##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2008
 o
    
    Transition Report Pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934
 For the transition period from to
 Commission File Number: 000  13305
 PARALLEL PETROLEUM CORPORATION
  Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    75-1971716
(I.R.S. Employer
Identification No.)1004 N. Big Spring, Suite 400
Midland, Texas
(Address of Principal Executive Offices
    
    79701
 (Zip Code)
   Title of Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $.01 par value 
Rights to Purchase Series A Preferred Stock
    
    Nasdaq Global Select Market
  o þ
 o þ
 þ o
 o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




---



##### 



Item No.
    
    PagePART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    17Item 1B. Unresolved Staff Comments
    
    
    35Item 2. Properties
    
    
    35Item 3. Legal Proceedings
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    42Item 6. Selected Financial Data
    
    
    44Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    45Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    74Item 8. Financial Statements and Supplementary Data
    
    
    79Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    79Item 9A. Controls and Procedures
    
    
    79Item 9B. Other Information
    
    
    82PART IIIItem 10.
Directors, Executive Officers and Corporate Governance
    
    
    82Item 11. Executive Compensation
    
    
    87Item 12. Security Ownership of Certain Benefical Owners and Management and
Related Stockholder Matters
    
    
    87Item 13.
Certain Relationships and Related Transactions, and Director
Independence
    
    
    91Item 14. Principal Accountant Fees and Services
    
    
    92PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    93EX-10.24EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



Cautionary Statement Regarding Forward -Looking Statements
  
    
    our future financial and operating performance and results;
    
    our drilling plans and ability to secure drilling rigs to effectuate our plans;
    
    production volumes;
    
    availability of natural gas gathering and transmission facilities;
    
    our business strategy;
    
    market prices;
    
    sources and availability of funds necessary to conduct operations and
complete acquisitions;
    
    development costs;
    
    number and location of planned wells;
    
    our future commodity price risk management activities;
    
    our plans and forecasts; and
    
    any other statements that are not historical facts.
   
    
    difficult and adverse conditions in the global and domestic capital and credit markets;
    
    continued volatility and further deterioration of the capital and credit markets;
    
    uncertainty about the effectiveness of the U.S. governments plan to purchase large
amounts of illiquid, mortgage-backed and other securities from financial institutions;
    
    the impairment of financial institutions;
    
    exposure to financial and capital market risk;
    
    changes in general economic conditions, including the performance of financial
markets and interest rates, which may affect our ability to raise capital and generate
operating cash flow;




---



##### Table of Contents




    
    unanticipated changes in industry trends;
    
    fluctuations in prices of oil and natural gas;
    
    dependence on key personnel;
    
    reliance on technological development and technology development programs;
    
    demand for oil and natural gas;
    
    losses due to future litigation;
    
    future capital requirements and availability of financing;
    
    geological concentration of our reserves;
    
    risks associated with drilling and operating wells;
    
    competition;
    
    general economic conditions;
    
    governmental regulations and liability for environmental matters;
    
    receipt of amounts owed to us by customers and counterparties to our derivative contracts;
    
    hedging decisions, including whether or not to hedge;
    
    terrorist attacks or war;
    
    actions of third party co-owners of interests in properties in which we also
own an interest; and
    
    fluctuations in interest rates and availability of capital.
  1 4
  (ii)




---



##### Table of Contents



PART I
 
 ITEM 1. BUSINESS
 About Our Company
   
    
    Bbl or Bbls  barrel or barrels of oil or other liquid hydrocarbons;
    
    Bcf  billion cubic feet of natural gas;
    
    BOE  equivalent barrel of oil or 6 Mcf of natural gas for one barrel of oil;
    
    MBbls  thousand barrels of oil or other liquid hydrocarbons;
    
    MBoe  thousand barrels of oil equivalent;
    
    MMBbls  million barrels of oil or other liquid hydrocarbons;
    
    MMBoe  million barrels of oil equivalent;
    
    MMBtu  million British thermal units;
    
    Mcf  thousand cubic feet of natural gas; and
    
    MMcf  million cubic feet of natural gas.
   Available Information
 www.sec.gov
 www.plll.com
  (1)




---



##### Table of Contents



cindyt@plll.com
 Developments in 2008 and 2009
 Adverse Economic Environment.
 Amended and Restated Credit Agreement
  First Amendment to Credit Agreement.
 Second
Amendment to Credit Agreement.
 (2)




---



##### Table of Contents



Exercise of Warrants.
 Acquisitions and Divestitures.
 Exchange of Senior Notes 1 4 1 4
 (3)




---



##### Table of Contents



Barnett Shale Farmout Agreement.
 
    
    all wells drilled from November 1, 2008 through December 31, 2009, and all
wells drilled during each succeeding calendar year through 2016 will be treated
as a separate project or payout period, creating eight separate projects or
payout periods;
    
    at the time Chesapeake commences the drilling of a well during one of the
payout periods, we will assign to Chesapeake 100% of our leasehold interest
within the subject unit or lease, reserving and retaining a 50% reversionary
interest that will vest after Chesapeake recovers 150% of its costs for a
particular payout period. Until 150% payout has been reached, Chesapeake will
fund 100% of our costs for drilling, completing and operating wells during the
payout period;
    
    on each project, Chesapeake is entitled to receive all revenues from our
reversionary interest until Chesapeake receives revenues totaling 150% of the
drilling, completion and operating costs Chesapeake incurs in funding our
reversionary interest;
    
    upon reaching the 150% payout level for a given project, 50% of the interest
assigned to Chesapeake will revert back to us;
    
    after 150% project payout, we will pay all costs and receive all revenues
attributable to our 50% reversionary interest in each project;
    
    for wells drilled after January 1, 2017, we will pay all costs and receive
all revenues attributable to our 50% reversionary interest; and
    
    we will retain all of our interest in wells commenced prior to November 1,
2008, except for 3 wells commenced in late October 2008. We will retain all of
our interest in approximately 90 gross (22.4 net) producing wells and 31 gross
(9.49 net) wells in progress.
   (4)




---



##### Table of Contents



2009 Capital Budget
   Proved Reserves as of December 31, 2008
   About Our Business and Strategy
   (5)




---



##### Table of Contents



Proved Reserves as of December 31, 2008(1)Oil
    
    Natural Gas
    
    Total
    
    % of Total(M Bbl)
    
    (M M cf)
    
    (M Boe)
    
    M BoeResource projects:Barnett Shale
    
    
    
    
    
    
    26,008
    
    
    
    4,335
    
    
    
    13
    %New Mexico Wolfcamp
    
    
    1
    
    
    
    34,742
    
    
    
    5,791
    
    
    
    18
    %Total resource projects
    
    
    1
    
    
    
    60,750
    
    
    
    10,126
    
    
    
    31
    %Permian Basin of West Texas
    
    
    21,122
    
    
    
    8,931
    
    
    
    22,610
    
    
    
    68
    %Onshore Gulf Coast of South Texas
    
    
    83
    
    
    
    2,152
    
    
    
    442
    
    
    
    1
    %Total
    
    
    21,206
    
    
    
    71,833
    
    
    
    33,178
    
    
    
    100
    %
 
 (1)
    
    NYMEX prices, as of December 31, 2008, were $44.60 per Bbl and
$5.62 per MMBtu.  
    
    $10.2 million for the completion of wells that were in progress at year-end
in our north Texas Barnett Shale project;
    
    $5.2 million for the completion of wells that were in progress at year-end,
pipeline construction, seismic and leasehold acquisitions in our New Mexico
Wolfcamp Carbonate project;
    
    $12.1 million for the completion of wells that were in progress at year-end,
the drilling and completion of new wells and workovers of existing wells in our
Permian Basin of west Texas properties; and
    
    $1.6 million for the drilling and completion of new wells in our Yegua/Frio
and Cotton Valley Reef projects and lease maintenance on our Utah/Colorado
project.
 Business Segments
  Our Strategy
  Conduct Exploitation Activities on Our Existing Assets.
 (6)




---



##### Table of Contents



Use of Horizontal Drilling and Fracture Stimulation Activities in Gas Resource Plays.
 Use of Advanced Technologies and Production Techniques.
 Acquire Long-Lived Properties with Enhancement Opportunities.
 Conduct Exploratory Activities.
 Drilling Activities in 2008
  (7)




---



##### Table of Contents



Number of GrossNumber of
    
    Wells Drilling or
    
    GrossDepth
    
    Gross
    
    Waiting on Completion
    
    Productive
    
    GrossArea
    
    Range (feet)
    
    Wells Drilled
    
    at December 31, 2008
    
    Wells
    
    Dry WellsNorth TexasBarnett Shale
    
    
    7,000
    
    
    
    
    
    
    
    8,000
    
    
    
    63
    
    
    
    39
    (1)
    
    
    24
    
    
    
    Permian Basin of West Texas
and New MexicoCarm-Ann
    
    
    4,000
    
    
    
    
    
    
    
    4,500
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Harris
    
    
    4,000
    
    
    
    
    
    
    
    4,500
    
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    Fullerton
    
    
    4,000
    
    
    
    
    
    
    
    5,000
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    Wolfcamp Gas
    
    
    4,300
    
    
    
    
    
    
    
    4,500
    
    
    
    23
    
    
    
    3
    
    
    
    20
    
    
    
    Diamond M Deep
    
    
    7,000
    
    
    
    
    
    
    
    8,000
    
    
    
    9
    
    
    
    2
    
    
    
    7
    
    
    
    Onshore Gulf Coast of TexasFrio/Yegua/Wilcox
    
    
    5,000
    
    
    
    
    
    
    
    10,000
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    1117
    
    
    
    45
    
    
    
    71
    
    
    
    1
 
 (1)
    
    Includes 13 wells that were included in the Barnett Shale Farmout Agreement, dated February
11, 2009, with Chesapeake Energy Corporation. See Note19- Subsequent Events. Drilling and Acquisition Costs
  Year Ended December 31,2008
    
    
    2007
    
    
    2006($ in thousands)Proved property acquisition costs
    
    $
    41,481
    
    
    $
    
    
    
    $
    27,370Unproved property acquisition costs
    
    
    41,568
    
    
    
    36,750
    
    
    
    30,058Exploration costs
    
    
    59,290
    
    
    
    55,827
    
    
    
    71,003Development costs
    
    
    88,235
    
    
    
    61,766
    
    
    
    69,285$
    230,574
    
    
    $
    154,343
    
    
    $
    197,716
 Current Drilling Projects
  Fort Worth Basin of North Texas
 
    
    Barnett Shale Gas Project, Tarrant County, Texas
  Permian Basin of New Mexico
 
    
    Wolfcamp Gas Project, Eddy and Chaves Counties, New Mexico
 (8)




---



##### Table of Contents



Permian Basin of West Texas
  
    
    Diamond M Canyon Reef Unit & Shallow Leases, Scurry County, Texas
  
    
    Carm-Ann San Andres Field, Andrews and Gaines Counties, Texas
  
    
    Harris San Andres Field, Andrews and Gaines Counties, Texas
  
    
    Fullerton San Andres Field, Andrews County, Texas
  Onshore Gulf Coast of South Texas
 
    
    Yegua/Frio/Wilcox and Cook Mountain Gas Projects, Jackson, Wharton and Liberty
Counties, Texas
 Our 2009 budget for the south Texas projects is approximately $0.8 million for the drilling of
2 gross (0.5 net) new wells.
 Other Projects
 
    
    East Texas Cotton Valley Reef Gas Project, Leon, Freestone and Anderson Counties,
Texas
  
    
    Utah/Colorado Conventional Oil & Gas and Heavy Oil Sands Projects, Uinta Basin
  (9)




---



##### Table of Contents



Oil and Natural Gas Prices
  Average Price Received for theYear Ended December 31,2008
    
    2007
    
    2006Oil (Bbl)
    
    $
    95.25
    
    
    $
    65.97
    
    
    $
    59.86Natural gas (M cf)
    
    $
    7.74
    
    
    $
    6.29
    
    
    $
    6.19
   Employees and Consultants
   Wells Drilled
  Exploratory Wells (1)
    
    Development Wells (2)Year Ended
    
    Productive
    
    Dry
    
    Productive
    
    DryDecember 31,
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    Net2008
    
    
    39
    
    
    
    10.65
    
    
    
    1
    
    
    
    0.13
    
    
    
    77
    
    
    
    37.73
    
    
    
    
    
    
    
    2007
    
    
    36
    
    
    
    13.93
    
    
    
    1
    
    
    
    1.00
    
    
    
    67
    
    
    
    32.29
    
    
    
    1
    
    
    
    0.372006
    
    
    5
    
    
    
    2.87
    
    
    
    3
    
    
    
    1.42
    
    
    
    122
    
    
    
    68.35
    
    
    
    1
    
    
    
    0.08
 
 (1)
    
    An exploratory well is a well drilled to find and produce oil or natural gas in an unproved
area, to find a new reservoir in a field previously found to be productive of oil or natural
gas in another reservoir, or to extend a known reservoir.(2)
    
    A development well is a well drilled within the proved area of an oil or natural gas
reservoir to the depth of a stratigraphic horizon known to be productive.  (10)




---



##### Table of Contents



Volumes, Prices and Lifting Costs
  Year Ended December 31,2008
    
    2007
    
    2006(in thousands, except per unit data)Production, Prices and Lifting Costs:Oil (Bbls)
    
    
    1,027
    
    
    
    1,051
    
    
    
    1,137Natural gas (M cf)
    
    
    10,944
    
    
    
    7,422
    
    
    
    6,539BOE
    
    
    2,851
    
    
    
    2,288
    
    
    
    2,227Oil price (per Bbl) (1)
    
    $
    95.25
    
    
    $
    65.97
    
    
    $
    59.86Natural gas price (per M cf) (1)
    
    $
    7.74
    
    
    $
    6.29
    
    
    $
    6.19BOE price (1)
    
    $
    64.02
    
    
    $
    50.72
    
    
    $
    48.73Average Lifting Cost (including production taxes) per BOE
    
    $
    13.18
    
    
    $
    11.60
    
    
    $
    10.06
 
 (1)
    
    Average price received at the wellhead for our oil and natural gas.   2008
    
    
    2007
    
    
    2006($ in thousands)Oil revenue
    
    $
    97,799
    
    
    $
    69,315
    
    
    $
    68,076Effect of oil hedges
    
    
    
    
    
    
    
    
    
    
    (11,512
    )Natural gas revenue
    
    
    84,716
    
    
    
    46,716
    
    
    
    40,461$
    182,515
    
    
    $
    116,031
    
    
    $
    97,025
  (11)




---



##### Table of Contents



Markets and Customers
   2008
    
    2007
    
    2006Chesapeake Operating, Inc.
    
    
    22
    %
    
    
    12
    %
    
    

(1)Conoco, Inc.
    
    
    18
    %
    
    
    21
    %
    
    
    20
    %Dale Operating Company
    
    
    (1)
    
    
    
    (1)
    
    
    
    10
    %Occidental Energy Marketing
    
    
    10
    %
    
    
    (1)
    
    
    
        (1)Texland Petroleum, Inc.
    
    
    29
    %
    
    
    30
    %
    
    
    30
    %Tri-C Resources, Inc.
    
    
    (1)
    
    
    
        (1)
    
    
    
    12
    %
 
 (1)
    
    Less than 10%.     Office Facilities
   Competition
  (12)




---



##### Table of Contents




    
    adequate capital resources for projects in our core areas of operations;
    
    the technological capabilities to conduct a thorough evaluation of a
particular project; and
    
    a small staff that can respond quickly to exploration and acquisition
opportunities.
  
    
    leasehold prospects under which oil and natural gas reserves may be
discovered or developed;
    
    drilling rigs and related equipment to explore for such reserves;
    
    data necessary to identify, evaluate and acquire properties and the
financial resources necessary to carry out the purchase and development of
the properties; and
    
    knowledgeable and experienced personnel to conduct all phases of oil and
natural gas operations.
 Oil and Natural Gas Regulations
  
    
    price controls;
    
    taxes; and
    
    environmental and other laws relating to the oil and natural gas industry.
   (13)




---



##### Table of Contents




    
    the unitization of pooling of oil and natural gas properties;
 
    
    the establishment of maximum rates of production from oil and natural gas
wells; and
 
    
    the regulation of spacing, plugging and abandonment of wells.
     Environmental Regulations
  
    
    require prior governmental authorization for certain activities;
 
    
    limit or prohibit activities because of protected areas or species;
 
    
    impose substantial liabilities for pollution related to our operations or
properties; and
 (14)




---



##### Table of Contents




    
    provide significant penalties for noncompliance.
  
    
    containment or cleanup;
 
    
    personal injury;
 
    
    property damage; and
 
    
    penalties assessed or other claims sought for natural resource damages.
  
    
    Water. The Oil Pollution Act, or OPA, was enacted in 1990 and
amends provisions of the Federal Water Pollution Control Act of 1972 (FWPCA)
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 us. States in which we operate 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
us.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. 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.We generate non-hazardous solid waste that fall under
the requirements of the Federal Resource Conservation and Recovery Act and
comparable state statues. The EPA and the states in which we operate are
considering the adoption of stricter disposal standards for the type of
non-hazardous waste we generate. The
 (15)




---



##### Table of Contents



Resource Conservation and Recovery Act
also governs the generation, management, and disposal of hazardous wastes. At
present, we are not required to comply with a substantial portion of the
Resource Conservation and Recovery Act requirements because our operations
generate minimal quantities of hazardous wastes. However, it is anticipated
that additional wastes, which could include wastes currently
generated during operations, could in the future be designated as hazardous
wastes. Hazardous wastes are subject to more rigorous and costly disposal and
management requirements than are non-hazardous wastes. Such changes in the
regulations may result in us incurring additional capital expenditures or
operating expenses.Wastes containing naturally occurring radioactive materials (NORM) may also
be generated in connection with our operations. Certain processes used to
produce oil and gas may enhance the radioactivity of NORM, which may be
present in oilfield wastes. NORM is not subject to regulation under the Atomic
Energy Act of 1954, or the Low Level Radioactive Waste Policy Act. NORM is
subject primarily to individual state radiation control regulations. In
addition, NORM handling and management activities are governed by regulations
promulgated by the Occupational Safety and Health Administration (OSHA).
These state and OSHA regulations impose certain requirements concerning work
protection; the treatment, storage and disposal of NORM waste; the management
of waste piles, containers and tanks containing NORM; and restrictions on the
uses of land with NORM contamination.
 
    
    Superfund.The Comprehensive Environmental Response, Compensation,
and Liability Act, sometimes called CERCLA or Superfund, imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a hazardous substance
into the environment. These persons include the current owner or operator of
any site where a release historically occurred and companies that disposed or
arranged for the disposal of the hazardous substances found at the site.
CERCLA also authorizes the EPA and, in some instances, third parties to act
in response to threats to the public health or the environment and to seek to
recover from the responsible classes of persons the costs they incur. In the
course of our ordinary operations, we may have managed substances that may
fall within CERCLAs definition of a hazardous substance. We may be jointly
and severally liable under CERCLA for all or part of the costs required to
clean up sites where we disposed of or arranged for the disposal of these
substances. This potential liability extends to properties that we owned or
operated as well as to properties owned and operated by others at which
disposal of our hazardous substances occurred.We currently own or lease numerous properties that for many years have been
used for exploring and producing oil and natural 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.
  (16)




---



##### Table of Contents



Massachusetts, et al. v. EPA Massachusetts
 
 ITEM 1A. RISK FACTORS
  Risks Related to Our Business
 General economic conditions could adversely impact our results of operations.
    (17)




---



##### Table of Contents



Adverse capital and credit market conditions may significantly affect our ability to meet liquidity
needs, access to capital and cost of capital.
     Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations and we do not expect these conditions to
improve in the near future.
  (18)




---



##### Table of Contents



There can be no assurance that actions of the U.S. Government, Federal Reserve and other
governmental and regulatory bodies for the purpose of stabilizing the financial markets will
achieve the intended effect.
  The impairment of financial institutions could adversely affect us.
  If the counterparties to the derivative instruments we use to hedge our business risks default or
fail to perform, we may be exposed to risks we had sought to mitigate, which could materially
adversely affect our financial condition and results of operations.
 (19)




---



##### Table of Contents



The fluctuation and volatility of oil and natural gas prices may adversely affect our business, the
value of our mineral properties, our revenues and profitability.
  The volatility of the oil and natural gas industry may have an adverse impact on our operations.
  
    
    the level of oil and natural gas prices, expectations about future oil and natural
gas prices and the ability of international cartels to set and maintain production
levels and prices;
    
    the cost of exploring for, producing and transporting oil and natural gas;
    
    the level and price of foreign oil and natural gas transportation;
    
    available pipeline and other oil and natural gas transportation capacity;
    
    weather conditions;
 (20)




---



##### Table of Contents




    
    international political, military, regulatory and economic conditions;
    
    the level of consumer demand;
    
    the price and the availability of alternative fuels;
    
    the effect of worldwide energy conservation measures; and
    
    the ability of oil and natural gas companies to raise capital.
  
    
    impair our financial condition, liquidity, ability to finance planned
capital expenditures and results of operations;
    
    reduce the amount of oil and natural gas that we can produce economically;
    
    cause us to delay or postpone some of our capital projects;
    
    reduce our revenues, operating income and cash flow; and
    
    reduce the recorded value of our oil and natural gas properties.
  We must replace oil and natural gas reserves that we produce. Failure to replace reserves may
negatively affect our business.
  We are subject to uncertainties in reserve estimates and future net cash flows.
  (21)




---



##### Table of Contents




    
    actual prices we receive for oil and natural gas;
    
    the amount and timing of actual production;
    
    supply and demand of oil and natural gas;
    
    limits of increases in consumption by natural gas purchasers; and
    
    changes in governmental regulations or taxation.
  Competition in the oil and natural gas industry is intense, and many of our competitors have
greater financial, technological and other resources than we do.
  
    
    seeking to acquire desirable producing properties or new leases for future
exploration;
 
    
    marketing our oil and natural gas production;
 
    
    integrating new technologies; and
 
    
    seeking to acquire the equipment and expertise necessary to develop and
operate our properties.
  We do not control all of our operations and development projects, which may adversely affect our
production, revenues and results of operations.
 (22)




---



##### Table of Contents




    
    timing and amount of capital expenditures;
 
    
    expertise and financial resources;
 
    
    inclusion of other participants in drilling wells; and
 
    
    use of technology.
  Our business is subject to many inherent risks, including operating risks, which may result in
substantial losses, and insurance may be unavailable or inadequate to protect us against these
risks.
   
    
    explosions, blowouts and fires;
 
    
    natural disasters;
 
    
    pressure forcing oil or natural gas out of the wellbore at a dangerous
velocity coupled with the potential for fire or explosion;
 
    
    weather;
 
    
    failure of oilfield drilling and service equipment and tools;
 
    
    changes in underground pressure in a formation that causes the surface to
collapse or crater;
 
    
    pipeline ruptures or cement failures;
 
    
    environmental hazards such as natural gas leaks, oil spills and discharges
of toxic gases; and
 (23)




---



##### Table of Contents




    
    availability of needed equipment at acceptable prices, including steel
tubular products.
  
    
    injury or loss of life;
 
    
    damage to and destruction of property, natural resources and equipment;
 
    
    pollution and other environmental damage;
 
    
    regulatory investigations and penalties;
 
    
    suspension of our operations; and
 
    
    repair and remediation costs.
   The oil and natural gas industry is capital intensive.
    
    
    our proved reserves;
 
    
    the level of oil and natural gas we are able to produce from existing
wells;
 
    
    the prices at which oil and natural gas are sold; and
 
    
    our ability to acquire, locate and produce new reserves.
   There are risks in acquiring producing properties, including difficulties in integrating acquired
properties into our business, additional liabilities and expenses associated with acquired
properties,
 (24)




---



##### Table of Contents



diversion of management attention, increasing the scope, geographic diversity and
complexity of our operations and incurrence of additional debt.
    We could experience delays in securing drilling equipment and crews, which would cause us to fail
to meet our drilling plans and negatively impact our operations.
  The marketability of our natural gas production depends on facilities that we typically do not own
or control.
  Our producing properties are geographically concentrated.
  (25)




---



##### Table of Contents



Our derivative activities create a risk of financial loss.
  
    
    production is less than the hedged volumes;
 
    
    the counterparties to our future contracts fail to perform under the contract; or
 
    
    a sudden, unexpected event materially impacts oil or natural gas prices.
   We are subject to complex federal, state and local laws and regulations that could adversely affect
our business.
  
    
    permits for drilling operations;
    
    drilling bonds;
    
    spacing of wells;
    
    unitization and pooling of properties;
    
    environmental protection;
    
    reports concerning operations; and
 (26)




---



##### Table of Contents




    
    taxation.
  
    
    personal injuries;
    
    property damage;
    
    oil spills;
    
    discharge of hazardous materials;
 
    
    reclamation costs;
    
    remediation and clean-up costs; and
    
    other environmental damages.
  Declining oil and natural gas prices may cause us to record ceiling test write-downs.
    Terrorist activities may adversely affect our business.
  (27)




---



##### Table of Contents



We are highly dependent upon key personnel.
    Part of our business is seasonal in nature.
  Failure to maintain effective internal controls could have a material adverse effect on our
operations.
  Our business can be adversely impacted by downward changes in oil and natural gas prices,
and most significantly by declines in oil prices.
  A shortage of available drilling rigs, equipment and personnel may delay or restrict our
operations.
  (28)




---



##### Table of Contents



Risks Related to Our Common Stock
 We do not pay dividends on our common stock.
 1 4
 Our stockholders rights plan, provisions in our corporate governance documents and Delaware
law may delay or prevent an acquisition of Parallel, which could decrease the value of our
common stock.
   
    
    restrictions on dividends on common stock and other series of
preferred stock if dividends on any new series of preferred stock have
not been paid;
    
    dilution of the voting power of common stock and other series of
preferred stock to the extent that a new series of preferred stock has
voting rights, or to the extent that any new series of preferred stock
is convertible into common stock;
    
    dilution of the equity interest of common stock and other series of
preferred stock; and
    
    limitation on the right of holders of common stock and other series
of preferred stock to share in Parallels assets upon liquidation until
satisfaction of any liquidation preference attributable to any new
series of preferred stock.
 (29)




---



##### Table of Contents



Future sales of our common stock could adversely affect our stock prices.
  The price of our common stock may fluctuate which may cause our common stock to trade at a
substantially lower price than the price which you paid for our common stock.
  If securities analysts downgrade our stock or cease coverage of us, the price of our stock
could decline.
  Risks Related to Our 101/4% Senior Notes and Our Other Indebtedness
 We have a substantial amount of indebtedness, which may adversely affect our cash flow and
our ability to operate our business, remain in compliance with debt covenants and make
payments on our debt, including our 101/4% senior notes .
 1 4
 
    
    we may have difficulty borrowing money in the future for
acquisitions, capital expenditures or to meet our operating expenses or
other general corporate obligations;
    
    we will need to use a substantial portion of our cash flows to pay
principal and interest on our debt, which will reduce the amount of
money we have for operations, working capital, capital expenditures,
expansion, acquisitions or general corporate or other business
activities;
    
    we may have a higher level of debt than some of our competitors,
which may put us at a competitive disadvantage;
 (30)




---



##### Table of Contents




    
    we may be more vulnerable to economic downturns and adverse
developments in our industry or the economy in general, especially
declines in oil and natural gas prices; and
    
    our debt level could limit our flexibility in planning for, or
reacting to, changes in our business and the industry in which we
operate.
 We may incur substantially more debt, which may intensify the risks described above,
including our ability to service our indebtedness.
 1 4 1 4
 To service our indebtedness, we will require a significant amount of cash. Our ability to
generate cash depends on many factors beyond our control, and any failure to meet our debt
obligations could harm our business, financial condition and results of operations.
 1 4
 1 4 1 4 1 4
  
    
    our debt holders declaring all outstanding principal and interest due and
payable;
 (31)




---



##### Table of Contents




    
    the lenders under our revolving credit facility terminating their
commitments to loan us money and foreclose against the assets securing their
loans to us; and
    
    our bankruptcy or liquidation, which is likely to result in delays in the
payment of our 101/4% senior notes and in the exercise of enforcement remedies
under our 101/4% senior notes.
 1 4
 Restrictive debt covenants in the Indenture and the amended and restated credit agreement
governing our revolving credit facility restrict our business in many ways.
 1 4
 
    
    transfer or sell assets;
    
    make investments;
    
    pay dividends, redeem subordinated indebtedness or make other
restricted payments;
    
    incur or guarantee additional indebtedness or issue disqualified
capital stock;
    
    create or incur liens;
    
    incur dividend or other payment restrictions affecting certain
subsidiaries;
    
    consummate a merger, consolidation or sale of all or substantially
all of our assets;
    
    enter into transactions with affiliates; and
    
    engage in businesses other than the oil and gas business.
 1 4 1 4
 1 4
 (32)




---



##### Table of Contents



Our borrowings under our revolving credit facility expose us to interest rate risk.
  We are subject to many restrictions under our revolving credit facility. If we default under
our revolving credit facility, the lenders could foreclose on, and acquire control of,
substantially all of our assets.
  1 4
 Our 101/4% senior notes are structurally subordinated to any of our secured indebtedness to
the extent of the assets securing such indebtedness.
 1 4 1 4 1 4 1 4 1 4 1 4
 (33)




---



##### Table of Contents



1 4
 A subsidiary guarantee could be voided if it constitutes a fraudulent transfer under U.S.
bankruptcy or similar state laws, which would prevent the holders of our 101/4% senior
notes from relying on the subsidiary to satisfy our payment obligations under the 101/4%
senior notes .
 1 4
 
    
    was insolvent or rendered insolvent by making the subsidiary
guarantee;
    
    was engaged in a business or transaction for which the subsidiary
guarantors remaining assets constituted unreasonably small capital; or
    
    intended to incur, or believed that it would incur, debts beyond its
ability to pay them as they mature.
    
    
    the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets;
    
    the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
    
    it could not pay its debts as they become due.
 1 4 1 4 1 4
 (34)




---



##### Table of Contents



We may not have sufficient liquidity to repurchase the 101/4% senior notes upon a change of
control .
 1 4 1 4 1 4 1 4 1 4 1 4 1 4
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
 General
  (35)




---



##### Table of Contents



(36)




---



##### Table of Contents



Producing Wells and Acreage
  Producing Wells(1)
    
    AcreageOil(2)
    
    Gas
    
    Developed
    
    UndevelopedGross
    
    Net(3)
    
    Gross
    
    Net(3)
    
    Gross
    
    Net(4)
    
    Gross
    
    Net(4)Resource ProjectsBarnett Shale
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    22.40
    
    
    
    5,450
    
    
    
    1,401
    
    
    
    28,151
    
    
    
    8,936New Mexico
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    51.74
    
    
    
    18,105
    
    
    
    13,386
    
    
    
    79,777
    
    
    
    64,115Total Resource Projects
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    74.14
    
    
    
    23,555
    
    
    
    14,787
    
    
    
    107,928
    
    
    
    73,051Permian Basin of West TexasFullerton
    
    
    170
    
    
    
    144.54
    
    
    
    
    
    
    
    
    
    
    
    3,683
    
    
    
    3,155
    
    
    
    
    
    
    
    Carm-Ann/N. Means Queen
    
    
    95
    
    
    
    81.69
    
    
    
    
    
    
    
    
    
    
    
    4,431
    
    
    
    3,949
    
    
    
    378
    
    
    
    294Harris
    
    
    84
    
    
    
    74.94
    
    
    
    
    
    
    
    
    
    
    
    1,637
    
    
    
    1,476
    
    
    
    3,428
    
    
    
    3,217Diamond M
    
    
    103
    
    
    
    91.10
    
    
    
    
    
    
    
    
    
    
    
    5,805
    
    
    
    5,096
    
    
    
    
    
    
    
    Other Permian
    
    
    60
    
    
    
    27.57
    
    
    
    13
    
    
    
    10.80
    
    
    
    22,439
    
    
    
    15,429
    
    
    
    
    
    
    
    Total Permian Basin
    
    
    512
    
    
    
    419.84
    
    
    
    13
    
    
    
    10.80
    
    
    
    37,995
    
    
    
    29,105
    
    
    
    3,806
    
    
    
    3,511Onshore Gulf Coast of South TexasYegua/Frio/Wilcox
    
    
    3
    
    
    
    0.62
    
    
    
    27
    
    
    
    6.48
    
    
    
    4,332
    
    
    
    1,895
    
    
    
    2,643
    
    
    
    1,036Cook Mountain
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    1.04
    
    
    
    1,482
    
    
    
    166
    
    
    
    74
    
    
    
    14Total Onshore Gulf Coast
of South Texas
    
    
    3
    
    
    
    0.62
    
    
    
    37
    
    
    
    7.52
    
    
    
    5,814
    
    
    
    2,061
    
    
    
    2,717
    
    
    
    1,050Other ProjectsCotton Valley
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.30
    
    
    
    1,121
    
    
    
    100
    
    
    
    19,726
    
    
    
    3,544Utah/Colorado
    
    
    11
    
    
    
    0.34
    
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    156
    
    
    
    179,932
    
    
    
    175,786Total Other Projects
    
    
    11
    
    
    
    0.34
    
    
    
    2
    
    
    
    0.30
    
    
    
    1,281
    
    
    
    256
    
    
    
    199,658
    
    
    
    179,330Grand Total
    
    
    526
    
    
    
    420.80
    
    
    
    232
    
    
    
    92.76
    
    
    
    68,645
    
    
    
    46,209
    
    
    
    314,109
    
    
    
    256,942
 
 (1)
    
    Does not include 258 gross (131.30 net) wells that were shut in or
temporarily abandoned as of December 31, 2008.(2)
    
    Does not include 161 gross (134.29 net) injection wells as of December 31,
2008.(3)
    
    Net wells are computed by multiplying the number of gross wells by our
working interest in the gross wells.(4)
    
    Net acres are computed by multiplying the number of gross acres by our
working interest in the gross acres.     (37)




---



##### Table of Contents



Title to Properties
  Oil and Natural Gas Reserves
    Proved Developed
    
    Proved Developed
    
    Proved
    
    TotalProducing
    
    Non-Producing
    
    Undeveloped
    
    ProvedOil (MBbls)
    
    
    11,235
    
    
    
    902
    
    
    
    9,069
    
    
    
    21,206Gas (MMcf)
    
    
    53,111
    
    
    
    2,640
    
    
    
    16,082
    
    
    
    71,833MBOE
    
    
    20,087
    
    
    
    1,342
    
    
    
    11,749
    
    
    
    33,178
   (38)




---



##### Table of Contents



ReservesProduction
    
    
    Total Proved
    
    
    Proved DevelopedNatural
    
    
    
    
    
    
    
    
    
    
    Natural
    
    
    
    
    
    
    NaturalOil
    
    
    Gas
    
    
    
    
    
    
    Oil
    
    
    Gas
    
    
    Oil
    
    
    Gas(MBbls)
    
    
    (MMcf)
    
    
    MBOE
    
    
    (MBbls)
    
    
    (MMcf)
    
    
    (MBbls)
    
    
    (MMcf)Resource ProjectsBarnett Shale
    
    
    
    
    
    
    5,049
    
    
    
    842
    
    
    
    
    
    
    
    26,008
    
    
    
    
    
    
    
    20,262New Mexico Wolfcamp
    
    
    1
    
    
    
    4,596
    
    
    
    767
    
    
    
    1
    
    
    
    34,742
    
    
    
    1
    
    
    
    28,302Total Resource Projects
    
    
    1
    
    
    
    9,645
    
    
    
    1,609
    
    
    
    1
    
    
    
    60,750
    
    
    
    1
    
    
    
    48,564Permian Basin of West TexasFullerton
    
    
    518
    
    
    
    91
    
    
    
    533
    
    
    
    7,628
    
    
    
    1,208
    
    
    
    7,286
    
    
    
    1,143Carm-Ann SanAndres/N. Means Queen
    
    
    122
    
    
    
    60
    
    
    
    132
    
    
    
    3,424
    
    
    
    1,600
    
    
    
    919
    
    
    
    299Harris
    
    
    185
    
    
    
    38
    
    
    
    191
    
    
    
    5,093
    
    
    
    677
    
    
    
    1,617
    
    
    
    269Diamond M
    
    
    144
    
    
    
    182
    
    
    
    174
    
    
    
    4,731
    
    
    
    3,138
    
    
    
    1,986
    
    
    
    1,017Other Permian Basin
    
    
    37
    
    
    
    254
    
    
    
    80
    
    
    
    246
    
    
    
    2,308
    
    
    
    245
    
    
    
    2,308Total Permian Basin
    
    
    1,006
    
    
    
    625
    
    
    
    1,110
    
    
    
    21,122
    
    
    
    8,931
    
    
    
    12,053
    
    
    
    5,036Onshore Gulf Coast of South Texas
    
    
    20
    
    
    
    674
    
    
    
    132
    
    
    
    83
    
    
    
    2,152
    
    
    
    83
    
    
    
    2,151Total
    
    
    1,027
    
    
    
    10,944
    
    
    
    2,851
    
    
    
    21,206
    
    
    
    71,833
    
    
    
    12,137
    
    
    
    55,751
     (39)




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
  th
  (40)




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (41)




---



##### Table of Contents



PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information
  Closing Price Per ShareHigh
    
    Low2006First Quarter
    
    $
    21.13
    
    
    $
    15.67Second Quarter
    
    $
    25.56
    
    
    $
    18.47Third Quarter
    
    $
    26.39
    
    
    $
    18.90Fourth Quarter
    
    $
    20.96
    
    
    $
    16.342007First Quarter
    
    $
    23.31
    
    
    $
    16.00Second Quarter
    
    $
    24.69
    
    
    $
    21.79Third Quarter
    
    $
    22.88
    
    
    $
    16.76Fourth Quarter
    
    $
    20.96
    
    
    $
    16.652008First Quarter
    
    $
    19.88
    
    
    $
    13.15Second Quarter
    
    $
    23.22
    
    
    $
    19.21Third Quarter
    
    $
    20.79
    
    
    $
    8.62Fourth Quarter
    
    $
    8.87
    
    
    $
    1.61
   Dividends
 1 4
 Sale of Unregistered Securities
  (42)




---



##### Table of Contents



Repurchase of Equity Securities
  (43)




---



##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
  Year Ended December 31,2008(1)
    
    2007
    

2006(2)
    
    2005
    
    2004(in thousands, except per share and per unit data)Consolidated Income Statement Data:Operating revenues
    
    $
    182,515
    
    
    $
    116,031
    
    
    $
    97,025
    
    
    $
    66,150
    
    
    $
    35,837Operating expenses
    
    $
    392,761
    
    
    $
    67,066
    
    
    $
    56,606
    
    
    $
    32,805
    
    
    $
    23,571Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,589
    )
    
    $
    2,271Cumulative preferred stock dividend
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (271
    )
    
    $
    (572
    )Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155
    
    
    $
    (1,860
    )
    
    $
    1,699Income (loss) per common shareBasic
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.73
    
    
    $
    (0.06
    )
    
    $
    0.07Diluted
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.71
    
    
    $
    (0.06
    )
    
    $
    0.07Weighted
average common stock and common stock equivalents outstandingBasic
    
    
    41,471
    
    
    
    38,120
    
    
    
    35,888
    
    
    
    32,253
    
    
    
    25,323Diluted
    
    
    41,471
    
    
    
    38,120
    
    
    
    36,756
    
    
    
    32,253
    
    
    
    25,688Cash dividends  common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheet Data:Total assets
    
    $
    550,576
    
    
    $
    563,093
    
    
    $
    442,818
    
    
    $
    253,008
    
    
    $
    170,671Total liabilities
    
    $
    443,530
    
    
    $
    327,831
    
    
    $
    259,036
    
    
    $
    163,506
    
    
    $
    110,677Long-term debt, less current maturities
    
    $
    370,890
    
    
    $
    205,383
    
    
    $
    165,000
    
    
    $
    100,000
    
    
    $
    79,000Total stockholders equity
    
    $
    107,046
    
    
    $
    235,262
    
    
    $
    183,782
    
    
    $
    89,502
    
    
    $
    59,994Consolidated Statement of Cash Flow Data:Cash provided by (used in)Operating activities
    
    $
    121,041
    
    
    $
    74,119
    
    
    $
    68,186
    
    
    $
    35,359
    
    
    $
    17,415Investing activities
    
    $
    (258,297
    )
    
    $
    (164,897
    )
    
    $
    (194,548
    )
    
    $
    (83,190
    )
    
    $
    (68,777
    )Financing activities
    
    $
    165,743
    
    
    $
    92,684
    
    
    $
    125,854
    
    
    $
    49,468
    
    
    $
    38,765Operating Data:Product SalesOil (Bbls)
    
    
    1,027
    
    
    
    1,051
    
    
    
    1,137
    
    
    
    923
    
    
    
    729Gas (M cf)
    
    
    10,944
    
    
    
    7,422
    
    
    
    6,539
    
    
    
    3,592
    
    
    
    2,690BOE
    
    
    2,851
    
    
    
    2,288
    
    
    
    2,227
    
    
    
    1,522
    
    
    
    1,177Average
sales price(3)Oil (per Bbl)
    
    $
    95.25
    
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    51.78
    
    
    $
    39.05Gas (per M cf)
    
    $
    7.74
    
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    8.54
    
    
    $
    5.85Proved reservesOil (Bbls)
    
    
    21,206
    
    
    
    28,434
    
    
    
    28,721
    
    
    
    21,192
    
    
    
    18,916Gas (M cf)
    
    
    71,833
    
    
    
    57,234
    
    
    
    58,896
    
    
    
    25,237
    
    
    
    16,825
 (44)




---



##### Table of Contents



(1)
    
    Includes $300.5 million impairment of oil and natural
gas properties. See Note 5- Oil and Natural Gas Properties(2)
    
    Results include $9.0 million of equity in income of pipeline and gathering systems
representing our share of net gain on sale of certain pipeline assets.(3)
    
    Excludes the effects of hedging. 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview and Strategy
    
    
    focuses on projects having less geologic risk;
    
    emphasizes acquisition, exploitation, development and enhancement
activities;
    
    includes the utilization of horizontal and fracture stimulation technologies
on certain types of reservoirs;
    
    focuses on acquiring producing properties; and
    
    expands the scope of operations by diversifying our exploratory and
development efforts, both in and outside of our primary areas of operation.
 (45)




---



##### Table of Contents




    
    the prices we receive for the oil and natural gas we produce;
    
    the results of reprocessing and reinterpreting our 3-D seismic data;
    
    the results of our drilling activities;
    
    the costs of obtaining high quality field services;
    
    our ability to find and consummate acquisition opportunities;
    
    our ability to negotiate and enter into work to earn arrangements, joint
ventures or other similar arrangements on terms acceptable to us; and
    
    sources and availability of funds to conduct operations and complete
acquisitions.
  Operating Performance
  
    
    seasonal demand;
    
    weather;
    
    hurricane conditions in the Gulf of Mexico;
    
    availability of pipeline transportation to end users;
    
    proximity of our wells to major transportation pipeline infrastructures; and
    
    to a lesser extent, world oil prices.
  
    
    production expense;
    
    overhead requirements;
    
    costs of capital; and
    
    effects of our derivative contracts.
 (46)




---



##### Table of Contents



Results of Operations
   
    
    reserve base;
    
    sources of production;
    
    product mix (gas versus oil volumes); and
    
    the prices we receive for our oil and natural gas production.
   (47)




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006(in thousands, except per unit data)Production Volumes:Oil (Bbls)
    
    
    1,027
    
    
    
    1,051
    
    
    
    1,137Natural gas (Mcf)
    
    
    10,944
    
    
    
    7,422
    
    
    
    6,539BOE
    
    
    2,851
    
    
    
    2,288
    
    
    
    2,227BOE per day
    
    
    7.8
    
    
    
    6.3
    
    
    
    6.1Sale Prices:Oil (per Bbl)(1)
    
    $
    95.25
    
    
    $
    65.97
    
    
    $
    59.86Natural gas (per Mcf)(1)
    
    $
    7.74
    
    
    $
    6.29
    
    
    $
    6.19BOE Price(1)
    
    $
    64.02
    
    
    $
    50.72
    
    
    $
    48.73BOE Price(2)
    
    $
    64.02
    
    
    $
    50.72
    
    
    $
    43.56Operating Revenues:Oil
    
    $
    97,799
    
    
    $
    69,315
    
    
    $
    68,076Effect of oil hedges
    
    
    
    
    
    
    
    
    
    
    (11,512
    )Natural gas
    
    
    84,716
    
    
    
    46,716
    
    
    
    40,461182,515
    
    
    
    116,031
    
    
    
    97,025Operating Expenses:Lease operating expense
    
    
    28,454
    
    
    
    22,200
    
    
    
    16,819Production taxes
    
    
    9,135
    
    
    
    5,545
    
    
    
    5,577Production tax refund
    
    
    (1,958
    )
    
    
    (1,209
    )
    
    
    General and administrative
    
    
    11,907
    
    
    
    10,415
    
    
    
    9,523Depreciation, depletion and amortization
    
    
    44,691
    
    
    
    30,115
    
    
    
    24,687Impairment of oil and natural gas properties
    
    
    300,532
    
    
    
    
    
    
    
    392,761
    
    
    
    67,066
    
    
    
    56,606Operating income (loss)
    
    $
    (210,246
    )
    
    $
    48,965
    
    
    $
    40,419
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. Critical Accounting Policies and Practices
  Use of Critical Accounting Estimates in the Preparation of Consolidated Financial
Statements.
 (48)




---



##### Table of Contents



Full Cost and Impairment of Assets.
   Depletion.
 (49)




---



##### Table of Contents



Proved Reserve Estimates.
   Income Taxes. Accounting for Income Taxes .
 Asset Retirement Obligations. Accounting for Asset Retirement Obligations
 (50)




---



##### Table of Contents



Stock Based Compensation. Share-Based Payment,
 Litigation and Other Contingency Reserves.
 Allowance for Doubtful Accounts.
 Derivatives. Accounting for Derivative Instruments and Hedging Activities Accounting for Certain
Derivative Instruments and Certain Hedging Activities on Amendment of FASB Statement No. 133 Fair Value
Measurements
   (51)




---



##### Table of Contents



Years Ended December 31, 2008 and December 31, 2007
   Oil and Gas Revenues
 Revenues
    
    Production2008
    
    2007
    
    2008
    
    2007Oil (Bbls)
    
    
    54
    %
    
    
    60
    %
    
    
    36
    %
    
    
    46
    %Natural gas (M cf)
    
    
    46
    %
    
    
    40
    %
    
    
    64
    %
    
    
    54
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  %Year Ended December 31,
    
    
    Increase
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)(in thousands, except per unit data)Production Volumes:Oil (Bbls)
    
    
    1,027
    
    
    
    1,051
    
    
    
    (24
    )
    
    
    (2
    )%Natural gas (M cf)
    
    
    10,944
    
    
    
    7,422
    
    
    
    3,522
    
    
    
    47
    %BOE
    
    
    2,851
    
    
    
    2,288
    
    
    
    563
    
    
    
    25
    %BOE per day
    
    
    7.8
    
    
    
    6.3
    
    
    
    1.5
    
    
    
    24
    %Sale Prices:Oil (per Bbl)
    
    $
    95.25
    
    
    $
    65.97
    
    
    $
    29.28
    
    
    
    44
    %Natural gas (per M cf)
    
    $
    7.74
    
    
    $
    6.29
    
    
    $
    1.45
    
    
    
    23
    %BOE price
    
    $
    64.02
    
    
    $
    50.72
    
    
    $
    13.30
    
    
    
    26
    %Operating Revenues:Oil
    
    $
    97,799
    
    
    $
    69,315
    
    
    $
    28,484
    
    
    
    41
    %Natural gas
    
    
    84,716
    
    
    
    46,716
    
    
    
    38,000
    
    
    
    81
    %Total
    
    $
    182,515
    
    
    $
    116,031
    
    
    $
    66,484
    
    
    
    57
    %
 Oil revenues
  Natural gas revenues
  (52)




---



##### Table of Contents



Costs and Expenses
 %Year Ended December 31,
    
    
    Increase
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    28,454
    
    
    $
    22,200
    
    
    $
    6,254
    
    
    
    28
    %Production taxes
    
    
    9,135
    
    
    
    5,545
    
    
    
    3,590
    
    
    
    65
    %Production tax refund
    
    
    (1,958
    )
    
    
    (1,209
    )
    
    
    (749
    )
    
    
    62
    %General and administrative
    
    
    11,907
    
    
    
    10,415
    
    
    
    1,492
    
    
    
    14
    %Depreciation, depletion and amortization
    
    
    44,691
    
    
    
    30,115
    
    
    
    14,576
    
    
    
    48
    %Impairment of oil and natural gas properties
    
    
    300,532
    
    
    
    
    
    
    
    300,532
    
    
    
    N/ATotal
    
    $
    392,761
    
    
    $
    67,066
    
    
    $
    325,695
    
    
    
    486
    %
 Lease operating expense
  Production taxes
   General and Administrative
  (53)




---



##### Table of Contents



Depreciation, depletion and amortization
  Impairment of oil and natural gas properties
  Other income (expense)
 %Year Ended December 31,
    
    
    Increase
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    32,018
    
    
    $
    (36,776
    )
    
    $
    68,794
    
    
    
    187
    %Interest and other income
    
    
    278
    
    
    
    197
    
    
    
    81
    
    
    
    41
    %Interest expense, net of capitalized interest
    
    
    (23,750
    )
    
    
    (19,177
    )
    
    
    (4,573
    )
    
    
    24
    %Cost of debt retirement
    
    
    (286
    )
    
    
    (760
    )
    
    
    474
    
    
    
    (62
    )%Other expense
    
    
    (12
    )
    
    
    (118
    )
    
    
    106
    
    
    
    (90
    )%Equity in income (loss) of pipelines
and gathering system ventures
    
    
    380
    
    
    
    (311
    )
    
    
    691
    
    
    
    (222
    )%Total
    
    $
    8,628
    
    
    $
    (56,945
    )
    
    $
    65,573
    
    
    
    (115
    )%
 Gain (loss) on derivatives not classified as hedges
  Interest expense
  Cost of debt retirement
  (54)




---



##### Table of Contents



Equity in income (loss) of pipelines and gathering system ventures
   Income taxes, deferred
  Basic and diluted net loss
  Years Ended December 31, 2007 and December 31, 2006
   Oil and Gas Revenues
 Revenues(1)
    
    Production2007
    
    2006
    
    2007
    
    2006Oil (Bbls)
    
    
    60
    %
    
    
    58
    %
    
    
    46
    %
    
    
    51
    %Natural gas (M cf)
    
    
    40
    %
    
    
    42
    %
    
    
    54
    %
    
    
    49
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 
 (1)
    
    Includes the effects of derivative transactions accounted for as hedges. (55)




---



##### Table of Contents



%Year Ended December 31,
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)(in thousands, except per unit data)Production Volumes:Oil (Bbls)
    
    
    1,051
    
    
    
    1,137
    
    
    
    (86
    )
    
    
    (8
    )%Natural gas (M cf)
    
    
    7,422
    
    
    
    6,539
    
    
    
    883
    
    
    
    14
    %BOE
    
    
    2,288
    
    
    
    2,227
    
    
    
    61
    
    
    
    3
    %BOE per day
    
    
    6.3
    
    
    
    6.1
    
    
    
    0.2
    
    
    
    3
    %Sale Prices:Oil (per Bbl)(1)
    
    $
    65.97
    
    
    $
    59.86
    
    
    $
    6.11
    
    
    
    10
    %Natural gas (per M cf)(1)
    
    $
    6.29
    
    
    $
    6.19
    
    
    $
    0.10
    
    
    
    2
    %BOE price(1)
    
    $
    50.72
    
    
    $
    48.73
    
    
    $
    1.99
    
    
    
    4
    %BOE price(2)
    
    $
    50.72
    
    
    $
    43.56
    
    
    $
    7.16
    
    
    
    16
    %Operating Revenues:Oil
    
    $
    69,315
    
    
    $
    68,076
    
    
    $
    1,239
    
    
    
    2
    %Effect of oil hedges
    
    
    
    
    
    
    (11,512
    )
    
    
    11,512
    
    
    
    (100
    )%Natural gas
    
    
    46,716
    
    
    
    40,461
    
    
    
    6,255
    
    
    
    15
    %Total
    
    $
    116,031
    
    
    $
    97,025
    
    
    $
    19,006
    
    
    
    20
    %
 
 (1)
    
    Excludes hedge transactions.(2)
    
    Includes hedge transactions. Oil revenues
  Natural gas revenues
  Oil hedges
  (56)




---



##### Table of Contents



Costs and Expenses
 %Year Ended December 31,
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Lease operating expense
    
    $
    22,200
    
    
    $
    16,819
    
    
    $
    5,381
    
    
    
    32
    %Production taxes
    
    
    5,545
    
    
    
    5,577
    
    
    
    (32
    )
    
    
    (1
    )%Production tax refund
    
    
    (1,209
    )
    
    
    
    
    
    
    (1,209
    )
    
    
    N/AGeneral and administrative
    
    
    10,415
    
    
    
    9,523
    
    
    
    892
    
    
    
    9
    %Depreciation, depletion and amortization
    
    
    30,115
    
    
    
    24,687
    
    
    
    5,428
    
    
    
    22
    %Total
    
    $
    67,066
    
    
    $
    56,606
    
    
    $
    10,460
    
    
    
    18
    %
 Lease operating expense
  Production taxes
   General and administrative
   (57)




---



##### Table of Contents



Depreciation, depletion and amortization
  Other income (expense)
 %Year Ended December 31,
    
    
    Increase
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)
    
    
    (Decrease)($ in thousands)Gain (loss) on derivatives not classified as hedges
    
    $
    (36,776
    )
    
    $
    2,802
    
    
    $
    (39,578
    )
    
    
    (1,412
    )%Gain (loss) on ineffective portion of hedges
    
    
    
    
    
    
    626
    
    
    
    (626
    )
    
    
    (100
    )%Interest and other income
    
    
    197
    
    
    
    158
    
    
    
    39
    
    
    
    25
    %Interest expense, net of capitalized interest
    
    
    (19,177
    )
    
    
    (12,360
    )
    
    
    (6,817
    )
    
    
    55
    %Cost of debt retirement
    
    
    (760
    )
    
    
    
    
    
    
    (760
    )
    
    
    N/AOther expense
    
    
    (118
    )
    
    
    (189
    )
    
    
    71
    
    
    
    (38
    )%Equity in income (loss) of pipelines
and gathering system ventures
    
    
    (311
    )
    
    
    8,593
    
    
    
    (8,904
    )
    
    
    (104
    )%Total
    
    $
    (56,945
    )
    
    $
    (370
    )
    
    $
    (56,575
    )
    
    
    15,291
    %
 Gain (loss) on derivatives not classified as hedges
   Interest expense
  (58)




---



##### Table of Contents



Cost of debt retirement
  Equity in income (loss) of pipelines and gathering system ventures
    Income tax
   Basic and diluted net income
  Liquidity and Capital Resources
  (59)




---



##### Table of Contents



Year ended December 31,2008
    
    2007
    
    2006($ in thousands)Operating activities
    
    $
    121,041
    
    
    $
    74,119
    
    
    $
    68,186Investing activities
    
    $
    (258,297
    )
    
    $
    (164,897
    )
    
    $
    (194,548
    )Financing activities
    
    $
    165,743
    
    
    $
    92,684
    
    
    $
    125,854
   (60)




---



##### Table of Contents



Shelf Registration Statement
  Revolving Credit Facility
  (61)




---



##### Table of Contents



(62)




---



##### Table of Contents




    
    creating, incurring, assuming or permitting to exist any lien, security
interest or other encumbrance on any of our assets or properties, except
specified permitted liens;
    
    selling, leasing, transferring or otherwise disposing of any of our assets,
except (a) our oil and natural gas properties between scheduled determinations
of the borrowing base having an aggregate value not exceeding the lesser of
(i) 5% of the value of all of our proved producing oil and natural gas
reserves, or (ii) $20.0 million; (b) extracted petroleum hydrocarbons sold in
the ordinary course of our business; (c) worthless or obsolete equipment; (d)
transfers to us or any subsidiary; and (e) our assets and the assets of any
subsidiary having an aggregate fair market value not exceeding
$10.0 million;
 
    
    allowing our current ratio (as adjusted for available borrowing and
unrealized derivative losses) to be less than 1.0 to 1.0 as of the end of any
fiscal quarter;
    
    allowing our ratio of consolidated funded debt to consolidated EBITDA for any fiscal
quarter (calculated at the end of each fiscal quarter using the results of the
immediately preceding twelve-month period) to exceed 4.25 to 1.00 as of December 31,
2008 and for any test period during 2009 and 2010, or 4.00 to 1.00 during the year 2011
and thereafter. See Note 19- Subsequent Events;
    
    allowing our adjusted consolidated net worth to be less than the sum of (a)
$175.0 million, plus (b) 75% of the net proceeds from the sale of any equity
securities, plus (c) 50% of our consolidated net income for each fiscal quarter
determined on a cumulative basis from January 1, 2008;
    
    forming or acquiring any new subsidiary or consolidating or merging with or
into any other entity, except for certain intra-company consolidations or
mergers where we are the surviving entity;
    
    becoming liable in respect of any indebtedness, or guaranteeing or otherwise
in any manner becoming liable for indebtedness, liabilities or other
obligations of any other person, except for (a) indebtedness incurred in
connection with our revolving credit facility; (b) taxes, assessments and
government charges; (c) obligations arising out of interest rate management
transactions permitted under our revolving credit facility; (d) indebtedness
evidenced by our 101/4% senior notes due 2014 not to exceed the aggregate
principal amount of $150.0 million; (e) indebtedness incurred in the ordinary
course of business that is not more than 60 days past due; or (f) other
indebtedness not exceeding $1.0 million in the aggregate;
    
    declaring, paying or making any loans, advances, distributions or dividends
to our equity owners, or purchasing, acquiring, redeeming or retiring any stock
or other security issued by us, except for certain purchases of the notes and
certain intra-company dividends or distributions from our subsidiaries to us;
    
    making or permitting to remain outstanding any loans or advances to any
person or entity, except (a) advances made in the ordinary course of our
business; (b) other loans or advances to a third party not to exceed $1.0
million in the aggregate; or (c) intra-company loans;
    
    discounting, or selling with recourse, or selling for less than market
value, any of our notes receivable or accounts receivable;
 (63)




---



##### Table of Contents




    
    permitting any material change in the character of our business;
    
    entering into transactions with our affiliates, except transactions upon
terms that are no less favorable than could be obtained in a transaction
negotiated at arms length with an unrelated third party;
    
    entering into commodity hedging or interest rate management transactions,
except transactions required by our revolving credit facility, consented to by
our lenders, or transactions designed to hedge, provide a floor price for, or
swap crude oil or natural gas, provided certain conditions are satisfied;
    
    making any investments in any person or entity, except (a) investments with
maturities of not more than 180 days in direct obligations of the United States
of America or any agency thereof; (b) investments in certain certificates of
deposit; (c) our existing investments at May 16, 2008; (d) investments after
May 16, 2008 in Hagerman Gas Gathering System, not to exceed $5.0 million in
the aggregate; (e) investments in any subsidiary; (f) other investments not to
exceed $5.0 million in the aggregate during any calendar year when aggregated
with loans and advances permitted to be made or remain outstanding under our
revolving credit facility;
    
    permitting any material amendment or alteration to our organizational or
governing documents;
    
    permitting any plan subject to ERISA to (a) engage in any prohibited
transaction as such term is defined in Section 4975 of the Internal Revenue
Code of 1986, as amended; (b) incur any accumulated funding deficiency as
such term is defined in Section 302 of ERISA; or (c) terminate in a manner
which could result in the imposition of a lien on its property pursuant to
Section 4068 of ERISA;
    
    permitting any change in accounting method or fiscal year;
    
    allowing our subsidiaries to issue or sell to any third party any equity
interest in them, or any option, warrant or other right to acquire any such
equity interest;
    
    making any amendment or entering into any agreement to amend or otherwise
change the Indenture governing our 101/4% senior notes due 2014, failing to
comply with the terms of the Indenture, or, except as specifically required by
the Indenture, making any prepayment of amounts owing under such notes; or
    
    permitting or incurring any lease obligations which would cause the
aggregate amount of all payments pursuant to all such leases to exceed $1.0
million in any twelve month period during the life of such leases, except for
oil and gas related leases.
  Senior Notes
 Purchase Agreement 1 4
 (64)




---



##### Table of Contents



Indenture
  1 4
  Year
    
    Redemption Price2011
    
    
    105.125
    %2012
    
    
    102.563
    %2013
    
    
    100.000
    %
     (65)




---



##### Table of Contents




    
    the sale or other disposition of all or substantially all of our assets;
 
    
    the adoption by the Board of Directors of a plan of liquidation or
dissolution;
    
    any person becomes the owner of more than 50% of our voting stock;
    
    the first day on which a majority of the members of the Board of Directors
of Parallel are not continuing directors; or
    
    certain mergers and consolidations with or into any other person.
  
    
    default for 30 days in the payment when due of interest on the senior notes;
    
    default in the payment when due of the principal of the senior notes;
    
    our failure to comply with the covenants or agreements in the Indenture;
    
    defaults on indebtedness under other mortgages, indentures or instruments
which results from our failure to pay the principal or interest on such
indebtedness or which results in the acceleration of such indebtedness prior to
its maturity and the principal amount of any such indebtedness aggregates $10.0
million or more;
    
    our failure to pay final judgments in excess of $10.0 million;
    
    any subsidiary guarantee is held in any judicial proceeding to be
unenforceable or invalid; and
    
    certain events of bankruptcy or insolvency with respect to us or certain of
our subsidiaries.
  
    
    transfer or sell assets;
    
    make investments;
    
    pay dividends, redeem subordinated indebtedness or make other restricted
payments;
    
    incur or guarantee additional indebtedness or issue disqualified capital
stock;
    
    create or incur liens;
    
    incur dividend or other payment restrictions affecting certain subsidiaries;
 (66)




---



##### Table of Contents




    
    consummate a merger, consolidation or sale of all or substantially all of
our assets;
    
    enter into transactions with affiliates; and
    
    engage in businesses other than the oil and gas business.
  Registration Rights Agreement
  Debt Ratings
 Commodity Price and Interest Rate Risk Management Transactions and Effects of Derivative
Instruments
    (67)




---



##### Table of Contents



Fair Value Measurements
   Future Capital Requirements
  
    
    our internally generated cash flows;
 (68)




---



##### Table of Contents




    
    the availability of additional borrowings under our revolving credit
facility or from other sources;
    
    the availability of supplies and services;
    
    additional sources of funding; and
    
    our future drilling successes.
 Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  Obligation Due in PeriodContractual Cash Obligations
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    After 5 years
    
    
    Total($ in thousands)Revolving Credit Facility (secured)(1)
    
    $
    10,688
    
    
    $
    10,688
    
    
    $
    10,688
    
    
    $
    10,688
    
    
    $
    235,688
    
    
    $
    
    
    
    $
    278,440Senior Notes (unsecured)(2)
    
    
    15,375
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    15,375
    
    
    
    165,375
    
    
    
    242,250Office Lease (Dinero Plaza)
    
    
    271
    
    
    
    107
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    409Asset Retirement Obligations(3)
    
    
    158
    
    
    
    1,966
    
    
    
    129
    
    
    
    296
    
    
    
    40
    
    
    
    8,790
    
    
    
    11,379Derivative Obligations
    
    
    3,004
    
    
    
    2,821
    
    
    
    2,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,140Put Premium Obligations(4)
    
    
    646
    
    
    
    2,341
    
    
    
    1,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,676Hagerman Gas Gathering System earn out(5)
    
    
    
    
    
    
    
    
    
    
    532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    532Total
    
    $
    30,142
    
    
    $
    33,298
    
    
    $
    30,759
    
    
    $
    26,359
    
    
    $
    251,103
    
    
    $
    174,165
    
    
    $
    545,826
 
 (1)
    
    Outstanding principal of $225.0 million due December 31, 2013 and estimated interest
obligation calculated using the interest rate at December 31, 2008 of 4.75%. See Note 11-
Credit Arrangements.(2)
    
    Outstanding principal of $150.0 million due August 1, 2014 and interest obligation calculated
at an interest rate of 101/4%.(3)
    
    Asset retirement obligations of oil and natural gas assets, excluding salvage value and
accretion.(4)
    
    The put premium obligations above represent the undiscounted obligation to our counterparty.
We have recognized $97,000 of interest for the year ended December 31, 2008 and will recognize
$394,000 of additional interest associated with the put premium obligations over the remaining
life of the contracts.(5)
    
    Estimated earn out obligation due an unaffiliated third party based on the operation
efficiency of the Hagerman Gas Gathering System.    (69)




---



##### Table of Contents



Trends and Outlook
     
    
    revised our 2009 capital expenditures downward to $29.1 million of which:
 
    
    $10.2 million for the completion of wells that were in progress at
year-end in our North Texas Barnett Shale project;
    
    $5.2 million for the completion of wells that were in progress at
year-end, pipeline construction, seismic and leasehold acquisitions in our
New Mexico Wolfcamp Carbonate project;
    
    $12.1 million for the completion of wells that were in progress at
year-end, the drilling and completion of new wells and workovers of
existing wells in our Permian Basin of West Texas properties; and
    
    $1.6 million for the drilling and completion of new wells in our
Yegua/Frio and Cotton Valley Reef projects and lease maintenance on our
Utah/Colorado project
 
    
    drew an additional $62.5 million under our Revolving Credit Agreement and
invested the majority of the $62.5 million in a demand deposit money market
account for the purpose of strengthening our liquidity;
    
    did not request an increase in our borrowing base at the present time
because of the associated interest rate and fee increases; and
    
    entered into the Barnett shale Farmout Agreement described on
page 4.
 (70)




---



##### Table of Contents




    
    internally generated cash from operations;
    
    proceeds from bank borrowings;
    
    industry joint venture arrangements;
    
    proceeds from sales of equity and debt securities; and
    
    proceeds from sales of non-core assets.
 The continued availability of these capital sources depends upon a number of variables,
including:
 
    
    our proved reserves;
    
    the volumes of oil and natural gas we produce from existing wells;
    
    the prices at which we sell oil and natural gas;
    
    our ability to acquire, locate and produce new reserves; and
    
    events occurring within the global capital markets.
  
    
    increased bank borrowings;
    
    additional sales of our debt or equity securities;
    
    sales of non-core properties;
    
    other forms of financing; or
    
    a combination of any of the above.
  Oil and Natural Gas Price Trends
  (71)




---



##### Table of Contents



Production Trends
    Lease Operating Expense Trends
  Interest Expense Trends
  Inflation
  (72)




---



##### Table of Contents



Recent Accounting Pronouncements
 Fair
Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities, Including an Amendment of FASB Statement No. 115,
 Amendment of FASB Interpretation
No. 39
 Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statementsan amendment of ARB No. 51
 Effective Date of
FASB Statement No. 157 157-2),
 (73)




---



##### Table of Contents



Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities
 The Hierarchy of Generally Accepted Accounting
Principles The
Meaning of Present Fairly in Conformity With General Accepted
Accounting Principles
 Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities Earnings per Share
 Modernization of Oil and Gas Reporting. a b c
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  (74)




---



##### Table of Contents



Market risk
 Credit risk
 Funding risk
 Operational risk
     Non-derivative Financial Instruments
  Derivative Financial Instruments
  (75)




---



##### Table of Contents



Interest Rate Sensitivity as of December 31, 2008
  2013 and2009
    
    2010
    
    2011
    
    2012
    
    after
    
    TotalRevolving Credit Facility (secured)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    225,000
    
    
    $
    225,000Interest rate
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %
    
    
    4.75
    %Senior notes
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150,000
    
    
    $
    150,000Interest rate
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
    
    
    10.25
    %
  1 4 1 4
  (76)




---



##### Table of Contents



Notional
    
    
    Weighted Average

    
    EstimatedPeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates

    
    Fair Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2009 through December 31, 2009
    
    $
    100
    
    
    
    4.22
    %
    
    $
    (3,004
    )January 1, 2010 through October 31, 2010
    
    $
    100
    
    
    
    4.71
    %
    
    
    (2,517
    )November 1, 2010 through December 31, 2010
    
    $
    50
    
    
    
    4.26
    %
    
    
    (216
    )January 1, 2011 through December 31, 2011
    
    $
    100
    
    
    
    4.67
    %
    
    
    (2,315
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (8,052
    )
 Commodity Price Sensitivity
      (77)




---



##### Table of Contents



Put Options.
   Barrels of
    
    
    
    
    
    
    EstimatedPeriod of Time
    
    Oil
    
    
    Floor
    
    
    Fair Market Value($ in thousands)January 1, 2009 through December 31, 2009
    
    
    109,500
    
    
    $
    100.00
    
    
    $
    5,112January 1, 2010 through December 31, 2010
    
    
    280,100
    
    
    $
    84.36
    
    
    
    6,405January 1, 2011 through December 31, 2011
    
    
    146,000
    
    
    $
    100.00
    
    
    
    5,139Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    16,656
 Collars.
  (78)




---



##### Table of Contents



Barrels of
    
    
    NYMEX Oil Prices
    
    
    EstimatedPeriod of Time
    
    Oil
    
    
    Floor
    
    
    Ceiling
    
    
    Fair Market Value($ in thousands)January 1, 2009 through December 31, 2009
    
    
    766,500
    
    
    $
    65.71
    
    
    $
    82.93
    
    
    $
    10,942January 1, 2010 through October 31, 2010
    
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    
    
    2,449M M Btu of
    

    WAHA Gas PricesNatural Gas
    
    Floor
    
    CeilingJanuary 1, 2009 through December 31, 2009
    
    
    3,285,000
    
    
    $
    7.06
    
    
    $
    9.93
    
    
    
    6,611Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,002
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  (79)




---



##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that our
receipts and expenditures are being made only in accordance with authorizations
of management and our Board of Directors; and
 
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
  Internal Control Integrated Framework,
  Changes in Internal Controls
  (80)




---



##### Table of Contents



Attestation Report
 
 
 Internal Control  Integrated Framework
    .
  (81)




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
  
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  DirectorName
    
    Age
    
    Since
    
    Position with CompanyJeffrey G. Shrader(1)
    
    
    58
    
    
    
    2001
    
    
    Director and Chairman of the Board of DirectorsLarry C. Oldham(2)
    
    
    55
    
    
    
    1979
    
    
    Director, President and Chief Executive OfficerDonald E. Tiffin
    
    
    51
    
    
    
    
    
    
    Chief Operating OfficerSteven D. Foster
    
    
    53
    
    
    
    
    
    
    Chief Financial OfficerEric A. Bayley
    
    
    60
    
    
    
    
    
    
    Vice President of Corporate EngineeringJohn S. Rutherford
    
    
    48
    
    
    
    
    
    
    Vice President of Land and AdministrationEdward A. Nash(1)
    
    
    60
    
    
    
    2007
    
    
    DirectorMartin B. Oring(1)
    
    
    63
    
    
    
    2001
    
    
    DirectorRay M. Poage(1)
    
    
    61
    
    
    
    2003
    
    
    Director
 
 (1)
    
    Member of Hedging and Acquisitions Committee, Compensation Committee, Audit
Committee
and the Corporate Governance and Nominating Committee.(2)
    
    Member of Hedging and Acquisitions Committee.    (82)




---



##### Table of Contents



(83)




---



##### Table of Contents



Consulting Arrangements
  Corporate Governance
  Committees of the Board of Directors
  
    
    the Audit Committee;
    
    the Corporate Governance and Nominating Committee;
    
    the Compensation Committee; and
    
    the Hedging and Acquisitions Committee.
 Audit Committee
  (84)




---



##### Table of Contents



www.plll.com
  Corporate Governance and Nominating Committee
 www.plll.com.
  
    
    a statement that the writer is a stockholder and is proposing a candidate
for consideration by the committee;
    
    the name of and contact information for the candidate;
    
    a statement of the candidates age, business and educational experience;
    
    information sufficient to enable the committee to evaluate the candidate;
    
    a statement detailing any relationship between the candidate and any joint
interest owners, customer, supplier or competitor of Parallel;
    
    detailed information about any relationship or understanding between the
proposing stockholder and the candidate; and
    
    a statement that the candidate is willing to be considered and willing to
serve as a Director if nominated and elected.
 Compensation Committee
  (85)




---



##### Table of Contents



www.plll.com
 Hedging and Acquisitions Committee
  Code of Ethics
 www.plll.com
 
 Stockholder Communications with Directors
   
    
    if you request, forward the communication to the other Directors;
    
    request that management handle the inquiry directly, for example where it is
a request for information about the company or it is a stock-related matter; or
    
    not forward the communication to the other Directors or management if it is
primarily commercial in nature or if it relates to an improper or irrelevant
topic.
 Director Attendance at Annual Meetings
  (86)




---



##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Name and Address
    
    Amount and Nature
    
    Percentof Beneficial Owner
    
    of Beneficial Ownership(1)
    
    of Class(2)Larry C. Oldham
    
    
    631,090
    (3)
    
    
    1.52
    %1004 N. Big Spring, Suite 400
Midland, Texas 79701Donald E. Tiffin
    
    
    67,400
    (4)
    
    
    *1004 N. Big Spring, Suite 400 
Midland, Texas 79701Eric A. Bayley
    
    
    153,690
    (5)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Steven D. Foster
    
    
    11,000
    (6)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701John S. Rutherford
    
    
    44,000
    (7)
    
    
    *1004 N. Big Spring, Suite 400
Midland, Texas 79701Edward A. Nash
    
    
    33,615
    (8)
    
    
    *16214 Lafone
Spring, Texas 77379Martin B. Oring
    
    
    158,774
    (9)
    
    
    *10817 Grande Blvd.
West Palm Beach, Florida 33417
 (87)




---



##### Table of Contents



Name and Address
    
    Amount and Nature
    
    Percentof Beneficial Owner
    
    of Beneficial Ownership(1)
    
    of Class(2)Ray M. Poage
    
    
    131,028
    (10)
    
    
    *4711 Meandering Way 
Colleyville, Texas 76034Jeffrey G. Shrader
    
    
    68,460
    (11)
    
    
    *801 S. Filmore, Suite 600
Amarillo, Texas 79105Neuberger Berman, Inc.
    
    
    3,080,089

(12)
    
    
    7.40
    %605 Third Avenue
New York, New York 10158Noah Malone Mitchell, 3rd
    
    
    3,400,572

(13)
    
    
    8.18
    %4801 Gaillardia Parkway, Suite 225
Oklahoma City, Oklahoma 73142Reid S. Walker
    
    
    3,325,745

(14)
    
    
    8.00
    %300 Crescent Court, Suite 1111
Dallas, Texas 75201G. Stacy Smith
    
    
    3,325,745

(14)
    
    
    8.00
    %300 Crescent Court, Suite 1111
Dallas, Texas 75201Barrow,
Hanley, Mewhinney & Strauss, Inc.
    
    
    2,169,780

(15)
    
    
    5.22
    %200 Ross
Avenue, 31st Floor
Dallas, Texas 75201-2761Barclays
Global Investors, NA
    
    
    2,498,253

(16)
    
    
    6.01
    %400 Howard
Street
San Francisco, California 94105All Executive Officers and Directors
    
    
    1,299,057
    (17)
    
    
    3.10
    %as a Group (9 persons)
 
 *
    
    Less than one percent.(1)
    
    Unless otherwise indicated, all shares of common stock
are held directly with sole voting and investment powers.(2)
    
    Securities not outstanding, but included in the
beneficial ownership of each such person, are deemed to be outstanding for
the purpose of computing the percentage of outstanding securities of the
class owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the class owned by any other person.
Shares of common stock that may be acquired within sixty days of February
17, 2009, upon exercise of outstanding stock options are deemed to be
outstanding.(3)
    
    Includes 375,000 shares of common stock held indirectly
through Oldham Properties, Ltd., a limited partnership, and as to which Mr.
Oldham disclaims beneficial ownership. Also included are 22,500 shares of
common stock underlying a presently exercisable stock option held by Mr.
Oldham. At February 17, 2009, a total of 150,000 shares of common stock
were pledged as collateral to secure repayment of loans.


(88)



---



##### Table of Contents



(4)
    
    Of the total number of shares shown, 57,400 shares are
held indirectly through Mr. Tiffins individual retirement account.(5)
    
    Includes 50,000 shares of common stock underlying a
presently exercisable stock option. A total of 6,790 shares of common
stock are held indirectly by Mr. Bayley through an individual retirement
account and 408(k) Plan.(6)
    
    Includes 400 shares of common stock held by Mr.
Fosters spouse and 9,000 shares held in his 408(k) Plan.(7)
    
    All of such shares may be acquired upon exercise of a
presently exercisable stock option.(8)
    
    Includes 19,450 shares of common stock held indirectly
by Mr. Nash through an individual retirement account. Also included are
7,500 shares underlying a restricted stock award which vests in increments
of 2,500 shares on each of June 12, 2009, June 12, 2010 and June 12, 2011,
but as to which Mr. Nash has sole voting power.(9)
    
    Of the total number of shares shown, 82,019 shares are
held by Wealth Preservation, LLC, a limited liability company owned and
controlled by Mr. Oring and his wife, and 30,000 shares may be acquired by
Mr. Oring upon exercise of stock options that are presently exercisable.(10)
    
    Includes 20,068 shares of common stock held indirectly
by Mr. Poage through his individual retirement account. Also included are
97,500 shares that may be acquired upon exercise of presently exercisable
stock options.(11)
    
    Includes 30,000 shares of common stock that may be
acquired upon exercise of a presently exercisable stock option.(12)
    
    Based on Amendment No. 3 to Schedule 13G filed by
Neuberger Berman, Inc., Neuberger Berman, LLC, Neuberger Berman Management,
LLC, and Neuberger Berman Equity Funds with the Securities and Exchange
Commission on February 12, 2009, Neuberger Berman, Inc., or NBI, reported
beneficial ownership of 3,080,089 shares
of common stock. Of these shares, NBI and Neuberger Berman, LLC each
reported sole voting power with respect to 740 shares; shared voting
power with respect to 2,610,170 shares; and shared dispositive power with
respect to 3,080,089 shares. Neuberger Berman Management, LLC reported
shared voting and dispositive powers with respect to 2,610,170 shares and
Neuberger Berman Equity Funds reported shared voting and dispositive powers
with respect to 2,598,470 shares. NBI is the parent company of Neuberger
Berman, LLC, an investment advisor and broker-dealer, and Neuberger Berman
Management LLC, an investment advisor to a series of public mutual funds.
Neuberger Berman, LLC is deemed to be a beneficial owner of such shares
since it has shared dispositive power, and in some cases the sole power to
vote such shares. Neuberger Berman Management LLC is deemed to be a
beneficial owner of such shares since it has shared dispositive and voting
power. The holdings of Lehman Brothers Asset Management LLC, and
Lehman Brothers Asset Management Inc., affiliates
of Neuberger Berman LLC, are also included in the total number of shares
shown.(13)
    
    Based on Schedule 13G filed with the Securities and
Exchange Commission on January 9, 2009, Mr. Mitchell and his wife, Amy
Mitchell, reported shared voting and dispositive powers with respect to
such shares.(14)
    
    Based on Amendment No. 1 to Schedule 13G filed with the Securities and
Exchange Commission on February  17, 2009, Reid S. Walker and G. Stacy Smith
each reported shared voting powers and shared dispositive powers with
respect to such shares.(15)
    
    Based on Amendment No. 1 to Schedule 13G filed by Barrow,
Hanley, Mewhinney & Strauss, Inc. with the Securities and
Exchange Commission on February 12, 2009, (89)




---



##### Table of Contents



Barrow, Hanley, Mewhinney
& Strauss, Inc. or BHMSI, reported beneficial
ownership of 2,169,780 shares of common stock. Of these shares BHMSI
reported sole voting power of 953,880 shares; shared  voting power with
respect to 1,215,900 shares; and sole dispositive powers with respect
to 2,169,780 shares.(16)
    
    Based on Schedule 13G filed by Barclays Global Investors,
NA, Barclays Global Funds Advisors, Barclays Global Investors, Ltd.
Barclays Global Investors Japan Limited, Barclays Global Investors
Canada Limited, Barclays Global Investor  Australia Limited and Barclays Global
Investors (Deutschland) AG with the Securities and Exchange
Commission on February 5, 2009, Barclays Global Investors, NA
reported beneficial ownership of 2,498,253 shares of common stock. Of
these shares Barclays Global Investors, NA reported sole voting power
of 1,418,350 shares and sole dispositive power of 1,575,562 shares,
Barclays Global Fund Advisors reported sole voting and dispositive
powers with respect to 922,691 shares.(17)
    
    Includes 274,000 shares of common stock underlying
stock options that are presently exercisable. The unexercisable portion of
stock options held by our officers and directors do not become exercisable
within the next sixty days.
 Equity Compensation Plans
  (c)Number of securitiesremaining available forfuture issuance under(a)
    
    (b)
    
    equity compensationNumber of securities to
    
    Weighted-average
    
    plans (excludingbe issued upon exercise
    
    exercise price of
    
    securities reflected inPlan category
    
    of outstanding options
    
    outstanding options
    
    column (a))Equity compensation plans
approved by security holders
    
    
    615,000
    (1)
    
    $
    16.31
    
    
    
    1,697,160
    (2)Equity compensation plans not
approved by security holders
    
    
    124,000
    (3)
    
    $
    4.97
    
    
    
    0Total
    
    
    739,000
    
    
    $
    14.41
    
    
    
    1,697,160
 
 (1)
    
    Includes shares of common stock issuable upon exercise of stock options granted under our
1997 Nonemployee Directors Stock Option Plan, 1998 Stock Option Plan, 2001 Nonemployee
Directors Stock Option Plan and 2008 Long-Term Incentive Plan.(2)
    
    Of these shares, 69,808 shares of common stock are available for future issuance under our
2004 Non-Employee Director Stock Grant Plan and 1,627,352 shares of common stock are available
for future awards under our 2008 Long-Term Incentive Plan.(3)
    
    These shares represent shares of common stock underlying stock options granted on June 20,
2001 to non-officer employees under our 2001 Employee Stock Option Plan. The 2001 Employee
Stock Option Plan is the only equity compensation plan in effect that we have adopted without
approval of our stockholders. Our directors and officers are not eligible to participate in
this plan. A description of the material features of this plan can be found under the caption
2001 Employee Stock Option Plan on page F-36. (90)




---



##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 Certain Transactions
   Procedures for Reviewing Certain Transactions
  
    
    a director or officer of Parallel or a nominee to become a director;
    
    an owner of more than 5% of our outstanding common stock;
    
    certain family members of any of the above persons; and
    
    any entity in which any of the above persons is employed or is a partner or
principal or in which such person has a 5% or greater ownership interest.
 Approval Procedures
  
    
    the related partys relationship to Parallel and interest in the
transaction;
    
    the material terms of the proposed transaction;
    
    the benefits to Parallel of the proposed transaction;
 (91)




---



##### Table of Contents




    
    the availability of other sources of comparable properties or services; and
    
    whether the proposed transaction is on terms comparable to terms available
to an unrelated third party or to employees generally.
   Ratification Procedures
  Director Independence
   
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  (92)




---



##### Table of Contents



Types
of Fees
    
    2008
    
    
    2007($ in thousands)Audit fees
    
    $
    571
    
    
    $
    736Audit-related fees
    
    
    
    
    
    
    13Tax fees
    
    
    
    
    
    
    All other fees
    
    
    
    
    
    
    Total
    
    $
    571
    
    
    $
    749
   
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
       The exhibits to this Annual Report on Form 10-K required to be filed pursuant to Item 15(b)
are listed below and in the Index to Exhibits attached hereto.(c)
    
    No financial statement schedules are required to be filed as part of this Annual Report on
Form 10-K or they are inapplicable.
 No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007)
 (93)




---



##### Table of Contents



No.
    
    Description of Exhibit3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designations, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000)4.4
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.5
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.6
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006)4.8
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. (Incorporated
by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006)4.9
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.10
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.11
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)
 (94)




---



##### Table of Contents



No.
    
    Description of Exhibit4.12
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.13
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.14
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007)4.15
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.11):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.2
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.3
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.4
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.5
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.6
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.7
    
    2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated March 27, 2008)10.8
    
    Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.9
    
    Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.10
    
    Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.11
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)
 (95)




---



##### Table of Contents



No.
    
    Description of Exhibit10.12
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.13
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.14
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.15
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)10.16
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.17
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)10.18
    
    Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by
reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006)10.19
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007)10.20
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465)10.21
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007)10.22
    
    Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008)
 (96)




---



##### Table of Contents



No.
    
    Description of Exhibit10.23
    
    First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank (Incorporated by reference to Exhibit 10.34 of the
Registrants Form 10-Q Report for the third fiscal quarter ended September 30, 2008)*10.24
    
    Second Amendment to Fourth Amended
and Restated Credit Agreement, executed as of February 19,
2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley, Gillespie & Associates Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.**32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes  Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes  Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith. (97)




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Index to the Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Financial Statements:Consolidated Balance Sheets at December 31, 2008 and 2007
    
    
    F-3Consolidated Statements of Operations for the years ended December 2008, 2007 and 2006
    
    
    F-5Consolidated Statements of Stockholders Equity for the years ended December 31,
2008, 2007 and 2006
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December 31, 2008,
2007 and 2006
    
    
    F-7Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 2008, 2007 and 2006
    
    
    F-9Notes to Consolidated Financial Statements
    
    
    F-10
  F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
  F-2




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Balance Sheets
 ($ in thousands)
 December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    36,303
    
    
    $
    7,816Short-term investments
    
    
    5,002
    
    
    
    Accounts receivable:Oil and natural gas sales
    
    
    13,399
    
    
    
    20,499Joint interest owners and other, net of allowance for doubtful accounts of $50
    
    
    2,805
    
    
    
    2,460Affiliates and joint ventures
    
    
    12
    
    
    
    3,97016,216
    
    
    
    26,929Other current assets
    
    
    430
    
    
    
    449Derivatives
    
    
    22,665
    
    
    
    151Deferred tax asset
    
    
    
    
    
    
    10,293Total current assets
    
    
    80,616
    
    
    
    45,638Property and equipment, at cost:Oil and
natural gas properties, full cost method (including $137,202 and
$86,402 not subject to depletion)
    
    
    878,722
    
    
    
    648,576Other
    
    
    3,172
    
    
    
    2,877881,894
    
    
    
    651,453Less accumulated depreciation, depletion and amortization
    
    
    (490,566
    )
    
    
    (145,482
    )Net property and equipment
    
    
    391,328
    
    
    
    505,971Restricted cash
    
    
    81
    
    
    
    78Investment in pipelines and gathering system ventures
    
    
    337
    
    
    
    8,638Other assets, net of accumulated amortization of $1,443 and $1,193
    
    
    3,566
    
    
    
    2,768Deferred tax asset
    
    
    60,567
    
    
    
    Derivatives
    
    
    14,081
    
    
    
    $
    550,576
    
    
    $
    563,093
  F-3




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets (continued)  ($ in thousands)
 December 31,2008
    
    
    2007Liabilities and Stockholders EquityCurrent liabilities:Accounts payable trade
    
    $
    13,560
    
    
    $
    12,264Accrued liabilities
    
    
    21,742
    
    
    
    29,135Accrued interest on senior notes
    
    
    6,407
    
    
    
    6,449Asset retirement obligations
    
    
    158
    
    
    
    598Derivative obligations
    
    
    3,004
    
    
    
    30,424Put premium obligations
    
    
    628
    
    
    
    Deferred tax liability
    
    
    6,597
    
    
    
    Total current liabilities
    
    
    52,096
    
    
    
    78,870Revolving credit facility
    
    
    225,000
    
    
    
    60,000Senior notes (principal amount $150,000)
    
    
    145,890
    
    
    
    145,383Asset retirement obligations
    
    
    11,221
    
    
    
    4,339Derivative obligations
    
    
    5,136
    
    
    
    13,194Put premium obligations
    
    
    3,655
    
    
    
    Deferred tax liability
    
    
    
    
    
    
    26,045Termination obligation
    
    
    532
    
    
    
    Total long-term liabilities
    
    
    391,434
    
    
    
    248,961Commitments and contingenciesStockholders equity:Series A preferred stock  par value $0.10 per share, authorized 50,000 shares
    
    
    
    
    
    
    Common stock  par value $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 41,597,161 and 41,252,644
    
    
    415
    
    
    
    412Additional paid-in capital
    
    
    200,132
    
    
    
    196,457Retained earnings (deficit)
    
    
    (93,501
    )
    
    
    38,393Total stockholders equity
    
    
    107,046
    
    
    
    235,262$
    550,576
    
    
    $
    563,093
  F-4




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Operations
 ($ in thousands, except per share data)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Oil and natural gas revenues:Oil and natural gas sales
    
    $
    182,515
    
    
    $
    116,031
    
    
    $
    97,025Costs and expenses:Lease operating expense
    
    
    28,454
    
    
    
    22,200
    
    
    
    16,819Production taxes
    
    
    9,135
    
    
    
    5,545
    
    
    
    5,577Production tax refund
    
    
    (1,958
    )
    
    
    (1,209
    )
    
    
    General and administrative
    
    
    11,907
    
    
    
    10,415
    
    
    
    9,523Depreciation, depletion and amortization
    
    
    44,691
    
    
    
    30,115
    
    
    
    24,687Impairment of oil and natural gas properties
    
    
    300,532
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    392,761
    
    
    
    67,066
    
    
    
    56,606Operating income (loss)
    
    
    (210,246
    )
    
    
    48,965
    
    
    
    40,419Other income (expense), net:Gain (loss) on derivatives not classified as hedges
    
    
    32,018
    
    
    
    (36,776
    )
    
    
    2,802Gain on ineffective portion of hedges
    
    
    
    
    
    
    
    
    
    
    626Interest and other income
    
    
    278
    
    
    
    197
    
    
    
    158Interest expense, net of capitalized interest
    
    
    (23,750
    )
    
    
    (19,177
    )
    
    
    (12,360
    )Cost of debt retirement
    
    
    (286
    )
    
    
    (760
    )
    
    
    Other expense
    
    
    (12
    )
    
    
    (118
    )
    
    
    (189
    )Equity in gain (loss) of pipelines and gathering system ventures
    
    
    380
    
    
    
    (311
    )
    
    
    8,593Total other income (expense), net
    
    
    8,628
    
    
    
    (56,945
    )
    
    
    (370
    )Income (loss) before income taxes
    
    
    (201,618
    )
    
    
    (7,980
    )
    
    
    40,049Income tax benefit (expense)
    
    
    69,724
    
    
    
    3,319
    
    
    
    (13,894
    )Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155Net income (loss) per common share:Basic
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.73Diluted
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.71
  F-5




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Stockholders Equity
 Years ended December 31, 2008, 2007 and 2006
 (amounts in thousands)
 AccumulatedCommon stock
    
    
    Additional
    
    
    Retained
    
    
    Other
    
    
    TotalNumber of
    
    
    
    
    
    
    paid-in
    
    
    earnings
    
    
    Comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    capital
    
    
    (deficit)
    
    
    Loss
    
    
    equityBalance,
January 1, 2006
    
    
    34,749
    
    
    $
    347
    
    
    $
    78,699
    
    
    $
    16,899
    
    
    $
    (6,443
    )
    
    $
    89,502Common stock issued, net of transaction costs
    
    
    2,500
    
    
    
    25
    
    
    
    60,242
    
    
    
    
    
    
    
    
    
    
    
    60,267Common stock issued for services
    
    
    5
    
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    118Cashless exercise of warrants
    
    
    117
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    176
    
    
    
    2
    
    
    
    764
    
    
    
    
    
    
    
    
    
    
    
    766Stock option expense
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    
    
    
    
    
    
    
    
    531Changes in fair value of cash flow hedges, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,443
    
    
    
    6,443Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,155
    
    
    
    
    
    
    
    26,155Balance,
January 1, 2007
    
    
    37,547
    
    
    
    375
    
    
    
    140,353
    
    
    
    43,054
    
    
    
    
    
    
    
    183,782Common stock issued, net of transaction costs
    
    
    3,000
    
    
    
    30
    
    
    
    52,492
    
    
    
    
    
    
    
    
    
    
    
    52,522Common stock issued for services
    
    
    4
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    
    
    
    
    96Cashless exercise of warrants
    
    
    83
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    619
    
    
    
    6
    
    
    
    2,454
    
    
    
    
    
    
    
    
    
    
    
    2,460Stock option expense
    
    
    
    
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    
    
    
    
    247Tax benefit of stock option exercise
in excess of compensation
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    
    
    
    
    
    
    
    
    816Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,661
    )
    
    
    
    
    
    
    (4,661
    )Balance,
January 1, 2008
    
    
    41,253
    
    
    
    412
    
    
    
    196,457
    
    
    
    38,393
    
    
    
    
    
    
    
    235,262Common stock issued for services
    
    
    22
    
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    358Options exercised
    
    
    174
    
    
    
    2
    
    
    
    733
    
    
    
    
    
    
    
    
    
    
    
    735Warrants exercised, net of transaction costs
    
    
    148
    
    
    
    1
    
    
    
    795
    
    
    
    
    
    
    
    
    
    
    
    796Reduction in estimated stock offering costs
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    
    
    
    
    
    
    
    
    468Stock option expense
    
    
    
    
    
    
    
    
    
    
    1,321
    
    
    
    
    
    
    
    
    
    
    
    1,321Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131,894
    )
    
    
    
    
    
    
    (131,894
    )Balance,
December 31, 2008
    
    
    41,597
    
    
    $
    415
    
    
    $
    200,132
    
    
    $
    (93,501
    )
    
    $
    
    
    
    $
    107,046
  F-6




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Cash Flows
 ($ in thousands)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, depletion and amortization
    
    
    44,691
    
    
    
    30,115
    
    
    
    24,687Impairment of oil and natural gas properties
    
    
    300,532
    
    
    
    
    
    
    
    Gain on sale of automobiles
    
    
    
    
    
    
    (30
    )
    
    
    Accretion of asset retirement obligation
    
    
    401
    
    
    
    324
    
    
    
    248Accretion of senior notes discount
    
    
    507
    
    
    
    197
    
    
    
    Deferred income tax (benefit) expense
    
    
    (69,724
    )
    
    
    (3,319
    )
    
    
    13,894(Gain) loss on derivatives not classified as hedges
    
    
    (32,018
    )
    
    
    36,776
    
    
    
    (2,802
    )(Gain) loss on ineffective portion of hedges
    
    
    
    
    
    
    
    
    
    
    (626
    )Amortization of deferred financing costs
    
    
    567
    
    
    
    493
    
    
    
    492Cost of debt retirement
    
    
    286
    
    
    
    760
    
    
    
    Accretion of interest on put obligations
    
    
    97
    
    
    
    
    
    
    
    Common stock issued in lieu of cash for directors fees
    
    
    358
    
    
    
    96
    
    
    
    118Stock option expense
    
    
    1,321
    
    
    
    247
    
    
    
    531Equity in (gain) loss in pipelines and gathering system ventures
    
    
    (380
    )
    
    
    311
    
    
    
    (8,593
    )Return on investment in pipelines and gathering system ventures
    
    
    
    
    
    
    287
    
    
    
    9,000Bad debt expense
    
    
    
    
    
    
    (30
    )
    
    
    71Changes in assets and liabilities:Other assets, net
    
    
    (861
    )
    
    
    (114
    )
    
    
    1,075Restricted cash
    
    
    (3
    )
    
    
    247
    
    
    
    (50
    )Accounts receivable
    
    
    10,713
    
    
    
    2,253
    
    
    
    (15,151
    )Other current assets
    
    
    19
    
    
    
    1,070
    
    
    
    (153
    )Accounts payable and accrued liabilities
    
    
    (3,571
    )
    
    
    9,097
    
    
    
    19,290Net cash provided by operating activities
    
    
    121,041
    
    
    
    74,119
    
    
    
    68,186Cash flows from investing activities:Additions to oil and natural gas properties
    
    
    (217,393
    )
    
    
    (146,798
    )
    
    
    (189,396
    )Use of restricted cash for acquisition of oil and natural gas properties
    
    
    
    
    
    
    
    
    
    
    2,366Proceeds
from disposition of oil and natural gas properties and other property and equipment
    
    
    427
    
    
    
    1,677
    
    
    
    130Additions to other property and equipment
    
    
    (434
    )
    
    
    (379
    )
    
    
    (210
    )Settlements of derivative instruments
    
    
    (35,869
    )
    
    
    (16,615
    )
    
    
    (3,902
    )Short-term investments
    
    
    (5,002
    )
    
    
    
    
    
    
    Net investment in pipelines and gathering system ventures
    
    
    (26
    )
    
    
    (2,782
    )
    
    
    (11,260
    )Return of investment in pipelines and gathering system ventures
    
    
    
    
    
    
    
    
    
    
    7,724Net cash used in investing activities
    
    
    (258,297
    )
    
    
    (164,897
    )
    
    
    (194,548
    )
  F-7




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 Consolidated Statements of Cash Flows (Continued)  ($ in thousands)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Cash flows from financing activities:Borrowings from bank line of credit
    
    
    165,000
    
    
    
    92,000
    
    
    
    117,000Payments on bank line of credit
    
    
    
    
    
    
    (147,000
    )
    
    
    (52,000
    )Payment on term loan
    
    
    
    
    
    
    (50,000
    )
    
    
    Senior notes (principal amount $150,000 in 2008 and 2007)
    
    
    
    
    
    
    145,186
    
    
    
    Deferred financing costs
    
    
    (788
    )
    
    
    (813
    )
    
    
    (179
    )Deferred debt offering
    
    
    
    
    
    
    (1,671
    )
    
    
    Proceeds from exercise of stock options and warrants
    
    
    1,531
    
    
    
    2,460
    
    
    
    766Proceeds (net) from common stock issued
    
    
    
    
    
    
    52,522
    
    
    
    60,267Net cash provided by financing activities
    
    
    165,743
    
    
    
    92,684
    
    
    
    125,854Net increase (decrease) in cash and cash equivalents
    
    
    28,487
    
    
    
    1,906
    
    
    
    (508
    )Cash and cash equivalents at beginning of year
    
    
    7,816
    
    
    
    5,910
    
    
    
    6,418Cash and cash equivalents at end of year
    
    $
    36,303
    
    
    $
    7,816
    
    
    $
    5,910Non-cash financing and investing activities:Deferred purchase of derivative puts
    
    $
    4,186
    
    
    $
    
    
    
    $
    Oil and natural gas properties asset retirement obligation
    
    $
    6,041
    
    
    $
    (450
    )
    
    $
    2,320Additions to oil and natural gas properties accrued
    
    $
    (2,100
    )
    
    $
    2,500
    
    
    $
    6,000Termination obligation capitalized to oil and natural gas
properties
    
    $
    532
    
    
    $
    
    
    
    $
    Transfer to oil and natural gas properties
    
    $
    8,707
    
    
    $
    
    
    
    $
    Transfer from equity investment
    
    $
    (8,707
    )
    
    $
    
    
    
    $
    Non-cash exchange of oil and natural gas properties:Properties received in exchange
    
    $
    
    
    
    $
    6,463
    
    
    $
    Properties delivered in exchange
    
    $
    
    
    
    $
    (5,495
    )
    
    $
    Other transactions:Interest paid
    
    $
    22,609
    
    
    $
    13,096
    
    
    $
    12,255Taxes paid
    
    $
    40
    
    
    $
    
    
    
    $
    40
  F-8




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 Consolidated Statements of Comprehensive Income (Loss)
 ($ in thousands)
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155Other comprehensive income (loss):Unrealized losses on derivatives
    
    
    
    
    
    
    
    
    
    
    (1,648
    )Reclassification adjustment for losses
on derivatives included in net income (loss)
    
    
    
    
    
    
    
    
    
    
    11,409Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    9,761Income tax expense, deferred
    
    
    
    
    
    
    
    
    
    
    (3,318
    )Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    6,443Total comprehensive income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    32,598
  F-9




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (1) Organization, Business and Summary of Significant Accounting Policies
 Organization and Business
 (a)
    
    Nature of OperationsThe Companys focus is on the acquisition, development and exploitation of long-lived
oil and natural gas reserves and, to a lesser extent, exploration for new oil and
natural gas reserves. The Companys business activities are currently carried out
primarily in Texas and New Mexico. The Companys activities are focused in the Permian
Basin of west Texas and New Mexico, the Fort Worth Basin of north Texas and the onshore
Gulf Coast area of south Texas.(b)
    
    Concentration of Credit RiskThe Companys cash and short term investments are subject to credit risk through our
exposure with the financial institutions which hold these assets. The Company had
approximately $36.3 million in cash and cash equivalents as of December 31, 2008. The
Company maintains its cash in bank deposit and brokerage accounts which, at times, may
exceed federally insured limits. As of December 31, 2008, the Company had deposits in
excess of the FDIC and SIPC limits in the amount of $26.7 million. In addition, the
Company had short-term investments in United States Treasury bills of $5.0 million.The Company is also exposed to credit risk from its unsecured accounts receivable from
working interest owners and crude oil and natural gas purchasers. The activities and
payment patterns of these owners and purchasers are monitored by the Company.The Company has entered into various derivative contracts with financial institutions.
These contracts are intended to reduce the Companys exposure to commodity price and
interest rate fluctuations. The risk of nonperformance by the Companys counterparties
is mitigated by the fact that such counterparties (or their affiliates) are also bank
lenders under the Companys Revolving Credit Agreement and the derivative instruments
with these counterparties allow the Company to setoff amounts owed by the counterparty
against any obligation of the Company owed to the counterparty under the Companys
Revolving Credit Agreement.The Company manages the credit risk associated with its largest customers by using a
credit risk monitoring tool to actively monitor credit ratings, including S&P and
Moodys, financial statement filings, financial position, bankruptcy filings and current
news. Additionally, the Company actively monitors the information discussed above for
some competitors, oil service companies, banks and other financial institutions that the
Company does business with to help minimize its exposure to overall business risk and,
in some cases, counterparty risk.
 Significant Accounting Policies
 (c)
    
    Basis of ConsolidationThe accompanying financial statements present the consolidated accounts of Parallel
Petroleum Corporation, a Delaware Corporation, and its wholly owned subsidiaries,
Parallel L.P. and Parallel, L.L.C. (collectively the Company or Parallel) prior to
their dissolution
and merger into Parallel on July 2, 2007. All significant inter-company account balances
and transactions have been eliminated.
 F-10




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The Company accounts for its interests in oil and natural gas joint ventures and working
interests using the proportionate consolidation method. Under this method, the Company
records its proportionate share of assets, liabilities, revenues and expenses.(d)
    
    Property and EquipmentOil and natural gas properties:The Company uses the full cost method of accounting for its oil and natural gas
producing activities. Accordingly, all costs associated with acquisition, exploration,
and development of oil and natural gas reserves, including directly related overhead
costs, are capitalized.Under full cost accounting rules, capitalized costs, less accumulated amortization and
related deferred income taxes, shall not exceed an amount (the ceiling) equal to the sum
of: (i) the after tax present value of estimated future net revenues computed by
applying current prices of oil and gas reserves to estimated future production of proved
oil and gas reserves as of the date of the latest balance sheet presented, less
estimated future expenditures (based on current costs) to be incurred in developing and
producing the proved reserves computed using a discount factor of ten percent and
assuming continuation of existing economic conditions; (ii) the cost of properties not
being amortized; and (iii) the lower of cost or estimated fair value of unproven
properties included in the costs being amortized. If unamortized costs capitalized
within a cost center, less related deferred income taxes, exceed the ceiling, the excess
shall be charged to expense and separately disclosed during the period in which the
excess occurs. Amounts thus required to be written off shall not be reinstated for any
subsequent increase in the cost center ceiling. Under rules and regulations of the
Securities and Exchange Commission, the excess above the ceiling may be limited or
eliminated if, subsequent to the end of the quarter or year but prior to the release of
the financial results, prices have increased sufficiently that such excess above the
ceiling would not have existed if the increased prices were used in the calculations.Management and service fees received under contractual arrangements, if any, are treated
as reimbursement of costs, offsetting the costs incurred to provide those services.
Specifically, the Company serves as operator of certain oil and natural gas properties
in which it owns an interest. Under operating agreements naming the Company as operator,
the Company is reimbursed for certain specified direct charges and overhead charges.
Amounts received in reimbursement for drilling activities are applied as a reduction to
Parallels capital costs, and amounts received in reimbursement for producing activities
are applied to reduce the Companys general and administrative expenses.Depletion is provided using the unit-of-production method based upon estimates of proved
oil and natural gas reserves with oil and natural gas production being converted to a
common unit of measure based upon their relative energy content. Investments in unproved
properties and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If the
results of an assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. Once the assessment of
unproved properties is complete and when major development projects are evaluated, the
costs previously excluded from amortization are transferred to the full cost pool and
amortization begins. The amortizable base includes estimated future development costs
and where significant, dismantlement, restoration and abandonment costs, net of
estimated salvage value.In arriving at rates under the unit-of-production method, the quantities of recoverable
oil and natural gas reserves are established based on estimates made by the Companys
geologists
 F-11




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 and engineers which require significant judgment as does the projection of
future production volumes and levels of future costs, including future development
costs. In addition, considerable judgment is necessary in determining when unproved
properties become impaired and in determining the existence of proved reserves once a
well has been drilled. All of these judgments may have significant impact on the
calculation of depletion expense. There have been no material changes in the methodology
used by the Company in calculating depletion of oil and gas properties under the full
cost method during the three years ended December 31, 2008.Sales of proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would significantly alter
the relationship between capitalized costs and proved oil and natural gas reserves, in
which case the gain or loss would be recognized in the statement of operations.Other Property and Equipment: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 natural gas properties, the
cost and related accumulated depreciation are removed from the accounts with the
resulting gains or losses, if any, recognized in the statement of operations.
Depreciation of other property and equipment is computed using the straight-line method
based on the estimated useful lives of the property and equipment.(e)
    
    Asset Retirement ObligationsOn January 1, 2003, the Company adopted Statement of Financial Accounting Standards SFAS
No. 143, Accounting for Asset Retirement Obligations(SFAS 143).SFAS 143 required
companies to recognize a liability for the present value of all legal obligations
associated with the retirement of tangible long-lived assets and to capitalize an equal
amount as part of the cost of the related oil and natural gas properties. The Company
recognizes the legal obligation of the dismantlement, restoration and abandonment costs
associated with its oil and natural gas properties with its asset retirement obligation.
These costs are impacted by our estimate of remaining lives as well as current market
conditions associated with these costs. Accretion expense is recognized as a component
of lease operating expense.(f)
    
    Income TaxesThe Company accounts for income taxes based upon Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes(SFAS 109).Under SFAS 109, the Company accounts for income taxes using the liability method. Under
the liability method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled. Under the liability method, the effect on previously recorded deferred tax
assets and liabilities resulting from a change in tax rates is recognized in earnings in
the period in which the change is enacted.The Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of
FASB Statement No. 109(FIN 48), on January 1, 2007. FIN 48 clarifies the accounting
for
 F-12




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS 109 and prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition.Interest recorded, if any, will be charged to interest expense, and penalties recorded
will be charged to other expense in the Companys statement of operations.(g)
    
    Equity InvestmentsInvestments in affiliated companies with a 20% to 50% ownership interest were accounted
for under the equity method and, accordingly, net income included the Companys
proportionate share of its income or loss. In addition, the Company had an investment
in a joint venture which was accounted for by the equity method because the Company did
not have effective control or voting interest although the Company had owned
approximately 76 1/2% of the joint venture economic interest. See
Note 10 -  Investment in
Gas Gathering Systems.(h)
    
    Deferred financing costsCosts associated with obtaining financing under long-term debt under revolving credit
facilities and senior notes are deferred and expensed over the term of the applicable
long-term debt facility or the term of the notes.(i)
    
    Stock-Based CompensationParallel accounts for stock based compensation in accordance with the SFAS No. 123
(revised 2004), Share-Based Payment,( SFAS 123(R)). Parallel adopted SFAS 123(R)
effective January 1, 2006, applying the modified prospective method, whereby
compensation cost associated with the unvested portion of awards granted during the
period of June 2001 to December 2002 was recognized over the remaining vesting period.
Under this method, prior periods were not revised for comparative purposes.(j)
    
    Environmental ExpendituresThe Company is subject to extensive federal, state and local environmental laws and
regulations. These laws regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit. Expenditures
that relate to an existing condition caused by past operations and that have no future
economic benefits are expensed.Liabilities for expenditures of a noncapital nature are recorded when environmental
assessment and or remediation is probable, and the costs can be reasonably estimated.
Such liabilities are generally undiscounted unless the timing of cash payments for the
liability or component is fixed or reliably determinable.(k)
    
    Earnings Per ShareBasic earnings per share excludes any dilutive effects of options, 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
 F-13




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 share is computed similar to basic earnings per share; however,
diluted earnings per share reflects the assumed conversion of all potentially dilutive
securities.The Company uses the treasury stock method described in SFAS
No. 128, Earnings per
Share,(SFAS 128) to calculate the dilutive effect of stock options, stock warrants,
convertible debentures and non-vested restricted stock. This method requires that the
Company compute the presumed proceeds from the exercise of options and other dilutive
instruments, including the expected tax benefit to us and assumes that we used the net
proceeds to purchase shares of our common stock at the average price during the period.
These assumed net shares issued are then included in the calculation of the diluted
weighted average shares outstanding for the period, if the effect is dilutive.(l)
    
    Use of Estimates in the Preparation of Consolidated Financial StatementsThe preparation of the accompanying Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the balance sheet and the amounts of revenues and expenses
recognized during the reporting period. The Company analyzes its estimates based on
historical experience and various other assumptions that we believe to be reasonable
under the circumstances. However, actual results could differ from such estimates.Significant estimates include volumes of oil and natural gas reserves, abandonment
obligations, impairment of oil and natural gas properties, income taxes, bad debts,
derivatives, contingencies and litigation.Oil and natural gas reserve estimates, which are the basis for unit-of-production
depletion and the ceiling test, have number our inherent uncertainties. The accuracy of
any reserve estimate is a function of the quality of available data and of engineering
and geological interpretation and judgment. Results of drilling, testing, and
production subsequent to the date of the estimate may justify revision of such estimate.
Accordingly, reserve estimates are often different from the quantities of oil and
natural gas that are ultimately recovered. In addition, reserve estimates are
vulnerable to changes in wellhead prices of crude oil and natural gas. Such prices have
been volatile in the past and can be expected to be volatile in the future.(m)
    
    Cash EquivalentsFor purposes of the statements of cash flows, the Company considers all demand deposits,
money market accounts and certificates of deposit purchased with an original maturity of
three months or less to be cash equivalents.(n)
    
    Restricted CashCash that is restricted as to withdrawal, such as certificates of deposit, would not be
included with cash because of the time restrictions. Also, cash must be available for
current use in order to be classified as a current asset. Cash that is restricted in
use would not be included in current assets unless its restrictions will expire with the
operating cycle. Cash restricted for a noncurrent use, such as cash designated for the
purchase of property or equipment would be recorded as a noncurrent asset.
 F-14




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (o)
    
    Short-Term InvestmentsShort-term investments represent certificates of deposit and U.S. government securities
with maturities of less than twelve months. Each of the investments are carried at
amortized cost as management has the intention and ability to hold these to maturity.(p)
    
    Allowance for Doubtful AccountsThe Company maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of some of its customers to make required payments. These estimated
allowances are periodically reviewed, on a case by case basis, analyzing the customers
payment history and information regarding customers creditworthiness known to the
Company. In addition, the Company records a reserve based on the size and age of all
receivable balances against which the Company does not have specific reserves. If the
financial condition of its customers was to deteriorate, resulting in their inability to
make payments, additional allowances may be required.(q)
    
    ReclassificationsCertain reclassifications have been made to prior years amounts to conform with current
year presentation.(r)
    
    Derivative Financial InstrumentsDerivative financial instruments, utilized to manage or reduce commodity price risk
related to the Companys production and interest rate risk related to the Companys
long-term debt are accounted for under the provisions of SFAS No. 133, Accounting for
Derivative Instruments and for Hedging Activities", and related interpretations and
amendments. Under this Statement, derivatives are carried on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in oil and natural gas sales for
commodity trades and in interest expense for interest rate swaps when the hedged item
affects earnings. Ineffective portions of changes in the fair value of cash flow hedges
are also recognized in other expense. If the derivative is not designated as a hedge,
changes in the fair value are recognized in other income (expense).(s)
    
    Revenue RecognitionOil and natural gas revenues are recorded using the sales method, whereby the Company
recognizes oil and natural gas revenue based on the amount of oil and natural gas sold
to purchasers. For the period ended December 31, 2008, 2007 and 2006, the Company did
not have any significant oil or natural gas imbalances. The Company does not recognize
revenues until they are realized or realizable and earned. Revenues are considered
realized or realizable and earned when: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the sellers
price to the buyer is fixed or determinable; and, (iv) collectibility is reasonably
assured.
 F-15




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The following summarizes revenue for each of the three years ended December 31 by
product sold.
 2008
    
    
    2007
    
    
    2006($ in thousands)Oil revenue
    
    $
    97,799
    
    
    $
    69,315
    
    
    $
    68,076Effects of oil hedges
    
    
    
    
    
    
    
    
    
    
    (11,512
    )Natural gas revenue
    
    
    84,716
    
    
    
    46,716
    
    
    
    40,461$
    182,515
    
    
    $
    116,031
    
    
    $
    97,025
 (t)
    
    Recent Accounting PronouncementsIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS 157).
SFAS 157 defines fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value in accordance with generally accepted accounting
principles and expands disclosure requirements related to the use of fair value measures
in financial statements. The Company adopted SFAS 157 effective January 1, 2008 and the
adoption did not have a significant effect on its financial position or operating
results.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115,
(SFAS 159) which became effective on January 1, 2008. SFAS 159 permits entities to
measure eligible financial assets, financial liabilities and firm commitments at fair
value, on an instrument-by-instrument basis, that are otherwise not permitted to be
accounted for at fair value under other generally accepted accounting principles. The
fair value measurement election is irrevocable and subsequent changes in fair value must
be recorded in earnings. This statement did not have any effect on the Companys
financial position or operating results as the Company did not elect to apply the fair
value method.In April 2007, the FASB issued FASB Staff Position FIN 39-1, Amendment of FASB
Interpretation No. 39(FSP FIN 39-1). FSP FIN 39-1 clarifies that a reporting entity
that is party to a master netting arrangement can offset fair value amounts recognized
for the right to reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) against fair value amounts recognized for derivative instruments
that have been offset under the same master netting arrangement. FSP FIN 39-1 was
effective for financial statements issued for fiscal years beginning after November 15,
2007. Adoption of FSP FIN 39-1 did not have a material impact on the Companys
consolidated financial statements.In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations
(SFAS 141(R)), which replaces FASB Statement No. 141. SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non-
controlling interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements that will enable users to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for acquisitions
that occur in an entitys fiscal year that begins after December 15, 2008, which will be
the Companys fiscal year
2009. The impact, if any, will depend on the nature and size of business combinations
the Company consummates after the effective date.
 F-16




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statementsan amendment of ARB No. 51(SFAS 160). SFAS 160
requires that accounting and reporting for minority interests will be recharacterized as
noncontrolling interests and classified as a component of equity. SFAS 160 also
establishes reporting requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding noncontrolling interest in one or more subsidiaries or
that deconsolidate a subsidiary. This statement is effective as of the beginning of an
entitys first fiscal year beginning after December 15, 2008, which will be the
Companys fiscal year 2009. Based upon the Companys balance sheet, the statement would
have no impact.In February 2008, the FASB issue Financial Staff Positions (FSP) FAS 157-2, Effective
Date of FASB Statement No. 157(FSP FAS 157-2), which delays the effective date of
SFAS 157, for all nonfinancial assets and nonfinancial liabilities, except those that
are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. FSP FAS 157-2 is effective for the
Company beginning January 1, 2009. The Company does not anticipate that this
pronouncement will have a material impact on its results of operations or consolidated
financial position.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). This
statement is intended to improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments and hedging activities and
their effects on the entitys financial position, financial performance, and cash flows.
SFAS 161 applies to all derivative instruments within the scope of SFAS 133, Accounting
for Derivative Instruments and Hedging Activities(SFAS 133), as well as related
hedged items, bifurcated derivatives, and nonderivative instruments that are designated
and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide expanded disclosures. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application permitted. This statement will have no impact to the
Companys financial results of operations. The Company will apply SFAS 161 beginning
January 1, 2009.In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles(SFAS 162), which becomes effective for the Company 60 days
following the SECs approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With General Accepted
Accounting Principles". This standard identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of financial
statements that are presented in conformity with generally accepted accounting
principles. The Company does not anticipate that this pronouncement will have a material
impact on its results of operations or consolidated financial position.In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1

Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities (FSP EITF 03-6-1), which addresses whether instruments
granted
in share-based payment transactions are participating securities prior to vesting and,
therefore, need to be included in the net income allocation in computing basic net
income per share under the two class method prescribed under SFAS 128
Earnings per
Share. FSP 03-6-1 is effective for
 F-17




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 financial statements issued for fiscal years
beginning after December 15, 2008 and, to the extent applicable, must be applied
retrospectively by adjusting all prior-period net income per share data to conform to
the provisions of the standard. The adoption of FSP EITF 03-6-1 is not expected to have
a material effect on the Companys earnings per share calculations.In December 2008, the Securities and Exchange Commission published a Final Rule,
Modernization of Oil and Gas Reporting.The new
 rule permits the use of new technologies to determine proved reserves if those
technologies have been demonstrated to lead to reliable conclusions about reserves
volumes. The new requirements also will allow companies to disclose their probable and
possible reserves to investors. In addition, the new disclosure requirements require
companies to: (a) report the independence and qualifications of its reserves preparer or
auditor; (b) file reports when a third party is relied upon to prepare reserves
estimates or conducts a reserves audit; and (c) report oil and gas reserves using an
average price based upon the prior 12-month period rather than year-end prices. The use of average prices will affect
future impairment and depletion calculations.The new disclosure requirements are effective for annual reports on Forms 10-K for
fiscal years ending on or after December 31, 2009. A company may not apply the
new rules to disclosures in quarterly reports prior to the first annual report in which
the revised disclosures are required. The Company has not yet determined the impact of
this Final Rule, which will vary depending on changes in commodity prices on its
  disclosures  financial position or results of operations.
 (2)
    
    Earnings Per ShareThe following table provides the computation of basic and diluted earnings per share for the
years ended December 31:
 2008
    
    
    2007
    
    
    2006(in thousands, except per share data)Basic EPS Computation:Numerator-Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155Denominator-Weighted average common shares outstanding
    
    
    41,471
    
    
    
    38,120
    
    
    
    35,888Basic EPS:Net income (loss) per share
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.73Diluted EPS Computation:Numerator-Net income (loss)
    
    $
    (131,894
    )
    
    $
    (4,661
    )
    
    $
    26,155Denominator -Weighted average common shares outstanding
    
    
    41,471
    
    
    
    38,120
    
    
    
    35,888Employee stock options
    
    
    
    
    
    
    
    
    
    
    599Warrants
    
    
    
    
    
    
    
    
    
    
    269Weighted average common shares for diluted
earnings per share assuming conversion
    
    
    41,471
    
    
    
    38,120
    
    
    
    36,756Diluted EPS:Net income (loss) per share
    
    $
    (3.18
    )
    
    $
    (0.12
    )
    
    $
    0.71
 F-18




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the years ended December 31, 2008 and 2007, the effects of all potentially dilutive
securities (including options and warrants) were excluded from the computation of diluted
earnings per share because the Company had a net loss and, therefore, the effect would have
been anti-dilutive. Approximately 286,000 and 878,000 options and warrants were excluded from
the computation of diluted earnings per share in 2008 and 2007, respectively.(3)
    
    Fair Value of Financial InstrumentsThe fair values and methods and assumptions used to estimate the fair values for each class of
financial instruments are as follows. The fair value of a financial instrument is the amount
at which the instrument could be exchanged in a current transaction between two willing
parties.The carrying amount of cash, short-term investments, 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 outstanding under the Companys revolving credit
facility in 2008 and 2007 approximated fair value because the Companys borrowing rate on this
financial instrument is based on a variable market rate of interest.The carrying value of the Companys 101/4% senior notes at December 31, 2008 is approximately
$145.9 million and their estimated fair value is approximately $99.0 million. Fair value is
estimated based on market trades at or near December 31, 2008.The Company also has derivative instruments which are
described in Note 9 - Derivative Instruments.(4)
    
    Property Exchange and AcquisitionsIn January, 2006, Parallel acquired additional interest in the Harris San Andres Field
properties located in Andrews and Gaines counties, Texas for a net purchase price of
approximately $23.4 million, including adjustments. The 2006 purchase was made utilizing
Parallels restricted cash and revolving credit facility. In March 2006, Parallel purchased
additional interests in the Barnett Shale Gas Project located in Tarrant County, Texas. The
additional interests were acquired from five unaffiliated parties for a total cash purchase
price of approximately $5.5 million. In April 2006, Parallel acquired an additional interest
in the Barnett Shale Gas Project located in Tarrant County, Texas from one other unaffiliated
third party for approximately $570,000.On February 23, 2007, we entered into a property exchange agreement with an unrelated third
party. As a result of the exchange, we acquired an additional 9,233 net undeveloped acres in
our New Mexico Wolfcamp project area with an estimated fair value of approximately $6.5
million. We are the operator of wells drilled on this undeveloped acreage. Under the terms
of the exchange agreement, we assigned to the third party interests in 37 non-operated wells
and 3,250 net undeveloped non-operated acres in the New Mexico Wolfcamp project area, along
with cash of approximately $969,000. In accordance with the full cost method of accounting, no
gain or loss was recorded on the transaction.On June 26, 2008 we exercised a preferential right and purchased additional the interests
owned by an unrelated third party in our operated Diamond M properties in Scurry County,
Texas, effective May 1, 2008. The purchase price, approximately $35.5 million, was financed
with borrowings under our revolving credit facility. The additional interest acquired
represented proved reserves of approximately 2.0 million BOE.The acquired interest consisted of two components, including an 89% working interest in the
Base production and reserves and a 22.3% working interest in the production and reserves above
the
 F-19




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Base. As used in our original trade agreement with the unrelated third party, the Base
production and reserves generally referred to and meant future production and reserves defined by an
established base production decline curve as of December 19, 2001. Prior to this acquisition,
we did not own an interest in the Base production and reserves but owned a 65.7% working
interest in the production and reserves above the Base. This acquisition resulted in an
increase in our current ownership in the Base production and reserves from zero to an
approximate 89% working interest (77% net revenue interest), and an increase in the production
and reserves above the Base from a 65.7% working interest to an 88% working interest (76% net
revenue interest).As described in Note 10 - Investment in Gas Gathering Systems, in June 2008 we acquired all of
the assets of the Hagerman Gas Gathering System Joint Venture.(5)
    
    Oil and Natural Gas PropertiesThe following table reflects capitalized costs related to the oil and natural gas properties
as of December 31:
 2008
    
    
    2007($ in thousands)Proved properties
    
    $
    741,520
    
    
    $
    562,174Unproved properties, not subject to depletion
    
    
    137,202
    
    
    
    86,402878,722
    
    
    
    648,576Accumulated depletion (1)
    
    
    (488,168
    )
    
    
    (143,264
    )$
    390,554
    
    
    $
    505,312
 
 (1)
    
    Includes $300.5 million impairment of oil and natural gas properties in 2008.   PrepaidDrillingCosts andLeasehold
    
    
    Geological and
    
    
    Work-in-Year Incurred
    
    
    
    Costs
    
    
    Geophysical
    
    
    Progress
    
    
    Total($ in thousands)2008
    
    
    
    $
    35,866
    
    
    $
    5,334
    
    
    $
    39,103
    
    
    $
    80,3032007
    
    
    
    
    34,195
    
    
    
    2,088
    
    
    
    3,665
    
    
    
    39,9482006
    
    
    
    
    15,415
    
    
    
    989
    
    
    
    
    
    
    
    16,404Prior
    
    
    
    
    496
    
    
    
    51
    
    
    
    
    
    
    
    547$
    85,972
    
    
    $
    8,462
    
    
    $
    42,768
    
    
    $
    137,202
  F-20




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     2008
    
    
    2007
    
    
    2006($ in thousands)Proved property acquisition costs
    
    $
    41,481
    
    
    $
    
    
    
    $
    27,370Unproved property acquisition costs
    
    
    41,568
    
    
    
    36,750
    
    
    
    30,058Exploration costs
    
    
    59,290
    
    
    
    55,827
    
    
    
    71,003Development costs
    
    
    88,235
    
    
    
    61,766
    
    
    
    69,285$
    230,574
    
    
    $
    154,343
    
    
    $
    197,716
 (6)
    
    Other AssetsBelow are the components of other assets as of December 31, 2008 and 2007:
 December 31,2008
    
    
    2007($ in thousands)Revolving credit facility deferred financing costs, net
    
    $
    1,306
    
    
    $
    1,185Senior notes deferred financing costs, net
    
    
    1,432
    
    
    
    1,575Other
    
    
    828
    
    
    
    8$
    3,566
    
    
    $
    2,768
 Amortization expense was approximately $567,000, $493,000, and $492,000 in 2008, 2007 and
2006, respectively.(7)
    
    Other Accrued LiabilitiesBelow are the components of other accrued liabilities as of December 31, 2008 and 2007:
 December 31,2008
    
    
    2007($ in thousands)Revenue payable to joint interest owners
    
    $
    8,004
    
    
    $
    9,062Accrued capital expenditures
    
    
    9,275
    
    
    
    11,907Accrued lease operating expense
    
    
    2,223
    
    
    
    1,581Other
    
    
    2,240
    
    
    
    6,585$
    21,742
    
    
    $
    29,135
 F-21




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (8)
    
    Asset Retirement ObligationsThe Companys asset retirement obligations consist of costs related to the plugging of
wells, the removal of facilities and equipment and site restoration on oil and natural gas
properties.The following table summarizes the Companys asset retirement obligation transactions for
the years ended December 31:
 2008
    
    
    2007
    
    
    2006($ in thousands)Beginning asset retirement obligation
    
    $
    4,937
    
    
    $
    5,063
    
    
    $
    2,495Additions related to new properties
    
    
    1,152
    
    
    
    257
    
    
    
    406Revisions in estimated cash flows
    
    
    4,949
    
    
    
    (342
    )
    
    
    1,979Deletions related to property disposals
    
    
    (60
    )
    
    
    (365
    )
    
    
    (65
    )Accretion expense
    
    
    401
    
    
    
    324
    
    
    
    248Ending asset retirement obligation
    
    $
    11,379
    
    
    $
    4,937
    
    
    $
    5,063
 (9)
    
    Derivative InstrumentsThe Company enters into derivative contracts to provide a measure of stability in the cash
flows associated with the Companys oil and natural gas production and interest rate payments
and to manage exposure to commodity price and interest rate risk. The Companys objective is
to lock in a range of oil and natural gas prices and to limit variability in its cash interest
payments. In addition, the Companys revolving credit facility requires the Company to
maintain derivative financial instruments which limit the Companys exposure to fluctuating
commodity prices covering at least 50% of the Companys estimated monthly production of oil
and natural gas extending 24 months into the future.Derivative contracts not designed as cash flow hedges are marked to market at each period
end and the increases or decreases in fair values are recorded to earnings. No derivative
contracts entered into subsequent to June 30, 2004, have been designated as cash flow hedges.Adoption of SFAS No. 157The Company adopted SFAS No. 157, Fair Value Measurements(SFAS 157), effective January 1,
2008 for all financial assets and liabilities. As defined in SFAS 157, fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). In determining
the fair value of its derivative contracts the Company evaluates its counterparty and
third party service provider valuations and adjusts for credit risk when appropriate SFAS 157
requires disclosure that establishes a framework for measuring fair value and expands
disclosure about fair value measurements. The statement requires fair value measurements be
classified and disclosed in one of the following categories:
 Level 1:
    
    Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities. The Company
considers active markets as those in which transactions for the assets or
liabilities occur in sufficient frequency and volume to provide pricing
information on an ongoing basis.
 F-22




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Level 2:
    
    Quoted prices in markets that are not active, or inputs which are observable,
either directly or indirectly, for substantially the full term of the asset or
liability. This category includes those derivative instruments that are valued
using observable market data. Substantially all of these inputs are observable in
the marketplace throughout the full term of the derivative instrument, can be
derived from observable data, or supported by observable levels at which
transactions are executed in the marketplace. Instruments in this category include
non-exchange traded derivatives such as over-the-counter commodity price swaps and
interest rate swaps.
 Level 3:
    
    Measured based on prices or valuation models that require inputs that are
both significant to the fair value measurement and less observable from objective
sources (i.e., supported by little or no market activity). The Companys valuation
models are primarily industry-standard models that consider various inputs
including: (a) quoted forward prices for commodities, (b) time value,
(c) volatility factors and (d) current market and contractual prices for the
underlying instruments, as well as other relevant economic measures. Level 3
instruments primarily include derivative instruments, such as commodity price
collars and puts. These instruments are considered Level 3 because the Company
does not have sufficient corroborating market evidence for volatility to support
classifying these assets and liabilities as Level 2.
   Quoted Prices inActive Marketsfor Identical
    
    
    Other Observable
    
    
    Unobservable
    
    
    Fair Value atAssets (Level 1)
    
    
    Inputs (Level 2)
    
    
    Inputs (Level 3)
    
    
    December 31, 2008Interest Swaps
    
    $
    
    
    
    $
    (8,052
    )
    
    $
    
    
    
    $
    (8,052
    )Oil Puts
    
    
    
    
    
    
    
    
    
    
    16,656
    
    
    
    16,656Oil & Gas Collars
    
    
    
    
    
    
    
    
    
    
    20,002
    
    
    
    20,002$
    
    
    
    $
    (8,052
    )
    
    $
    36,658
    
    
    $
    28,606
  F-23




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Twelve Months EndedDecember 31, 2008Derivative
    
    
    DerivativeCollars
    
    
    PutsBeginning balance
    
    $
    (15,852
    )
    
    $
    Total gains
    
    
    30,453
    
    
    
    12,470Settlements
    
    
    5,401
    
    
    
    Purchases
    
    
    
    
    
    
    4,186Ending balance
    
    $
    20,002
    
    
    $
    16,656Change in unrealized gains (losses) included in earnings relating
to derivatives still held as of December 31, 2008(1)
    
    $
    35,854
    
    
    $
    12,470
 
 (1)
    
    Gains and losses (realized and unrealized) included in earnings for
the year ended December 31, 2008 are reported in other income on the
Consolidated
Statement of Operations.  Interest Rates
  Interest Rate Swaps.
 F-24




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Notional
    
    
    Weighted Average

    
    EstimatedPeriod of Time
    
    Amounts
    
    
    Fixed Interest Rates

    
    Fair Market Value($ in millions)
    
    
    
    
    
    
    ($ in thousands)January 1, 2009 through December 31, 2009
    
    $
    100
    
    
    
    4.22
    %
    
    $
    (3,004
    )January 1, 2010 through October 31, 2010
    
    $
    100
    
    
    
    4.71
    %
    
    
    (2,517
    )November 1, 2010 through December 31, 2010
    
    $
    50
    
    
    
    4.26
    %
    
    
    (216
    )January 1, 2011 through December 31, 2011
    
    $
    100
    
    
    
    4.67
    %
    
    
    (2,315
    )Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    (8,052
    )
 Commodity Prices
  Put Options.
   Barrels of
    
    
    
    
    
    
    EstimatedPeriod of Time
    
    Oil
    
    
    Floor
    
    
    Fair Market Value($ in thousands)January 1, 2009 through December 31, 2009
    
    
    109,500
    
    
    $
    100.00
    
    
    $
    5,112January 1, 2010 through December 31, 2010
    
    
    280,100
    
    
    $
    84.36
    
    
    
    6,405January 1, 2011 through December 31, 2011
    
    
    146,000
    
    
    $
    100.00
    
    
    
    5,139Total Fair Market Value
    
    
    
    
    
    
    
    
    
    $
    16,656
 F-25




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Collars.
  Barrels of
    
    
    NYMEX Oil Prices
    

    EstimatedPeriod of Time
    
    
    
    
    
    Oil
    
    
    Floor
    
    
    Ceiling
    

    Fair Market Value($ in thousands)January 1, 2009 through December 31, 2009
    
    
    
    
    
    
    766,500
    
    
    $
    65.71
    
    
    $
    82.93
    
    $
    10,942January 1, 2010 through October 31, 2010
    
                
    
    486,400
    
    
    $
    63.44
    
    
    $
    78.26
    
    

    2,449
 M M Btu of
    
    
    WAHA Gas PricesNatural Gas
    
    
    Floor
    
    
    CeilingJanuary 1,
2009 through December 31, 2009
    
    
    3,285,000
    
    
    $
    7.06
    
    
    $
    9.93
    
    
    
    6,611Total Fair Market Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    20,002
 (10)
    
    Investment in Gas Gathering SystemsPrior to 2006, the Company had three separate partnership investments to construct pipeline
systems which gather natural gas, primarily on its leaseholds in the Barnett Shale area. The
partnership investments included West Fork Pipeline Company I, L.P., West Fork Pipeline
Company II, L.P. and West Fork Pipeline Company V, L.P. These investments were recorded as
equity method investments.In the fourth quarter of 2006, substantially all of the assets of West Fork Pipeline I and
West Fork Pipeline V were sold. The Company received distributions of $16.0 million and
$683,000, respectively, as a result of these asset sales. The total of these distributions,
approximately $16.7 million, is reported in the accompanying statement of cash flows for 2006
in Cash flows from operating activities as Return on investment in pipelines and gathering
systems ventures in the amount of $9.0 million, which represents the excess of distributions
received over the Companys cash investments in these ventures, and in Cash flows from
investing activities as Return of investment in pipelines and gathering systems ventures in
the amount of $7.7 million, representing the return through distribution of the Companys
previous cash investments in the two joint ventures.The Company had a total equity investment of $337,000 in West Fork Pipeline II at December 31,
2008. The Companys investment percentage in the West Fork Pipeline II is 23.25848%.The Company had a net investment of $8.7 million in the Hagerman Gas Gathering System Joint
Venture (Hagerman) to construct pipelines on certain of its leaseholds in New Mexico. The
Companys investment percentage in Hagerman was 76.50%. In June 2008, the Company acquired
all of the assets of the Hagerman Gas Gathering System Joint Venture, or the Joint Venture,
for the purchase price of $3.2 million, in connection with winding up and terminating the
Joint Venture. The winding up of the Joint Venture commenced on June 19, 2008. At the time
of the winding up of the Joint Venture, the investment was transferred into oil and natural
gas properties and subsequent results have been included in the Companys operating income and
not as an equity gain (loss) item in the Companys Consolidated Statement of Operations.
 F-26




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   December 31,2008
    
    
    2007($ in thousands)West Fork Pipeline Company II, L.P.
    
    $
    337
    
    
    $
    312Hagerman Gas Gathering System
    
    
    
    
    
    
    8,326$
    337
    
    
    $
    8,638
  Year Ended December 31,2008
    
    
    2007
    
    
    2006($ in thousands)West Fork Pipeline Company I, L.P.(1)
    
    $
    
    
    
    $
    161
    
    
    $
    9,286West Fork Pipeline Company II, L.P.
    
    
    (1
    )
    
    
    3
    
    
    
    (50
    )West Fork Pipeline Company V, L.P.(2)
    
    
    
    
    
    
    126
    
    
    
    (147
    )Hagerman Gas Gathering System(3)
    
    
    381
    
    
    
    (601
    )
    
    
    (496
    )$
    380
    
    
    $
    (311
    )
    
    $
    8,593
 
 (1)
    
    Included in the Companys earnings for 2007
is its proportionate share of a final cash distribution of
$161,000 received in the fourth quarter of 2007. Included in
the Companys earnings for 2006 is its proportionate gain in
the sale of the partnership assets of approximately $9.1
million.(2)
    
    Included in the Companys earnings for 2007
was its proportionate share of a final cash distribution of
$126,000 received in the fourth quarter of 2007. Included in
the Companys earnings for 2006 is its proportionate loss in
the sale of the partnership assets of approximately $90,000.(3)
    
    Includes the Companys proportionate share
of earnings before the acquisition of the remaining assets in
June 2008. F-27




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31,2008
    
    
    2007($ in thousands)Balance SheetCurrent assets
    
    $
    78
    
    
    $
    62Account receivables  affiliates
    
    
    
    
    
    
    696Total current assets
    
    
    78
    
    
    
    758Plan and pipeline costs
    
    
    707
    
    
    
    10,917Total assets
    
    $
    785
    
    
    $
    11,675Current liabilities
    
    $
    
    
    
    $
    50Accounts payable  affiliates
    
    
    
    
    
    
    523Total current liabilities
    
    
    
    
    
    
    573Partner capital
    
    
    785
    
    
    
    11,102Total
liabilities and partner capital
    
    $
    785
    
    
    $
    11,675
 Year Ended December 31,2008
    
    
    2007
    
    
    2006($ in thousands)Income StatementRevenues
    
    $
    1,188
    
    
    $
    847
    
    
    $
    2,402Costs and expenses
    
    
    (699
    )
    
    
    (1,654
    )
    
    
    (2,597
    )Gain/loss on sale of assets
    
    
    
    
    
    
    782
    
    
    
    23,780Net income (loss)
    
    $
    489
    
    
    $
    (25
    )
    
    $
    23,585
 (11)
    
    Credit ArrangementsIn the past, the Company has maintained two separate credit facilities. One of these credit
facilities is the Fourth Amended and Restated Credit Agreement, dated May 16, 2008, as
amended on October 31, 2008 described below, or the Revolving Credit Agreement. This
Revolving Credit Agreement provides the Company with a revolving line of credit having a
borrowing base limitation of $230.0 million.The Companys second credit facility was a five year term loan facility provided to it under
a Second Lien Term Loan Agreement, or the Second Lien Agreement, with a group of banks and
other lenders. The Second Lien Agreement was paid in its entirety and terminated on July 31,
2007 with the Companys payment to the lenders of $50.2 million, including interest.On July 31, 2007, the Company completed a private offering of unsecured senior notes in the
principal amount of $150.0 million.
 F-28




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1 4
 2008
    
    
    2007($ in thousands)Revolving Credit Facility note payable to banks,Agent banks base lending rate of 4.75%
    
    $
    225,000
    
    
    $
    Libor Tranche at 6.84%
    
    
    
    
    
    
    60,000Senior notes (principal amount $150,000)
rate of 101/4%
    
    
    145,890
    
    
    
    145,383Total notes payable to banks
    
    $
    370,890
    
    
    $
    205,383
 Revolving Credit Facility
       F-29




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          Second Lien Term Loan Facility
 1 2
   F-30




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Senior Notes
 1 4
    Interest
Incurred
  F-31




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (12)
    
    Income TaxesThe Companys income tax benefit (expense) consists of the following:
 2008
    
    
    2007
    
    
    2006($ in thousands)Federal
income tax benefit of net operating loss carryforward
    
    $
    7,974
    
    
    $
    8,428
    
    
    $
    13,252State
income tax benefit (expense) of net operating loss carryforward
    
    
    2
    
    
    
    (80
    )
    
    
    Total
tax benefit of current net operating loss carryforward
    
    $
    7,976
    
    
    $
    8,348
    
    
    $
    13,252Deferred Federal tax benefit (expense)
    
    $
    60,005
    
    
    $
    (6,006
    )
    
    $
    (26,993
    )Deferred State tax benefit (expense)
    
    
    1,743
    
    
    
    977
    
    
    
    (153
    )Total deferred tax benefit (expense)
    
    $
    61,748
    
    
    $
    (5,029
    )
    
    $
    (27,146
    )Total income tax benefit (expense)
    
    $
    69,724
    
    
    $
    3,319
    
    
    $
    (13,894
    )
  2008
    
    
    2007
    
    
    2006($ in thousands,  except tax rate)Income tax
benefit (expense) at statutory rate
    
    $
    68,525
    
    
    $
    2,713
    
    
    $
    (13,606
    )Permanent differences
    
    
    (20
    )

    
    
    (103
    )
    
    
    (203
    )State tax, net of Federal benefit (expense)
    
    
    1,152
    
    
    
    592
    
    
    
    (101
    )Other
    
    
    67
    
    
    
    117
    
    
    
    16Actual income tax benefit (expense)
    
    $
    69,724
    
    
    $
    3,319
    
    
    $
    (13,894
    )Effective tax rate
    
    
    34.60
    %
    
    
    41.60
    %
    
    
    34.72
    %
  F-32




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    
    2007($ in thousands)Current:Deferred tax assets:Fair market value losses on derivatives expected
to be settled within one year
    
    $
    
    
    
    $
    10,293Deferred tax liabilities:Fair market value gains on derivatives expected
to be settled within one year
    
    
    (6,597
    )
    
    
    Net current deferred tax assets (liabilities)
    
    $
    (6,597
    )
    
    $
    10,293Noncurrent:Deferred tax assets:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes, depletion and impairment of oil and natural gas properties
    
    $
    34,217
    
    
    $
    Federal operating loss carryforwards
    
    
    22,611
    
    
    
    15,081State operating loss credit carryforwards
    
    
    1,764
    
    
    
    1,805Statutory depletion carryforwards
    
    
    2,639
    
    
    
    2,609Alternative minimum tax credit carryforwards
    
    
    157
    
    
    
    157Fair market value losses on derivatives not expected
to be settled within one year
    
    
    
    
    
    
    5,275Asset retirement obligations
    
    
    489
    
    
    
    350Other
    
    
    946
    
    
    
    73Total noncurrent deferred tax assets
    
    
    62,823
    
    
    
    25,350Deferred tax liabilities:Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion
    
    
    
    
    
    
    (50,368
    )Fair market value gain on derivatives not expected
to be settled within one year
    
    
    (1,645
    )
    
    
    Federal impact of state operating loss credit carryforwards
    
    
    (600
    )
    
    
    (614
    )Partnership investments
    
    
    (11
    )
    
    
    (413
    )Total noncurrent deferred tax liabilities
    
    
    (2,256
    )
    
    
    (51,395
    )Net noncurrent deferred income tax assets (liabilities)
    
    $
    60,567
    
    
    $
    (26,045
    )
 F-33




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Net operating
    
    
    AMTloss
    
    
    operating loss($ in thousands)2019
    
    $
    2,566
    
    
    $
    2,9182021
    
    
    4,576
    
    
    
    4,4982022
    
    
    44
    
    
    
    442023
    
    
    8
    
    
    
    3322024
    
    
    3,718
    
    
    
    3,8062025
    
    
    6,258
    
    
    
    5,0082026
    
    
    27,849
    
    
    
    26,0032027
    
    
    23,452
    
    
    
    21,921$
    68,471
    
    
    $
    64,530
      F-34




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (13)
    
    Stockholders EquitySale of Equity SecuritiesOn December 6, 2007, the Company sold 3,000,000 shares of its common stock in an underwritten
public offering at a price of $18.50. The Company used the net proceeds for general
corporate purposes and for conducting exploitation, development and acquisition activities in
certain core areas such as the Companys Permian Basin properties and its Barnett Shale gas
project.Stock Compensation, Warrants and RightsParallel accounts for stock based compensation in accordance with the SFAS 123(R).The Company awards incentive stock options, nonqualified stock options, restricted stock and
stock awards to selected key employees, officers, and directors. The options are awarded at
an exercise price equal to the closing price of the Companys common stock on the date of
grant. These options vest over a period of two to ten years with a ten-year exercise period.
As of December 31, 2008, options expire beginning in 2011 and extending through 2018. The
stock options, restricted stock and stock awards fair values are described below for each
grant. Stock based compensation expense is classified as general and administrative expenses
in the Consolidated Statements of Operations.
 (a)
    
    Plans
    
    1997 Nonemployee Directors Stock Option Plan. The 1997 Nonemployee
Directors Stock Option Plan was approved by the Companys 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 this plan are not incentive stock
options within the meaning of the Internal Revenue Code.Under provisions of the plan, the option exercise price must be the fair market value
of the stock subject to the option on the grant date. Options are not transferable
other than by will or the laws of descent and distribution.At December 31, 2007, there were no shares of common stock available for future option
grants under the 1997 Stock Option Plan.At December 31, 2008, options to purchase a total of 92,500 shares of common stock were
outstanding under this plan.
    
    1998 Stock Option Plan.In June 1998, the Companys 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.Under provisions of the plan, the option exercise price must be the fair market value
of the stock subject to the option on the grant date. Options are not transferable
other than by will or the laws of descent and distribution.Options may not be granted under the 1998 Plan after March 11, 2008. However, at May
29, 2003, there were no shares of common stock available for future option grants under
the 1998 Stock Option Plan.
 F-35




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 At December 31, 2008, options to purchase a total of 42,500 shares of common stock were
outstanding under this plan.
    
    2001 Nonemployee Directors Stock Option Plan.The 2001 Nonemployee
Directors Stock Option Plan was approved by the Companys stockholders at the annual
meeting of stockholders held in June 2001. 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.Under provisions of the plan, the option exercise price must be the fair market value
of the stock subject to the option on the grant date. Options are not transferable
other than by will or the laws of descent and distribution.Options may not be granted under this plan after May 2, 2011. However, as of August
23, 2005, no shares of common stock were available for future option grants under this
plan.At December 31, 2008, options to purchase 125,000 shares of common stock were
outstanding under this plan.
    
    2001 Employee Stock Option Plan. In June 2001, our Board of Directors
adopted the 2001 Employee Stock Option Plan. This plan authorized the grant of options
to purchase up to 200,000 shares of common stock, or less than 1.00% of our
outstanding shares of common stock. Directors and officers are not eligible to receive
options under this plan. Only employees are eligible to receive options. Stock options
granted under this plan are not incentive stock options.This plan was implemented without stockholder approval.Under provisions of the plan, 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 this plan are not transferable other than by will or the
laws of descent and distribution.The Employee Stock Option Plan will expire on June 20, 2011. However, as of June 20,
2001, no shares of common stock were available for future option grants under this
plan.At December 31, 2008, options to purchase 124,000 shares of common stock were
outstanding under this plan.
    
    2004 Non-Employee Director Stock Grant Plan.The 2004 Non-Employee
Directors Stock Grant Plan was approved by the Companys stockholders at the annual
meeting of stockholders held in June 2004. Under this plan, each non-employee Director
is entitled to receive an annual retainer fee consisting of shares of common stock
that will be automatically granted on the first day of July in each year. The total
number of shares of common stock initially available for grant under the plan was
116,000 shares, subject to adjustment as described in the plan. The plan will remain
in effect until terminated by the Board, although no additional share of common stock
may be issued after the 116,000 shares subject to the plan have been issued.Under provisions of the plan, 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
this plan are not transferable other than by will or the laws of
descent and distribution.
 F-36




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 As of December 31, 2008, the Company had 69,808 remaining shares of common stock
available to issue to directors under this plan.
 
    
    2008 Long-Term Incentive Plan. The Companys 2008 Long-Term Incentive Plan
was approved by the Companys stockholders at the annual meeting of stockholders held
on May 28, 2008. This plan provides for granting of nonqualified and incentive stock
options, restricted stock awards, performance awards and other awards to selected
officers, employees, consultants and outside directors. The maximum number of
shares of common stock that may be delivered pursuant to awards granted under the plan
is 2,000,000 shares.The option price for shares of common stock that may be purchased under a nonqualified
or incentive stock option must be at least equal to the fair market value of the shares
on the date of grant. The exercise price of an option may be paid in cash, in shares of
Parallels common stock or a combination of both. Unless terminated earlier, stock
options granted under the plan expire no more than ten years from the date of the
grant.The plan will remain in effect until May 28, 2018, unless sooner terminated by the
Board of Directors of the Company. No award may be made under the plan after its
expiration date. No awards under the plan may be repriced or exchanged for awards with
lower exercise prices because of a drop in market prices since grant, unless such
repricings or exchanges are approved by the stockholders of the Company.At December 31, 2008, options to purchase 355,000 shares of common stock were
outstanding under this plan and 1,627,352 shares were available for future awards.(b)
    
    Stock OptionsFor the twelve months ended December 31, 2008, 2007 and 2006, the Company recognized
compensation expense of approximately $1.3 million, $247,000 and $531,000 with tax
benefits of approximately $449,000, $84,000 and $181,000, respectively, associated with
its stock option grants.During June 2007, the Company revised its estimate of expected forfeitures of stock
options granted to directors due to the resignation of a director and the subsequent
forfeiture of 40,000 stock options held by the director. As a result, the Company revised
its estimate of the grant date fair value of shares expected to ultimately vest under its
stock option plan by approximately $283,000. As a consequence, general and administrative
expenses during the three months ended June 30, 2007 were reduced by approximately
$154,000 which included a cumulative adjustment for amounts previously expensed and
associated with options estimated to be forfeited or surrendered.
 F-37




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Year ended
    
    
    Year ended
    
    
    Year endedDecember 31, 2008
    
    
    December 31, 2007
    
    
    December 31, 2006Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseOptions
    
    
    price
    
    
    Options
    
    
    price
    
    
    Options
    
    
    price(in thousands)
    
    
    
    
    
    
    (in thousands)
    
    
    
    
    
    
    (in thousands)Stocks options:Outstanding at
beginning of year
    
    
    558
    
    
    $
    7.03
    
    
    
    1,199
    
    
    $
    5.40
    
    
    
    1,405
    
    
    $
    5.22Granted
    
    
    355
    
    
    
    21.02
    
    
    
    18
    
    
    
    22.89
    
    
    
    
    
    
    
    Exercised
    
    
    (174
    )
    
    
    4.23
    
    
    
    (619
    )
    
    
    3.98
    
    
    
    (176
    )
    
    
    4.35Surrendered
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    12.27
    
    
    
    (30
    )
    
    
    3.09Outstanding at
end of year
    
    
    739
    
    
    $
    14.41
    
    
    
    558
    
    
    $
    7.03
    
    
    
    1,199
    
    
    $
    5.40Exercisable at
end of year
    
    
    293
    
    
    $
    7.30
    
    
    
    420
    
    
    $
    5.39
    
    
    
    1,001
    
    
    $
    4.32Weighted average
fair value of options
granted during the year
    
    
    
    
    
    $
    10.63
    
    
    
    
    
    
    $
    12.45
    
    
    
    
    
    
    $
    
  Average
    
    
    IntrinsicRemaining Life
    
    
    Value(in thousands)Stock options outstanding
as of December 31, 2008
    
    
    8.8
    
    
    $
    Currently exercisable
as of December 31, 2008
    
    
    4.6
    
    
    $
    
  ($ in thousands)2009
    
    $
    1,5342010
    
    
    7892011
    
    
    3752012
    
    
    105Total
    
    $
    2,803
  F-38




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    2007
    
    2005
    
    2001Expected volatility
    
    
    46.50
    %
    
    
    52.52
    %
    
    
    54.20
    %
    
    
    57.95
    %Expected dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Expected term (in years)
    
    
    6.25
    
    
    
    5.75
    
    
    
    6.5
    
    
    
    7.5Risk free rate
    
    
    3.81%-3.86
    %
    
    
    4.89
    %
    
    
    4.20
    %
    
    
    5.05
    %
 ($ in thousands)Intrinsic Value of Options Exercised Year Ended December 31, 2008
    
    $
    2,336Intrinsic Value of Options Exercised Year Ended December 31, 2007
    
    $
    10,071Intrinsic Value of Options Exercised Year Ended December 31, 2006
    
    $
    2,855Fair Market Value of Options Granted Year Ended December 31, 2008
    
    $
    3,774Fair Market Value of Options Granted Year Ended December 31, 2007
    
    $
    218Fair Market Value of Options Granted Year Ended December 31, 2006
    
    $
    Average Weighted Grant Date Fair Value of Options
Issued and Unvested, December 31, 2008
    
    $
    4,383Average Weighted Grant Date Fair Value of Options
Issued and Outstanding, December 31, 2008
    
    $
    5,618
 (c)
    
    Restricted StockOn June 12, 2008, 10,000 shares of restricted stock were awarded to a non-employee
director under the Companys 2008 Long-Term Incentive Plan. The fair value of the
restricted stock award was approximately $209,000 and based on the last sales price of
the Companys common stock on the Nasdaq Global Market on the date of grant. For the
twelve months ended December 31, 2008 the Company recognized compensation expense of
approximately $106,000 for restricted stock. These shares vest in four equal increments
on June 12th of each year, commencing on June 12, 2008.The following table presents future stock-based compensation expense for the restricted stock
award, which we expect to recognize during the indicated vesting periods:
 ($ in thousands)2009
    
    $
    672010
    
    
    292011
    
    
    7Total
    
    $
    103
 F-39




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  WeightedAverageRemainingAward Date
    
    
    ContractualRestricted Stock
    
    
    Fair Value
    
    
    Term(years)Outstanding December 31, 2007
    
    
    
    
    
    $
    Granted
    
    
    10,000
    
    
    $
    20.91Vested
    
    
    (2,500
    )
    
    $
    20.91Surrendered
    
    
    
    
    
    $
    Non-vested shares at December 31, 2008
    
    
    7,500
    
    
    $
    20.91
    
    
    
    1.4
 (d)
    
    Stock AwardsFor the twelve months ended December 31, 2008, 2007 and 2006, the Company recognized
compensation expense of approximately $253,000, $96,000 and $118,000 associated with
restricted stock awards.Effective July 1, 2004, the Company began paying an annual retainer fee to each
non-employee Director in the form of shares of the Companys common stock. Under the 2004
Non-Employee Director Stock Grant Plan, each non-employee Director is entitled to receive
an annual retainer fee in the form of shares of common stock having a value of $25,000.
The shares of stock are automatically granted on the first day of July in each year. The
Company has 69,808 remaining shares of common stock available to issue to directors under
this arrangement.On July 1, 2008, each of our four non-employee directors were awarded 1,153 shares of
common stock under our 2004 Non-Employee Director Stock Grant Plan. The fair value of
common stock awarded of $20.25 per share was based on the average of the high and low
sales price of our common stock on the Nasdaq Global Market on the date of grant. The
shares vested 100% on the date of the grant.On July 1, 2007, each of our four non-employee directors were awarded 1,100 shares of
common stock under our 2004 Non-Employee Director Stock Grant Plan. The fair value of
common stock awarded of $21.79 per share was based on the average of the high and low
sales price of our common stock on the Nasdaq Global Market on the date of grant. The
shares vested 100% on the date of the grant.On July 1, 2006, each of our four non-employee directors were awarded 1,174 shares of
common stock under our 2004 Non-Employee Director Stock Grant Plan. The fair value of
common stock awarded of $25.23 per share was based on the average of the high and low
sales price of our common stock on the Nasdaq Global Market on the date of grant. The
shares vested 100% on the date of the grant.From time to time the Board of Directors authorizes stock awards to the non-employee
directors for compensation other than the annual retainer. On June 12, 2008, each of our
four non-employee directors was awarded 1,912 shares of common stock under our 2008
Long-Term Incentive Plan. The fair value of the common stock awarded of $20.91 per share
was based on the last sales price of our common stock on the Nasdaq Global Market on the
date of grant. The shares vested 100% on the date of the grant.
 F-40




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (e)
    
    Stock WarrantsThe Company had 300,030 warrants outstanding at December 31, 2007, which were issued as
part of the Companys initial public offering in 1980. Each warrant allowed the holder to
buy one share of common stock for $6.00. The warrants were exercisable for a 30 day
period commencing on the date a registration statement covering exercise was declared
effective. The warrants contained antidilution provisions. On April 15, 2008, the
Companys registration statement relating to 300,030 shares of common stock issuable upon
the exercised of outstanding warrants was declared effective by the Securities and
Exchange Commission. The warrants were exercisable at $6.00 per share at any time on or
before 5:00 p.m., Mountain Time, on May 15, 2008, at which time the warrants expired.
Between April 15, 2008 and May 15, 2008 a total of 148,757 warrants were exercised for
net proceeds of approximately $796,000. Warrants to purchase 151,273 shares were not
exercised and expired by their terms on May 15, 2008.The Company had 100,000 warrants outstanding at July 11, 2007 and December 31, 2006 which
were issued as partial payment for services rendered for financial and investment advice
for the Companys private placement offering in December, 2003. The warrants had a term
of five years from date of issuance and vesting period of one year. The warrants had an
exercise price of $3.98 per share and contained a provision for cashless exercise. The
fair value related to these warrants in the amount of $157,000 was recorded in other
expenses in 2003 based on the estimated fair value on the date of grant using the
Black-Scholes option pricing model. The holders of these warrants elected to exercise
during 2007 through cashless exercise as allowed under the terms of the warrants. As a
result, 82,734 common shares were issued to the warrant holders.(f)
    
    Stock RightsOn October 5, 2000, the board of directors adopted a Stockholder Rights Plan (the Plan)
and declared a dividend of one Stock Right for each outstanding share of the Companys
common stock. Generally, the Plan is designed to protect the Company from unfair or
coercive takeover attempts, prevent a potential acquiror from gaining control of the
Company without fairly compensating all of the Companys stockholders, and encourage
third parties that may have an interest in acquiring the Company to negotiate with the
Companys board of directors. In particular, the Plan is intended to (i) reduce the risk
of coercive or partial tender offers that may not offer fair value to all stockholders;
(ii) deter purchasers who through open market or private purchase may attempt to achieve
a position of substantial influence or control over the Company without paying a fair
control premium to selling or remaining stockholders; and (iii) preserve the board of
directors bargaining power and flexibility to deal with acquirors and otherwise to seek
to maximize value for all stockholders. The Plan is intended to achieve these goals by
confronting a potential acquiror of the Companys common stock with the possibility that
the Company or its stock-holders will be able to substantially dilute the acquirors
equity interest by using the Stock Rights to acquire additional Company common stock, or
in certain cases stock of the acquiror, at a 50% discount.If a person acquires 15% or more of the Companys common stock or a tender offer or
exchange offer is made for 15% or more of the common stock, each Stock Right will entitle
the holder to purchase from the Company one one-thousandth of a share of Series A
Preferred Stock, par value $0.10 per share, at an exercise price of $26.00 per one
one-thousandth of a share, subject to adjustment.
 F-41




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     (14)
    
    Related Party TransactionsIn December, 2001, and prior to his employment with Parallel, Donald E. Tiffin, Parallels
Chief Operating Officer, received a 3% working interest from an unaffiliated third party in
the Diamond M Project in Scurry County, Texas for services rendered in connection with
assembling the project. In August, 2002, shortly after his employment with Parallel, and due
to the personal financial exposure in the Diamond M Project and to prevent the interest from
being acquired by a third party, Mr. Tiffin assigned two-thirds of his ownership interest in
the project to Parallel at no cost, leaving him with a 1% working interest. Parallel acquired
its initial interest in the Diamond M Project in December, 2001. In 2008, 2007 and 2006, the
Company charged approximately $95,000, $45,000 and $111,000, respectively, for capital
expenditures and lease operating expenses and paid approximately $116,000, $65,000 and
$100,000, respectively, in oil and natural gas revenues related to this project. In
addition, $5,000 of this balance was for outstanding joint interest billings to an executive
officer as of December 31, 2007. This receivable was collected within one month of billing.As of December 31, 2008 and 2007, the Company had accounts receivable of $12,000 and $4.0
million, respectively, from affiliates. Joint interest receivables from a joint interest
owner (who was also a joint venture partner in Hagerman) represented $0 and $3.4 million of
these balances at December 31, 2008 and 2007, respectively.
 F-42




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (15)
    
    Major Customers and ConcentrationsThe following purchasers and operators accounted for 10% or more of the Companys oil and natural
gas sales for the years ended December 31:
 2008
    
    2007
    
    2006Chesapeake Operating, Inc.
    
    
    22
    %
    
    
    12
    %
    
    
(1)Conoco, Inc.
    
    
    18
    %
    
    
    21
    %
    
    
    20
    %Dale Operating Company
    
    
    (1)
    
    
    
    (1)
    
    
    
    10
    %Occidental Energy Marketing
    
    
    10
    %
    
    
    (1)
    
    
    
(1)Texland Petroleum, Inc.
    
    
    29
    %
    
    
    30
    %
    
    
    30
    %Tri-C Resources, Inc.
    
    
    (1)
    
    
    
    (1)
    
    
    
    12
    %
 
 (1)
    
    Less than 10%. A substantial portion of Parallels oil and natural gas reserves and production are located
in the Permian Basin and the Fort Worth Basin. The Company may be disproportionally exposed
to the impact of delays of interruptions of production from these wells due to mechanical
problems, damages to the current producing reservoirs and significant governmental
regulations, including any curtailment of production or interruption of transportation of oil
or natural gas produced from these wells.The Company manages the credit risk associated with its largest customers by using a credit
risk monitoring tool to actively monitor credit ratings, including S&P and Moodys, financial
statement filings, financial position, bankruptcy filings and current news.(16)
    
    Commitments and ContingenciesOn April 14, 2008, the Company was added as a defendant to a lawsuit filed in 2007, styled
Brady Briscoe vs. Capstar Drilling, L.P. (Capstar), Cause No. 21,287, in the 259th
District Court of Jones County, Texas. The plaintiff alleged that he was injured as the
result of an accident while he was working, as an employee of an unrelated third party, on a
drilling rig operated by Capstar. Capstar was conducting drilling operations for the
Company. The plaintiff asserted general allegations of negligence as to Capstar and,
specifically, a failure to properly equip its drilling rig, further alleging the Company was
in charge of the drilling rig and the operational details of the plaintiffs work. The
plaintiff sued for an amount of actual damages of up to $15.0 million, together with
pre-judgment interest, post-judgment interest and exemplary damages. Capstar recently
settled with the plaintiff and Capstar was dismissed from the lawsuit. If judgment is
entered against the Company, it would be entitled to a credit for the amount that the
plaintiff has already received from Capstar. On November 13, 2008, the plaintiff, filed
notice of non-suit, without prejudice, of all claims and causes of action asserted against
the Company.On March 24, 2008, a lawsuit was filed in the 24th District Court of Jackson
County, Texas, against the Company and twenty-two other defendants in Cause No. 07-6-13069,
styled Tony Kubenka, Carolyn Kubenka, Dennis J. Kallus, David J. Kallus, Mary L. Kallus,
Patricia Kallus, Nova Deleon, Janie Figuerova, and Larkin Thedford, Plaintiffs v. Tri-C
Resources, Inc., Marie S. Adian, Laura E. Adian, Glenn A. Fiew, Lynn Kramer, Debra Boysen,
Carol J. Gleason, Alana Sue Curlee, Connie W. Marthiljohni, Claire E. Adian, Zachary D.
Adian, Donald R. Starkweather, Inc., D.A. Webernick, Danette Bundick, Johnny A. Webernick,
Donna Gail Glover, Sherry Shulze, William H. Webernick, Jr., TAC Resources, Inc., New Century
Exploration, Inc., Allegro Investments, Inc.,
 F-43




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    F-44




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 On January 1, 2005 the Company established a 401(k) Plan and Trust for eligible employees.
During 2008, 2007 and 2006, the Company contributed an aggregate of approximately $317,000,
$274,000 and $240,000, respectively, to the 401(k) Plan.The Company leases office space under two non-cancelable operating leases with one expiring
in 2010 and the second lease expiring in 2011. Future annual payments under these operating
leases are approximately $271,000, $107,000 and $31,000 for the years ending December 31,
2009 through May 31, 2011, respectively. Rental expense under the Companys current leases
totaled approximately $240,000, $200,000 and $194,000 for the years ended December 31, 2008,
2007, and 2006, respectively.The Company has three field offices and storage facilities. These facilities are located in
Andrews and Snyder, Texas and Hagerman, New Mexico. Rental expense totaled approximately
$6,000, $23,000 and $23,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.The Company has an Incentive and Retention Plan which provides for the payment to eligible
officers and employees of a one time performance bonus and retention payment upon the
occurrence of a change of control as defined in the Plan. Because of the uncertainty of the
occurrence of a change of control or corporate transaction within the meaning of the plan,
the amount of these bonuses is undeterminable. As of December 31, 2008, the per share closing
price of the Companys stock was $2.01. This closing price is under the base of $3.73 and
$8.62. Therefore, the officers and employees would not receive any monetary compensation
under this plan.In January 2006, the Company adopted a Non-officer Employee Severance Plan for the purpose of
providing the Companys non-officer employees with an incentive to remain employed with the
Company. This Plan provides for a one-time severance payment to the non-officer employees
equal to one year of their then current base salary upon the occurrence of a change of
control within the meaning of the Plan. Based on the aggregate non-officer base salaries in
effect as of December 31, 2008, the total severance amount payable under the plan would have
been approximately $4.4 million.(17)
    
    Supplemental Oil and Natural Gas Reserve Data (Unaudited)The Company has presented the reserve estimates utilizing an oil price of $40.00, $89.93 and
$54.67 per Bbl and a natural gas price of $5.18, $6.77 and $5.00 per Mcf as of December 31,
2008, 2007 and 2006, respectively. Information for oil is presented in barrels (Bbl) and for
natural gas in thousands of cubic feet (Mcf).The estimates of the Companys proved oil and natural gas reserves and related future net
cash flows that are presented in the following tables are based upon estimates made by
independent petroleum engineering consultants as of December 31, 2008, 2007 and 2006. The
Company cautions that there are many inherent uncertainties in estimating proved reserve
quantities, projecting future production rates, and timing of development expenditures.
Accordingly, these estimates are likely to change as future information becomes available.
Proved oil and natural gas reserves are the estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating conditions.
Proved developed reserves are those reserves expected to be recovered through existing wells,
with existing equipment and operating methods.
 F-45




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Oil and Condensate (Bbls)For the Year Ended December 31,2008
    
    2007
    
    2006(In thousands)Proved developed and undeveloped reservesBeginning of year
    
    
    28,434
    
    
    
    28,721
    
    
    
    21,192Purchase of oil and natural gas properties
    
    
    1,839
    
    
    
    
    
    
    
    3,270Sales of oil and natural gas properties
    
    
    (1
    )
    
    
    (75
    )
    
    
    Extensions and discoveries
    
    
    243
    
    
    
    1,146
    
    
    
    8,182Revisions of previous estimates
    
    
    (8,282
    )
    
    
    (307
    )
    
    
    (2,786
    )Production
    
    
    (1,027
    )
    
    
    (1,051
    )
    
    
    (1,137
    )End of year
    
    
    21,206
    
    
    
    28,434
    
    
    
    28,721Proved developed reserves at year end
    
    
    12,137
    
    
    
    14,378
    
    
    
    14,932
 Natural Gas (MCF)For the Year Ended December 31,2008
    
    2007
    
    2006(In thousands)Proved developed and undeveloped reservesBeginning of year
    
    
    57,234
    
    
    
    58,896
    
    
    
    25,237Purchase of oil and natural gas properties
    
    
    1,008
    
    
    
    
    
    
    
    4,355Sales of oil and natural gas properties
    
    
    (188
    )
    
    
    (3,105
    )
    
    
    Extensions and discoveries
    
    
    24,105
    
    
    
    25,905
    
    
    
    38,159Revisions of previous estimates
    
    
    618
    
    
    
    (17,040
    )
    
    
    (2,316
    )Production
    
    
    (10,944
    )
    
    
    (7,422
    )
    
    
    (6,539
    )End of year
    
    
    71,833
    
    
    
    57,234
    
    
    
    58,896Proved developed reserves at year end
    
    
    55,751
    
    
    
    41,556
    
    
    
    28,741
    F-46




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   , Disclosures about
Oil and Gas Producing Activities"
   Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves  ($ in thousands)
 December 31,2008
    
    
    2007
    
    
    2006Future cash inflows
    
    $
    1,220,173
    
    
    $
    2,944,746
    
    
    $
    1,864,860Future costs:Production
    
    
    (535,074
    )
    
    
    (824,261
    )
    
    
    (606,138
    )Development
    
    
    (92,001
    )
    
    
    (117,981
    )
    
    
    (138,715
    )Future income taxes
    
    
    (20,782
    )
    
    
    (536,227
    )
    
    
    (292,954
    )Future net cash flows
    
    
    572,316
    
    
    
    1,466,277
    
    
    
    827,05310% annual discount for estimated timing of cash flows
    
    
    (264,396
    )
    
    
    (831,839
    )
    
    
    (490,565
    )Standardized measure of discounted future net cash flows
    
    $
    307,920
    
    
    $
    634,438
    
    
    $
    336,488
 F-47




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves  ($ in thousands)
 December 31,2008
    
    
    2007
    
    
    2006Increase (decrease):Purchases of minerals in place
    
    $
    20,149
    
    
    $
    
    
    
    $
    20,698Extensions and discoveries and improved recovery,
net of future production and development costs
    
    
    45,387
    
    
    
    97,918
    
    
    
    104,622
    (1)Accretion of discount
    
    
    88,392
    
    
    
    46,996
    
    
    
    47,281Net change in sales prices net of production costs
    
    
    (537,396
    )
    
    
    341,421
    
    
    
    (78,387
    )Changes in estimated future development costs
    
    
    43,696
    
    
    
    28,424
    
    
    
    12,726Revisions of quantity estimates
    
    
    (87,091
    )
    
    
    (64,408
    )
    
    
    (44,561
    )Net change in income taxes
    
    
    245,791
    
    
    
    (116,010
    )
    
    
    (21,452
    )Sales, net of production costs
    
    
    (147,284
    )
    
    
    (89,818
    )
    
    
    (86,130
    )Changes of production rates (timing) and other
    
    
    1,838
    
    
    
    53,427
    
    
    
    20,901
    (1)Net increase
    
    
    (326,518
    )
    
    
    297,950
    
    
    
    (24,302
    )Standardized measure of discounted future net cash flows:Beginning of year
    
    
    634,438
    
    
    
    336,488
    
    
    
    360,790End of year
    
    $
    307,920
    
    
    $
    634,438
    
    
    $
    336,488
 
 (1)
    
    During 2006, the Company revised its method of calculating Extensions and
discoveries and improved recovery, net of future production and development costs. F-48




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (18)
    
    Selected Quarterly Financial Data (Unaudited)
 QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth($ in thousands, except per share data)2008Oil and natural gas revenues
    
    $
    43,941
    
    
    $
    56,075
    
    
    $
    56,201
    
    
    $
    26,298Total costs and expenses
    
    
    21,188
    
    
    
    23,998
    
    
    
    25,051
    
    
    
    322,524Operating income (loss)
    
    
    22,753
    
    
    
    32,077
    
    
    
    31,150
    
    
    
    (296,226
    )(1)Gain (loss) on derivatives not classified as hedges
    
    $
    (21,886
    )
    
    $
    (71,609
    )
    
    $
    65,661
    
    
    $
    59,852Net income (loss)
    
    $
    (2,740
    )
    
    $
    (29,205
    )
    
    $
    58,677
    
    
    $
    (158,626
    )Net income (loss) per common share  basic
    
    $
    (0.07
    )
    
    $
    (0.70
    )
    
    $
    1.41
    
    
    $
    (3.81
    )(1)Net income (loss) per common share  diluted
    
    $
    (0.07
    )
    
    $
    (0.70
    )
    
    $
    1.41
    
    
    $
    (3.81

)(1)2007Oil and natural gas revenues
    
    $
    23,116
    
    
    $
    27,354
    
    
    $
    29,487
    
    
    $
    36,074Total costs and expenses
    
    
    14,827
    
    
    
    15,291
    
    
    
    18,206
    
    
    
    18,742Operating income
    
    
    8,289
    
    
    
    12,063
    
    
    
    11,281
    
    
    
    17,332Gain (loss) on derivatives not classified as hedges
    
    $
    (4,435
    )
    
    $
    (2,170
    )
    
    $
    (4,556
    )
    
    $
    (25,615
    )Net income (loss)
    
    $
    (96
    )
    
    $
    3,464
    
    
    $
    293
    
    
    $
    (8,322
    )Net income (loss) per common share  basic
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    (0.21
    )Net income (loss) per common share  diluted
    
    $
    
    
    
    $
    0.09
    
    
    $
    0.01
    
    
    $
    (0.21
    )
 
 (1)
    
    Fourth quarter 2008 results includes a $300.5 million impairment to the Companys
oil and natural gas properties. See Note 5 Oil and Natural Gas Properties. (19)
    
    Subsequent EventsSecond Amendment to Credit Agreement.On February 19,
2009, but effective as of December 31, 2008, the Company entered into a
Second Amendment to its Revolving Credit Agreement (the Second Amendment). Generally, the
Second Amendment increased the Companys annual interest rate for Libor loans by one-fourth of
one percent (0.25%). In addition, the Second Amendment modified one of the financial covenants
that the Company must comply with. Before the amendment, the Companys ratio of consolidated
funded debt to consolidated EBITDA (calculated at the end of each fiscal quarter using the
results of the immediately preceding twelve-month period, each a test period) was not
allowed to exceed 4.00 to 1.00. After the Second Amendment, this ratio is not allowed to
exceed 4.25 to 1.00 as of December 31, 2008 and for any test period during 2009 and 2010, or
4.00 to 1.00 during the year 2011 and thereafter. The bank fees
associated with this second amendment to credit agreement were
$575,000.
 F-49




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Barnett Shale Farmout Agreement.
 
    
    all wells drilled from November 1, 2008 through December 31, 2009, and all
wells drilled during each succeeding calendar year through 2016 will be
treated as a separate project or payout period, creating eight separate
projects or payout periods;
    
    at the time Chesapeake commences the drilling of a well during one of the
payout periods, the Company will assign to Chesapeake 100% of its leasehold
interest within the subject unit or lease, reserving and retaining a 50%
reversionary interest that will vest after Chesapeake recovers 150% of its
costs for a particular payout period. Until 150% payout has been reached,
Chesapeake will fund 100% of the Companys costs for drilling, completing and
operating wells during the payout period;
    
    on each project, Chesapeake is entitled to receive all revenues from the
Companys reversionary interest until Chesapeake receives revenues totaling
150% of the drilling, completion and operating costs Chesapeake incurs in
funding the Companys reversionary interest;
    
    upon reaching the 150% payout level for a given project, 50% of the
interest assigned to Chesapeake will revert back to the Company;
    
    after 150% project payout, the Company will pay all costs and receive all
revenues attributable to its 50% reversionary interest in each project;
    
    for wells drilled after January 1, 2017, the Company will pay all costs
and receive all revenues attributable to its 50% reversionary interest; and
    
    the Company will retain all of its interest in wells commenced prior to
November 1, 2008, except for 3 wells commenced in late October 2008. The
Company will retain all of its interest in approximately 90 gross (22.4 net)
producing wells and 31 gross (9.49 net) wells in progress.
   Natural Gas Hedge.
 F-50




---



##### Table of Contents



PARALLEL PETROLEUM CORPORATIONFebruary 23, 2009
    By:
    /s/ Larry C. OldhamLarry C. OldhamPresident and Chief Executive OfficerFebruary 23, 2009
    By:
    /s/ Steven D. FosterSteven D. FosterChief Financial Officer




---



##### Table of Contents



/s/ Jeffrey G. Shrader
    
    Director and Chairman of
    
    February 23, 2009Jeffrey G. Shrader
    
    the Board of Directors/s/ Larry C. Oldham
    
    President and Chief Executive Officer
    
    February 23, 2009Larry C. Oldham
    
    (Principal Executive Officer)/s/ Steven D. Foster
    
    Chief Financial Officer
    
    February 23, 2009Steven D. Foster
    
    (Principal Financial and
Accounting Officer)/s/ Edward A. Nash

Edward A. Nash
    
    Director
    
    February 23, 2009/s/ Martin B. Oring

Martin B. Oring
    
    Director
    
    February 23, 2009/s/ Ray M. Poage

Ray M. Poage
    
    Director
    
    February 23, 2009




---



##### Table of Contents



No.
    
    Description of Exhibit3.1
    
    Certificate of Incorporation of Registrant (Incorporated by reference to Exhibit 3.1 to Form
10-Q of the Registrant for the fiscal quarter ended June 30, 2004)3.2
    
    Bylaws of Registrant (Incorporated by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed on November 30, 2007)3.3
    
    Certificate of Formation of Parallel, L.L.C. (Incorporated by reference to Exhibit No. 3.3 of
the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.4
    
    Limited Liability Company Agreement of Parallel, L.L.C. (Incorporated by reference to Exhibit
No. 3.4 of the Registrants Statement on Form S-3, No. 333-119725 filed on October 13, 2004)3.5
    
    Certificate of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit
No. 3.5 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on
October 13, 2004)3.6
    
    Agreement of Limited Partnership of Parallel, L.P. (Incorporated by reference to Exhibit No.
3.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.1
    
    Certificate of Designations, Preferences and Rights of Serial Preferred Stock  6%
Convertible Preferred Stock (Incorporated by reference to Exhibit 4.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 2004)4.2
    
    Certificate of Designations, Preferences and Rights of Series A Preferred Stock (Incorporated
by reference to Exhibit 4.2 of Form 
10-K of the Registrant for the fiscal year ended December
31, 2000)4.3
    
    Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust
Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 1 of Form 8-A of the
Registrant filed with the Securities and Exchange Commission on October 10, 2000)4.4
    
    Form of common stock certificate of the Registrant (Incorporated by reference to Exhibit No.
4.6 of the Registrants Registration Statement on Form S-3, No. 333-119725 filed on October
13, 2004)4.5
    
    Warrant Purchase Agreement, dated November 20, 2001, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.6
    
    Warrant Purchase Agreement, dated December 23, 2003, between the Registrant and Stonington
Corporation (Incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2004)4.7
    
    Purchase Warrant Agreement, dated as of October 1, 1980, between the Registrant and American
Stock Transfer, Inc. (Incorporated by reference to Exhibit 4.7 of Form 10-K of the Registrant
for the fiscal year ended December 31, 2006)4.8
    
    First Amendment to Warrant Agreement, dated as of February 22, 2007, among the Registrant,
Computershare Shareholder Services, Inc. and Computershare Trust Company, N.A. (Incorporated
by reference to Exhibit 4.8 of Form 10-K of the Registrant for the fiscal year ended December
31, 2006)4.9
    
    Form of Rule 144A 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.2 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)




---



##### Table of Contents



No.
    
    Description of Exhibit4.10
    
    Form of IAI 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.3 to the
Registrants Current Report on Form 8-K filed on August 1, 2007)4.11
    
    Form of Regulation S 101/4% Senior Note due 2014 (Incorporated by reference to Exhibit 4.4 to
the Registrants Current Report on Form 8-K filed on August 1, 2007)4.12
    
    Indenture, dated as of July 31, 2007, among the Registrant as Issuer and Wells Fargo Bank,
National Association as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.13
    
    Registration Rights Agreement, dated as of July 31, 2007, by and among the Registrant,
Jefferies & Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP
Paribas Securities Corp. (Incorporated by reference to Exhibit 10.2 to the Registrants
Current Report on Form 8-K filed on August 1, 2007)4.14
    
    Purchase Agreement, dated as of July 26, 2007, by and among the Registrant, Jefferies &
Company, Inc., Merrill Lynch, Pierce, Fenner and Smith Incorporated and BNP Paribas Securities
Corp. (Incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K
filed on August 1, 2007)4.15
    
    Form of 101/4% Unrestricted Senior Note due 2014 (Incorporated by reference to Exhibit 4.13 of
Form S-4 of the Registrant, Registration No. 333-148465)Executive Compensation Plans and Arrangements (Exhibit No.s 10.1 through 10.11):10.1
    
    1992 Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2004)10.2
    
    Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Form 10-Q of the Registrant for the fiscal quarter ended June 30, 2005)10.3
    
    1998 Stock Option Plan (Incorporated by reference to Exhibit 10.4 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.4
    
    2001 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.7 of
the Registrants Form 10-Q Report for the fiscal quarter ended March 31, 2004)10.5
    
    2004 Non-Employee Director Stock Grant Plan (Incorporated by reference to Exhibit 10.1 of the
Registrants Form 8-K Report dated September 22, 2004)10.6
    
    Incentive and Retention Plan (Incorporated by reference to Exhibit 10.7 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.7
    
    2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of the Registrants
Form 8-K Report dated March 27, 2008)10.8
    
    Form of Nonqualified Stock Option Agreement for nonqualified stock options granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.9
    
    Form of Outside Director Stock Award Agreement for stock awards granted under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)10.10
    
    Form of Outside Director Restricted Stock Agreement for restricted stock grants under the
Registrants 2008 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the
Registrants Current Report on Form 8-K filed on June 18, 2008)




---



##### Table of Contents



No.
    
    Description of Exhibit10.11
    
    Agreement of Limited Partnership of West Fork Pipeline Company LP (Incorporated by reference
to Exhibit 10.21 of Form 10-K of the Registrant for the fiscal year ended December 31, 2004)10.12
    
    ISDA Master Agreement, dated as of October 13, 2005, between Parallel, L.P. and Citibank,
N.A. (Incorporated by reference to Exhibit 10.5 of the Registrants Form 8-K Report dated
October 14, 2005 and filed with the Securities and Exchange Commission on October 20, 2005)10.13
    
    Third Amended and Restated Credit Agreement, dated as of December 23, 2005, among Parallel
Petroleum Corporation, Parallel, L.P., Parallel, L.L.C. and Citibank Texas, N.A., BNP Paribas,
CitiBank F.S.B., Western National Bank, Compass Bank, Comerica Bank, Bank of Scotland and
Fortis Capital Corp. (Incorporated by reference to Exhibit No. 10.1 of the Registrants Form
8-K Report, dated December 23, 2005, as filed with the Securities and Exchange Commission on
December 30, 2005)10.14
    
    Second Lien Term Loan Agreement, dated November 15, 2005, among Parallel Petroleum
Corporation, Parallel, L.P., BNP Paribas and Citibank Texas, N.A. (Incorporated by reference
to Exhibit No. 10.4 of the Registrants Form 8-K Report, dated November 15, 2005, as filed
with the Securities and Exchange Commission on November 21, 2005)10.15
    
    Intercreditor and Subordination Agreement, dated November 15, 2005, among Citibank Texas,
N.A., BNP Paribas, Parallel Petroleum Corporation, Parallel, L.P. and Parallel, L.L.C.
(Incorporated by reference to Exhibit No. 10.5 of the Registrants Form 8-K Report, dated
November 15, 2005, as filed with the Securities and Exchange Commission on November 21, 2005)10.16
    
    Guaranty, dated as of December 23, 2005, made by Parallel, L.L.C. to and in favor of
Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.23 of Form 10-K of the
Registrant for the fiscal year ended December 31, 2006)10.17
    
    Third Amended and Restated Pledge Agreement, dated as of December 23, 2005, between
Parallel, L.L.C. and Citibank Texas, N.A. (Incorporated by reference to Exhibit 10.24 of Form
10-K of the Registrant for the fiscal year ended December 31, 2006)10.18
    
    Second Lien Guarantee and Collateral Agreement, dated as of November 15, 2005, made by
Parallel Petroleum Corporation and Parallel, L.P. to and in favor of BNP Paribas (Incorporated
by reference to Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2006)10.19
    
    Third Amendment to Third Amended and Restated Credit Agreement, dated as of July 31, 2007,
among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.3 of the Registrants Current Report on Form 8-K filed on August 1, 2007)10.20
    
    Fourth Amendment to Third Amended and Restated Credit Agreement, dated as of November 30,
2007, among the Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank,
Comerica Bank, Bank of Scotland, and Fortis Capital Corp. (Incorporated by reference to
Exhibit 10.27 of Form S-4 of the Registrant, Registration No. 333-148465)10.21
    
    Hagerman Gas Gathering System Joint Venture Agreement, dated as of January 16, 2007, among
the Registrant, Feagan Gathering Company and Capstone Oil and Gas Company, L.P. (Incorporated
by reference to Exhibit 10.28 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2007)10.22
    
    Fourth Amended and Restated Credit Agreement, dated as of May 16, 2008, among the
Registrant, Citibank, N.A., BNP Paribas, Western National Bank, Compass Bank, Comerica Bank,
Bank of Scotland plc, and Texas Capital Bank, N.A. (Incorporated by reference to Exhibit 10.1
of the Registrants Current Report on Form 8-K filed on May 22, 2008)10.23
    
    First Amendment to Fourth Amended and Restated Credit Agreement, dated as of October 31,
2008, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank,




---



##### Table of Contents



No.
    
    Description of ExhibitCompass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America, N.A. and West
Texas National Bank (Incorporated by reference to Exhibit 10.34 of the Registrants Form 10-Q
Report for the third fiscal quarter ended September 30, 2008)*10.24
    
    Second Amendment to Fourth Amended
and Restated Credit Agreement, executed as of February 19,
2009, by and among Parallel Petroleum Corporation, Citibank, N.A., BNP Paribas, Western
National Bank, Compass Bank, Bank of Scotland plc, Texas Capital Bank, N.A., Bank of America,
N.A. and West Texas National Bank14
    
    Code of Ethics (Incorporated by reference to Exhibit No. 14 of the Registrants Form 10-K
Report for the fiscal year ended December 31, 2003 and filed with the Securities and Exchange
Commission on March 22, 2004)*23.1
    
    Consent of BDO Seidman, LLP*23.2
    
    Consent of Cawley, Gillespie & Associates Inc. Independent Petroleum Engineers*31.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.*31.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes  Oxley Act of 2002.**32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.**32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes  Oxley Act of 2002.
 
 *
    
    Filed herewith.**
    
    Furnished herewith.