAGE>
                                       1


                                  EXHITBIT 2.4
                                 PROMISSORY NOTE

$30,000,000.00                     Midland, Texas              December 27, 1999

     FOR VALUE  RECEIVED,  the undersigned  PARALLEL  PETROLEUM  CORPORATION,  a
Delaware corporation (referred to herein as "Borrower"),  hereby unconditionally
promises  to pay to the order of BANK  ONE,  TEXAS,  N.A.,  a  national  banking
association ("Lender"), at 2301 West Wall Street, Midland County, Midland, Texas
79701,  or such other address as Lender shall  designate in writing to Borrower,
the principal sum of THIRTY MILLION AND NO/100 DOLLARS  ($30,000,000.00),  or if
less,  so much  thereof as may be advanced  pursuant to the Loan  Agreement  (as
hereinafter defined), in lawful money of the United States of America,  together
with interest from the date hereof until paid at the rates specified in the Loan
Agreement.

     The  principal  and all  accrued  interest  on this  Note  shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.

     This Note is executed  pursuant to that  certain  Restated  Loan  Agreement
dated of even date herewith between Borrower and Lender (herein, as from time to
time amended,  modified or restated,  called the "Loan  Agreement"),  and is the
Note  referred  to  therein.  All  capitalized  terms used but not  specifically
defined herein shall have the meanings  ascribed  thereto in the Loan Agreement.
Reference  is  made to the  Loan  Agreement  and the  other  Loan  Papers  for a
statement of the prepayment rights and obligations of Borrower, a description of
the properties mortgaged and assigned as security, the nature and extent of such
security and the rights of the parties  under the Loan Papers in respect to such
security,  for a statement of the terms and conditions  under which the due date
of this Note I may be  accelerated  and for statements  regarding  other matters
affecting this Note (including  without limitation the obligations of the holder
hereof to advance funds  hereunder,  principal  and interest  payment due dates,
voluntary and mandatory prepayments, exercise of rights and remedies, payment of
attorneys'  fees,  court costs and other costs of collection and certain waivers
by Borrower  and others now or hereafter  obligated  for payment of any sums due
hereunder).  Upon the occurrence of an Event of Default, as that term is defined
in the Loan Agreement or the other Loan Papers, the holder hereof shall have all
rights and  remedies of the Lender under the Loan  Agreement  and the other Loan
Papers.

     Nothing contained in this Note, the Loan Agreement, any other Loan Paper or
in any other agreement or undertaking relating hereto or to the Obligation shall
be construed to obligate Borrower,  under any circumstances  whatsoever,  to pay
interest at a rate in excess of the Highest Lawful Rate. All sums paid under the
Loan Agreement or under this Note that are deemed to be interest shall be spread
and prorated over the entire period for which this Note is  outstanding.  In the
event that any sums received hereunder or under the Loan Agreement from Borrower
are at any  time  under  applicable  law  deemed  or held to  provide  a rate of
interest in excess of the Highest Lawful Rate, the effective rate of interest on
the Obligation  shall be deemed reduced to and shall be the Highest Lawful Rate,
and Borrower and any other  parties  hereby agree to accept as their sole remedy
under such circumstances either the return of any sums of interest that may have
been collected in excess of the Highest Lawful Rate or the  application of these
sums as a credit  against the unpaid  principal  amount of this Note,  whichever
remedy may be elected by Lender. In addition,  in the event that the maturity of
this Note is accelerated by reason of the election by Lender  hereunder or under
the Loan Agreement,  then earned interest may never include more than the amount
calculated  pursuant to the Highest  Lawful  Rate,  and if unearned  interest is
provided  for in this  Note or the other  Loan  Papers,  Borrower  and any other
parties  liable on said  documents  hereby  agree to accept as their sole remedy
under such circumstances  either (a) the cancellation of said unearned interest,
or (b) if  theretofore  paid,  either the return to Borrower or the crediting of
said  unearned  interest  on the  principal  amount due under this Note or other
documents,  whichever action may be elected by Lender. To the extent the Highest
Lawful Rate is determined  by reference to the laws of the State of Texas,  same
shall be the weekly  ceiling  provided  for in Chapter 303 of the Texas  Finance
Code and in Article  5069-lD.001 of the Revised Civil Statutes of Texas, in each
case as amended,  provided  that Lender may, by notice to  Borrower,  elect such
other reference as is allowed by said statutes.

<PAGE>
                                       2



     If any payment of  principal or interest on this Note shall become due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business  Day and such  extension  of time  shall in such  case be  included  in
computing interest in connection with such payment.

     If this Note is placed in the hands of an attorney for collection, or if it
is collected  through any legal proceeding at law or in equity or in bankruptcy,
receivership  or other court  proceedings,  Borrower  agrees to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.

     Borrower and each surety,  endorser,  guarantor and other party ever liable
for payment of any sums of money  payable on this Note,  jointly  and  severally
waive  presentment  and  demand  for  payment,  notice  of  acceleration  or the
intention to accelerate the maturity, protest, notice of protest and nonpayment,
as to this Note and as to each and all installments hereof, and agree that their
liability  under this Note shall not be affected by any renewal or  extension in
the time of payment hereof,  or in any indulgences,  or by any release or change
in any security for the payment of this Note,  and hereby consent to any and all
renewals, extensions, indulgences, releases or changes.

     This  Note  shall be  governed  by and  construed  in  accordance  with the
applicable  laws of the United  States of  America  and the laws of the State of
Texas,  except that  Chapter  346 of the Texas  Finance  Code  (which  regulates
certain revolving credit loan accounts and revolving  tri-party  accounts) shall
not apply to this Note.

     This Note is  given,  to the  extent  of  $15,965,889.22,  in  renewal  and
rearrangement,  but not in extinguishment  or novation,  of the unpaid principal
balance of the  certain  promissory  note dated  July 1, 1996,  in the  original
principal  amount of $30,000,000,  executed by Borrower and payable to the order
of Lender.

<PAGE>
                                       3


     THIS WRITTEN NOTE, THE LOAN  AGREEMENT AND THE OTHER LOAN PAPERS  REPRESENT
THE FINAL AGREEMENT  BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR,  CONTEMPORANEOUS,  OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

        EXECUTED this 27th day of December, 1999.

        BORROWER:

                                                PARALLEL PETROLEUM CORPORATION,
                                                  a Delaware corporation


                                                By: /S/ Larry C. Oldham
                                                    -------------------------
                                                        Larry C. Oldham
                                                        President

<PAGE>

                                  Exhibit 23.1


                        Consent of Independent Auditors




The Board of Directors and Stockholders
Parallel Petroleum Corporation


We consent to the incorporation by reference in the registration statements (No.
33-46959,  No.  33-57348 and No.  333-34617) on Forms S-8, and the  registration
statements (No. 33-90296 and No.  333-11021) on Forms S-3 of Parallel  Petroleum
Corporation of our report dated February 9, 2000, relating to the balance sheets
of Parallel  Petroleum  Corporation  as of December  31, 1999 and 1998,  and the
related statements of income,  stockholders'  equity, and cash flows for each of
the years in the three-year period ended December 31, 1999, which appears in the
December 31,1999 annual report on Form 10-K of Parallel Petroleum Corporation.



                                                /s/ KPMG LLP


Midland, Texas
March 30, 2000

<PAGE>

                                  Exhibit 23.2




                   Consent of Independent Petroleum Engineers




As independent  petroleum  engineers,  we hereby consent to the incorporation by
reference in the  registration  statements (No.  33-46959,  No. 33-57348 and No.
333-34617) on Forms S-8, and the registration  statements (No.  33-90296 and No.
333-11021) on Forms S-3 of Parallel  Petroleum  Corporation  of our estimates of
reserves,  included  in the  annual  report on Form 10-K of  Parallel  Petroleum
Corporation for the fiscal year ended December 31, 1999.



                                           JOE C. NEAL AND ASSOCIATES


Midland, Texas
March 28, 2000

<PAGE>


                                  Exhibit 23.3




                   Consent of Independent Petroleum Engineers


As independent  petroleum  engineers,  Williamson  Petroleum  Consultants,  Inc.
hereby  consents to (i) the use of our reserve  report and all references to our
firm  included  in or made part of the  Parallel  Petroleum  Corporation  annual
report on Form 10-K for the fiscal year ended December 31, 1999 to be filed with
the  Securities  and Exchange  Commission on or about March 30, 2000 and (ii) to
the  incorporation by reference of the Form 10-K in the registration  statements
(No. 33-46959, No. 33-57348 and No. 333-34617 on Forms S-8, and the registration
statements (No. 33-90296 and No. 333-11021) on Forms S-3.





                        /s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.


Midland, Texas
March 30, 2000