<PAGE>
                                       1



                   SECURITIES AND EXCHANGE COMMISSION

                         WASHINGTON, D. C. 20549

                                FORM 10-Q

                      ----------------------------
(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, 2000 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 incorporation or organization)
(I.R.S. Employer Identification 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  2, 2000,  there were  20,331,858  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, 1999 and
            September 30, 2000 (unaudited)                                3

       -    Unaudited Statements of Operations for the three months
            and nine months ended September 30, 1999 and 2000             5

       -    Unaudited Statements of Cash Flows for the nine
            months ended September 30, 1999 and 2000                      6

       -   Notes to Financial Statements                                  7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS                                        12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK       19



                      PART II. - OTHER INFORMATION


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                        19

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                 22


<PAGE>
                                       3




                     PARALLEL PETROLEUM CORPORATION

                              BALANCE SHEETS

<TABLE>

                                                                                     (UNAUDITED)
ASSETS                                                  DECEMBER 31, 1999*       SEPTEMBER 30, 2000
                                                        ------------------       ------------------
<S>                                                     <C>                      <C>
Current Assets:

Cash and cash equivalents                                  $   1,276,417             $   3,075,827

Accounts receivable:

   Oil and gas                                                 1,312,923                 2,205,510

   Others, net of allowance for doubtful
     accounts of $157,187 in 1999 and 2000                       314,911                   214,423


Affiliate                                                         20,658                     2,398
                                                            ------------              ------------
                                                               1,648,492                 2,422,331
                                                            ------------              ------------

Other assets                                                      39,677                    11,170

Assets held for sale                                           2,127,734                         -
                                                            ------------              ------------

Total current assets                                           5,092,320                 5,509,328
                                                            ------------              ------------

Property and equipment, at cost:

   Oil and gas properties, full cost method                   65,136,783                68,983,180

   Other                                                         289,720                   366,893
                                                            ------------              ------------
                                                              65,426,503                69,350,073
   Less accumulated depreciation and depletion                27,502,855                31,084,653
                                                            ------------              ------------
       Net property and equipment                             37,923,648                38,265,420
                                                            ------------              ------------

Investment in First Permian, LLC (Notes 1 and 6)                 201,311                         -

Other assets, net of accumulated amortization of $141,428 in
     1999 and $92,639 in 2000                                     46,791                    46,954
                                                            ------------              ------------
                                                            $ 43,264,070              $ 43,821,702
                                                            ============              ============
</TABLE>

<PAGE>
                                       4


                      PARALLEL PETROLEUM CORPORATION

                              BALANCE SHEETS
                                (CONTINUED)

<TABLE>

                                                                                       (Unaudited)
Liabilities and Stockholders' Equity                          December 31, 1999*   September 30, 2000
                                                              -----------------    ------------------
<S>                                                           <C>                  <C>
Current liabilities:

  Current maturities of long-term debt (Note 3)                   $   3,665,889     $           -

  Investment liability in First Permian (Notes 1 and 6)                       -            366,765

  Accounts payable and accrued liabilities:

    Trade                                                             1,471,013          2,259,295

    Affiliate                                                             2,702              1,070

    Preferred stock dividend                                             24,363            170,537
                                                                  -------------      -------------
                                                                      1,498,078          2,430,902
                                                                  -------------      -------------

  Total current liabilities                                           5,163,967          2,797,667
                                                                  -------------      -------------

Long-term debt, excluding current maturities (Note 3)                12,300,000         13,100,000

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 1999 and 2000                                            97,450             97,450

  Common stock - par value $.01 per share, authorized 60,000,000
    shares, issued and outstanding 20,331,858 in 1999 and 2000          203,319            203,319

  Additional paid-in surplus                                         34,847,141         34,384,254

  Retained deficit                                                   (9,347,807)        (6,760,988)
                                                                  -------------      -------------
    Total stockholders' equity                                       25,800,103         27,924,035



Contingencies                                                                -                   -
                                                                  -------------      -------------
                                                                  $  43,264,070      $  43,821,702
                                                                  =============      =============

</TABLE>


*The balance  sheet as of December  31, 1999 has been  derived  from  Parallel's
audited  financial  statements.  The accompanying  notes are an integral part of
these financial statements.

<PAGE>
                                       5



                      PARALLEL PETROLEUM CORPORATION

                         STATEMENTS OF OPERATIONS

                                (UNAUDITED)

<TABLE>

                                                     Three Months Ended                         Nine Months Ended
                                                        September 30,                             September 30,
                                                  ------------------------                 --------------------------
                                                   1999              2000                    1999               2000
                                                  ------            ------                 -------             ------

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

Oil and gas revenues                             $  2,291,448      $  4,162,667             $  6,246,264       $ 10,133,872
                                                 ------------      ------------             ------------       ------------
Cost and expenses:
    Lease operating expense                           598,586           738,929                1,663,550          1,971,315
    General and administrative                        218,731           182,250                  642,879            640,209
    Depreciation, depletion and amortization        1,422,119         1,299,187                3,282,913          3,581,798
                                                 ------------      ------------             ------------       ------------
                                                    2,239,436         2,220,366                5,589,342          6,193,322
                                                 ------------      ------------             ------------       ------------
          Operating income                             52,012         1,942,301                  656,922          3,940,550
                                                 ------------      ------------             ------------       ------------
Other income (expense), net:
    Interest income                                     7,973            62,779                   34,944             94,024
    Other income                                        6,999            38,522                   20,228             86,959
    Interest expense                                 (396,110)         (337,519)              (1,143,238         (1,029,266)
    Other expense                                      (2,351)           (2,891)                  (4,861)            (4,872)
                                                 ------------      ------------             ------------       ------------
          Total other expense, net                   (383,489)         (239,109)              (1,092,927)          (853,155)

    Equity in income (loss) of First Permian, LLC     181,108            (4,493)                 181,108           (500,576)
                                                 ------------      ------------             ------------       ------------
                                                     (202,381)         (243,602)                (911,819)        (1,353,731)
                                                 ------------      ------------             ------------       ------------
Income (loss) before income taxes                    (150,369)        1,698,699                 (254,897)         2,586,819

Income taxes                                                -                 -                        -                  -
                                                 ------------      ------------             ------------       ------------

          Net income (loss)                      $   (150,369)     $  1,698,699             $   (254,897)      $  2,586,819
                                                 ============      ============             ============       ============

Cumulative preferred stock dividend              $    146,174      $    146,174             $    462,887       $    462,887
                                                 ============      ============             ============       ============

  Net income (loss) available                    $   (296,543)     $  1,552,525             $   (717,784)      $  2,123,932
     to common stockholders                      ============      ============             ============       ============

Net income (loss) per common share:
     Basic                                       $     (0.016)     $      0.076             $     (0.039)      $      0.105
                                                 ============      ============             ============       ============
     Diluted                                     $     (0.016)     $      0.072             $     (0.039)      $      0.103
                                                 ============      ============             ============       ============

Weighted average common shares
outstanding - diluted                              18,331,858        23,511,753               18,329,759         20,635,568
                                                 ============      ============             ============       ============


</TABLE>

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

<PAGE>
                                       6


                        PARALLEL PETROLEUM CORPORATION

                           STATEMENTS OF CASH FLOWS

                                 (UNAUDITED)

<TABLE>

                                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                                         -------------------------------
                                                                              1999               2000
                                                                         -----------          ----------

<S>                                                                      <C>                 <C>
Cash flows from operating activities:

     Net income (loss)                                                    $    (254,897)       $  2,586,819
     Adjustments to reconcile net income (loss) to net cash
        provided by operating activities:
          Depreciation and depletion                                          3,282,913           3,581,798
          Equity in income (loss)from investments in First Permian, LLC        (181,108)            500,576
          Other, net                                                            (20,103)               (163)
          Changes in assets and liabilities:
          Decrease (increase) in accounts receivables                            40,969            (773,839)
          Decrease (increase) in prepaid expenses and other                      43,818              28,507
          Decrease (increase) in accounts payable and accrued liabilities    (1,149,730)            932,824
                                                                          -------------        ------------
           Net cash provided by operating activities                          1,761,862           6,856,522
                                                                          -------------        ------------
Cash flows from investing activities:
      Additions to property and equipment                                    (3,074,183)         (4,797,991)
      Proceeds from disposition of property and equipment                       435,231           3,002,155
      Investment in First Permian, LLC                                           (2,250)                  -
      Distribution from First Permian, LLC                                            -              67,500
                                                                          -------------        ------------
           Net cash provided by (used in) investing activities               (2,641,202)         (1,728,336)
                                                                          -------------        ------------
Cash flows from financing activities:
      Borrowings from bank line of credit                                       780,000                  -
      Payments on bank line of credit                                                 -          (2,865,889)
      Proceeds from exercise of options and warrants                             17,188                  -
      Payment of preferred stock dividend                                      (462,887)           (462,887)
                                                                          -------------        ------------
           Net cash provided by (used in) financing activities                  334,301          (3,328,776)
                                                                          -------------        ------------
           Net increase (decrease) in cash and cash equivalents                (545,039)          1,799,410

Beginning cash and cash equivalents                                           1,178,819           1,276,417
                                                                          -------------        ------------
Ending cash and cash equivalents                                          $     633,780        $  3,075,827
                                                                          =============        ============
Non-cash financing activities:
     Accrued preferred stock dividend                                     $     170,537        $    170,537
                                                                          =============        ============
     Transfer of assets held for sale to oil and gas property             $           -        $  2,127,734
                                                                          =============        ============

</TABLE>

The accompanying notes are an integral part of these financials.

<PAGE>
                                       7



                     PARALLEL PETROLEUM CORPORATION
                      NOTES TO FINANCIAL STATEMENTS


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

     The financial  information included herein,  except the balance sheet as of
December  31,  1999,  is  unaudited.  However,  such  information  includes  all
adjustments of management  (consisting solely of normal recurring  adjustments),
which are, in our  opinion,  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 financial
statements  should be read with the financial  statements  and notes included in
Parallel's 1999 Annual Report and 1999 Form 10-K.

     We own an  equity  interest  in First  Permian,  LLC,  a  Delaware  limited
liability company. The founding members of First Permian were Parallel Petroleum
Corporation,  Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment
Corporation.  Parallel,  Baytech, Tejon and Mansefeldt each contributed cash for
initial members' interests of 22.5%,  22.5%, 27.5% and 27.5%,  respectively,  on
June  30,  1999.  Effective  May 31,  2000,  First  Permian's  original  limited
liability company agreement was amended and restated to provide for, among other
things,  the  admission of  additional  members,  the issuance of a new class of
preferred  membership  units and the issuance of  additional  common  membership
units in return for additional capital  contributions  totaling $20,000,000 from
new members.  As a result of the issuance of additional common membership units,
our interest at September 30, 2000 was 28.665%.  However,  effective  October 1,
2000, our interest increased to 30.675%. See "Recent Events: Change in Ownership
Interest of First Permian, LLC" on page 9 for additional information.

     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 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 the
income (loss) of First Permian.

NOTE 2.   RECENT EVENTS

Adoption of Rights Agreement

     On October 5, 2000, the Board of Directors declared a dividend distribution
of one Right for each outstanding  share of Parallel's  common stock,  $0.01 par
value (the "Common  Stock"),  to stockholders of record at the close of business
on October 16, 2000. Each Right entitles the registered  holder to purchase from
Parallel one  one-thousandth  (1/1,000) of a share of Series A Preferred  Stock,
par value $0.10 per share (the "Preferred Stock"), at a Purchase Price of $26.00
per  one  one-thousandth  (1/1,000)  of a  share,  subject  to  adjustment.  The
description  and terms of the  Rights are set forth in a Rights  Agreement  (the
"Rights Agreement")  between Parallel and Computershare Trust Company,  Inc., as
Rights Agent (the "Rights Agent").

     Initially,  the Rights will be attached  to all Common  Stock  certificates
representing  shares then outstanding,  and no separate Rights Certificates will
be distributed.  The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public  announcement  that a person or
group of affiliated or associated persons (an "Acquiring  Person") has acquired,
or obtained the right to acquire,  beneficial ownership of fifteen percent (15%)
or more of the  outstanding  shares  of Common  Stock  (the  "Stock  Acquisition
Date"),  or (ii) ten (10)  business  days (or such  later  date as the  Board of
Directors shall  determine)  following the  commencement of a tender or exchange
offer that would result in a person or group beneficially owning fifteen percent
(15%) or more of such  outstanding  shares of Common Stock.  The date the Rights
separate is referred to as the "Distribution Date."

<PAGE>
                                       8


     Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock  certificates and will be transferred with and only with such Common Stock
certificates,  (ii) new Common Stock certificates  issued after October 16, 2000
will contain a notation  incorporating  the Rights  Agreement by reference,  and
(iii)  the  surrender  for  transfer  of  any   certificates  for  Common  Stock
outstanding will also constitute the transfer of the Rights  associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
we reserve the right to require prior to the  occurrence  of a Triggering  Event
(as defined  below)  that,  upon any  exercise of Rights,  a number of Rights be
exercised so that only whole shares of Preferred Stock will be issued.

     The Rights are not exercisable  until the Distribution Date and will expire
at the close of  business  on  October  5,  2010,  unless  earlier  redeemed  by
Parallel.

     As soon as practicable  after the Distribution  Date,  Rights  Certificates
will be mailed to  holders  of  record  of the  Common  Stock as of the close of
business  on  the  Distribution  Date  and,  thereafter,   the  separate  Rights
Certificates  will  represent the Rights.  Except in  connection  with shares of
Common Stock issued or sold  pursuant to the exercise of stock options under any
employee plan or arrangements,  or upon the exercise,  conversion or exchange of
securities hereafter issued by Parallel, or as otherwise determined by the Board
of Directors,  only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.

     At any time  until the Stock  Acquisition  Date,  Parallel  may  redeem the
Rights in whole,  but not in part,  at a price of $0.001 per Right  (payable  in
cash, shares of Common Stock or other  consideration  deemed  appropriate by the
Board of  Directors).  Immediately  upon the  action of the  Board of  Directors
ordering  redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.

     Until a Right is  exercised,  the  holder  thereof,  as such,  will have no
rights as a stockholder of Parallel, including, without limitation, the right to
vote or to receive  dividends.  While the distribution of the Rights will not be
taxable to stockholders  or to Parallel,  stockholders  may,  depending upon the
circumstances,  recognize  taxable  income in the event that the  Rights  become
exercisable for Common Stock (or other  consideration) of Parallel or for common
stock of an acquiring company as set forth above or in the event that the Rights
are redeemed.

     Other than those provisions relating to the principal economic terms of the
Rights,  any of the  provisions  of the Rights  Agreement  may be amended by the
Board of Directors of Parallel at any time during the period in which the Rights
are  redeemable.  At any time  when the  Rights  are no longer  redeemable,  the
provisions  of the  Rights  Agreement  may be  amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided,  however, that no amendment may
cause the Rights again to become redeemable.

Amendment of Bylaws

     Also on October 5, 2000, the Board of Directors of Parallel adopted certain
amendments to our Bylaws.  These  amendments  modify and add certain  provisions
regarding the advance notice  requirements  for stockholder  proposals before an
annual meeting of stockholders, the calling of special meetings of stockholders,
stockholder written consents and the procedures for nominating directors.

Contemplated Change in Credit Facility

     On November 6, 2000, we signed a commitment letter with Bank United, Texas,
N.A to establish a new credit facility. The purpose of the credit facility is to
refinance  our debt  facility at Bank One,  N.A.,  and to provide  funds for the
acquisition  of and  development  drilling  on oil  and gas  properties  and for
general corporate purposes. We expect to execute definitive loan documents on or
before December 1, 2000. As a result of the commitment with Bank United,  Texas,
N.A., we classified  debt on the balance sheet as long term with a maturity date
of October 1, 2003.

     The loan agreement will provide for a reducing  revolving  credit  facility
under  which  we may  borrow  up to the  lesser  of (a)  $30,000,000  or (b) the
borrowing base then in effect.  The initial  borrowing base will be $15,500,000.
The borrowing base  automatically  reduces by $323,000 each month until the next
borrowing base redetermination, which will be scheduled six months from the date
of signing  the final loan  documents.  We are not  required  to make  principal
payments in the amount by which the borrowing base is reduced.

<PAGE>
                                       9



     Subject to semi-annual  borrowing base redeterminations and compliance with
the loan  agreement  covenants  and  representations,  we may borrow,  repay and
reborrow from time to time within the available revolving credit amount.

     The unpaid  principal  balance of the credit facility bears interest at our
election at a fluctuating  rate equal to the Wall Street  Journal prime rate, or
the LIBOR rate plus 2.75%.

     The  loan  will  be  secured  by  substantially  all of  our  oil  and  gas
properties.  Commitment fees of one-fourth of one percent are payable  quarterly
in arrears on the  difference  between the  borrowing  base and the  outstanding
balance of the loan.

     The  loan  agreement  will  contain  various   restrictive   covenants  and
compliance requirements,  including (1) maintenance of certain financial ratios,
(2)  limitations  on additional  indebtedness,  and (3)  prohibiting  payment of
dividends.

Change in Ownership Interest of First Permian, LLC

     We own an equity  interest  in First  Permian,  LLC,  a  limited  liability
company.  Our interest in First Permian for the three months ended September 30,
2000 was  28.665%.  Effective  October 1, 2000,  however,  our interest in First
Permian  increased to 30.675%.  First Permian was the holder and payee of a $3.1
million note receivable from one of the other members of First Permian. The note
was collateralized by 80,000 common membership units of First Permian.  The note
was  canceled  on  September  30,  2000 and,  in  exchange,  the  80,000  common
membership units held as collateral for the note were acquired by First Permian.
This  transaction  had the  effect  of  reducing  the  total  number  of  common
membership  units  outstanding,  decreasing  one member's pro rata  interest and
increasing the interests of the remaining members of First Permian.

NOTE 3.   LONG TERM DEBT

     See discussion of Parallel's loan commitment with Bank United,  Texas, N.A.
at page 8 under  "Contemplated  Change in Credit  Facility."  As a result of the
commitment  with Bank United,  Parallel has  classified  its debt on the balance
sheet as long term with a maturity date of October 1, 2003.

Revolving Credit Facility

     At September  30, 2000,  Parallel was party to a loan  agreement  with Bank
One, Texas, N.A. The loan agreement,  as restated in December 1999, provided for
a revolving  credit facility under which we could borrow up to the lesser of (a)
$30,000,000  or (b) the  borrowing  base  then in  effect.  The  borrowing  base
automatically  reduces by  $300,000  each  month,  which  requires  us to make a
principal  payment in the same amount by which the  borrowing  base was reduced.
The total outstanding principal amount of our bank borrowings was $18,815,889 at
September  30,  1999,  $15,965,889  at  December  31,  1999 and  $13,100,000  at
September 30, 2000.

     At September  30, 2000, we had borrowed all the funds  currently  available
under the revolving facility.  All indebtedness under the revolving facility was
scheduled  to mature July 1, 2001.  However,  as described  above under  "Recent
Events",  proceeds from the new credit facility with Bank United will be used to
retire this debt.

     The unpaid  principal  balance  of the Bank One  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 3.0%.  Interest
under the revolving facility is due and payable monthly.  At September 30, 2000,
the interest rate was the bank's base rate plus .25% or 9.75%.

     The loan agreement with Bank One 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.


<PAGE>
                                       10


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
semiannually  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 1999,  we  recognized  a noncash  impairment
charge  of  $1,705,000  related  to  our  oil  and  gas  reserves  and  unproved
properties.  The  impairment of oil and gas assets was primarily the result of a
decrease in year- end proved reserves. At September 30, 2000, 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. LIABILITY IN FIRST PERMIAN, LLC

     At September  30, 2000,  our net  investment  in First  Permian,  LLC was a
liability as a result of recording our share of the losses of First Permian.  We
have recorded a liability to the extent that we have  guaranteed  $10,000,000 of
the debt of First  Permian,  LLC.  Effective  October 25, 2000, we were released
from the  $10,000,000  guarantee  and have  discontinued  the  equity  method of
accounting for our share of losses of First  Permian.  When First Permian begins
to generate  income,  we will resume  applying the equity  method only after our
share  in First  Permian's  net  income  equals  the  share  of net  losses  not
recognized during the period the equity method was suspended.

NOTE 7. 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.  The following tables present per share net
income calculations for the periods indicated.


<PAGE>
                                       11



<TABLE>

                                                                   Three Months Ended                   Nine Months Ended
                                                                      September 30,                      September 30,
                                                                ------------------------             -----------------------
                                                                  1999           2000                   1999         2000
                                                                ---------      ---------             ----------     --------
<S>                                                             <C>            <C>                   <C>            <C>

Basic EPS Computation:
     Numerator -
         Net income (loss)                                      $  (150,369)    $ 1,698,699          $  (254,897)   $ 2,586,819
         Preferred stock dividends                                 (146,174)       (146,174)            (462,887)      (462,887)
                                                                -----------     -----------          -----------    -----------
         Net income (loss) available to common stockholders     $  (296,543)    $ 1,552,525          $  (717,784)   $ 2,123,932
                                                                ===========     ===========          ===========    ===========

     Denominator -
     Weighted average common shares outstanding                  18,331,858      20,331,858           18,329,759     20,331,858
                                                                ===========     ===========          ===========    ===========
Basic earnings (loss) per share                                 $    (0.016)    $     0.076          $    (0.039)   $     0.105
                                                                ===========     ===========          ===========    ===========


                                                                   Three Months Ended                   Nine Months Ended
                                                                      September 30,                      September 30,
                                                                ------------------------             -----------------------
                                                                  1999           2000                   1999         2000
                                                                ---------      ---------             ----------     --------

Diluted EPS Computation:
     Numerator -
          Net income (loss)                                     $  (150,369)   $  1,698,699          $  (254,897)   $ 2,586,819
          Preferred stock dividends                                (146,174)              -             (462,887)      (462,887)
                                                                -----------    ------------          -----------    -----------
          Net income (loss) available to common stockholders    $  (296,543)   $  1,698,699          $  (717,784)   $ 2,123,932
                                                                ===========    ============          ===========    ===========

     Denominator -
     Weighted average common shares outstanding                  18,331,858      20,331,858           18,329,759     20,331,858
     Employee stock options                                               -         393,359                    -        303,710
     Warrants                                                             -           2,292                    -              -
     Preferred stock                                                      -       2,784,244                    -              -
                                                                -----------    ------------          -----------    -----------
                                                                 18,331,858      23,511,753           18,329,759     20,635,568
                                                                ===========    ============          ===========    ===========
Diluted earnings (loss) per share                               $    (0.016)   $      0.072          $    (0.039)   $     0.103
                                                                ===========    ============          ===========    ===========
</TABLE>


     Convertible   preferred  stock   equivalents  of  974,500  shares  for  the
three-month  period  ended  March  31,  1999 and the  nine-month  periods  ended
September  30, 2000 and 1999 that could  potentially  dilute basic  earnings per
share in the future,  were not included in the  computation of diluted  earnings
per  share  for  the  periods  presented  because  to  do  so  would  have  been
antidilutive.

NOTE 8:   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.  SFAS No. 133  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.
Parallel  will adopt  SFAS No. 133 as  required  by SFAS 137,  "Deferral  of the
Effective  Date of the FASB Statement No. 133" beginning in the first quarter of
2001.  Although  we have  not  fully  assessed  the  implications  of  this  new
statement,  we do not  believe  Parallel  has  any  free  standing  or  embedded
derivative instruments that would need to be accounted for under SFAS 133.

<PAGE>
                                       12


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  Permiam.  During 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,  LLC, a limited  liability  company.  First Permian 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.

     The founding members of First Permian were Parallel Petroleum  Corporation,
Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment  Corporation.
Parallel,  Baytech,  Tejon and  Mansefeldt  each  contributed  cash for  initial
members' interests of 22.5%, 22.5%, 27.5% and 27.5%,  respectively,  on June 30,
1999. At March 31, 2000, Parallel,  Baytech, Tejon and Mansefeldt and affiliates
owned member interests of 35%, 35%, 15% and 15%, respectively. Effective May 31,
2000,  First Permian's  original  company  agreement was amended and restated to
provide for,  among other  things,  the  admission of  additional  members,  the
issuance  of a new  class of  preferred  membership  units and the  issuance  of
additional common membership units in return for capital contributions  totaling
$20,000,000. As a result of issuance of additional common units, our interest at
September 30, 2000 was 28.665%. However, effective October 1, 2000, our interest
increased to 30.675%. See "Recent Events:  Change in Ownership Interest of First
Permian, LLC" on page 9 for additional information.

     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>
                                       13


     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  infrastructures  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.

     For the nine months ended  September  30, 2000,  the average sales price we
received for our crude oil production  averaged  $27.80 per barrel compared with
$15.09 per barrel at  September  30, 1999 and $17.32 per barrel at December  31,
1999.  The average sales price for natural gas during this same period was $3.37
per mcf compared  with $2.10 per mcf at September  30, 1999 and $2.27 per mcf at
December 31, 1999.

     Sustained  low oil and gas prices in 1998 and 1999  limited  the capital we
had available for drilling activities during this time, which adversely affected
the  quantities  and value of our proved oil and gas  reserves.  On  November 6,
2000, we signed a commitment letter with Bank United,  Texas, N.A to establish a
new credit facility. The purpose of the credit facility is to refinance our debt
facility at Bank One,  N.A.,  and to provide  funds for the  acquisition  and/or
development  drilling  on oil  and gas  properties  and  for  general  corporate
purposes.  We expect to execute  definitive loan documents on or before December
1, 2000.

     The loan agreement will provide for a reducing  revolving  credit  facility
under  which  we may  borrow  up to the  lesser  of (a)  $30,000,000  or (b) the
borrowing  base  then in  effect.  The  initial  borrowing  base  will be set at
$15,500,000.  The borrowing  base  automatically  reduces by $323,000 each month
until the next  borrowing  base  redetermination,  which will be  scheduled  six
months from the date of signing the final loan documents. We are not required to
make principal payments in the amount by which the borrowing base is reduced.

     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 2000 production volumes to increase  significantly compared to
our production volumes in the prior year as a result of our drilling activities.

<PAGE>
                                       14


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
                                       -------------------------------    -------------------------
                                         3-31-00    6-30-00   9-30-00        9-30-99       9-30-00
                                         -------    -------   -------        -------       -------
<S>                                      <C>       <C>        <C>            <C>           <C>
Production and prices:
   Oil (Bbls)                             39,283    44,753    42,317          31,991        42,317
   Natural gas (Mcf)                     570,504   657,039   733,621         645,301       733,621
   Equivalent barrels of oil (EBO)       134,367   154,260   164,587         139,542       164,587

   Oil price (per BBL)                    $26.70    $27.13    $29.53          $21.89        $29.53
   Gas price (per Mcf)                    $ 3.02    $ 3.02    $ 3.97          $ 2.47        $ 3.97
   Price per EBO                          $20.65    $20.72    $25.29          $16.42        $25.29


RESULTS OF OPERATIONS PER EBO:
Oil and gas revenues                      $20.65    $20.72    $25.29          $16.42        $25.29
Costs and expenses:
   Lease operating expense                  4.57      4.01      4.49            4.29          4.49
   General and administrative               1.47      1.69      1.11            1.57          1.11
   Depreciation and depletion               7.91      7.90      7.89           10.19          7.89
                                          ------    ------    ------          ------        ------
          Total costs and expenses         13.95     13.60     13.49           16.05         13.49
                                          ------    ------    ------          ------        ------
Operating income (loss)                     6.70      7.12     11.80            0.37         11.80
                                          ------    ------    ------          ------        ------
Interest expense, net                      (2.41)    (2.18)    (1.67)          (2.78)        (1.67)
Other income, net                           0.04      0.27      0.22            0.03          0.22
                                          ------    ------    ------          ------        ------
                                           (2.37)    (1.91)    (1.45)          (2.75)        (1.45)
Equity in earnings (loss) of
   First Permian, LLC                      (2.88)    (0.71)    (0.03)           1.30         (0.03)
                                          ------    ------    ------          ------        ------

         Net income (loss)                $ 1.45    $ 4.50    $10.32          $(1.08)       $10.32
                                          ======    ======    ======          ======        ======

Net operating cash flow before            $12.24    $13.11    $18.24          $ 9.11        $18.24
working capital adjustments               ======    ======    ======          ======        ======
</TABLE>

<PAGE>
                                       15



<TABLE>

                                                                       Nine Months Ended
                                                                 -------------------------------
                                                                  9-30-98    9-30-99    9-30-00
                                                                 ---------  --------   ---------
<S>                                                              <C>        <C>        <C>
Production and Prices:

Oil (Bbls)                                                        136,180    122,518    126,353
Natural gas (Mcf)                                               2,407,751  2,092,750  1,961,164
Equivalent barrels of oil (EBO)                                   537,472    471,310    453,214
Oil price (per BBL)                                             $   13.25  $   15.09  $   27.80
Gas price (per Mcf)                                             $    2.20  $    2.10  $    3.37
Price per EBO                                                   $   13.22  $   13.25  $   22.36

Results of operations per EBO:
Oil and gas revenues                                            $   13.22  $   13.25  $   22.36
Costs and expenses:
     Lease operating expense                                         3.34       3.53       4.35
     General and administrative                                      1.20       1.36       1.41
     Depreciation and depletion                                      5.78       6.96       7.90
                                                                ---------  ---------  ---------
          Total costs and expenses                                  10.32      11.85      13.66
                                                                ---------  ---------  ---------
Operating income                                                     2.90       1.40       8.70
                                                                ---------  ---------  ---------
Interest expense, net                                               (1.94)     (2.35)     (2.06)
Other income, net                                                    0.09       0.03       0.18
                                                                ---------  ---------  ---------
                                                                    (1.85)     (2.32)     (1.88)
Equity in earnings (loss) of First Permian, LLC                      0.00       0.38      (1.10)
                                                                ---------  ---------  ---------
          Net income(loss) before income taxes                  $    1.05  $   (0.54) $    5.72
                                                                ---------  ---------  ---------
Income tax expense - deferred                                        0.35       0.00       0.00
                                                                ---------  ---------  ---------
          Net income (loss)                                     $    0.70  $   (0.54) $    5.72
                                                                =========  =========  =========
Net operating cash flow before working capital adjustments      $   6.83   $    6.42  $   14.72
                                                                =========  =========  =========
</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
                                                   ---------------------------------       ---------------------
                                                    3-31-00     6-30-00     9-30-00         9-30-99     9-30-00
                                                   ---------   ---------   ---------       ---------   ---------
<S>                                                <C>         <C>         <C>             <C>         <C>
Oil and gas revenues                                  100.0%      100.0%      100.0%          100.0%      100.0%
Costs and expenses:
    Lease operating expense                            22.1        19.4        17.7            26.6        19.5
    General and administrative                          7.1         8.1         4.4            10.3         6.3
    Depreciation and depletion                         38.3        38.1        31.2            52.5        35.3
                                                     ------      ------      ------          ------      ------

          Total costs and expenses                     67.5        65.6        53.3            89.4        61.1
                                                     ------      ------      ------          ------      ------
Operating income                                       32.5        34.4        46.7            10.6        38.9
                                                     ------      ------      ------          ------      ------
Interest expense, net                                 (11.7)      (10.5)       (6.6)          (17.7)       (9.2)
Other income, net                                       0.2         1.3         0.8             0.2         0.8
                                                     ------      ------      ------          ------      ------
                                                      (11.5)       (9.2)       (5.8)          (17.5)       (8.4)

Equity in earnings (loss) of First Permian, LLC       (13.9)       (3.4)       (0.1)            2.9        (4.9)
                                                     ------      ------      ------          ------      ------
                                                      (25.4)      (12.6)       (5.9)          (14.6)      (13.3)
                                                     ------      ------      ------          ------      ------
          Net income (loss)                             7.1        21.8        40.8            (4.0)       25.6
                                                     ======      ======      ======          ======      ======

</TABLE>
<PAGE>
                                       16



RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

     Oil and Gas Revenues.  Oil and gas revenues increased $1,871,219 or 82%, to
$4,162,667 for the three months ended  September 30, 2000,  from  $2,291,448 for
the same period of 1999. The increase was primarily the result of a 54% increase
in the average sales price we received per EBO and an 18% increase in production
volumes. We received $25.29 per EBO in the three months ended September 30, 2000
compared with $16.42 per EBO for the same period of 1999.

     Production Costs.  Production costs increased  $140,343 or 23%, to $738,929
during the third  three  months of 2000,  compared  with  $598,586  for the same
period of 1999.  Average  production costs per EBO increased 5% to $4.49 for the
third  three  months  in 2000  compared  to $4.29  for the same  period in 1999,
primarily a result of increased  production taxes associated with higher oil and
gas revenues and a 18% increase in oil and gas production volumes.

     General and Administrative  Expenses.  General and administrative  expenses
decreased by $36,481 or 17% to $182,250 for the third three months of 2000, from
$218,731  for the same  period of 1999.  The  decrease  was  primarily  due to a
decrease in franchise  taxes and receipt of  management  fees  totaling  $18,750
related to our ownership  interest in First Permian.  General and administrative
expenses  were $1.11 per EBO in the third three months of 2000 compared to $1.57
per EBO in the third three  months of 1999.  The decrease per EBO is a result of
an 18% increase in production volumes in the third quarter of 2000 when compared
with the same  period of the prior year and higher  oil and gas  prices.  Future
general and  administrative  costs are expected to remain  fairly stable with no
material increases expected in any particular category.

     Depreciation,  Depletion and Amortization Expense. Depreciation,  depletion
and amortization expense ("DD&A") decreased by $122,932 or 9%, to $1,299,187 for
the third three months of 2000 compared with  $1,422,119  for the same period of
1999.  The  decrease  is  attributable  to an  increase  in  the  amount  of our
recoverable  reserves,  which  resulted  in a lower  DD&A  rate  per  EBO.  As a
percentage  of revenues,  the DD&A rate  decreased by 33% when compared with the
prior year third quarter. The DD&A rate per EBO decreased to $7.89 for the third
quarter of 2000 compared with $10.19 per EBO for the third quarter of 1999.

     Historically,  we have reviewed our estimates of proven reserve  quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct  internal reviews of our estimated proven reserves on a more frequent
basis and make necessary  adjustments 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.

     Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results  of First  Permian  resulted  in a noncash  loss of $4,493 for the three
months  ended  September  30, 2000,  which  reflects our pro rata share of First
Permian's  loss for the three months  ended  September  30, 2000.  For the three
months ended September 30, 1999, we reported noncash earnings of $181,108, which
reflected  our pro rata share of First  Permian's  income for that period.  When
comparing  periods,  First Permian's  recorded a net loss in the current quarter
primarily because of:

     (i)  crude oil hedge payments totaling $3,889,056;

     (ii) noncash charges totaling $262,827 associated with the amortization of
          banking fees; and

     (iii) payments of preferred dividends totaling $303,750.

As a term of providing financing for First Permian to acquire the assets of Fina
Oil and Chemical, the lending bank required First Permian to hedge a significant
portion of its monthly oil  production  volumes.  The hedge  expires on June 30,
2001.

     Net Interest Expense.  Net interest expense  decreased  $113,397 or 29%, to
$274,740 for the three months ended  September  30, 2000  compared with $388,137
for the same period of 1999, due principally to decreased bank borrowings.

     Net Income and  Operating  Cash Flow.  We reported net income of $1,698,699
for the three  months  ended  September  30,  2000  compared  with a net loss of
$150,369 for the three  months ended  September  30, 1999.  Operating  cash flow
increased $1,911,737 or 125%, to $3,002,379 for the three months ended September
30, 2000 compared to $1,090,642  for the three months ended  September 30, 1999.
The increase in net income and operating  cash flow resulted from a 82% increase
in oil and gas  revenues,  a 54% increase in the average  sales price per EBO, a
17%  decrease  in  general  and

<PAGE>
                                       17



administrative  costs,  a 9% decrease in DD&A  expenses,  a 29%  decrease in net
interest  expense and a 18% increase in production  volumes.  These factors were
partially offset by a 23% increase in production costs.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000:

     Oil and Gas Revenues. Oil and gas revenues increased $3,887,608, or 62%, to
$10,133,872  for the nine months ended  September 30, 2000,  from $6,246,264 for
the same period of 1999. The increase was primarily the result of a 69% increase
in the  average  sales  price per EBO.  We  received  $22.36 per EBO in the nine
months ended September 30, 2000 compared with $13.25 per EBO for the same period
of 1999.  Higher  prices were  partially  offset by a 4% decrease in oil and gas
production.

     Production Costs. Production costs increased $307,765 or 19%, to $1,971,315
during the first nine  months of 2000,  compared  with  $1,663,550  for the same
period of 1999. Average production costs per EBO increased 23%, to $4.35 for the
first  nine  months  in 2000  compared  to $3.53  for the same  period  in 1999,
primarily a result of increased  production taxes associated with higher oil and
gas  revenues,  which  was  partially  offset  by a 4%  decrease  in oil and gas
production.

     General and Administrative  Expenses.  General and administrative  expenses
decreased by $2,670,  or 1%, to $640,209 for the first nine months of 2000, from
$642,879  for the same  period  of  1999.  The  decrease  was  primarily  due to
decreased  franchise  taxes and  receipt of  management  fees  totaling  $56,250
related to our ownership  interest in First Permian.  General and administrative
expenses  were $1.41 per EBO in the first nine months of 2000  compared to $1.36
per EBO in the first nine months of 1999.  The increase per EBO is a result of a
4% decrease  in oil and gas  production  volumes,  when  compared  with the same
nine-month period of the prior year. Future general and administrative costs are
expected to remain  fairly  stable with no  material  increases  expected in any
particular category.

     Depreciation,  Depletion and Amortization Expense. Depreciation,  depletion
and amortization  expense ("DD&A")  increased by $298,885,  or 9%, to $3,581,798
for the first nine months of 2000 compared with  $3,282,913  for the same period
of 1999. As a percentage of revenues,  DD&A  decreased by 33% when compared with
the prior year nine months,  a result of an increase in the average  sales price
per EBO we  received  in the first  nine  months of 2000.  The DD&A rate per EBO
increased to $7.90 for the first nine months of 2000 compared with $6.96 per EBO
for the first nine months of 1999.

     Historically,  we have reviewed our estimates of proven reserve  quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct  internal reviews of our estimated proven reserves on a more frequent
basis and make necessary  adjustments 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.

     Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian  resulted in a noncash  charge of $500,576 for the nine
months  ended  September  30, 2000,  which  reflects our pro rata share of First
Permian's loss for the nine months ended September 30, 2000. Since First Permian
was formed on July 1, 1999, there are no comparable  numbers for the nine months
ended  September  30, 1999.  First  Permian  recorded a loss for the  nine-month
period ended September 30, 2000 primarily as a result of:

          (i)  crude oil hedge payments totaling $10,014,120;

          (ii) noncash   charges   totaling   $475,260   associated   with   the
               amortization of banking fees;

          (iii) payments of preferred dividends totaling $405,000, and

          (iv) a noncash charge of $960,825 associated with the restructuring of
               its debt, which was booked as a nonrecurring extraordinary item.

As a term of providing financing for First Permian to acquire the assets of
Fina Oil and Chemical, the lending bank required
First Permian to hedge a significant portion of its monthly oil production
volumes. The hedge expires on June 30, 2001.

     Net Interest  Expense.  Interest  expense  decreased  $173,052,  or 16%, to
$935,242 for the nine months ended  September 30, 2000 compared with  $1,108,294
for the same period of 1999 due principally to decreased bank borrowings.


<PAGE>
                                       18


     Net Income and  Operating  Cash Flow.  We reported net income of $2,586,819
for the nine months ended  September 30, 2000 compared to a net loss of $254,897
for the nine months ended  September  30, 1999.  Operating  cash flow  increased
$3,822,285,  or 134%, to $6,669,193 for the nine months ended September 30, 2000
compared to  $2,846,908  for the nine  months  ended  September  30,  1999.  The
increase in net income and  operating  cash flow resulted from a 62% increase in
oil and gas  revenues,  a 69% increase in the average  sales price per EBO and a
16% decrease in interest  expense.  These factors were partially offset by a 19%
increase in production  costs,  a 9% increase in DD&A expenses and a 4% decrease
in  production  volumes.  In  addition,  we  recorded  a net  loss  of  $500,576
associated  with our interest in First  Permian.  This is a noncash  charge that
affects net income but does not affect operating cash flows.

LIQUIDITY AND CAPITAL RESOURCES

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

     Working capital  increased  $2,783,309 as of September 30, 2000 compared to
December 31, 1999. Current assets exceeded current  liabilities by $2,711,661 at
September  30,  2000.  As of December  31, 1999,  current  liabilities  exceeded
current  assets by $71,647.  Current  assets as of September 30, 2000  increased
primarily  due to an  increase  in cash and  cash  equivalents  and in  accounts
receivable.  Current liabilities as of September 30, 2000 decreased primarily as
a result of  entering  into a new banking  facility,  which  eliminated  current
maturities of long term debt totaling $3,665,889.

     We incurred property costs of approximately $4.8 million, primarily for our
oil and gas property acquisition,  development,  and enhancement  activities for
the nine  months  ended  September  30,  2000.  Such costs were  financed by the
utilization  of the cash  provided by  operations  and proceeds from the sale of
certain undeveloped properties totaling approximately $3.2 million.

     Based on our  projected  oil and gas  revenues  and  related  expenses,  we
believe  that our  internally  generated  cash flow will be  sufficient  to fund
normal  operations,  interest expense and principal  reduction  payments on bank
debt  and  preferred  stock  dividends.   We  continually  review  and  consider
alternative methods of financing.

TRENDS AND PRICES

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

     Because of the prolonged deterioration in oil and gas prices experienced in
1998 and the first half of 1999, the capital  normally  available to us from our
cash flows and bank  borrowings  during that period was  significantly  reduced,
affecting  our ability to fund future  capital  expenditures.  Although  oil and
natural  gas prices have  improved  significantly  since that time,  our capital
expenditure  budget  for 2000 is still  highly  dependent  on future oil and gas
prices and will be consistent with internally generated cash flows.

     For the twelve months ended  December 31, 1999,  the average sales price we
received for our oil was approximately $17.32 per barrel while the average sales
price we received for natural gas was  approximately  $2.27 per  thousand  cubic
feet ("Mcf").  At September 30, 2000,  the average price we received for our oil
production was approximately $29.53 per Bbl, while the average price received at
that same date for our natural gas production was approximately $3.97 per Mcf.

<PAGE>
                                       19


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not trade in derivative financial  instruments and do not have firmly
committed sales transactions.  We have not entered into hedging arrangements and
do not have any delivery commitments. While hedging arrangements reduce exposure
to losses as a result of unfavorable price changes,  they also limit our ability
to benefit from favorable market price changes.

     Our major market risk exposure is in the pricing  applicable to our oil and
natural gas production.  Realized  pricing is primarily driven by the prevailing
domestic  price for crude oil and spot prices  applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have  been  volatile  and  unpredictable.  Pricing  volatility  is  expected  to
continue. Oil prices ranged from a monthly low of $21.12 per barrel to a monthly
high of $30.91 per barrel during third  quarter 2000.  The natural gas prices we
received during third quarter 2000 ranged from a monthly low of per $1.73 Mcf to
a monthly high of $6.30 per Mcf. A significant  decline in the prices of oil and
natural gas could have a material adverse effect on our financial  condition and
results of operations.

     Our only  financial  instrument  sensitive to changes in interest  rates is
bank debt. Our annual  interest costs in 2000 will fluctuate based on short-term
interest  rates.  As the interest rate is variable and reflects  current  market
conditions,  the carrying  value  approximates  the fair value.  The table below
shows  principal  cash flows and  related  weighted  average  interest  rates by
expected  maturity dates.  Weighted average interest rates were determined using
weighted average interest paid and accrued in December 1999.
<TABLE>

                                              2000     2001     2002     2003     TOTAL     FAIR VALUE
                                              ----     ----     ----     ----     -----     ----------
                                                     (IN 000'S, EXCEPT INTEREST RATES)
<S>                                          <C>       <C>      <C>      <C>      <C>       <C>

Variable rate debt:
 Revolving Facility (secured)                $  -      $ -      $  -   $ 13,100  $ 13,100     $13,100
     Average interest rate                                                9.75%     9.75%
</TABLE>


                       PART II - OTHER INFORMATION

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

Adoption of Rights Agreement

     On October 5, 2000, the Board of Directors declared a dividend distribution
of one Right for each outstanding  share of Parallel's  common stock,  $0.01 par
value (the "Common  Stock"),  to stockholders of record at the close of business
on October 16, 2000. Each Right entitles the registered  holder to purchase from
Parallel one  one-thousandth  (1/1,000) of a share of Series A Preferred  Stock,
par value $0.10 per share (the "Preferred Stock"), at a Purchase Price of $26.00
per one  one-  thousandth  (1/1,000)  of a share,  subject  to  adjustment.  The
description  and terms of the  Rights are set forth in a Rights  Agreement  (the
"Rights Agreement")  between Parallel and Computershare Trust Company,  Inc., as
Rights Agent (the "Rights Agent").

     Initially,  the Rights will be attached  to all Common  Stock  certificates
representing  shares then outstanding,  and no separate Rights Certificates will
be distributed.  The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public  announcement  that a person or
group of affiliated or associated persons (an "Acquiring  Person") has acquired,
or obtained the right to acquire,  beneficial ownership of fifteen percent (15%)
or more of the  outstanding  shares  of Common  Stock  (the  "Stock  Acquisition
Date"),  or (ii) ten (10)  business  days (or such  later  date as the  Board of
Directors shall  determine)  following the  commencement of a tender or exchange
offer that would result in a person or group beneficially owning fifteen percent
(15%) or more of such  outstanding  shares of Common Stock.  The date the Rights
separate is referred to as the "Distribution Date."

     Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock  certificates and will be transferred with and only with such Common Stock
certificates,  (ii) new Common Stock certificates  issued after October 16, 2000
will contain a notation  incorporating  the Rights  Agreement by reference,  and
(iii)  the  surrender  for  transfer  of  any   certificates  for  Common  Stock
outstanding will also constitute the transfer of the Rights  associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
we reserve the right to require prior to the  occurrence  of



<PAGE>
                                       20


a  Triggering  Event (as defined  below) that,  upon any  exercise of Rights,  a
number of Rights be exercised so that only whole shares of Preferred  Stock will
be issued.

     The Rights are not exercisable  until the Distribution Date and will expire
at the close of business on October 5, 2010, unless earlier redeemed by Parallel
as described below.

     As soon as practicable  after the Distribution  Date,  Rights  Certificates
will be mailed to  holders  of  record  of the  Common  Stock as of the close of
business  on  the  Distribution  Date  and,  thereafter,   the  separate  Rights
Certificates  will  represent the Rights.  Except in  connection  with shares of
Common Stock issued or sold  pursuant to the exercise of stock options under any
employee plan or arrangements,  or upon the exercise,  conversion or exchange of
securities hereafter issued by Parallel, or as otherwise determined by the Board
of Directors,  only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.

     In the event that (i) Parallel is the surviving  corporation in a merger or
other  business  combination  with an  Acquiring  Person  (or any  associate  or
affiliate thereof) and our Common Stock remains outstanding and unchanged,  (ii)
any person shall acquire beneficial ownership of more than fifteen percent (15%)
of the  outstanding  shares of Common  Stock  (except  pursuant  to (A)  certain
consolidations  or  mergers  involving  Parallel  or sales or  transfers  of the
combined assets,  cash flow or earning power of Parallel and our subsidiaries or
(B) an offer for all  outstanding  shares  of  Common  Stock at a price and upon
terms and conditions  which the Board of Directors  determines to be in the best
interests  of  Parallel  and  our   stockholders),   or  (iii)  there  occurs  a
reclassification  of  securities,  a  recapitalization  of the company or any of
certain  business   combinations  or  other  transactions  (other  than  certain
consolidations  and mergers  involving  Parallel  and sales or  transfers of the
combined assets, cash flow or earning power of the company and our subsidiaries)
involving Parallel or any of our subsidiaries which has the effect of increasing
by more  than one  percent  (1%)  the  proportionate  share of any  class of the
outstanding   equity   securities  of  Parallel  or  any  of  our   subsidiaries
beneficially  owned  by an  Acquiring  Person  (or any  associate  or  affiliate
thereof),  each holder of a Right (other than the  Acquiring  Person and certain
related  parties)  will  thereafter  have the right to receive,  upon  exercise,
Common Stock (or, in certain  circumstances,  cash, property or other securities
of Parallel)  having a value equal to two times the Purchase Price of the Right.
Notwithstanding  any of the  foregoing,  following the  occurrence of any of the
events  described  in this  paragraph,  all Rights that are,  or (under  certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring  Person will be null and void. The events  described in this paragraph
are referred to as "Flip-in Events."

     For example,  at a Purchase Price of $26.00 per Right, each Right not owned
by an Acquiring Person (or by certain related parties or transferees)  following
an event  set forth in the  preceding  paragraph  would  entitle  its  holder to
purchase $52.00 worth of Common Stock (or other  consideration,  as noted above)
for $26.00.Assuming  that the Common Stock had a per share market price of $5.20
at such time,  the holder of each valid  Right  would be entitled to purchase 10
shares of Common Stock for $26.00.

     In the event that, at any time following the Stock Acquisition Date, (i) we
enter into a merger or other  business  combination  transaction in which we are
not the surviving  corporation,  (ii) Parallel is the surviving corporation in a
consolidation,  merger or similar  transaction  pursuant to which all or part of
the  outstanding  shares of Common Stock are changed into or exchanged for stock
or other  securities of any other person or cash or any other  property or (iii)
more than 50% of the combined assets, cash flow or earning power of Parallel and
our  subsidiaries  is sold or  transferred  (in each  case  other  than  certain
consolidations  with,  mergers with and into,  or sales of assets,  cash flow or
earning  power by or to  subsidiaries  of  Parallel as  specified  in the Rights
Agreement),  each holder of a Right (except  Rights which  previously  have been
voided as set forth  above)  shall  thereafter  have the right to receive,  upon
exercise,  common  stock of the  acquiring  company  having a value equal to two
times the Purchase  Price of the Right.  The events  described in this paragraph
are referred to as "Flip-over  Events."  Flip-in Events and Flip-over Events are
referred to collectively as "Triggering Events."

     The Purchase Price  payable,  the number and kind of shares covered by each
Right and the number of Rights  outstanding  are subject to adjustment from time
to time to  prevent  dilution  (i) in the  event of a stock  dividend  on,  or a
subdivision,  combination or  reclassification  of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted  certain rights,  options or warrants
to subscribe for Preferred Stock or securities  convertible into Preferred Stock
at less than the current market price of the Preferred  Stock, or (iii) upon the
distribution  to holders of the  Preferred  Stock of evidences of  indebtedness,
cash (excluding regular quarterly cash dividends),  assets (other than dividends
payable in Preferred Stock) or subscription rights or warrants (other than those
referred to in (ii) immediately above).

<PAGE>
                                       21


     With  certain  exceptions,  no  adjustment  in the  Purchase  Price will be
required until cumulative adjustments amount to at least one percent (1%) of the
Purchase  Price.  No  fractional  shares of  Preferred  Stock are required to be
issued (other than fractions which are integral  multiples of one one-thousandth
(1/1,000) of a share of Preferred  Stock) and, in lieu  thereof,  we may make an
adjustment  in cash  based on the  market  price of the  Preferred  Stock on the
trading date immediately prior to the date of exercise.

     At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of fifty percent (50%) or more of the
outstanding  shares of Common  Stock,  the Board of Directors  of Parallel  may,
without payment of the Purchase Price by the holder,  exchange the Rights (other
than Rights owned by such person or group,  which will become void), in whole or
in part,  for shares of Common Stock at an exchange  ratio of one-half (1/2) the
number of shares of Common Stock (or in certain  circumstances  Preferred Stock)
for which a Right is  exercisable  immediately  prior to the time of  Parallel's
decision to exchange the Rights (subject to adjustment).

     At any time  until the Stock  Acquisition  Date,  Parallel  may  redeem the
Rights in whole,  but not in part,  at a price of $0.001 per Right  (payable  in
cash, shares of Common Stock or other  consideration  deemed  appropriate by the
Board of  Directors).  Immediately  upon the  action of the  Board of  Directors
ordering  redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.

     Until a Right is  exercised,  the  holder  thereof,  as such,  will have no
rights as a stockholder of Parallel, including, without limitation, the right to
vote or to receive  dividends.  While the distribution of the Rights will not be
taxable to stockholders  or to Parallel,  stockholders  may,  depending upon the
circumstances,  recognize  taxable  income in the event that the  Rights  become
exercisable for Common Stock (or other  consideration) of Parallel or for common
stock of an acquiring company as set forth above or in the event that the Rights
are redeemed.

     Other than those provisions relating to the principal economic terms of the
Rights,  any of the  provisions  of the Rights  Agreement  may be amended by the
Board of Directors of Parallel at any time during the period in which the Rights
are  redeemable.  At any time  when the  Rights  are no longer  redeemable,  the
provisions  of the  Rights  Agreement  may be  amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided,  however, that no amendment may
cause the Rights again to become redeemable.

Amendment of Bylaws

     Also on October 5, 2000, the Board of Directors of Parallel adopted certain
amendments to our Bylaws.  These  amendments  modify and add certain  provisions
regarding the advance notice  requirements  for stockholder  proposals before an
annual meeting of stockholders, the calling of special meetings of stockholders,
stockholder written consents and the procedures for nominating  directors.

<PAGE>
                                       22



ITEM 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  Certificate  of  Designations,  Preferences  and  Rights  of
                    Serial  Preferred  Stock -Q of the Registrant for the fiscal
                    quarter ended September 30, 1998)

               3.3  Form of Certificate of  Designation,  Preferences and Rights
                    of Series A Preferred Stock of the Registrant  (Incorporated
                    by  reference  to  Exhibit  2 of Form 8-A of the  Registrant
                    dated  October  9, 2000 and filed  with the  Securities  and
                    Exchange Commission on October 10, 2000)

               3.4  Bylaws of Registrant (Incorporated by reference to Exhibit 3
                    of Form 8-K of the  Registrant  dated  October  5,  2000 and
                    filed with the Securities and Exchange Commission on October
                    10, 2000)

               4.1  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  dated  October  9, 2000 and filed  with the
                    Securities and Exchange Commission on October 10, 2000)

               4.2  Form of Rights  Certificate  (Incorporated  by  reference to
                    Exhibit 3 of Form 8-A of the  Registrant  dated  October  9,
                    2000 and filed with the Securities  and Exchange  Commission
                    on October 10, 2000)

               10.1 Restated Loan  Agreement,  dated December 27, 1999,  between
                    the Registrant and Bank One, Texas,  N.A.  (Incorporated  by
                    reference to Exhibit 10.8 to Form 10-K of the Registrant for
                    the fiscal year ended December 31, 1999)

               *27. Financial Data Schedule

          (b)  Reports on Form 8-K

               No  reports  were  filed on Form 8-K  during  the  quarter  ended
               September 30, 2000.

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





<PAGE>
                                       23

                                   SIGNATURES



               Pursuant to the  requirements  of the Securities and 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


                                       BY:  /s/ THOMAS R. CAMBRIDGE
Date:   November 13, 2000
                                       ------------------------------------
                                       Thomas R. Cambridge
                                       Chairman of the Board of Directors
                                       and Chief Executive Officer



Date:   November 13, 2000               BY:  /s/ LARRY C. OLDHAM
                                       ------------------------------------
                                       Larry C. Oldham,
                                       President and Principal Financial Officer