<PAGE>

                                       1


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549

                                   FORM 10-Q/A

                                 Amendment No. 2

                          ----------------------------
(Mark One)

/X/  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

              For the quarterly period ended September 30, 1999 or

/ /  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934
     For the Transition period from                  to

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

                         COMMISSION FILE NUMBER 0-13305

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


                         PARALLEL PETROLEUM CORPORATION
             (Exact name of registrant as specified in its charter)

             DELAWARE                                       75-1971716
       (State of other jurisdiction of           (I.R.S. Employer Identification
       incorporation or organization)                        Number)

      One Marienfeld Place, Suite 465,
           Midland, Texas                                        79701
   (Address of principal executive offices)                  (Zip Code)

                                 (915) 684-3727
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                          if changed since last report)

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

                 Yes  'X'                        No

         At November 1, 1999,  there were 18,331,858  shares of the Registrant's
Common Stock, $0.01 par value, outstanding.


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

<PAGE>
                                       2


                                      INDEX



                         PART I. - FINANCIAL INFORMATION


                                                                        Page No.
ITEM 1. FINANCIAL STATEMENTS

        Reference is made to the succeeding pages for the following
        financial statements:

        - Balance Sheets as of December 31, 1998 and September 30, 1999
          (unaudited)                                                      4

        - Unaudited Statements of Operations for the three months ended
          September 30, 1998 and 1999 and nine months ended
          September 30, 1998 and 1999                                      6

        - Unaudited Statements of Cash Flows for the nine months ended     7
          September 30, 1998 and 1999

        - Notes to Financial Statements                                    8


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS                                         11


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK        19



                          PART II. - OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                  20



<PAGE>
                                       3

                                EXPLANATORY NOTE


         This  amendment  reflects the  retroactive  exclusion of Parallel's pro
rata share of the assets and  liabilities and revenues and expenses with respect
to a 22.5% ownership interest in First Permian,  L.L.C., as previously  reported
in Form 10-Q for the  quarter  ended  September  30,  1999.  First  Permian is a
Delaware  limited  liability  company formed on June 25, 1999 to acquire the oil
and gas assets of a wholly owned subsidiary of Fina Oil and Chemical Company.

         For the quarter ended September 30, 1999, we accounted for our interest
in First Permian under the pro rata method of  consolidation.  Under this method
of accounting, our pro rata share in the assets and liabilities and revenues and
expenses of First Permian were  consolidated with the assets and liabilities and
revenues   and   expenses   of   Parallel.   However,   because  of  recent  SEC
interpretations of accounting for consolidated  investments,  beginning with the
fourth  quarter of 1999, we changed our method of accounting for our interest in
First  Permian from the pro rata  consolidation  method to the equity  method of
accounting and are restating the September 30, 1999 quarterly amounts. Under the
equity method of accounting,  investments are recorded at cost and are increased
or reduced by the company's  proportionate  share of income or loss.  Therefore,
Parallel's  restated balance sheet as of September 30, 1999 does not include the
22.5% pro rata  interest  in the assets and  liabilities  of First  Permian,  as
previously reported.  Instead, such interest is reported as an investment on the
balance  sheet  and our pro rata  share of income is  recognized  on the  income
statement as equity in earnings of First Permian.

<PAGE>
                                       4



                         PARALLEL PETROLEUM CORPORATION

                                 BALANCE SHEETS


<TABLE>

                                                  December 31,  September 30, 1999
ASSETS                                                 1998*       (Unaudited)
-------------                                     ------------- ------------------
<S>                                               <C>           <C>
Current assets:
 Cash and cash equivalents                          $ 1,178,819  $   633,780
 Accounts receivable:
   Oil and gas                                        1,432,659    1,354,340
   Others, net of allowance for doubtful accounts
      of $71,358 in 1998 and 1999                       247,740      296,326
   Affiliate                                             11,844          608
                                                   ------------ ------------
                                                      1,692,243    1,651,274
 Other assets                                            61,504       17,686
                                                   ------------ ------------
   Total current assets                               2,932,566    2,302,740
                                                   ------------ ------------

Property and equipment, at cost:
 Oil and gas properties, full cost method            65,565,466   68,202,581
 Other                                                  287,586      289,423
                                                   ------------ ------------
                                                     65,853,052   68,492,004
 Less accumulated depreciation and depletion         22,279,355   25,562,268
                                                   ------------ ------------
   Net property and equipment                        43,573,697   42,929,736
                                                   ------------ ------------
Investment in First Permian, LLC (Note 2)                   -        183,358

Other assets, net of accumulated amortization of
   $86,917 in 1998 and $102,689 in 1999                  58,519       78,622
                                                   ------------ ------------
                                                   $ 46,564,782 $ 45,494,456
                                                   ============ ============
</TABLE>

<PAGE>
                                       5

                         PARALLEL PETROLEUM CORPORATION

                                 BALANCE SHEETS
                                   (Continued)


<TABLE>
                                                  December 31,  September 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY                     1998*     (Unaudited)
------------------------------------              ------------  ------------------
<S>                                               <C>           <C>

Current liabilities:
 Accounts payable and accrued liabilities:
   Trade                                           $  2,803,539 $  1,482,244
   Affiliate                                                214        1,242
   Preferred stock dividend                                  --      170,537
                                                   ------------ ------------
   Total current liabilities                          2,803,753    1,654,023
                                                   ------------ ------------

Long-term debt:
   Bank credit facility (Note 3)                     18,035,889   18,815,889

 Deferred income taxes                                       --           --

Stockholders' equity:

  Preferred stock   6% convertible preferred stock
   par value $.10 per share(aggregate liquidation
   preference of $10) authorized 10,000,000 shares,
   issued and outstanding 974,500 in 1998 and 1999       97,450       97,450
 Common stock - par value $.01 per share, authorized
   60,000,000 shares, issued and outstanding
   18,306,858 in 1998 and 18,331,858 in 1999            183,069      183,319
  Additional paid-in surplus                         32,341,971   31,896,022
 Retained deficit                                    (6,897,350)  (7,152,247)
                                                    ------------ ------------
   Total stockholders' equity                        25,725,140   25,024,544

Contingencies
                                                   ------------ ------------
                                                   $ 46,564,782 $ 45,494,456
                                                   ============ ============
</TABLE>



*The balance  sheet as of December  31, 1998 has been  derived  from  Parallel's
audited  financial  statements.  The accompanying  notes are an integral part of
these financial statements.


<PAGE>
                                       6


                         PARALLEL PETROLEUM CORPORATION

                            STATEMENTS OF OPERATIONS

                                   (Unaudited)

<TABLE>
                                       Three Months Ended         Nine months Ended
                                          September 30,             September 30,
                                       ----------------------   ----------------------
                                           1998        1999       1998        1999
                                       ----------   ----------  ----------  ----------
<S>                                    <C>          <C>         <C>         <C>

Oil and gas revenues                   $2,540,809   $2,291,448  $7,106,512  $6,246,264
                                       ----------   ----------  ----------  ----------
Cost and expenses:
  Lease operating expense                 622,205      598,586   1,792,895   1,663,550
  General and administrative              227,865      218,731     647,371     642,879
  Depreciation, depletion
     and amortization                   1,114,438    1,422,119   3,108,721   3,282,913
                                       ----------   ----------  ----------  ----------
                                        1,964,508    2,239,436   5,548,987   5,589,342
                                       ----------   ----------  ----------  ----------
          Operating income                576,301       52,012   1,557,525     656,922
                                       ----------   ----------  ----------  ----------
Other income (expense), net:
   Equity in earnings of
     First Permian, LLC (Note 2)               --      181,108          --     181,108
   Interest income                            403        7,973         873      34,944
   Other income                             8,226        6,999      59,337      20,228
   Interest expense                      (396,682)    (396,110)  1,042,777) (1,143,238)
   Other expense                           (2,687)      (2,351)    (11,264)     (4,861)
                                       ----------   ----------  ----------  ----------
          Total other expense, net       (390,740)    (202,381)   (993,831)   (911,819)
                                       ----------   ----------  ----------  ----------
Income (loss) before income taxes         185,561     (150,369)    563,694    (254,897)

Income tax expense   deferred              61,269          --      185,964          --
                                       ----------   ----------  ----------  ----------
          Net income (loss)            $  124,292   $ (150,369) $  377,730  $ (254,897)
                                       ==========   ==========  ==========  ==========
Cumulative preferred stock dividend    $   90,000   $  146,174  $  173,000  $  462,887
                                       ==========   ==========  ==========  ==========
          Net income (loss) available
             to common stockholders    $   34,292   $ (296,543) $  204,730  $ (717,784)
                                       ==========   ==========  ==========  ==========
Net income (loss) per common share
          Basic                        $     .002   $   (.016)  $     .011  $    (.039)
                                       ==========   ==========  ==========  ==========
          Diluted                      $     .002   $   (.016)  $     .011  $    (.039)
                                       ==========   ==========  ==========  ==========
Weighted average common shares
          Outstanding - basic          18,381,967   18,331,858  18,207,852  18,329,759
                                       ==========   ==========  ==========  ==========
          Outstanding - diluted        18,756,045   18,331,858  18,751,500  18,329,759
                                       ==========   ==========  ==========  ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
                                       7


                         PARALLEL PETROLEUM CORPORATION

                            STATEMENTS OF CASH FLOWS

                         NINE MONTHS ENDED SEPTEMBER 30

                                   (Unaudited)

<TABLE>
                                                               1998          1999
                                                            ----------    ----------
<S>                                                          <C>          <C>
Cash flows from operating activities:

   Net income (loss)                                        $ 377,730     $ (254,897)
   Adjustments to reconcile net income (loss) to net cash
     Provided by operating activities:
        Depreciation, depletion and amortization            3,108,721      3,282,913
        Equity in income from investment                           --       (181,108)
                Income taxes                                  185,964             --
   Other, net                                                  (4,531)       (20,103)

   Changes in assets and liabilities:
     Decrease in trade receivables                             16,622         40,969
     (Increase) decrease in prepaid expenses and other        (61,201)        43,818
     Increase (decrease) in accounts payable and accrued
                liabilities                                   612,545     (1,149,730)
                                                          -----------    -----------
     Net cash provided by operating activities              4,235,850      1,761,862
                                                          -----------    -----------
Cash flows from investing activities:

   Additions to property and equipment                    (17,353,375)    (3,074,183)
   Proceeds from disposition of property and equipment        883,144        435,231
   Investment in First Permian, LLC                                --         (2,250)
                                                          -----------    -----------
     Net cash used in investing activities                (16,470,231)    (2,641,202)
                                                          -----------    -----------
Cash flows from financing activities:

   Proceeds from the issuance of long-term debt            14,307,390        780,000
          Payment of long-term debt                        (8,584,000)            --
          Proceeds from exercise of options and warrants       70,625         17,188
      Stock offering costs                                    (80,851)            --
          Proceeds from common stock issuance                       -             --
          Proceeds from preferred stock issuance            6,000,000             --
   Payment of preferred stock dividend                        (68,000)      (462,887)
                                                          -----------    -----------
     Net cash provided by financing activities             11,645,164        334,301
                                                          -----------    -----------
     Net decrease in cash and cash equivalents               (589,217)      (545,039)

Beginning cash and cash equivalents                           597,149      1,178,819
                                                          -----------    -----------
Ending cash and cash equivalents                          $     7,932    $   633,780
                                                          ===========    ===========
Non-cash financing activities:
   Accrued preferred stock dividend                       $        --    $   170,537
                                                          ===========    ===========
</TABLE>

The accompanying notes are an integral part of these financials.

<PAGE>
                                       8


                         PARALLEL PETROLEUM CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

         The financial  information  included herein,  with the exception of the
balance sheet as of December 31, 1998, is unaudited.  However,  such information
includes all adjustments  (consisting  solely of normal  recurring  adjustments)
which are, in the opinion of  management,  necessary for a fair statement of the
results of operations for the interim periods. The results of operations for the
interim period are not necessarily  indicative of the results to be expected for
an entire year.

         Certain  information  and  footnote  disclosures  normally  included in
financial  statements  prepared in accordance with generally accepted accounting
principles  have been condensed or omitted in this Form 10-Q Report  pursuant to
certain rules and regulations of the Securities and Exchange  Commission.  These
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial  statements  and notes  included in Parallel's  1998 Annual Report and
1998 Form 10-K.

         In June 1999,  we acquired a 22.5%  interest in First  Permian,  LLC, a
limited liability company.  We account for our investment in First Permian on an
equity basis.  Accordingly,  our investment in First Permian is recorded at cost
and is  increased or decreased  by our  proportionate  share of First  Permian's
income or loss.  Our 22.5%  interest is reported as an investment on the balance
sheet and our share of income or loss is recognized  on the income  statement as
equity in earnings of First Permian.

NOTE 2. RECENT EVENTS

         On November 12, 1999, we terminated  the offering  period for a private
placement  of  2,000,000  shares  of common  stock.  Stock  Purchase  Agreements
covering a total of 2,000,000 shares were received from 22 accredited  investors
and eight unaccredited investors.  The offering price of the stock was $1.60 per
share. After deducting estimated expenses in the amount of $27,000 payable by us
and sales commissions in the amount of $26,000 payable to Netherland Securities,
Inc. and $4,000 payable to Everen  Securities,  Inc., net proceeds are estimated
to be  $3,143,000,  of which  approximately  $1,500,000  million will be used to
reduce  bank  debt  and the  remaining  amount  will  be  used  to fund  capital
expenditures and for general corporate purposes.  Upon issuance of the 2,000,000
shares  of  common  stock,  we will  have  20,331,858  shares  of  common  stock
outstanding.  The private  placement was made in reliance on the exemptions from
registration under the Securities Act of 1933 pursuant to Section 4 (2) and Rule
506 of Regulation D under the Securities Act.

         On June 30, 1999,  First Permian,  LLC and a wholly owned subsidiary of
Fina Oil and Chemical Company  consummated a cash merger.  First Permian was the
surviving  entity.  The transaction was accounted for as a purchase.  The assets
acquired consisted  primarily of producing oil and gas properties located in the
Permian Basin of west Texas.  After giving effect to purchase price adjustments,
First Permian paid to Fina cash in the aggregate amount of  approximately  $92.0
million.

         First Permian is owned by Parallel,  Baytech,  Inc., Tejon  Exploration
Company and Mansefeldt Investment Corporation and affiliates. Baytech, Tejon and
Mansefeldt are privately  held oil and gas  companies.  Parallel and Baytech are
the managers of First Permian and each owns a 22.5% membership  interest.  Tejon
Exploration  and  Mansefeldt  Investment  each  own a 27.5%  interest  in  First
Permian.

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

         In  addition to the $74.0  million  loan from Bank One,  First  Permian
borrowed  $8.0  million  from Tejon  Exploration  Company and $8.0  million from
Mansefeldt Investment Corporation to help finance the acquisition of oil and gas
properties from Fina Oil and Chemical  Company.  Under terms of an Intercreditor
Agreement,  dated  June 30,  1999,  the loans made by Tejon and  Mansefeldt  are
unsecured and subordinate in all respects to the senior loans made by Bank One.

<PAGE>
                                       9


         Each  subordinated loan requires a principal payment of $2.5 million on
December 31, 1999 and $5.5 million on September 30, 2000.  Principal payments on
the subordinated loans are subject to certain restrictions.

NOTE 3. LONG TERM DEBT

         Our long term debt at September 30, 1999 consisted of the following:

         Revolving credit facility note payable to bank at the bank's
           base lending rate plus .25% (8.5% at September 30, 1999)  $18,815,889
                                                                     ===========

         Revolving Credit Facility.  At September 30, 1999, Parallel was a party
to a loan  agreement with Bank One,  Texas,  N.A. which provides for a revolving
credit facility (the "Revolving  Facility")  under which we may borrow up to the
lesser of $30,000,000 or the "borrowing base" then in effect. The borrowing base
in effect at September 30, 1999 was $18,815,889.  The borrowing base was subject
to reduction by a monthly commitment reduction of $380,000.  However,  effective
March 23, 1999, the monthly commitment reduction was suspended by the bank until
May 1, 1999 at which time the borrowing  base and monthly  commitment  reduction
were  scheduled  for   redetermination.   The  loan  agreement  provides  for  a
redetermination of the borrowing base and monthly commitment reduction every six
months on April 1 and  October 1 of each year or at such other times as the bank
elects.  As of the date of this Form 10-Q Report,  we had not received  from the
bank the redetermined  borrowing base or monthly  reduction amount. At September
30, 1999, we had borrowed all the funds currently  available under the Revolving
Facility.  All indebtedness  under the Revolving  Facility matures July 1, 2001.
The  loan is  secured  by  substantially  all of our  oil  and  gas  properties.
Commitment  fees of .25% per annum on the difference  between the commitment and
the average daily amount outstanding are due quarterly.

         The unpaid principal  balance of the Revolving  Facility bears interest
at our election at a rate equal to (i) the bank's base lending rate plus .25% or
(ii) the  bank's  Eurodollar  rate  plus a margin  of 2.5%.  Interest  under the
Revolving  Facility is due and payable  monthly.  At  September  30,  1999,  the
interest rate was the bank's base rate plus .25% or 8.5%.

         The  loan  agreement   contains  various   restrictive   covenants  and
compliance  requirements,  which include (1)  maintenance  of certain  financial
ratios, (2) limiting the incurrence of additional indebtedness,  (3) prohibiting
payment  of  dividends  on common  stock,  and (4)  prohibiting  the  payment of
dividends on preferred  stock when an event of default under the loan  agreement
is in existence.

NOTE 4. PREFERRED STOCK

         We have outstanding  974,500 shares of 6% Convertible  Preferred Stock,
$0.10 par value per share.  Cumulative  annual  dividends of $0.60 per share are
payable  semi-annually  on June 15 and  December 15 of each year.  Each share of
Preferred  Stock may be  converted,  at the option of the  holder,  into  2.8571
shares of  common  stock at an  initial  conversion  price of $3.50  per  share,
subject to adjustment in certain  events.  The preferred stock has a liquidation
preference of $10 per share and has no voting rights, except as required by law.
We may  redeem the  preferred  stock,  in whole or part,  for $10 per share plus
accrued and unpaid dividends.

NOTE 5. FULL COST CEILING TEST

         We use the full cost  method to account  for our oil and gas  producing
activities.  Under the full cost method of accounting, the net book value of oil
and gas  properties,  less  related  deferred  income  taxes,  may not  exceed a
calculated  "ceiling."  The  ceiling  limitation  is  the  discounted  estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net  revenues,  current  prices  and costs are  generally  held  constant
indefinitely.  The net book  value,  less  related  deferred  income  taxes,  is
compared to the ceiling on a quarterly and annual  basis.  Any excess of the net
book value,  less related deferred income taxes, is generally  written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not  written off if,  subsequent  to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess  above the ceiling  would not have existed if the  increased  prices were
used in the calculations.

         During the fourth quarter of 1998, we recognized a non-cash  impairment
charge of $15.0 million, or $12.0 million net of tax, related to our oil and gas
reserves  and  unproved  properties.  The  impairment  of oil and gas assets was
primarily  the result of the effect of  significantly  lower oil and natural gas
prices on both proved and unproved  oil and gas  properties.  At  September  30,

<PAGE>
                                       10



1999, our net book value of oil and gas, less related deferred income taxes, was
below the  calculated  ceiling.  As a result,  we were not  required to record a
reduction  of our  oil  and  gas  properties  under  the  full  cost  method  of
accounting.

NOTE 6. NET INCOME PER COMMON SHARE

         In 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128,  "Earnings per Share" ("FAS 128"). FAS
128 replaced the  calculation  of primary and fully  diluted  earnings per share
with basic and diluted  earnings per share.  Unlike primary  earnings per share,
basic earnings per share excludes any dilutive effects of 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 share is computed  similarly  to the  previously
reported fully diluted earnings per share and reflects the assumed conversion of
all potentially dilutive securities.

<TABLE>
                                                       Three Months Ended          Nine Months Ended
                                                          September 30,              September 30,
                                                   --------------------------    ---------------------
                                                       1998          1999           1998        1999
                                                   ----------     ----------     ----------   --------
<S>                                                <C>            <C>            <C>          <C>

Basic EPS Computation:
     Numerator
     Net income (loss)                              $  124,292     $ (150,369)    $  377,730  $ (254,897)
     Preferred stock dividends                         (90,000)      (146,174)      (173,000)   (462,887)
                                                    ----------     ----------     ----------  ----------
     Net income (loss) available to
            common stockholders                         34,292       (296,543)       204,730    (717,784)
                                                    ==========     ==========     ==========  ==========
   Denominator -
     Weighted average common shares outstanding     18,381,967     18,331,858     18,207,852  18,329,759
                                                    ----------     ----------     ----------  ----------
Basic EPS                                           $    0.002     $   (0.016)    $    0.011  $   (0.039)
                                                    ==========     ===========    ==========  ===========


                                                      Three Months Ended          Nine Months Ended
                                                          September 30,              September 30,
                                                   --------------------------    ---------------------
                                                       1998          1999           1998        1999
                                                   ----------     ----------     ----------   --------


Diluted EPS Computation:
     Numerator
     Net income (loss)                              $  124,292     $ (150,369)    $  377,730  $  254,897)
     Preferred stock dividends                         (90,000)      (146,174)      (173,000)   (462,887)
                                                    ----------     ----------     ----------  ----------
     Net income (loss) available to
            common stockholders                         34,292       (296,543)       204,730    (717,784)
                                                    ==========     ==========     ==========  ==========
   Denominator -
     Weighted average common shares outstanding     18,381,967     18,331,858     18,207,852  18,329,759
                Employee                               370,530             --        537,307          --
                Warrants                                 3,548             --          6,341          --
                                                    ----------     ----------     ----------  ----------
                                                    18,756,045     18,331,858     18,751,500  18,329,759
                                                    ==========    ===========     ==========  ==========
Diluted earnings (loss) per share                   $    0.002    $   (0.016)     $    0.011  $   (0.039)
                                                    ==========    ==========      ==========  ==========

</TABLE>

         Convertible  preferred  stock  equivalents  of  974,500  shares for the
three- and nine-month  periods ended September 30, 1999, that could  potentially
dilute  basic  earnings  per  share  in the  future,  was  not  included  in the
computation of diluted earnings per share for the periods  presented  because to
do so would have been antidilutive.

NOTE 7. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133  "Accounting  for Derivative
Instruments and Hedging  Activities" which establishes  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, and for hedging activities.  It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure those instruments at fair value. It establishes  conditions
under which a derivative may be designated as a hedge, and establishes standards
for  reporting  changes  in the fair  value  of a  derivative.  SFAS No.  133 is

<PAGE>
                                       11



required to be implemented  for the first quarter of the fiscal year ended 2000.
Early  adoption is permitted.  Recently,  the FASB  deferred the  implementation
requirements  of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS.

         In addition to historical  information contained herein, this Form 10-Q
Report  contains  forward-looking   statements  subject  to  various  risks  and
uncertainties  that could  cause our actual  results to differ  materially  from
those in the forward-  looking  statements.  Forward-looking  statements  can be
identified  by the use of  forward-looking  terminology  such as "may,"  "will,"
"expect,"  "intend,"  "anticipate,"  "estimate,"  "continue,"  "present  value,"
"future,"  "reserves" or other  variations  thereof or  comparable  terminology.
Factors,  that could cause or contribute to such differences could include,  but
are  not  limited  to,  those  relating  to  our  growth  strategy,  outstanding
indebtedness,  changes in  interest  rates,  dependence  on weather  conditions,
seasonality,  expansion and other activities of competitors,  changes in federal
or state environmental laws and the administration of such laws, and the general
condition  of the  economy  and its effect on the  securities  market.  While we
believe our forward- looking  statements are based upon reasonable  assumptions,
there are  factors  that are  difficult  to predict and that are  influenced  by
economic  and other  conditions  beyond our control.  Investors  are directed to
consider  such risks and other  uncertainties  discussed in  documents  filed by
Parallel with the SEC.

         The following  discussion  and analysis  should be read in  conjunction
with our Financial Statements and the related notes.

OVERVIEW

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

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

          .    investing in high-potential exploration prospects;

          .    acquiring  producing  properties  we believe can add  incremental
               value;

          .    exploiting our existing producing properties;

          .    emphasizing cost controls; and

          .    positioning for opportunity.

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

         Investment  in  First  Permian.  As  described  in Note 2 to  Financial
Statements,  on June 25,  1999 we joined with three  privately  held oil and gas
companies to acquire oil and gas properties from Fina Oil and Chemical  Company.
The  acquisition  was effected  through the  formation of First  Permian,  which
entered  into a cash  merger  with a  wholly  owned  subsidiary  of Fina Oil and
Chemical Company.  The primary assets of the acquired subsidiary are oil and gas
reserves and associated  assets in producing fields located in the Permian Basin
of west Texas. After giving effect to purchase price adjustments,  First Permian
paid  to  Fina  Oil  and  Chemical  Company  cash  in the  aggregate  amount  of
approximately $92.0 million.

         First Permian is owned by Parallel,  Baytech,  Inc., Tejon  Exploration
Company and Mansefeldt Investment Corporation and affiliates. Baytech, Tejon and
Mansefeldt are privately  held oil and gas  companies.  Parallel and Baytech are
the managers of First Permian and each owns a 22.5% membership  interest.  Tejon
Exploration and Mansefeldt  Investment and affiliates each owns a 27.5% interest
in First Permian.  We account for our interest in First Permian using the equity
method of  accounting  whereby our  investment  is increased or decreased by our
proportionate share of First Permian's net income or loss.

<PAGE>
                                       12


         The  purchase  was  financed,  in part,  with the  proceeds of a $110.0
million  revolving  credit facility  provided by Bank One, Texas,  N.A. to First
Permian.  The  principal  amount  of the  initial  loan was  $74.0  million.  In
addition,  First  Permian also  borrowed  $8.0  million  from Tejon  Exploration
Company and $8.0 million from Mansefeldt Investment  Corporation to help finance
the purchase.

         Operating  Performance.  Our  operating  performance  is  influenced by
several factors, the most significant of which are the prices we receive for our
oil and gas production volumes. The world price for oil has overall influence on
the prices we receive for our oil production.  The prices received for different
grades of oil are based  upon the world  price for oil,  which is then  adjusted
based  upon the  particular  grade.  Typically,  light oil is sold at a premium,
while heavy grades of crude are discounted.  Gas prices we receive are primarily
influenced  by seasonal  demand,  weather,  hurricane  conditions in the Gulf of
Mexico,  availability of pipeline  transportation  to end users and proximity of
our  wells to major  transportation  pipeline  infrastructure  and,  to a lesser
extent,   world  oil  prices.   Additional  factors  influencing  our  operating
performance  include production  expenses,  overhead  requirements,  and cost of
capital.

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

            .    cash flow from operations,
            .    sales of our equity securities, and
            .    bank borrowings.

         Because of the  sustained  deterioration  in prices we received for the
oil and gas we produced in 1998 and the first part of 1999, the capital normally
available to us from our cash flow and bank  borrowings  has been  significantly
reduced. In January 1998, we were receiving  approximately  $17.00 per barrel of
oil and $2.70 per Mcf of gas for the oil and gas we  produced.  Since then,  oil
prices  have been as low as $10.00 per  barrel.  At  January  1,  1999,  we were
receiving approximately $10.50 per barrel of oil and $2.00 per Mcf of gas.

         For the nine months ended  September 30, 1999,  the average sales price
we received for our crude oil  production  was $15.09 per barrel  compared  with
$13.25 per barrel at  September  30, 1998 and $12.49 per barrel at December  31,
1998.  The average sales price for natural gas during this same period was $2.10
per mcf compared  with $2.20 per mcf at September  30, 1998 and $2.04 per mcf at
December 31, 1998.

         Primarily  because  of  sustained  low oil and gas  prices,  which have
adversely  affected the value of our proved oil and gas reserves,  our available
borrowing  capacity  under  our  revolving  credit  facility  was  reduced  from
$21,000,000 to $18,815,889.  This means we have borrowed all the funds currently
available  under our revolving  credit  agreement.  We have reduced our drilling
activities  during  this  period of  reduced  cash flow and  restricted  capital
availability.  If the prices we receive for oil and gas  production  continue to
improve,  increasing  cash flow, or if we are  successful in raising  additional
capital, drilling activity may be accelerated.

         Our oil and gas producing  activities  are accounted for using the full
cost method of accounting.  Under this method,  we capitalize all costs incurred
in connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 5 to Financial Statements.
These  costs  include  lease  acquisition  costs,   geological  and  geophysical
expenditures,  costs of drilling both productive and  non-productive  wells, and
overhead  expenses  directly  related to land  acquisition  and  exploration and
development activities.  Proceeds from the disposition of oil and gas properties
are  accounted  for as a reduction in  capitalized  costs,  with no gain or loss
recognized  unless such disposition  involves a material change in reserves,  in
which case the gain or loss is recognized.

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

         Our production and results of operations  vary from quarter to quarter.
We do not expect our 1999 production volumes to increase  significantly compared
to our production volumes in the prior year.

<PAGE>
                                       13


RESULTS OF OPERATIONS

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

        .  sources of production;
        .  product mix (oil vs. gas volumes); and
        .  the prices we receive for our oil and gas production.

         Year-to-year  or  other  periodic  comparisons  of the  results  of our
operations can be difficult and may not accurately  describe our condition.  The
following  table  compares the results of  operations on the basis of equivalent
barrels of oil ("EBO") for the period indicated.  An EBO means one barrel of oil
equivalent using the ratio of six Mcf of gas to one barrel of oil.

<TABLE>

                                                THREE MONTHS ENDED             THREE MONTHS ENDED
                                       ----------------------------------   ------------------------
                                         3-31-99     6-30-99    9-30-99       9-30-98     9-30-99
                                        ---------   ---------  ---------     ---------   ---------
<S>                                     <C>         <C>        <C>           <C>         <C>

Production and prices:
  Oil (Bbls)                              44,619      45,908     31,991        48,321      31,991
  Natural gas (Mcf)                      697,593     749,856    645,301       869,215     645,301
  Equivalent barrels of oil(EBO)         160,884     170,884    139,542       193,190     139,542

  Oil price (per Bbl)                     $12.18      $13.17     $21.89        $12.15      $21.89
  Gas price (per Mcf)                     $ 2.03      $ 1.85     $ 2.47        $ 2.25      $ 2.47
  Price per EBO                           $12.20      $11.66     $16.42        $13.15      $16.42

Results of operations per EBO

Oil and gas revenues                      $12.20      $11.66     $16.42        $13.15      $16.42
Costs and expenses:
  Lease operating expense                   3.19        3.23       4.29          3.22        4.29
  General and administrative                1.26        1.29       1.57          1.18        1.57
  Depreciation and depletion                5.62        5.60      10.19          5.77       10.19
                                          ------      ------     ------        ------      ------
     Total costs and expenses              10.07       10.12      16.05         10.17       16.05
                                          ------      ------     ------        ------      ------
Operating income                            2.13        1.54        .37          2.98        0.37
                                          ------      ------     ------        ------      ------

Equity in earnings of First Permian, LLC     .00         .00       1.30           .00        1.30
Interest expense, net                      (2.22)      (2.12)     (2.78)        (2.05)      (2.78)
        Other income, net                    .03         .03        .03           .03         .03
                                          ------      ------     ------        ------      ------
Pretax income (loss)                        (.06)       (.55)     (1.08)          .96       (1.08)
Income tax benefit                           .00         .00        .00           .32         .00
                                          ------      ------     ------        ------      ------
          Net income (loss)               $ (.06)     $ (.55)    $(1.08)       $  .64      $(1.08)
                                          ------      ------     ------        ------      ------
Net cash flow before working
  capital adjustments                     $ 5.56      $ 5.05     $ 9.11        $ 6.73      $ 9.11
                                          ======      ======     ======        ======      ======

</TABLE>


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

<PAGE>
                                       14

<TABLE>
                                                          NINE MONTHS ENDED
                                              ---------------------------------------
                                                     9-30-97      9-30-98      9-30-99
                                                     -------      -------      -------
<S>                                                 <C>            <C>         <C>
Production and prices:

   Oil (Bbls)                                       133,924       136,180      122,518
   Natural gas (Mcf)                              2,632,460     2,407,751    2,092,750
   Equivalent barrels of oil (EBO)                  572,667       537,472      471,310

   Oil price (per Bbl)                               $20.45        $13.25       $15.09
   Gas price (per Mcf)                               $ 2.60        $ 2.20       $ 2.10
   Price per EBO                                     $16.72        $13.22       $13.25

Results of operations per EBO
Oil and gas revenues                                 $16.72        $13.22       $13.25

Costs and expenses:
   Lease operating expense                             3.93          3.34         3.53
   General and administrative                           .74          1.20         1.36
   Depreciation and depletion                          4.55          5.78         6.96
                                                     ------        ------       ------
Total costs and expenses                               9.22         10.32        11.85
                                                     ------        ------       ------
Operating income                                       7.50          2.90         1.40
                                                     ------        ------       ------
Equity in earnings of First Permian, LLC                .00           .00          .38
Interest expense, net                                 (1.03)        (1.94)       (2.35)
Other income, net                                       .03           .09          .03
                                                     ------        ------       ------
Pretax income                                          6.50          1.05        (0.54)
Income tax expense   deferred                          2.15           .35          .00
                                                     ------        ------       ------
     Net income                                        4.35           .70        (0.54)
                                                     ======        ======       ======
Net cash flow before working
capital adjustments                                  $11.05        $ 6.83       $ 6.42
                                                     ======        ======       ======
</TABLE>

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

<TABLE>


                                                THREE MONTHS ENDED              NINE MONTHS ENDED
                                       ----------------------------------   ------------------------
                                         3-31-99     6-30-99    9-30-99       9-30-98     9-30-99
                                        ---------   ---------  ---------     ---------   ---------
<S>                                     <C>         <C>        <C>           <C>         <C>



Oil and gas revenues                      100.0%      100.0%       100.0%       100.0%       100.0%
Costs and expenses:
  Production costs                         26.1        27.7         26.1         25.3         26.6
  General and administrative               10.3        11.1          9.5          9.1         10.3
  Depreciation, depletion and
     amortization                          46.0        48.0         62.0         43.7         52.5
                                         ------      ------       ------       ------       ------
      Total costs and expenses             82.4        86.8         97.6         78.1         89.4
                                         ------      ------       ------       ------       ------
Operating income                           17.6        13.2          2.4         21.9         10.6
                                         ------      ------       ------       ------       ------
Equity interest in earnings
 of First Permian, LLC                       .0          .0          7.9           .0          2.9
Interest expense, net                     (18.2)      (18.2)       (16.9)       (14.7)       (17.7)
Other income, net                            .2          .2           .2           .7           .2
                                        -------      -------     -------       ------       ------
Pretax income (loss)                      (18.0)       (4.8)        (8.8)         7.9         (4.0)
Income tax (expense) benefit                 .0          .0           .0          2.6           .0
                                        -------      ------       ------       ------       ------
Net income (loss)                           (.4)       (4.8)        (6.4)         5.3         (4.0)
                                        =======      ======       ======       ======       ======
</TABLE>


<PAGE>
                                       15


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER  30, 1998 AND 1999:



         Oil and Gas Revenues.  Oil and gas revenues decreased $249,361,  or 10%
to $2,291,448 for the three months ended September 30, 1999, from $2,540,809 for
the same period of 1998. The decrease in revenues is primarily attributable to a
28%  decrease in  production  volumes.  Offsetting  the  decrease in  production
volumes was an increase in the average  sales price per EBO. We received  $16.42
per EBO in the three months ended  September  30, 1999  compared with $13.15 per
EBO for the same period of 1998.

         Production  Costs.  Production  costs  decreased  $23,619,  or  4%,  to
$598,586  during the third three months of 1999  compared  with $622,205 for the
same period of 1998. Average production costs per EBO increased 33% to $4.29 for
the third three months in 1999  compared with $3.22 for the same period in 1998,
primarily because of lower production volumes.

         General  and  Administrative   Expenses.   General  and  administrative
expenses  decreased  by $9,134 or 4%, to $218,731  for the third three months of
1999,  from  $227,865  for the same period of 1998.  General and  administrative
expenses  were $1.57 per EBO in the third  three  months of 1999  compared  with
$1.18 per EBO in the third three months of 1998. The increase per EBO was due to
a 28% decrease in production volumes.

         Depreciation,   Depletion  and  Amortization   Expense.   Depreciation,
depletion and  amortization  expense  ("DD&A")  increased by $307,681 or 28%, to
$1,422,119  for the third three months of 1999 compared with  $1,114,438 for the
same period of 1998. As a percentage of revenues, the DD&A rate increased by 41%
when compared with the prior year three months,  primarily a result of a noncash
impairment  charge  incurred in the fourth quarter of 1998 that reduced our full
cost pool.  The DD&A rate per EBO increased to $10.19 for the three months ended
September  30, 1999  compared  with $5.77 per EBO for the third three  months of
1998.

         Historically,   we  have  reviewed  our  estimates  of  proven  reserve
quantities on an annual basis.  However,  due to the current  uncertainty of oil
and gas prices,  we conduct internal reviews of our estimated proven reserves on
a  more  frequent  basis  and  make  necessary   adjustment  to  our  DD&A  rate
accordingly.  We believe periodic reviews and  adjustments,  if necessary,  will
result  in a more  accurate  reflection  of its DD&A  rate  during  the year and
minimize possible year-end adjustments.

         Net Interest Expense. Net interest expense decreased $8,142 to $388,137
for the three months ended  September  30, 1999,  compared with $396,279 for the
same period of 1998, due principally to reduced bank borrowings.

         Net Income and Operating  Cash Flow. We reported a net loss of $150,369
for the three  months  ended  September  30,  1999  compared  with net income of
$124,292 for the three  months ended  September  30, 1998.  Operating  cash flow
decreased $28,249, or 2%, to $1,271,750 for the three months ended September 30,
1999 compared with $1,299,999 for the three months ended September 30, 1998. The
decrease in net income was primarily the result of a 10% decrease in oil and gas
revenues and a 28% increase in DD&A expense. The decrease in operating cash flow
was  primarily  the result of a 10%  decrease  in oil and gas  revenues  and the
absence of deferred income taxes.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999:

         Oil and Gas Revenues.  Oil and gas revenues decreased $860,248, or 12%,
to $6,246,264 for the nine months ended  September 30, 1999, from $7,106,512 for
the same period of 1998. The decrease in revenues is primarily attributable to a
12% decrease in production volumes.

         Production  Costs.  Production  costs  decreased  $129,345,  or 7%,  to
$1,663,550  during the first nine months of 1999,  compared with  $1,792,895 for
the same period of 1998, primarily because of lower production volumes.  Average
production  costs per EBO  increased  6%, to $3.53 for the first nine  months in
1999 compared with $3.34 for the same period in 1998, primarily because of lower
production volumes.

         General  and  Administrative   Expenses.   General  and  administrative
expenses  decreased  by $4,492,  or 1%, to $642,879 for the first nine months of
1999,  from  $647,371  for the same period of 1998.  General and  administrative
expenses were $1.36 per EBO in the first nine months of 1999 compared with $1.20
per EBO in the first nine months of 1998. The increase per EBO was due primarily
to lower production volumes.

<PAGE>
                                       16


         Depreciation,   Depletion  and  Amortization   Expense.   Depreciation,
depletion and  amortization  expense ("DD&A")  increased by $174,192,  or 6%, to
$3,282,913  for the first nine months of 1999 compared with  $3,108,721  for the
same period of 1998. As a percentage of revenues, the DD&A rate increased by 20%
when compared with the prior year nine months, a result of a non-cash impairment
charge  incurred in the fourth  quarter of 1998 that reduced our full cost pool.
The DD&A rate per EBO increased to $6.96 for the nine months ended September 30,
1999 compared with $5.78 per EBO for the first nine months of 1998.

         Historically,   we  have  reviewed  our  estimates  of  proven  reserve
quantities on an annual basis.  However,  due to the current  uncertainty of oil
and gas prices,  we conduct internal reviews of our estimated proven reserves on
a  more  frequent  basis  and  make  necessary   adjustment  to  our  DD&A  rate
accordingly.  We believe periodic reviews and  adjustments,  if necessary,  will
result  in a more  accurate  reflection  of its DD&A  rate  during  the year and
minimize possible year-end adjustments.

         Net Interest Expense.  Net interest expense increased $66,390 or 6%, to
$1,108,294 for the nine months ended September 30, 1999 compared with $1,041,904
for the same period of 1998, due principally to borrowings against our revolving
line of credit during 1998.

         Net Income and Operating  Cash Flow. We reported a net loss of $254,897
for the nine  months  ended  September  30,  1999,  compared  with net income of
$377,730  for the nine months ended  September  30,  1998.  Operating  cash flow
decreased  $644,399,  or 17%, to $3,028,016 for the nine months ended  September
30, 1999 compared with  $3,672,415 for the nine months ended September 30, 1998.
The decrease in net income resulted primarily from a 12% decrease in oil and gas
revenues,  a 12%  decrease  in  production  volumes  and a 6%  increase  in DD&A
expense.  These factors were offset by a 7% decrease in lease operating expenses
and a 1% decrease in general and  administrative  expenses.  Operating cash flow
decreased  primarily  because  of a  decrease  in oil and gas  revenues  and the
absence of deferred income taxes.

LIQUIDITY AND CAPITAL RESOURCES

         Our cash flow is highly  dependent on oil and gas prices.  Decreases in
the market  price of oil and gas in the prior 12 months have  reduced  cash flow
and also resulted in the  reduction of our borrowing  base under our bank credit
facility.  These factors have  decreased  the funds  available to us for capital
expenditures.

         Our working  capital  increased as of September  30, 1999 compared with
December 31, 1998.  Current assets exceeded  current  liabilities by $648,717 at
September  30, 1999  compared  with working  capital of $128,813 at December 31,
1998. The increase was primarily attributable to a decrease in accounts payable.

         We incurred net property  costs of $2,641,202 for the nine months ended
September  30,  1999.  Of this  amount,  $2,250 was  associated  with our equity
interest in First Permian.  The remaining  amount,  $2,638,952,  was expended on
Parallel's  3-D  seismic  interpretation,   leasehold  costs  and  drilling  and
completion activities.  These activities were financed by the utilization of our
cash flow provided by operations, sales of equity securities,  proceeds from the
sale of certain properties and cash provided by credit lines.

         At the present time, our cash flow from  operations is adequate to meet
normal  operating  expenses,  the interest expense under our credit facility and
preferred  stock  dividends.   However,  during  a  period  of  sustained  price
downturns,  we reduced exploration activities to match internally generated cash
flows.  Therefore,  without  additional  capital  or an  increase  in our credit
facility  borrowing  base, our capital  expenditure  budget for the remainder of
1999 remains  highly  dependent  on future oil and gas prices.  If the prices we
receive for oil and gas production continue to improve, increasing cash flow, or
if we are successful in obtaining  additional capital,  drilling activity may be
accelerated.

TRENDS AND PRICES

         During 1998, we experienced a significant erosion in prices for oil and
natural gas. Industry conditions deteriorated  significantly during 1998 and the
first three months of 1999 as a result. While prices recovered  significantly in
the third  quarter of 1999,  prices for the first nine months of 1999, on an EBO
basis,  were only slightly  improved versus the comparable period in 1998. There
is substantial  uncertainty regarding future oil and gas prices and there can be
no assurances that oil and gas prices will not decline in the future.

<PAGE>
                                       17


         Our revenues, cash flows and borrowing capacity are affected by changes
in oil and gas prices.  The markets for oil and gas have historically  been, and
will continue to be,  volatile.  Prices for oil and gas  typically  fluctuate in
response to relatively minor changes in supply and demand,  market  uncertainty,
and seasonal,  political and other factors beyond our control.  We are unable to
accurately predict domestic or worldwide political events or the effects of such
other factors on the prices we receive for oil and gas.

         Historically,  we have not entered into  transactions  to hedge against
changes in oil and gas  prices.  As of  September  30,  1999,  we had no hedging
contracts in place.

OTHER MATTERS

         In June 1998, the FASB issued SFAS No. 133  "Accounting  for Derivative
Instruments and Hedging  Activities" which establishes  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts, and for hedging activities.  It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure those instruments at fair value. It establishes  conditions
under which a derivative may be designated as a hedge, and establishes standards
for  reporting  changes  in the fair  value  of a  derivative.  SFAS No.  133 is
required to be implemented  for the first quarter of the fiscal year ended 2000.
Early  adoption is permitted.  Recently,  the FASB  deferred the  implementation
requirements  of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.

 INFORMATION SYSTEMS FOR THE YEAR 2000

         We place a high  priority on resolving  the  computer or embedded  chip
problems related to the Year 2000 that might cause operational disruptions.  Our
Year 2000 project  addresses  the  inability of computer  software;  hardware or
equipment  with  embedded  microprocessors  that are time  sensitive  to process
correctly  dates data  beginning on January 1, 2000.  This problem  results from
computer  programs  using two digits  rather  than four to define an  applicable
year.

         In  planning  and  developing  the  project,  we  considered  both  our
information technology,  or IT, systems and non-IT systems. IT systems generally
include computer equipment and software.  Alarm systems, fax machines,  monitors
for field operations and other miscellaneous systems, which may contain embedded
technology,  are  considered  non-IT  systems.  These  types of systems are more
difficult to assess and repair than IT systems.

         The scope of the project includes:

         .  conducting an inventory of software,  hardware and embedded  systems
            equipment;

         .  assessing the potential for failure and the associated risk;

         .  prioritizing  the  need  for  remediation,  repairing  or  replacing
            significant non-compliant items; and

         .  testing any modifications to ensure Year 2000 compliance.

         Additionally,  the project  assesses the risks associated with the Year
2000 compliance of material business partners.

         The  assessment  phase of our Year 2000 project is at varying stages of
completion  as it pertains to IT and non-IT  systems and  applications.  We have
begun a comprehensive  analysis of the operational problems and costs that would
be  reasonably  likely to result  from the failure by us and  significant  third
parties to complete  efforts  necessary  to achieve  Year 2000  compliance  on a
timely basis.

         We believe our most significant risks will be in two areas:

         . measuring the quantities of oil and natural gas produced; and
         . receiving timely payment from the purchasers of its gas and oil.

         We also  depend  upon  third  parties  for most of our  non-information
technology systems such as:

         . telephones;
         . facsimile machines;
         . air conditioning;

<PAGE>
                                       18


         .  heating;
         .  elevators  in the  office  building;  and
         .  other equipment   which  may  have  embedded   technology   such  as
            microprocessors.

         Many systems owned or controlled by third parties that we are dependent
upon, including non-information  technology systems, may or may not be Year 2000
compliant.  Written inquiries have been sent to these third parties, but most of
this  technology  is outside of our  control  and it is  difficult  to assess or
remedy any  non-compliance  that could  adversely  affect our ability to conduct
business.

         In December 1998, letters were mailed to significant  vendors,  service
providers and business partners to determine the extent to which interfaces with
such  entities are  vulnerable  to Year 2000 issues and whether the products and
services  purchased  from or provided by such entities are Year 2000  compliant.
Written assurances have been obtained from our bank lender, our major purchasers
of production,  with the exception of one, and our accounting  software provider
indicating  that they anticipate they are or will be Y2K compliant by the end of
the year.  Efforts  are  being  made to locate  the Y2K  coordinator  of the one
purchaser to determine their Y2K  compliance.  We are mindful that our own level
of  readiness  is  partially  dependent  on the ability of these and other third
parties to be fully compliant.  The failure of third parties to be Y2K compliant
creates  likelihood  that we will also  experience Y2K  interruptions  through a
"ripple effect" stemming from external forces.  However, we currently believe we
have resolved any significant Year 2000 issues.

         The  remedial  phase of the  project  is  substantially  complete.  The
remedial phase includes the upgrade and/or replacement of software  applications
and hardware  systems.  Most of the software  providers for Parallel's  personal
computers  have  confirmed  their  readiness  for the Year 2000 or have provided
updates to correct most identified Year 2000 problems. Testing of our local area
network and a check for embedded systems have been completed.  Minor corrections
to the local computers have been identified and corrected.

         It is impossible  to accurately  predict all potential Y2K problems and
the   magnitude  of  any  adverse   effects  on   Parallel.   Because  of  these
uncertainties,  we have  developed  a  contingency  plan to  minimize  potential
business  interruptions.  In preparing  contingency  plans, we have assumed that
many third  parties  will not be Y2K  compliant.  Our  remediation  efforts  are
expected  to reduce  significantly  our  level of  uncertainty  about  Year 2000
compliance and the possibility of interruptions  of normal business  operations.
After  completion  of the Year  2000  review  and  testing,  which is  currently
expected to be  completed  by September  30,  1999,  we will  further  develop a
contingency plan as required. This plan is expected to be completed by September
30, 1999.

         The  following  table  summarizes  the  current  overall  status of our
project and lists anticipated completion dates for each phase of the project.

<TABLE>

                                     Phase
----------------------------------------------------------------------------------------------------
            Component                 Inventory            Assessment           Remediation
----------------------------------------------------------------------------------------------------
<S>                                <C>                     <C>                  <C>
Business Partners                 January 31, 1999         August 31, 1999       Completed
Software                          April 30, 1999           May 31, 1999          Completed
Hardware                          April 30, 1999           September 15,1999     November 30, 1999
Embedded Systems                  April 30, 1999           May 31, 1999          Completed

</TABLE>


         To date,  only minor costs have been  incurred  for  project  planning.
Substantially all of the personnel  working on the project to identify,  assess,
remediate  and test Year 2000 issues are existing  employees.  Therefore,  labor
costs incurred in connection with the project are expected to be minimal.  Based
on current information,  we do not anticipate that the costs associated with any
necessary in-house modifications will be material to its operations or financial
condition.  The total cost of the project is  expected to range from  $10,000 to
$20,000.

         The failure to correct a material  Year 2000 problem could result in an
interruption  in,  or a  failure  of,  certain  normal  business  activities  or
operations that could  materially and adversely  affect  Parallel's  operations,

<PAGE>
                                       19



liquidity and financial condition.  Because of the uncertainty  surrounding Year
2000 issues,  primarily those associated with third party suppliers and material
business  partners,  we are unable to  determine  at this time whether Year 2000
failures will have a material impact on our operations.  However, the project is
expected  to reduce  the risk of Year 2000  issues  significantly,  particularly
regarding the  compliance and readiness of our material  vendors,  suppliers and
business  partners.  We believe that the timely  completion of this project will
reduce  the  possibility  of  significant   interruptions   of  normal  business
operations.

         This is a  flexible  plan that will  change to address  additional  Y2K
issues as new problems are identified.  As a result, any time and cost estimates
and the assessment of risks  associated  with Y2K issues are subject to revision
as needed to meet our goal to be Y2K compliant.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Our major market risk exposure is in the pricing  applicable to our oil
and  natural  gas  production.  Realized  pricing  is  primarily  driven  by the
prevailing domestic price for crude oil and spot prices applicable to the region
in which we produce natural gas.  Historically,  prices received for oil and gas
production have been volatile and  unpredictable.  Parallel has not entered into
any hedging arrangements.

         Interest Rate Risk.  Parallel's only financial  instrument sensitive to
changes in interest rates is bank debt.  Our annual  interest costs in 1999 will
fluctuate  based on  short-term  interest  rates.  Since  the  interest  rate is
variable and reflects current market conditions, the carrying value approximates
the fair  value.  The  following  table shows  principal  cash flows and related
weighted average interest rates by expected maturity dates.

<TABLE>

                                                                    Fair
Instrument                         1999    2000    2001    Total    Value
--------------------------------------------------------------------------------
                                       (in 000's, except interest rates)
<S>                                <C>     <C>     <C>     <C>      <C>
Variable rate debt
     Revolving Facility (secured)     -       -   $18.816  $18.816  $18.816
        Average interest rate       8.5%    8.5%     8.5%      8.5%
</TABLE>


<PAGE>
                                       20

TEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

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

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

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

         10.1     Certificate  of  Formation  of First  Permian,  L.L.C.,  dated
                  September 24, 1999  (Incorporated by reference to Exhibit 10.1
                  to Form 8-K of the  Registrant  dated July 14,  1999 and filed
                  with the Securities and Exchange Commission on July 15, 1999)

         10.2     Limited Liability Company Agreement of First Permian,  L.L.C.,
                  dated September 25, 1999 (Incorporated by reference to Exhibit
                  10.2 to Form 8-K of the  Registrant  dated  July 14,  1999 and
                  filed with the Securities and Exchange  Commission on July 15,
                  1999)

         10.3     Merger  Agreement,  dated September 25, 1999  (Incorporated by
                  reference to Exhibit 10.3 to Form 8-K of the Registrant  dated
                  July 14,  1999 and  filed  with the  Securities  and  Exchange
                  Commission on July 15, 1999)

         10.4     Agreement  and Plan of merger,  dated  September  30, 1999, of
                  First   Permian,   L.L.C.   and  Nash  Oil   Company,   L.L.C.
                  (Incorporated  by reference to Exhibit 10.4 to Form 8-K of the
                  Registrant  dated July 14, 1999 and filed with the  Securities
                  and Exchange Commission on July 15, 1999)

         10.5     Certificate  of Merger of First  Permian  L.L.C.  and Nash Oil
                  Company,  dated September 30, 1999  (Incorporated by reference
                  to Exhibit 10.5 to Form 8-K of the  Registrant  dated July 14,
                  1999 and filed with the Securities and Exchange  Commission on
                  July 15, 1999)

         10.6     Credit  Agreement,  dated  September  30,  1999,  among  First
                  Permian,   L.L.C.,   as  Borrower,   and  Parallel   Petroleum
                  Corporation  and  Baytech,  Inc. as  Guarantors  and Bank One,
                  Texas,  N.A.  and the  Institutions  named Herein as Banks and
                  Bank One, Texas, N.A., as Agent  (Incorporated by reference to
                  Exhibit 10.6 to Form 8-K of the Registrant dated July 14, 1999
                  and filed with the Securities and Exchange  Commission on July
                  15, 1999)

         10.7     Limited Guaranty, dated September 30, 1999, by and among First
                  Permian,  L.L.C., Parallel Petroleum Corporation and Bank One,
                  Texas N.A.  (Incorporated by reference to Exhibit 10.7 to Form
                  8-K of the  Registrant  dated July 14, 1999 and filed with the
                  Securities and Exchange Commission on July 15, 1999)

         10.8     Intercreditor Agreement, dated as of September 30, 1999, among
                  First  Permian,   L.L.C.,   Bank  One,  Texas,   N.A.,   Tejon
                  Exploration  Company and  Mansefeldt  Investment  Corporation.
                  (Incorporated  by reference to Exhibit 10.8 to Form 8-K of the
                  Registrant  dated July 14, 1999 and filed with the  Securities
                  and Exchange Commission on July 15, 1999)

<PAGE>
                                       21

         10.9     Subordinated  Promissory Note, dated September 30, 1999, among
                  First   Permian,   L.L.C.   and  Tejon   Exploration   Company
                  (Incorporated  by reference to Exhibit 10.9 to Form 8-K of the
                  Registrant  dated July 14, 1999 and filed with the  Securities
                  and Exchange Commission on July 15, 1999)

         10.10    Subordinated  Promissory Note, dated September 30, 1999, among
                  First  Permian,   L.L.C.  and  Mansefeldt  Investment  Company
                  (Incorporated by reference to Exhibit 10.10 to Form 8-K of the
                  Registrant  dated July 14, 1999 and filed with the  Securities
                  and Exchange Commission on July 15, 1999)

         *27      Financial Data Schedule

         (b)      Reports on Form 8-K

                  On September 14, 1999, we filed a report on Form 8-K/A,  dated
                  September 13, 1999, to amend the Form 8-K Report filed on July
                  15, 1999 that reported First Permian's  acquisition of oil and
                  gas properties  from Fina Oil and Chemical  Company.  The Form
                  8-K/A Report included the following financial statements:

               .    Statements of Revenues and Direct Operating Expenses for the
                    Years  Ended  December  31,  1997  and  1998 and for the Six
                    Months Ended June 30, 1998 and 1999.

               .    Unaudited Pro Forma Combined Statement of Operations for the
                    Year Ended December 31, 1998.

               .    Unaudited Pro Forma Combined Statement of Operations for the
                    Six Months  Ended June 30, 1999.

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

<PAGE>
                                       22



                              SIGNATURES



     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                       PARALLEL PETROLEUM CORPORATION



Date:   May 10, 2000                   BY:  /s/ THOMAS R. CAMBRIDGE
                                       --------------------------------
                                       Thomas R. Cambridge
                                       Chairman of the Board of Directors
                                       and Chief Executive Officer



Date:   May 10, 2000                   BY:  /s/ LARRY C. OLDHAM
                                       --------------------------------
                                       Larry C. Oldham,
                                       President and Principal
                                       Financial Officer