UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10-Q/A
  
 T
              Quarterly
      Report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
  For
the Quarterly Period Ended June 30, 2008
  Or
  £
              Transition
      Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934
  For
the Transition Period From
to
  Commission
File Number 0-7406
  
 PrimeEnergy
Corporation
 (Exact
name of registrant as specified in its charter)
  
 Delaware
                  84-0637348(State or
      other jurisdiction of incorporation
      or organization)
                  (IRS
      employer identification
      number)
  One
Landmark Square, Stamford, Connecticut 06901
 (Address
of principal executive offices)
  (203)
358-5700
 (Registrant’s
telephone number, including area code)
  (Former
name, former address and former fiscal year, if changed since last
report)
  
 Indicated 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 filings required
for the past 90 days.    YesTNo£
  Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer” and “smaller reporting company”
in Rule 12-B of the Exchange Act.
  Large Accelerated Filer
      £
                  Accelerated Filer                   
      £Non-Accelerated
      Filer   £
                  Smaller Reporting Company
      T(Do
      not check if smaller reporting company)
  Indicated by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes£NoT
  The
number of shares outstanding of each class of the Registrant’s Common Stock as
of August 11, 2008 was: Common Stock, $0.10 par value, 3,050,141
shares.
  
 
 
 
 PrimeEnergy Corporation
 Index to
Form 10-Q
 June 30,
2008
  Part
      I - Financial InformationItem 1.
      Financial Statements  (restated)Consolidated Balance Sheets – June 30, 2008 and December 31,
      2007
                3-4Consolidated Statements of Operations for the six and three
      months ended June 30, 2008 and 2007
                5-6Consolidated Statement of Stockholders’ Equity for the six
      months ended June 30, 2008 and for the year ended December 31,
      2007
                7Consolidated Statements of Cash Flows for the six months ended
      June 30, 2008 and 2007
                8Notes to Consolidated Financial
    Statements
                9-31Item 2. Management’s Discussion and Analysis of
      Financial Conditions and Results of Operation
                32-34Item 3. Quantitative and Qualitative Disclosures About
      Market Risk
                28-29Item 4T. Controls and Procedures
                36Part
      II - Other InformationItem 1. Legal Proceedings
                37Item 1A. Risk Factors
                37Item 2. Changes in Securities and Use of
      Proceeds
                37Item 3. Defaults Upon Senior
      Securities
                37Item 4T. Submission of Matters to a Vote of
      Security Holders
                38Item 5. Other Information
                38Item 6. Exhibits
                39Signatures
                40
 1
 Index
  EXPLANATORY
NOTE
 
 This
Amendment No. 1 on Form 10-Q/A (the “Form 10-Q/A”) amends the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 filed by PrimeEnergy
Corporation (the “Company”), originally filed with the Securities and Exchange
Commission on August 15, 2008. The Form 10-Q/A includes amended and restated
consolidated financial statements and related financial information for the year
ended December 31, 2007 and the quarters ended June 30, 2008 and 2007. This
information is disclosed in Note 2 to the consolidated financial
statements.
 
 The
restatement provides detail of the change in accounting method from
proportionate consolidation of partnerships that the Company controls to the
full consolidation method and the change in the basis of a partnership in which
the Company acquired a twenty percent non-controlling interest in
2005.
 
 The
following items are included in this amendment:
 
 PART
      I -
              ITEM
      1. Financial Statements
 ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
 
 All other
information contained in the original Form 10-Q remains unchanged. However, the
entire report with all Items is included in this Form 10-Q/A-1 for the
convenience of the reader. This Amendment No.1 on Form 10-Q/A does not reflect
events occurring after the filing of our Report on Form 10-Q on August 15, 2008
or include, or otherwise modify or update, the disclosure contained therein in
any way except as expressly indicated above.
 2
 Index
  PrimeEnergy Corporation
 Consolidated
Balance Sheets
 June 30,
2008 and December 31, 2007
  June
      30,
                    2008
                    (Unaudited
      and Restated)
                  
                  
                  December
      31
                    2007
                    (Audited
      and Restated)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  23,338,000
                  
                  
                  $
                  25,373,000Restricted
      cash and cash equivalents
                  
                  
                  5,312,000
                  
                  
                  
                  3,633,000Accounts
      receivable (net)
                  
                  
                  30,386,000
                  
                  
                  
                  21,311,000Due
      from related parties
                  
                  
                  223,000
                  
                  
                  
                  32,000Prepaid
      expenses
                  
                  
                  2,009,000
                  
                  
                  
                  1,391,000Derivative
      contracts
                  
                  
                  418,000
                  
                  
                  
                  1,332,000Inventory
      at cost
                  
                  
                  5,356,000
                  
                  
                  
                  3,705,000Deferred
      income tax
                  
                  
                  11,783,000
                  
                  
                  
                  1,582,000Total
      current assets
                  
                  
                  78,825,000
                  
                  
                  
                  58,359,000Property
      and equipment, at costOil
      and gas properties (successful efforts method), net
                  
                  
                  226,194,000
                  
                  
                  
                  237,852,000Field
      service equipment and other, net
                  
                  
                  9,001,000
                  
                  
                  
                  8,209,000Net
      property and equipment
                  
                  
                  235,195,000
                  
                  
                  
                  246,061,000Other
      assets
                  
                  
                  936,000
                  
                  
                  
                  1,245,000Total
      assets
                  
                  $
                  314,956,000
                  
                  
                  $
                  305,665,000
  See
accompanying notes to the consolidated financial statements.
  3
 Index
  PrimeEnergy
Corporation
 Consolidated
Balance Sheets
 June 30,
2008 and December 31, 2007
 
 June
      30,
                      2008
                      (Unaudited
      and Restated)
                    
                    
                    December
      31,
                      2007
                      (Audited
      and Restated)LIABILITIES
      and STOCKHOLDERS' EQUITYCurrent
      liabilities:Current
      bank debt
                    
                    $
                    18,000,000
                    
                    
                    $
                    34,950,000Accounts
      payable
                    
                    
                    37,225,000
                    
                    
                    
                    26,780,000Current
      portion of asset retirement and other long term obligation
                    
                    
                    2,171,000
                    
                    
                    
                    1,065,000Derivative
      liability short term
                    
                    
                    31,765,000
                    
                    
                    
                    4,340,000Accrued
      liabilities
                    
                    
                    11,394,000
                    
                    
                    
                    10,032,000Due
      to related parties
                    
                    
                    316,000
                    
                    
                    
                    520,000Total
      current liabilities
                    
                    
                    100,871,000
                    
                    
                    
                    77,687,000Long-term
      bank debt
                    
                    
                    101,050,000
                    
                    
                    
                    120,050,000Indebtedness
      to related parties
                    
                    
                    20,000,000
                    
                    
                    
                    --Asset
      retirement obligation
                    
                    
                    18,822,000
                    
                    
                    
                    16,936,000Derivative
      liability long term
                    
                    
                    23,847,000
                    
                    
                    
                    3,369,000Deferred
      income taxes
                    
                    
                    18,993,000
                    
                    
                    
                    26,022,000Total
      liabilities
                    
                    
                    283,583,000
                    
                    
                    
                    244,064,000Minority
      interest
                    
                    
                    11,705,000
                    
                    
                    
                    12,929,000Stockholders'
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares, none
      issued
                    
                    
                    --
                    
                    
                    
                    --Common
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2008
                    
                    
                    769,000
                    
                    
                    
                    769,000Paid
      in capital
                    
                    
                    11,024,000
                    
                    
                    
                    11,024,000Retained
      earnings
                    
                    
                    79,635,000
                    
                    
                    
                    72,885,000Accumulated
      other comprehensive income(loss), net
                    
                    
                    (35,058,000
                    )
                    
                    
                    (3,618,000
                    )56,370,000
                    
                    
                    
                    81,060,000Treasury
      stock, at cost, 4,642,912 common shares at 2008 and 4,558,544 common
      shares at 2007
                    
                    
                    (36,702,000
                    )
                    
                    
                    (32,388,000
                    )Total
      stockholders' equity
                    
                    
                    19,668,000
                    
                    
                    
                    48,672,000Total
      liabilities and stockholders, equity
                    
                    $
                    314,956,000
                    
                    
                    $
                    305,665,000
  See
accompanying notes to the consolidated financial statements.
  4
 Index
  PrimeEnergy Corporation
 Consolidated Statements of
Operations
 Six
Months Ended June 30, 2008 and 2007
 Unaudited
 
 2008
                      Restated
                    
                    
                    2007
                      RestatedRevenue:Oil
      and gas sales
                    
                    $
                    74,648,000
                    
                    
                    $
                    52,234,000Field
      service income
                    
                    
                    12,749,000
                    
                    
                    
                    11,800,000Administrative
      overhead fees
                    
                    
                    4,499,000
                    
                    
                    
                    4,812,000Other
      income
                    
                    
                    197,000
                    
                    
                    
                    166,000Total
      revenue
                    
                    
                    92,093,000
                    
                    
                    
                    69,012,000Costs
      and expenses:Lease
      operating expense
                    
                    
                    21,160,000
                    
                    
                    
                    17,013,000Field
      service expense
                    
                    
                    9,583,000
                    
                    
                    
                    9,050,000Depreciation,
      depletion and amortization
                    
                    
                    35,629,000
                    
                    
                    
                    20,611,000General
      and administrative expense
                    
                    
                    7,290,000
                    
                    
                    
                    7,050,000Exploration
      costs
                    
                    
                    299,000
                    
                    
                    
                    419,000Total
      costs and expenses
                    
                    
                    73,961,000
                    
                    
                    
                    54,143,000Add
      gain/(loss) on sale and exchange of assets
                    
                    
                    78,000
                    
                    
                    
                    611,000Income
      from operations
                    
                    
                    18,210,000
                    
                    
                    
                    15,480,000Other
      income and expensesLess:
      Interest expense
                    
                    
                    4,376,000
                    
                    
                    
                    4,512,000Add
      interest income
                    
                    
                    261,000
                    
                    
                    
                    495,000Less:
      Minority interest
                    
                    
                    3,894,000
                    
                    
                    
                    1,914,000Income
      before provision for income taxes
                    
                    
                    10,201,000
                    
                    
                    
                    9,549,000Provision
      for income taxes
                    
                    
                    3,451,000
                    
                    
                    
                    3,438,000Net
      income
                    
                    $
                    6,750,000
                    
                    
                    $
                    6,111,000Basic
      income per common share
                    
                    $
                    2.20
                    
                    
                    $
                    1.91Diluted
      income per common share
                    
                    $
                    1.76
                    
                    
                    $
                    1.55
  See accompanying notes to the
consolidated financial statements.
 5
 Index
  PrimeEnergy
Corporation
 Consolidated
Statements of Operations
 Three
Months Ended June 30, 2008 and 2007
 Unaudited
 
 2008
                      Restated
                    
                    
                    2007
                      RestatedRevenue:Oil
      and gas sales
                    
                    $
                    40,547,000
                    
                    
                    $
                    29,968,000Field
      service income
                    
                    
                    6,494,000
                    
                    
                    
                    5,904,000Administrative
      overhead fees
                    
                    
                    2,300,000
                    
                    
                    
                    2,482,000Other
      income
                    
                    
                    (5,000
                    )
                    
                    
                    165,000Total
      revenue
                    
                    
                    49,336,000
                    
                    
                    
                    38,519,000Costs
      and expenses:Lease
      operating expense
                    
                    
                    11,454,000
                    
                    
                    
                    9,474,000Field
      service expense
                    
                    
                    4,804,000
                    
                    
                    
                    4,499,000Depreciation,
      depletion and amortization
                    
                    
                    18,709,000
                    
                    
                    
                    12,917,000General
      and administrative expense
                    
                    
                    4,065,000
                    
                    
                    
                    3,852,000Exploration
      costs
                    
                    
                    242,000
                    
                    
                    
                    58,000Total
      costs and expenses
                    
                    
                    39,274,000
                    
                    
                    
                    30,800,000Add
      gain/(loss) on sale and exchange of assets
                    
                    
                    93,000
                    
                    
                    
                    348,000Income
      from operations
                    
                    
                    10,155,000
                    
                    
                    
                    8,067,000Other
      income and expensesLess:
      Interest expense
                    
                    
                    1,929,000
                    
                    
                    
                    2,829,000Add
      interest income
                    
                    
                    104,000
                    
                    
                    
                    268,000Less:
      Minority interest
                    
                    
                    2,248,000
                    
                    
                    
                    1,139,000Income
      before provision for income taxes
                    
                    
                    6,082,000
                    
                    
                    
                    4,367,000Provision
      for income taxes
                    
                    
                    2,063,000
                    
                    
                    
                    1,573,000Net
      income
                    
                    $
                    4,019,000
                    
                    
                    $
                    2,794,000Basic
      income per common share
                    
                    $
                    1.31
                    
                    
                    $
                    0.88Diluted
      income per common share
                    
                    $
                    1.05
                    
                    
                    $
                    0.71
  See
accompanying notes to the consolidated financial statements.
 6
 Index
 
 PrimeEnergy Corporation
 Consolidated
Statement of Stockholders’ Equity
 Six
Months Ended June 30, 2008  (Restated)
 (Unaudited)
  Common StockShares
                  
                  
                  Amount
                  
                  
                  Paid In
                    Capital
                  
                  
                  Retained
                    Earnings
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income/Loss
                  
                  
                  Treasury
                    Stock
                  
                  
                  TotalBalance
      at December 31, 2007
                  
                  
                  7,694,970
                  
                  
                  $
                  769,000
                  
                  
                  $
                  11,024,000
                  
                  
                  $
                  72,885,000
                  
                  
                  $
                  (3,618,000
                  )
                  
                  $
                  (32,388,000
                  )
                  
                  $
                  48,672,000Purchased
      84,368 shares of common Stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,314,000
                  )
                  
                  
                  (4,314,000
                  )Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,750,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,750,000Other
      comprehensive Income, net of taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (31,440,000
                  )
                  
                  
                  
                  
                  
                  
                  (31,440,000
                  )Balance
      at June 30, 2008
                  
                  
                  7,694,970
                  
                  
                  $
                  769,000
                  
                  
                  $
                  11,024,000
                  
                  
                  $
                  79,635,000
                  
                  
                  $
                  (35,058,000
                  )
                  
                  $
                  (36,702,000
                  )
                  
                  $
                  19,668,000
  See
accompanying notes to the consolidated financial statements.
  7
 Index
  PrimeEnergy Corporation
 Consolidated
Statements of Cash Flows
 Six
Months Ended June 30, 2008 and 2007
 (Unaudited)
 
 2008
                    Restated
                  
                  
                  2007
                    RestatedCash
      flows from operating activities:Net
      income
                  
                  $
                  6,750,000
                  
                  
                  $
                  6,111,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                  
                  
                  35,629,000
                  
                  
                  
                  20,611,000Dry
      hole and abandonment expense
                  
                  
                  --
                  
                  
                  
                  318,000Gain
      on sale of properties
                  
                  
                  (78,000
                  )
                  
                  
                  (611,000
                  )Provision
      for deferred taxes
                  
                  
                  1,340,000
                  
                  
                  
                  2,767,000Minority
      interest in earnings of partnerships
                  
                  
                  3,894,000
                  
                  
                  
                  1,914,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (7,112,000
                  )
                  
                  
                  7,711,000(Increase)
      decrease in due from related parties
                  
                  
                  738,000
                  
                  
                  
                  743,000(Increase)
      decrease in inventories
                  
                  
                  459,000
                  
                  
                  
                  2,496,000(Increase)
      decrease in prepaid expenses and other assets
                  
                  
                  (1,581,000
                  )
                  
                  
                  (456,000
                  )Increase
      (decrease) in accounts payable
                  
                  
                  12,860,000
                  
                  
                  
                  (3,069,000
                  )Increase
      (decrease) in accrued liabilities
                  
                  
                  1,404,000
                  
                  
                  
                  (170,000
                  )Increase
      (decrease) in due to related parties
                  
                  
                  (384,000
                  )
                  
                  
                  (1,000
                  )Net
      cash provided by operating activitiesNet
      cash provided by operating activities:
                  
                  
                  53,919,000
                  
                  
                  
                  38,364,000Cash
      flows from investing activities:Capital
      expenditures, including exploration expense
                  
                  
                  (33,126,000
                  )
                  
                  
                  (70,211,000
                  )Proceeds
      from sale of property and equipment
                  
                  
                  78,000
                  
                  
                  
                  611,000Net
      cash (used in) investing activities
                  
                  
                  (33,048,000
                  )
                  
                  
                  (69,600,000
                  )Cash
      flows from financing activities:Purchase
      of treasury stock
                  
                  
                  (4,314,000
                  )
                  
                  
                  (2,382,000
                  )Proceeds
      from long-term bank debt
                  
                  
                  72,175,000
                  
                  
                  
                  65,285,000Repayment
      of long-term bank debt
                  
                  
                  (87,959,000
                  )
                  
                  
                  (41,609,000
                  )Distribution
      to minority interest
                  
                  
                  (2,808,000
                  )
                  
                  
                  (1,990,000
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (22,906,000
                  )
                  
                  
                  19,304,000Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (2,035,000
                  )
                  
                  
                  (11,932,000
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  25,373,000
                  
                  
                  
                  29,056,000Cash
      and cash equivalents at the end of the period
                  
                  $
                  23,338,000
                  
                  
                  $
                  17,124,000
 
 See
accompanying notes to the consolidated financial statements.
  8
 Index
  PrimeEnergy Corporation
 Notes to
Consolidated Financial Statements
 June 30,
2008
  (1)
Interim Financial Statements:
  The
accompanying consolidated financial statements of PrimeEnergy Corporation, with
the exception of the consolidated balance sheet at December 31, 2007, have
not been audited by independent public accountants. In the opinion of
management, the accompanying financial statements reflect all adjustments
necessary to present fairly our financial position at June 30, 2008 and our
income and cash flows for the six months ended June 30, 2008 and 2007. All
such adjustments are of a normal recurring nature. Certain amounts presented in
prior period financial statements have been reclassified for consistency with
current period presentation. The results for interim periods are not necessarily
indicative of annual results.
  Effective
January 1, 2008, the Company adopted those provisions of Statement of
Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,”
that were required to be adopted. There was no financial statement impact upon
adoption on January 1, 2008. For further information regarding the adoption
of SFAS No. 157, please refer to Note 11 of the Notes to the Consolidated
Financial Statements.
  SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115,” became
effective on January 1, 2008 and permits companies to choose, at specified
dates, to measure certain eligible financial instruments at fair value. The
provisions of SFAS No. 159 apply only to entities that elect to use the
fair value option and to all entities with available-for-sale and trading
securities. At the effective date, companies may elect the fair value option for
eligible items that exist at that date, and the effect of the first
remeasurement to fair value must be reported as a cumulative-effect adjustment
to the opening balance of retained earnings. Since the Company has not elected
to adopt the fair value option for eligible items, SFAS No. 159 has not had
an impact on its financial position or results of operations.
  Recently
Issued Accounting Standards:
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” which identifies a consistent framework for selecting
accounting principles to be used in preparing financial statements for
nongovernmental entities that are presented in conformity with United States
generally accepted accounting principles (GAAP). The current GAAP hierarchy was
criticized due to its complexity, ranking position of FASB Statements of
Financial Accounting Concepts and the fact that it is directed at auditors
rather than entities. The statement specifies that the reporting entity, not the
auditors, is responsible for its compliance with GAAP. SFAS No. 162 will be
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles. The Company
does not believe that SFAS No. 162 will have an impact on its financial
position, result of operations or cash flows. The Company will adopt SFAS 162
when it becomes effective.
  In
March 2008, the FASB issued SFAS No. 161, “Disclosure about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 amends and expands the disclosure requirements
of SFAS No. 133 with the intent to provide users of financial statements
with an enhanced understanding of: (i) how and why an entity uses
derivative instruments; (ii) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations;
and (iii) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. This
statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. We are in the process of evaluating the impact of SFAS No. 161
on our consolidated financial statements.
  9
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(ARB) No. 51.” SFAS No. 160 clarifies that a noncontrolling interest
(previously commonly referred to as a minority interest) in a subsidiary is an
ownership interest in the consolidated entity and should be reported as equity
in the consolidated financial statements. The presentation of the consolidated
income statement has been changed by SFAS No. 160, and consolidated net
income attributable to both the parent and the noncontrolling interest is now
required to be reported separately. Previously, net income attributable to the
noncontrolling interest was typically reported as an expense or other deduction
in arriving at consolidated net income and was often combined with other
financial statement amounts. In addition, the ownership interests in
subsidiaries held by parties other than the parent must be clearly identified,
labeled, and presented in the equity in the consolidated financial statements
separately from the parent’s equity. Subsequent changes in a parent’s ownership
interest while the parent retains its controlling financial interest in its
subsidiary should be accounted for consistently, and when a subsidiary is
deconsolidated, any retained noncontrolling equity interest in the former
subsidiary must be initially measured at fair value. Expanded disclosures,
including a reconciliation of equity balances of the parent and noncontrolling
interest are also required. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008 and earlier adoption is prohibited. Prospective
application is required. We are in the process of evaluating the impact of SFAS
No. 160 on our consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”
SFAS No. 141(R) was issued in an effort to continue the movement toward the
greater use of fair values in financial reporting and increased transparency
through expanded disclosures. It changes how business acquisitions are accounted
for and will impact financial statements at the acquisition date and in
subsequent periods. Certain of these changes will introduce more volatility into
earnings. The acquirer must now record all assets and liabilities of the
acquired business at fair value, and related transaction and restructuring costs
will be expensed rather than the previous method of being capitalized as part of
the acquisition. SFAS No. 141(R) also impacts the annual goodwill
impairment test associated with acquisitions, including those that close before
the effective date of SFAS No. 141(R). The definitions of a “business” and
a “business combination” have been expanded, resulting in more transactions
qualifying as business combinations. SFAS No. 141(R) is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 31, 2008 and earlier adoption is prohibited. We cannot
predict the impact that the adoption of SFAS No. 141(R) will have on our
financial position, results of operations or cash flows with respect to any
acquisitions completed after December 31, 2008.
  (2)
Financial Restatement:
 
 The
restatements reflect the change in accounting method from proportionate
consolidation of partnerships that the Company controls to the full
consolidation method. The Company had historically accounted for its interests
in twenty limited partnerships and trusts, which own interests in oil and gas
properties using the proportionate consolidation under the guidance of EITF 00-1
as related to the extractive industries. Under the guidance of EITF 04-05 the
interests in limited partnerships and trusts that we control should have been
fully consolidated when EITF 04-05 became effective.
  10
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  The
restatements also reflect the correction of gain recognition in 2005 related to
the sale of assets to a partnership in which the company acquired a twenty
percent non-controlling interest.  The Company recorded 100% of the
gain however under the guidance of EITF 01-2 the Company, since it acquired a
20% interest in the partnership, should have recorded 80% of the
gain.  This correction in 2005 resulted in a reduction of the
Company’s basis related to the partnership interest and a decrease in the
current year depreciation and depletion of that asset.
 
 The
effects of the restatement on reported amounts for the period ended June 30,
2008, December 31, 2007 and June 30, 2007 are presented below in the following
tables:
 
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      Reported
                    June 2008
                  
                  
                  Cumulative
      Effective of PriorYear
      Adjustments
                  
                  
                  Current
      Year Adjustments
                  
                  
                  Notes
                  
                  
                  As
      Restated
                    June 2008ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  20,775,000
                  
                  
                  $
                  4,060,000
                  
                  
                  $
                  (1,497,000
                  )
                  
                  
                  b
                  
                  
                  $
                  23,338,000Restricted
      cash and cash equivalents
                  
                  
                  5,312,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  5,312,000Accounts
      receivable, net
                  
                  
                  29,080,000
                  
                  
                  
                  963,000
                  
                  
                  
                  343,000
                  
                  
                  
                  b
                  
                  
                  
                  30,386,000Due
      from related parties
                  
                  
                  281,000
                  
                  
                  
                  (180,000
                  )
                  
                  
                  122,000
                  
                  
                  
                  b
                  
                  
                  
                  223,000Prepaid
      expenses
                  
                  
                  2,009,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  2,009,000Derivative
      contracts
                  
                  
                  418,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  418,000Inventory
      at cost
                  
                  
                  5,360,000
                  
                  
                  
                  (6,000
                  )
                  
                  
                  2,000
                  
                  
                  
                  b
                  
                  
                  
                  5,356,000Deferred
      income tax
                  
                  
                  11,783,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  11,783,000Total
      current assets
                  
                  
                  75,018,000
                  
                  
                  
                  4,837,000
                  
                  
                  
                  (1,130,000
                  )
                  
                  
                  
                  
                  
                  
                  78,825,000Property
      and equipment, at cost:Oil
      and gas properties (successful efforts method), net
                  
                  
                  221,299,000
                  
                  
                  
                  4,681,000
                  
                  
                  
                  214,000
                  
                  
                  
                  a,b
                  
                  
                  
                  226,194,000Field
      service equipment
                  
                  
                  9,001,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  9,001,000Total
      net property and equipment
                  
                  
                  230,300,000
                  
                  
                  
                  4,681,000
                  
                  
                  
                  214,000
                  
                  
                  
                  
                  
                  
                  
                  235,195,000Other
      assets
                  
                  
                  871,000
                  
                  
                  
                  65,000
                  
                  
                  
                  --
                  
                  
                  
                  b
                  
                  
                  
                  936,000Total
      assets
                  
                  $
                  306,189,000
                  
                  
                  $
                  9,583,000
                  
                  
                  $
                  (816,000
                  )
                  
                  
                  
                  
                  
                  $
                  314,956,000
 11
 Index
 
 PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      Reported
                    June 2008
                  
                  
                  Cumulative
      Effective of Prior Year Adjustment
                  
                  
                  Current
      Year Adjustment
                  
                  
                  Notes
                  
                  
                  June
      2008
                    RestatedLIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                  
                  $
                  18,000,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  
                  
                  
                  $
                  18,000,000Accounts
      payable
                  
                  
                  37,352,000
                  
                  
                  
                  54,000
                  
                  
                  
                  (181,000
                  )
                  
                  
                  b
                  
                  
                  
                  37,225,000Current
      portion of asset retirement and other long-term
obligations
                  
                  
                  2,171,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  2,171,000Derivative
      liability short term
                  
                  
                  31,765,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  31,765,000Accrued
      liabilities
                  
                  
                  11,238,000
                  
                  
                  
                  79,000
                  
                  
                  
                  77,000
                  
                  
                  
                  b
                  
                  
                  
                  11,394,000Due
      to related parties
                  
                  
                  1,179,000
                  
                  
                  
                  (1,043,000
                  )
                  
                  
                  180,000
                  
                  
                  
                  b
                  
                  
                  
                  316,000Total
      current liabilities
                  
                  
                  101,705,000
                  
                  
                  
                  (910,000
                  )
                  
                  
                  76,000
                  
                  
                  
                  
                  
                  
                  
                  100,871,000Long-term
      bank debt
                  
                  
                  101,050,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  101,050,000Indebtedness
      to related parties
                  
                  
                  20,000,000
                  
                  
                  
                  
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  20,000,000Asset
      retirement obligations
                  
                  
                  17,406,000
                  
                  
                  
                  1,398,000
                  
                  
                  
                  18,000
                  
                  
                  
                  b
                  
                  
                  
                  18,822,000Derivative
      liability long term
                  
                  
                  23,847,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  23,847,000Deferred
      income taxes
                  
                  
                  19,788,000
                  
                  
                  
                  (908,000
                  )
                  
                  
                  113,000
                  
                  
                  
                  a,b
                  
                  
                  
                  18,993,000Total
      liabilities
                  
                  
                  283,796,000
                  
                  
                  
                  (420,000
                  )
                  
                  
                  207,000
                  
                  
                  
                  
                  
                  
                  
                  283,583,000Minority
      interest
                  
                  
                  1,313,000
                  
                  
                  
                  11,616,000
                  
                  
                  
                  (1,224,000
                  )
                  
                  
                  b
                  
                  
                  
                  11,705,000Stockholders’
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares; none
      issuedCommon
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2008 and 2007
                  
                  
                  769,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  769,000Paid
      in capital
                  
                  
                  11,024,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  11,024,000Retained
      earnings
                  
                  
                  81,047,000
                  
                  
                  
                  (1,613,000
                  )
                  
                  
                  201,000
                  
                  
                  
                  a
                  
                  
                  
                  79,635,000Accumulated
      other comprehensive income (loss), net
                  
                  
                  (35,058,000
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (35,058,000
                  )57,782,000
                  
                  
                  
                  (1,613,000
                  )
                  
                  
                  201,000
                  
                  
                  
                  
                  
                  
                  
                  56,370,000Treasury
      stock, at cost 4,642,912 common shares in 2008 and 4,558,544 in
      2008
                  
                  
                  (36,702,000
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (36,702,000
                  )Total
      stockholders’ equity
                  
                  
                  21,080,000
                  
                  
                  
                  (1,613,000
                  )
                  
                  
                  201,000
                  
                  
                  
                  
                  
                  
                  
                  19,668,000Total
      liabilities and stockholders’ equity
                  
                  $
                  306,189,000
                  
                  
                  $
                  9,583,000
                  
                  
                  $
                  (816,000
                  )
                  
                  
                  
                  
                  
                  $
                  314,956,000
 12
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 RESTATED
CONSOLIDATED STATEMENT of STOCKHOLDERS’ EQUITY
 As
Reported:
 Common StockShares
                          
                          
                          Amount
                          
                          Paid In
                            Capital
                          
                          Retained
                            Earnings
                          
                          
                          Accumulated
                            Other
                            Comprehensive
                            Income/Loss
                          
                          
                          Treasury
                            Stock
                          
                          
                          TotalBalance
      at December 31, 2007
                          
                          
                          7,694,970
                          
                          
                          $
                          769,000
                          
                          11,024,000
                          
                          74,498,000
                          
                          
                          (3,618,000
                          )
                          
                          (32,388,000
                          )
                          
                          50,285,000Purchased
      84,368 shares of common Stock
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (4,314,000
                          )
                          
                          
                          (4,314,000
                          )Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6,549,000
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          6,549,000Other
      comprehensive Income, net of taxes
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (31,440,000
                          )
                          
                          
                          
                          
                          
                          
                          (31,440,000
                          )Balance
      at June 30, 2008
                          
                          
                          7,694,970
                          
                          
                          $
                          769,000
                          
                          $ 11,024,000
                          
                          $
                          81,047,000
                          
                          
                          $
                          (35,058,000
                          )
                          
                          $
                          (36,702,000
                          )
                          
                          $
                          21,080,000
 
 As
Restated:
 Common StockShares
                    
                    
                    Amount
                    
                    Paid In
                      Capital
                    
                    Retained
                      Earnings
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      Income/Loss
                    
                    
                    Treasury
                      Stock
                    
                    
                    TotalBalance
      at December 31, 2007
                    
                    
                    7,694,970
                    
                    
                    $
                    769,000
                    
                    11,024,000
                    
                    72,885,000
                    
                    
                    (3,618,000
                    )
                    
                    (32,388,000
                    )
                    
                    (48,672,000
                    )Purchased
      84,368 shares of common Stock
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,314,000
                    )
                    
                    
                    (4,314,000
                    )Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,750,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,549,000Other
      comprehensive Income, net of taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (31,440,000
                    )
                    
                    
                    
                    
                    
                    
                    (31,440,000
                    )Balance
      at June 30, 2008
                    
                    
                    7,694,970
                    
                    
                    $
                    769,000
                    
                    $ 11,024,000
                    
                    $
                    79.635,000
                    
                    
                    $
                    (35,058,000
                    )
                    
                    $
                    (36,702,000
                    )
                    
                    $
                    19,668,000
  13
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 SIX
MONTHS ENDED JUNE 30, 2008
 
 As
      Reported
                    June 2008
                  
                  
                  Current
      year
                    adjustments
                  
                  
                  Notes
                  
                  
                  As
      Restated
                    June 2008Revenue:Oil
      and gas sales
                  
                  $
                  67,889,000
                  
                  
                  $
                  6,759,000
                  
                  
                  
                  b
                  
                  
                  $
                  74,648,000Field
      service income
                  
                  
                  12,718,000
                  
                  
                  
                  31,000
                  
                  
                  
                  b
                  
                  
                  
                  12,749,000Administrative
      overhead fees
                  
                  
                  4,499,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  4,499,000Other
      income
                  
                  
                  197,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  197,00085,303,000
                  
                  
                  
                  6,790,000
                  
                  
                  
                  
                  
                  
                  
                  92,093,000Costs
      and expenses:Lease
      operating expense
                  
                  
                  18,722,000
                  
                  
                  
                  2,438,000
                  
                  
                  
                  b
                  
                  
                  
                  21,160,000Field
      service expense
                  
                  
                  9,574,000
                  
                  
                  
                  9,000
                  
                  
                  
                  b
                  
                  
                  
                  9,583,000Depreciation,
      depletion and amortization
                  
                  
                  35,690,000
                  
                  
                  
                  (61,000
                  )
                  
                  
                  a,b
                  
                  
                  
                  35,629,000General
      and administrative expense
                  
                  
                  7,033,000
                  
                  
                  
                  257,000
                  
                  
                  
                  b
                  
                  
                  
                  7,290,000Exploration
      costs
                  
                  
                  299,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  299,00071,318,000
                  
                  
                  
                  2,643,000
                  
                  
                  
                  
                  
                  
                  
                  73,961,000Add
      gain on sale and exchange of assets
                  
                  
                  78,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  78,000Income
      from operations
                  
                  
                  14,063,000
                  
                  
                  
                  4,147,000
                  
                  
                  
                  
                  
                  
                  
                  18,210,000Other
      income and expense:Less
      interest expense
                  
                  
                  4,376,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  4,376,000Add
      interest income
                  
                  
                  200,000
                  
                  
                  
                  61,000
                  
                  
                  
                  b
                  
                  
                  
                  261,000Less
      minority interest
                  
                  
                  --
                  
                  
                  
                  3,894,000
                  
                  
                  
                  b
                  
                  
                  
                  3,894,000Income
      before provision for income taxes
                  
                  
                  9,887,000
                  
                  
                  
                  314,000
                  
                  
                  
                  
                  
                  
                  
                  10,201,000Provision
      for income taxes
                  
                  
                  3,338,000
                  
                  
                  
                  113,000
                  
                  
                  
                  a
                  
                  
                  
                  3,451,000Net
      income
                  
                  $
                  6,549,000
                  
                  
                  $
                  201,000
                  
                  
                  
                  
                  
                  
                  $
                  6,750,000Basic
      net income per common share
                  
                  $
                  2.13
                  
                  
                  $
                  0.07
                  
                  
                  
                  
                  
                  
                  $
                  2.20Diluted
      net income per common share
                  
                  $
                  1.71
                  
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  1.76
 14
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to CONSOLIDATED FINANCIAL
STATEMENTS, Continued
 
 CONSOLIDATED
STATEMENTS of CASH FLOWS
 SIX
MONTHS ENDED JUNE 30, 2008
 
 As
      Reported
                    June 2008
                  
                  
                  CurrentYear
      Adjustments
                  
                  
                  Notes
                  
                  
                  As
      Restated
                    June 2008Cash
      flows from operating activities:Net
      income
                  
                  $
                  6,549,000
                  
                  
                  $
                  201,000
                  
                  
                  
                  a
                  
                  
                  $
                  6,750,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                  
                  
                  35,690,000
                  
                  
                  
                  (61,000
                  )
                  
                  
                  a,b
                  
                  
                  
                  35,629,000Gain
      on sale of properties
                  
                  
                  (78,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (78,000
                  )Provision
      for deferred income taxes
                  
                  
                  1,227,000
                  
                  
                  
                  113,000
                  
                  
                  
                  a
                  
                  
                  
                  1,340,000Minority
      interest in earnings of partnerships
                  
                  
                  --
                  
                  
                  
                  3,894,000
                  
                  
                  
                  b
                  
                  
                  
                  3,894,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                  
                  
                  (8,732,000
                  )
                  
                  
                  1,620,000
                  
                  
                  
                  b
                  
                  
                  
                  (7,112,000
                  )(Increase)
      decrease in due from related parties
                  
                  
                  (68,000
                  )
                  
                  
                  806,000
                  
                  
                  
                  b
                  
                  
                  
                  738,000(Increase)
      decrease in inventories
                  
                  
                  463,000
                  
                  
                  
                  (4,000
                  )
                  
                  
                  b
                  
                  
                  
                  459,000(Increase)
      decrease in prepaid expenses and other assets
                  
                  
                  (1,646,000
                  )
                  
                  
                  65,000
                  
                  
                  
                  b
                  
                  
                  
                  (1,581,000
                  )Increase
      (decrease) in accounts payable
                  
                  
                  13,047,000
                  
                  
                  
                  (187,000
                  )
                  
                  
                  b
                  
                  
                  
                  12,860,000Increase
      (decrease) in accrued liabilities
                  
                  
                  1,560,000
                  
                  
                  
                  (156,000
                  )
                  
                  
                  b
                  
                  
                  
                  1,404,000Increase
      (decrease) in due to related parties
                  
                  
                  (384,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (384,000
                  )Net
      cash provided by operating activities
                  
                  
                  47,628,000
                  
                  
                  
                  6,291,000
                  
                  
                  
                  
                  
                  
                  
                  53,919,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                  
                  
                  (28,146,000
                  )
                  
                  
                  (4,980,000
                  )
                  
                  
                  b
                  
                  
                  
                  (33,126,000
                  )Proceeds
      from sale of properties and equipment
                  
                  
                  78,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  78,000Net
      cash used in investing activities
                  
                  
                  (28,068,000
                  )
                  
                  
                  (4,980,000
                  )
                  
                  
                  
                  
                  
                  
                  (33,048,000
                  )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                  
                  
                  (4,314,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (4,314,000
                  )Increase
      in long-term bank debt and other long-term obligations
                  
                  
                  72,175,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  72,175,000Repayment
      of long-term bank debt and other long-term obligations
                  
                  
                  (87,959,000
                  )
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (87,959,000
                  )Distribution
      to minority interest
                  
                  
                  --
                  
                  
                  
                  (2,808,000
                  )
                  
                  
                  b
                  
                  
                  
                  (2,808,000
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (20,098,000
                  )
                  
                  
                  (2,808,000
                  )
                  
                  
                  
                  
                  
                  
                  (22,906,000
                  )Net
      increase(decrease) in cash and cash equivalents
                  
                  
                  (538,000
                  )
                  
                  
                  (1,497,000
                  )
                  
                  
                  
                  
                  
                  
                  (2,035,000
                  )Cash
      and cash equivalents at the beginning of the period
                  
                  
                  21,313,000
                  
                  
                  
                  4,060,000
                  
                  
                  
                  b
                  
                  
                  
                  25,373,000Cash
      and cash equivalents at the end of the period
                  
                  $
                  20,775,000
                  
                  
                  $
                  2,563,000
                  
                  
                  
                  
                  
                  
                  $
                  23,338,000
 15
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As
      ReportedDecember 2007
                  
                  
                  Cumulative
      effect of Adjustments
                  
                  
                  Current
      Year Adjustments
                  
                  
                  Notes
                  
                  
                  As
      Restated
                    December 2007ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  $
                  21,313,000
                  
                  
                  $
                  4,403,000
                  
                  
                  $
                  (343,000
                  )
                  
                  
                  b
                  
                  
                  $
                  25,373,000Restricted
      cash and cash equivalents
                  
                  
                  3,633,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  3,633,000Accounts
      receivable, net
                  
                  
                  20,348,000
                  
                  
                  
                  694,000
                  
                  
                  
                  269,000
                  
                  
                  
                  b
                  
                  
                  
                  21,311,000Due
      from related parties
                  
                  
                  212,000
                  
                  
                  
                  (226,000
                  )
                  
                  
                  46,000
                  
                  
                  
                  b
                  
                  
                  
                  32,000Prepaid
      expenses
                  
                  
                  1,391,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  1,391,000Derivative
      contracts
                  
                  
                  1,332,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  1,332,000Inventory
      at cost
                  
                  
                  3,711,000
                  
                  
                  
                  (3,000
                  )
                  
                  
                  (3,000
                  )
                  
                  
                  b
                  
                  
                  
                  3,705,000Deferred
      income tax
                  
                  
                  1,582,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  1,582,000Total
      current assets
                  
                  
                  53,522,000
                  
                  
                  
                  4,868,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  
                  
                  
                  
                  58,359,000Property
      and equipment, at cost:Oil
      and gas properties (successful efforts method), net
                  
                  
                  233,171,000
                  
                  
                  
                  3,581,000
                  
                  
                  
                  1,100,000
                  
                  
                  
                  a,b
                  
                  
                  
                  237,852,000Field
      service equipment and other, net
                  
                  
                  8,209,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  8,209,000Net
      property and equipment
                  
                  
                  241,380,000
                  
                  
                  
                  3,581,000
                  
                  
                  
                  1,100,000
                  
                  
                  
                  
                  
                  
                  
                  246,061,000Other
      assets
                  
                  
                  1,180,000
                  
                  
                  
                  67,000
                  
                  
                  
                  (2,000
                  )
                  
                  
                  b
                  
                  
                  
                  1,245,000Total
      assets
                  
                  $
                  296,082,000
                  
                  
                  $
                  8,516,000
                  
                  
                  $
                  1,067,000
                  
                  
                  
                  
                  
                  
                  $
                  305,665,000
 16
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 RESTATED
CONSOLIDATED BALANCE SHEETS
 
 As Reported 2007
                  
                  
                  Cumulative
      Effective of Prior Year Adjustment
                  
                  
                  Current
      Year Adjustment
                  
                  
                  Notes
                  
                  
                  As Restated 2007LIABILITIES
      and STOCKHOLDERS’ EQUITY:Current
      liabilities:Current
      bank debt
                  
                  $
                  34,950,000
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  
                  
                  
                  $
                  34,950,000Accounts
      payable
                  
                  
                  26,726,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  85,000
                  
                  
                  
                  b
                  
                  
                  
                  26,780,000Current
      portion of asset retirement and other long-term
obligations
                  
                  
                  1,065,000
                  
                  
                  
                  31,000
                  
                  
                  
                  (31,000
                  )
                  
                  
                  b
                  
                  
                  
                  1,065,000Derivative
      liability short term
                  
                  
                  4,340,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  4,340,000Accrued
      liabilities
                  
                  
                  9,953,000
                  
                  
                  
                  68,000
                  
                  
                  
                  11,000
                  
                  
                  
                  b
                  
                  
                  
                  10,032,000Due
      to related parties
                  
                  
                  1,563,000
                  
                  
                  
                  (312,000
                  )
                  
                  
                  (731,000
                  )
                  
                  
                  b
                  
                  
                  
                  520,000Total
      current liabilities
                  
                  
                  78,597,000
                  
                  
                  
                  (244,000
                  )
                  
                  
                  (666,000
                  )
                  
                  
                  
                  
                  
                  
                  77,687,000Long-term
      bank debt
                  
                  
                  120,050,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  120,050,000Asset
      retirement obligations
                  
                  
                  15,538,000
                  
                  
                  
                  576,000
                  
                  
                  
                  822,000
                  
                  
                  
                  b
                  
                  
                  
                  16,936,000Derivative
      liability long term
                  
                  
                  3,369,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  3,369,000Deferred
      income taxes
                  
                  
                  26,930,000
                  
                  
                  
                  (1,093,000
                  )
                  
                  
                  185,000
                  
                  
                  
                  a,b
                  
                  
                  
                  26,022,000Total
      liabilities
                  
                  
                  244,484,000
                  
                  
                  
                  (761,000
                  )
                  
                  
                  341,000
                  
                  
                  
                  
                  
                  
                  
                  244,064,000Minority
      interest
                  
                  
                  1,313,000
                  
                  
                  
                  11,220,000
                  
                  
                  
                  396,000
                  
                  
                  
                  b
                  
                  
                  
                  12,929,000Stockholders’
      equity:Preferred
      stock, $.10 par value, authorized 5,000,000 shares; none
      issuedCommon
      stock, $.10 par value, authorized 10,000,000 shares; issued 7,694,970 in
      2007 and 2006
                  
                  
                  769,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  769,000Paid
      in capital
                  
                  
                  11,024,000
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  11,024,000Retained
      earnings
                  
                  
                  74,498,000
                  
                  
                  
                  (1,943,000
                  )
                  
                  
                  330,000
                  
                  
                  
                  a
                  
                  
                  
                  72,885,000Accumulated
      other comprehensive income (loss), net
                  
                  
                  (3,618,000
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (3,618,000
                  )82,673,000
                  
                  
                  
                  (1,943,000
                  )
                  
                  
                  330,000
                  
                  
                  
                  
                  
                  
                  
                  81,060,000Treasury
      stock, at cost 4,558,544 common shares in 2007 and 4,478,145 in
      2006
                  
                  
                  (32,388,000
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  (32,388,000
                  )Total
      stockholders’ equity
                  
                  
                  50,285,000
                  
                  
                  
                  (1,943,000
                  )
                  
                  
                  330,000
                  
                  
                  
                  
                  
                  
                  
                  48,672,000Total
      liabilities and stockholders’ equity
                  
                  $
                  296,082,000
                  
                  
                  $
                  8,516,000
                  
                  
                  $
                  1,067,000
                  
                  
                  
                  
                  
                  
                  $
                  305,665,000
 17
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 F0R THE
SIX MONTHS ENDED JUNE 30, 2007
 
 As
      Reported
                    June 2007
                  
                  
                  Current
      year
                    adjustments
                  
                  
                  Notes
                  
                  
                  As
      Restated
                    June 2007Revenue:Oil
      and gas sales
                  
                  $
                  47,672,000
                  
                  
                  $
                  4,562,000
                  
                  
                  
                  b
                  
                  
                  $
                  52,234,000Field
      service income
                  
                  
                  11,782,000
                  
                  
                  
                  18,000
                  
                  
                  
                  b
                  
                  
                  
                  11,800,000Administrative
      overhead fees
                  
                  
                  4,812,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  4,812,000Other
      income
                  
                  
                  166,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  166,00064,432,000
                  
                  
                  
                  4,580,000
                  
                  
                  
                  
                  
                  
                  
                  69,012,000Costs
      and expenses:Lease
      operating expense
                  
                  
                  14,797,000
                  
                  
                  
                  2,216,000
                  
                  
                  
                  b
                  
                  
                  
                  17,013,000Field
      service expense
                  
                  
                  9,050,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  9,050,000Depreciation,
      depletion and amortization
                  
                  
                  20,600,000
                  
                  
                  
                  11,000
                  
                  
                  
                  a,b
                  
                  
                  
                  20,611,000General
      and administrative expense
                  
                  
                  6,790,000
                  
                  
                  
                  260,000
                  
                  
                  
                  b
                  
                  
                  
                  7,050,000Exploration
      costs
                  
                  
                  419,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  419,00051,656,000
                  
                  
                  
                  2,487,000
                  
                  
                  
                  
                  
                  
                  
                  54,143,000Add
      gain on sale and exchange of assets
                  
                  
                  611,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  611,000Income
      from operations
                  
                  
                  13,387,000
                  
                  
                  
                  2,093,000
                  
                  
                  
                  
                  
                  
                  
                  15,480,000Other
      income and expense:Less:
      Interest expense
                  
                  
                  4,512,000
                  
                  
                  
                  --
                  
                  
                  
                  
                  
                  
                  
                  4,512,000Add
      interest income
                  
                  
                  417,000
                  
                  
                  
                  78,000
                  
                  
                  
                  b
                  
                  
                  
                  495,000Less:
      Minority interest
                  
                  
                  --
                  
                  
                  
                  1,914,000
                  
                  
                  
                  b
                  
                  
                  
                  1,914,000Income
      before provision for income taxes
                  
                  
                  9,292,000
                  
                  
                  
                  257,000
                  
                  
                  
                  
                  
                  
                  
                  9,549,000Provision
      for income taxes
                  
                  
                  3,345,000
                  
                  
                  
                  93,000
                  
                  
                  
                  a
                  
                  
                  
                  3,438,000Net
      income
                  
                  $
                  5,947,000
                  
                  
                  $
                  164,000
                  
                  
                  
                  
                  
                  
                  $
                  6,111,000Basic
      net income per common share
                  
                  $
                  1.86
                  
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  1.91Diluted
      net income per common share
                  
                  $
                  1.50
                  
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  1.55
 18
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
 
 CONSOLIDATED
STATEMENTS of CASH FLOWS
 FOR THE
SIX MONTHS ENDED JUNE 30, 2007
 
 As
      Reported
                      June 2007
                    
                    
                    CurrentYear
      Adjustments
                    
                    
                    Notes
                    
                    
                    As
      Restated
                      June 2007Cash
      flows from operating activities:Net
      income
                    
                    $
                    5,947,000
                    
                    
                    $
                    164,000
                    
                    
                    
                    a
                    
                    
                    $
                    6,111,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation,
      depletion, amortization and accretion on discounted
      liabilities
                    
                    
                    20,600,000
                    
                    
                    
                    11,000
                    
                    
                    
                    a,b
                    
                    
                    
                    20,611,000Dry
      hole and abandonment costs
                    
                    
                    318,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    318,000Gain
      on sale of properties
                    
                    
                    (611,000
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (611,000
                    )Provision
      for deferred income taxes
                    
                    
                    2,674,000
                    
                    
                    
                    93,000
                    
                    
                    
                    a
                    
                    
                    
                    2,767,000Minority
      interest in earnings of partnerships
                    
                    
                    --
                    
                    
                    
                    1,914,000
                    
                    
                    
                    b
                    
                    
                    
                    1,914,000Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                    
                    
                    6,800,000
                    
                    
                    
                    911,000
                    
                    
                    
                    b
                    
                    
                    
                    7,711,000(Increase)
      decrease in due from related parties
                    
                    
                    389,000
                    
                    
                    
                    354,000
                    
                    
                    
                    b
                    
                    
                    
                    743,000(Increase)
      decrease in inventories
                    
                    
                    2,506,000
                    
                    
                    
                    (10,000
                    )
                    
                    
                    b
                    
                    
                    
                    2,496,000(Increase)
      decrease in prepaid expenses and other assets
                    
                    
                    (522,000
                    )
                    
                    
                    66,000
                    
                    
                    
                    b
                    
                    
                    
                    (456,000
                    )Increase
      (decrease) in accounts payable
                    
                    
                    (2,963,000
                    )
                    
                    
                    (106,000
                    )
                    
                    
                    b
                    
                    
                    
                    (3,069,000
                    )Increase
      (decrease) in accrued liabilities
                    
                    
                    (28,000
                    )
                    
                    
                    (142,000
                    )
                    
                    
                    b
                    
                    
                    
                    (170,000
                    )Increase
      (decrease) in due to related parties
                    
                    
                    (18,000
                    )
                    
                    
                    17,000
                    
                    
                    
                    b
                    
                    
                    
                    (1,000
                    )Net
      cash provided by operating activities
                    
                    
                    35,092,000
                    
                    
                    
                    3,272,000
                    
                    
                    
                    
                    
                    
                    
                    38,364,000Cash
      flows from investing activitiesCapital
      expenditures, including exploration expense
                    
                    
                    (68,399,000
                    )
                    
                    
                    (1,812,000
                    )
                    
                    
                    b
                    
                    
                    
                    (70,211,000
                    )Proceeds
      from sale of properties and equipment
                    
                    
                    611,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    611,000Net
      cash used in investing activities
                    
                    
                    (67,788,000
                    )
                    
                    
                    (1,812,000
                    )
                    
                    
                    
                    
                    
                    
                    (69,600,000
                    )Cash
      flows from financing activitiesPurchase
      of stock for treasury
                    
                    
                    (2,382,000
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (2,382,000
                    )Increase
      in long-term bank debt and other long-term obligations
                    
                    
                    65,285,000
                    
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    65,285,000Repayment
      of long-term bank debt and other long-term obligations
                    
                    
                    (41,609,000
                    )
                    
                    
                    --
                    
                    
                    
                    
                    
                    
                    
                    (41,609,000
                    )Distribution
      to minority interest
                    
                    
                    --
                    
                    
                    
                    (1,990,000
                    )
                    
                    
                    b
                    
                    
                    
                    (1,990,000
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    21,294,000
                    
                    
                    
                    (1,990,000
                    )
                    
                    
                    
                    
                    
                    
                    19,304,000Net
      increase(decrease) in cash and cash equivalents
                    
                    
                    (11,402,000
                    )
                    
                    
                    (530,000
                    )
                    
                    
                    
                    
                    
                    
                    (11,932,000
                    )Cash
      and cash equivalents at the beginning of the period
                    
                    
                    24,653,000
                    
                    
                    
                    4,403,000
                    
                    
                    
                    b
                    
                    
                    
                    29,056,000Cash
      and cash equivalents at the end of the period
                    
                    $
                    13,251,000
                    
                    
                    $
                    3,873,000
                    
                    
                    
                    
                    
                    
                    $
                    17,124,000
  19
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  Explanatory
Notes to Restated Consolidated Statements of Operations, Balance Sheets and
Statements of Cash Flows
 
 a)
              The
      correction of the recorded gain on sale of assets to a partnership in
      which the Company acquired a twenty percent non-controlling interest in
      the year ended December 31, 2005 resulted in a decrease of $3.7
      million in the basis of the acquired interest in 2005. This change in the
      basis of oil and gas properties resulted in a reduction of depletion and
      depreciation expense of  $314,180 and $257,472 for the three
      months ended June 2008 and June 2007 respectively, and corresponding
      reductions in accumulated depletion and depreciation. The change in
      depletion and depreciation expense resulted in the noted change in
      deferred taxes.
  b)
              The
      restatement of these items, net of amounts described in note a, results
      from the change from the proportionate consolidation method to the full
      consolidation method of accounting for our controlling interests in
      unincorporatedentities.
   (3)
Significant Acquisitions, Dispositions and Property Activity
  The
Company makes an annual offer to repurchase the interests of the partners and
trust unit holders in certain of the Partnerships. The Company purchased such
interests in an amount totaling $153,000 is for the six months ending
June 30, 2008 and $371,000 for the year ending December 31,
2007.
  (4)
Restricted Cash and Cash Equivalents:
  Restricted
cash and cash equivalents include $5,312,000 and $3,633,000 at June 30,
2008 and December 31, 2007, respectively, of cash primarily pertaining to
undistributed revenue payments. There were corresponding accounts payable
recorded at June 30, 2008 and December 31, 2007 for these
liabilities.
  20
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (5)
Additional Balance Sheet Information
  Certain
balance sheet amounts are comprised of the following:
  June 30, 2008
                    Restated
                  
                  
                  December 31, 2007
                    RestatedAccounts
      Receivable:Joint
      interest billing
                  
                  $
                  6,795,000
                  
                  
                  $
                  3,192,000Trade
      receivables
                  
                  
                  2,565,000
                  
                  
                  
                  2,352,000Oil
      and gas sales
                  
                  
                  21,065,000
                  
                  
                  
                  14,785,000Income
      tax receivable
                  
                  
                  --
                  
                  
                  
                  795,000Other
                  
                  
                  243,000
                  
                  
                  
                  415,000$
                  30,668,000
                  
                  
                  $
                  21,539,000Less,
      allowance for doubtful accounts
                  
                  
                  (282,000
                  )
                  
                  
                  (228,000
                  )$
                  30,386,000
                  
                  
                  $
                  21,311,000Accounts
      Payable:Trade
                  
                  $
                  17,081,000
                  
                  
                  $
                  12,364,000Royalty
      and other owners
                  
                  
                  15,824,000
                  
                  
                  
                  11,209,000Other
                  
                  
                  4,320,000
                  
                  
                  
                  3,207,000Total
                  
                  $
                  37,225,000
                  
                  
                  $
                  26,780,000Accrued
      Liabilities:Compensation
      and related expenses
                  
                  $
                  3,135,000
                  
                  
                  $
                  1,687,000Property
      cost
                  
                  
                  2,974,000
                  
                  
                  
                  4,551,000Income
      tax
                  
                  
                  2,147,000
                  
                  
                  
                  --Other
                  
                  
                  3,138,000
                  
                  
                  
                  3,794,000Total
                  
                  $
                  11,394,000
                  
                  
                  $
                  10,032,000
 21
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (6)
Property and Equipment: (restated)
  Property
and equipment at June 30, 2008 and December 31, 2007 consisted of the
following:
  June 30,
                      2008
                    
                    
                    December 31,
                      2007Proved
      oil and gas properties, at cost
                    
                    $
                    390,725,000
                    
                    
                    $
                    378,908,000Unproved
      oil and gas properties, at cost
                    
                    
                    13,461,000
                    
                    
                    
                    4,458,000Less,
      accumulated depletion and depreciation
                    
                    
                    (177,992,000
                    )
                    
                    
                    (145,514,00
                    )$
                    226,194,000
                    
                    
                    $
                    237,852,000Field
      service equipment and other
                    
                    
                    19,546,000
                    
                    
                    
                    18,029,000Less,
      accumulated depreciation
                    
                    
                    (10,545,000
                    )
                    
                    
                    (9,820,000
                    )$
                    9,001,000
                    
                    
                    $
                    8,209,000Total
      net property and equipment
                    
                    $
                    235,195,000
                    
                    
                    $
                    246,061,000
  Total
interest incurred during the year ended December 31, 2007 was $12,984,000.
Of this amount, the Company capitalized $1,922,000. Capitalized interest is
included as part of the cost of oil and gas properties. The capitalized rates
are based upon the Company’s weighted-average cost of borrowings used to finance
expenditures. There was no interest capitalized during the first half of
2008.
  (7)
Long-Term Debt:
  Bank
Debt:
  The
Company currently has credit facilities totaling $360 million, consisting of a
$200 million credit facility through Guaranty Bank (the offshore facility) and a
$160 million credit facility through a syndicate of banks led by Guaranty Bank
(the onshore facility). The offshore facility’s maturity date is 2009 and
onshore credit facility matures in 2011.
  Availability
under the credit facilities is based on the loan value assigned to Prime’s oil
and gas properties. The determination of the Borrowing Base is made by the
lenders taking into consideration the estimated value of Prime’s oil and gas
properties in accordance with the lenders’ customary practices for oil and gas
loans. This process involves reviewing Prime’s estimated proved reserves and
their valuation. The Borrowing Base is re-determined semi-annually, and the
available borrowing amount could be increased or decreased as a result of such
redeterminations. In addition, Prime and the lenders each have discretion at any
time to have the Borrowing Base re-determined. A revision to Prime’s reserves
may prompt such a request on the part of the lenders, which could possibly
result in a reduction in the Borrowing Base and availability under the credit
facilities. If outstanding borrowings under either of the credit facilities
exceed the applicable portion of the Borrowing Base, Prime would be required to
repay the excess amount within a prescribed period. If we are unable to pay the
excess amount, it would cause an event of default.
  22
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  The
credit facilities include terms and covenants that require the Company to
maintain, as defined, a minimum current ratio, tangible net worth, debt coverage
ratio and interest coverage ratio, and restrictions are placed on the payment of
dividends and the amount of treasury stock the Company may purchase. The credit
facilities are collateralized by substantially all of the Company’s assets. The
Company is required to mortgage, and grant a security interest in, consolidated
proved oil and gas properties. Prime also pledged the stock of several
subsidiaries to the lenders to secure the credit facilities.
  During
the second quarter 2008, the Company entered into an amended and restated credit
agreement related to the offshore credit facility allowing for a subordinated
credit facility with a private lender and the release of certain collateral
which was then pledged to the new lender under a separate credit
agreement.
  At
June 30, 2008, the borrowing bases and outstanding balances of the
Company’s bank debt were $96 million and $89.6 million, respectively, under the
onshore credit facility at a weighted average interest rate of 5.92%, and $29.4
million under the offshore credit facility at a weighted average interest rate
of 5.28%. Total outstanding bank debt was $119 million at June 30,2008. The
combined average interest rates paid on outstanding bank borrowings subject to
interest at the bank’s base rate and on outstanding bank borrowings bearing
interest based upon the LIBO rate were 6.03% during the first six months of 2008
as compared to 8.89% during the same period of 2007.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into interest swap agreements for a period of two years,
beginning in April 2008, related to $60 million of Company bank debt resulting
in a fixed rate of 4.375%. The underlying debt contracts above are repriced
quarterly based upon the three-month LIBOR rates.
  Indebtedness to related
parties – noncurrent:
  During
the second quarter 2008, the Company’s offshore subsidiary entered into a
subordinated credit facility with a private lender with an availability of $50
million. The private lender has specific collateral pledged under a separate
credit agreement. The private lender is a member of the Company’s Board of
Directors.
  The
current advances of this credit facility are $20 million. The facility matures
in January 2010. The new loan bears interest at the rate of 10% per
annum.
  23
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (8) Other
Long-Term Obligations and Commitments:
  Operating
Leases:
  The
Company has several non-cancelable operating leases, primarily for rental of
office space, that have a term of more than one year.
  Operating Leases2008
                    
                    $
                    297,0002009
                    
                    
                    350,0002010
                    
                    
                    71,0002011
                    
                    
                    5,000Thereafter
                    
                    
                    —Total
      minimum payments
                    
                    $
                    723,000
  Asset
Retirement Obligation: (restated)
  A
reconciliation of our liability for plugging and abandonment costs for the Six
Months Ended June 30, 2008 and the year ended December 31, 2007 is as
follows:
  June 30, 2008
                        
                        
                        December 31, 2007Asset
      retirement obligation – beginning of period
                        
                        $
                        17,361,000
                        
                        
                        $
                        7,047,000Liabilities
      incurred
                        
                        
                        268,000
                        
                        
                        
                        468,000Liabilities
      settled
                        
                        
                        (134,000
                        )
                        
                        
                        (367,000
                        )Accretion
      expense
                        
                        
                        567,000
                        
                        
                        
                        461,000Revisions
      in estimated liabilities
                        
                        
                        1,211,000
                        
                        
                        
                        9,752,000Asset
      retirement obligation – end of period
                        
                        $
                        19,273,000
                        
                        
                        $
                        17,361,000
 
  The
Company’s liability is determined using significant assumptions, including
current estimates of plugging and abandonment costs, annual inflation of these
costs, the productive life of wells and our risk-adjusted interest rate. Changes
in any of these assumptions can result in significant revisions to the estimated
asset retirement obligation. Revisions to the asset retirement obligation are
recorded with an offsetting change to producing properties, resulting in
prospective changes to depreciation, depletion and amortization expense and
accretion of discount. Because of the subjectivity of assumptions and the
relatively long life of most of our wells, the costs to ultimately retire our
wells may vary significantly from previous estimates.
  24
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (9)
Contingent Liabilities:
  The
Company, as managing general partner of the affiliated Partnerships, is
responsible for all Partnership activities, including the drilling of
development wells and the production and sale of oil and gas from productive
wells. The Company also provides the administration, accounting and tax
preparation work for the Partnerships, and is liable for all debts and
liabilities of the affiliated Partnerships, to the extent that the assets of a
given limited Partnership are not sufficient to satisfy its obligations. As of
June 30, 2008, the affiliated Partnerships have established cash reserves
in excess of their debts and liabilities and the Company believes these reserves
will be sufficient to satisfy Partnership obligations.
  The
Company is subject to environmental laws and regulations. Management believes
that future expenses, before recoveries from third parties, if any, will not
have a material effect on the Company’s financial condition. This opinion is
based on expenses incurred to date for remediation and compliance with laws and
regulations which have not been material to the Company’s results of
operations.
  (10)
Stock Options and Other Compensation:
  In May
1989, non-statutory stock options were granted by the Company to four key
executive officers for the purchase of shares of common stock. At June 30,
2008 and 2007, options on 767,500 were outstanding and exercisable at prices
ranging from $1.00 to $1.25.
  (11)
Related Party Transactions:
  The
Company, as managing general partner or managing trustee, makes an annual offer
to repurchase the interest of the partners and trust unit holders in certain of
the Partnerships or Trusts.  The Company purchased such interests in
an amount totaling $153,000 in the second quarter 2008 and $371,000 during
2007.
 
 Treasury
stock purchases in 2008 and 2007 included shares acquired from related
parties.  Purchases from related parties included 70,000 shares
purchased for a total consideration of $3,500,000 during the first half of 2008
and a total of 31,700 shares purchased for a total consideration of $1,743,500
in 2007.
 
 Receivables
from related parties consist of reimbursable general and administrative costs,
lease operating expenses and reimbursement for property development and related
costs.  These receivables are due from joint venture partners, which
may include members of the Company’s Board of Directors.
 
 Payables
owed to related parties primarily represents receipts collected by the Company
as agent, for the joint venture partners, which may include members of the
Company’s Board of Directors, for oil and gas sales net of expenses. As of June
30, 2008, included in due to related parties is the amount of accrued interest
in the amount of $164,000 owed to the related party, a member of the Company’s
Board of Directors whom the Company’s offshore subsidiary entered into a credit
agreement.  The agreement provides for a loan of $20 million at a rate
of 10% per annum and is secured by certain oil and gas properties and the
Company’s interest in a limited partnership which owns a shopping center in
Alabama.
  25
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  (12)
Financial Instruments
  Adoption
of SFAS No. 157
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,”
which establishes a formal framework for measuring fair values of assets and
liabilities in financial statements that are already required by United States
generally accepted accounting principles to be measured at fair value. SFAS
No. 157 clarifies guidance in FASB Concepts Statement (CON) No. 7
which discusses present value techniques in measuring fair value. Additional
disclosures are also required for transactions measured at fair value. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. In February 2008, the FASB
issued FASB Staff Position (FSP) No. FAS 157-2, “Effective Date of FASB
Statement No. 157,” which granted a one year deferral (to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years) for certain non-financial assets and liabilities to comply with SFAS
No. 157. The Company will adopt the provisions of FAS No. 157 covered
under FSP No. 157-2 on January 1, 2009. Additionally, in February
2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13,” which amends SFAS No. 157 to exclude SFAS
No. 13 and related pronouncements that address fair value measurements for
purposes of lease classification and measurement. FSP No. FAS 157-1 is effective
upon the initial adoption of SFAS No. 157. The Company has adopted SFAS
No. 157 and the related FSPs discussed above which did not have an impact
on its financial position or results of operations for the quarter ended
June 30, 2008.
  As
defined in SFAS No. 157, fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price). The transaction is
based on a hypothetical transaction in the principal or most advantageous market
considered from the perspective of the market participant that holds the asset
or owes the liability.
 
 The
valuation techniques that can be used under SFAS No. 157 are the market
approach, income approach or cost approach. The market approach uses prices and
other information for market transactions involving identical or comparable
assets or liabilities, such as matrix pricing. The income approach uses
valuation techniques to convert future amounts to a single discounted present
amount based on current market conditions about those future amounts, such as
present value techniques, option pricing models (i.e. Black-Scholes model) and
binomial models (i.e. Monte-Carlo model). The cost approach is based on current
replacement cost to replace an asset.
 
 The
Company utilizes market data or assumptions that market participants who are
independent, knowledgeable and willing and able to transact would use in pricing
the asset or liability, including assumptions about risk and the risks inherent
in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated or generally unobservable. The Company attempts
to utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs. The Company is able to classify fair
value balances based on the observability of those inputs. SFAS No. 157
establishes a formal fair value hierarchy based on the inputs used to measure
fair value. The hierarchy gives the highest priority level 1 measurements and
the lowest priority to level 3 measurements, and accordingly, level 1
measurements should be used whenever possible.
  26
 Index
  PrimeEnergy
Corporation
 Notes to
Consolidated Financial Statements
 June 30,
2008
  The three
levels of the fair value hierarchy as defined by SFAS No. 157 are as
follows:
  •
              Level
      1: Valuations utilizing quoted, unadjusted prices for identical assets or
      liabilities in active markets that the Company has the ability to access.
      This is the most reliable evidence of fair value and does not require a
      significant degree of judgment. Examples include exchange-traded
      derivatives and listed equities that are actively
  traded.
  •
              Level
      2: Valuations utilizing quoted prices in markets that are not considered
      to be active or financial instruments for which all significant inputs are
      observable, either directly or indirectly for substantially the full term
      of the asset or liability. Financial instruments that are valued using
      models or other valuation methodologies are included. Models used should
      primarily be industry-standard models that consider various assumptions
      and economic measures, such as interest rates, yield curves, time value,
      volatilities, contract terms, current market prices, credit risk or other
      market-corroborated inputs. Examples include most over-the-counter
      derivatives (non-exchange traded), physical commodities, most structured
      notes and municipal and corporate
bonds.
  •
              Level
      3: Valuations utilizing significant, unobservable inputs. This provides
      the least objective evidence of fair value and requires a significant
      degree of judgment. Inputs may be used with internally developed
      methodologies and should reflect an entity’s assumptions using the best
      information available about the assumptions that market participants would
      use in pricing an asset or liability. Examples include certain corporate
      loans, real-estate and private equity investments and long-dated or
      complex over-the-counter
derivatives.
  Depending
on the particular asset or liability, input availability can vary depending on
factors such as product type, longevity of a product in the market and other
particular transaction conditions. In some cases, certain inputs used to measure
fair value may be categorized into different levels of the fair value hierarchy.
For disclosure purposes under SFAS No. 157, the lowest level that contains
significant inputs used in valuation should be chosen. Per SFAS No. 157,
the Company has classified its assets and liabilities into these levels
depending upon the data relied on to determine the fair values. The fair values
of the Company’s natural gas and crude oil price collars and swaps are valued
based upon quotes obtained from counterparties to the agreements and are
designated as Level 3.
  27
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
 
 NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  The
following fair value hierarchy table presents information about the Company’s
liabilities measured at fair value on a recurring basis as of June 30,
2008:
  Quoted Prices in
                                                Active Markets
                                                For Identical
                                                Assets
                                                (Level 1)
                                              
                                              
                                              Significant
                                                Other
                                                Observable
                                                Inputs (Level 2)
                                              
                                              
                                              Significant
                                                Unobservable
                                                Inputs (Level 3)
                                              
                                              
                                              Balance as of
                                                June 30,
                                                2008AssetsInterest
      Rate Contracts
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              534,000
                                              
                                              
                                              $
                                              534,000Total
      Assets
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              534,000
                                              
                                              
                                              $
                                              534,000LiabilitiesCommodity
      Derivative Contracts
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              (35,592,000
                                              )
                                              
                                              $
                                              (35,592,000
                                              )Total
      Liability
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              $
                                              (35,592,000
                                              )
                                              
                                              $
                                              (35,592,000
                                              )
  The
derivative contracts were measured based on quotes from the Company’s
counterparties. Such quotes have been derived using a model that considers
various inputs including current market and contractual prices for the
underlying instruments, quoted forward prices for natural gas and crude oil,
volatility factors and interest rates, such as a LIBOR curve for a similar
length of time as the derivative contract term. Although the Company utilizes
multiple quotes to assess the reasonableness of its values, the Company has not
attempted to obtain sufficient corroborating market evidence to support
classifying these derivative contracts as Level 2.
  The
following table sets forth a reconciliation of changes in the fair value of
financial assets and liabilities classified as level 3 in the fair value
hierarchy.
  Net
      liabilities as of January 1, 2008
                  
                  $
                  (3,618,000
                  )Total
      realized and unrealized losses:Included
      in earnings
                  
                  
                  (4,284,000
                  )Included
      in other comprehensive income
                  
                  
                  (27,719,000
                  )Purchases,
      sales, issuances and settlements, net
                  
                  
                  563,000Net
      liabilities as of June 30, 2008
                  
                  $
                  (35,058,000
                  )
 
 (a)
              Amounts
      reported in net income are classified as sales for commodity derivative
      instruments and as a reduction to interest expense for interest rate swap
      instruments.  28
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to CONSOLIDATED FINANCIAL
STATEMENTS, Continued
  Derivative
Instruments and Hedging Activity
  The
Company periodically enters into derivative commodity instruments to hedge its
exposure to price fluctuations on natural gas and crude oil production. At
June 30, 2008, the Company had eleven cash flow hedges open: two natural
gas price swap arrangements and nine crude oil collar arrangements. At
June 30, 2008, $55.8 million ($35.6 million net of tax) unrealized loss was
recorded in Accumulated Other Comprehensive Income, $31.8 million and $23.8
million short-term and long-term derivative payable. Also included in
Accumulated Other Comprehensive Income is unrealized gain on interest rate swaps
of $835,000 ($534,000 net of tax), and $267,000 in both short and long-term
derivative assets.
  The
change in the fair value of derivatives designated as hedges that is effective
is initially recorded to Accumulated Other Comprehensive Income. The ineffective
portion, if any, of the change in the fair value of derivatives designated as
hedges, and the change in fair value of all other derivatives, is recorded
currently in earnings as a component of oil and gas sales.
  As of
June 30, 2008, natural gas price swaps cover 2,985 Mmcf of production at a
weighted average price of $8.04 for 2008 and $9.75 for 2009. The oil price
collar covers 731 Mbbl of production at a floor price ranging from $60.00 to
$65.00, a ceiling price ranging from $77.40 to $86.50 and a third-tier call of
$100 on one collar arrangement.
  Assuming
no change in commodity prices, after June 30, 2008, the Company would
expect to reclassify to the Statement of Operations, over the next 12 months,
$20.7 million in after-tax loss associated with commodity hedges. This
reclassification represents the net short-term payables associated with open
positions currently not reflected in earnings at June 30, 2008 related to
anticipated remaining 2008 production and 2009 production through
June.
 
 Assuming
no change in interest rates after June 30, 2008, the Company would expect
to reclassify to the statement of operations $267,000 in after tax gains
associated with the interest rate swaps. This reclassification represents
interest swaps which will expire within one year of June 30,
2008.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into interest swap agreements for a period of two years,
beginning in April 2008, related to $60 million of Company bank debt resulting
in a fixed rate of 4.375%. The underlying debt contracts above are repriced
quarterly based upon the three-month LIBOR rates.
  29
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to
CONSOLIDATED FINANCIAL STATEMENTS, Continued
  Crude Oil Price CollarContract Period
                  
                  Volume In Mbbl
                  
                  
                  Weighted Average Price
                    Floor/Ceiling/Third Tier
                    (per Bbl)
                  
                  
                  Net Unrealized
                    (Loss)/Gain(In thousands)Third
      Quarter 2008
                  
                  
                  20
                  
                  
                  $
                  65/
                  
                  
                  $
                  79.25/
                  
                  
                  $
                  100.00Third
      Quarter 2008
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  60.00/
                  
                  
                  $
                  81.25Third
      Quarter 2008
                  
                  
                  15
                  
                  
                  
                  
                  
                  
                  $
                  60.00/
                  
                  
                  $
                  78.00Fourth
      Quarter 2008
                  
                  
                  18
                  
                  
                  $
                  65/
                  
                  
                  $
                  79.25/
                  
                  
                  $
                  100.00Fourth
      Quarter 2008
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  60.00/
                  
                  
                  $
                  81.25Fourth
      Quarter 2008
                  
                  
                  15
                  
                  
                  
                  
                  
                  
                  $
                  60.00/
                  
                  
                  $
                  78.00Full
      Year 2008
                  
                  
                  170
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (5,398
                  )First
      Quarter 2009
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  79.70First
      Quarter 2009
                  
                  
                  6
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  77.75First
      Quarter 2009
                  
                  
                  12
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  86.50Second
      Quarter 2009
                  
                  
                  17
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  79.70Second
      Quarter 2009
                  
                  
                  38
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  77.40Second
      Quarter 2009
                  
                  
                  2
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  77.75Second
      Quarter 2009
                  
                  
                  12
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  86.50Third
      Quarter 2009
                  
                  
                  57
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  77.40Third
      Quarter 2009
                  
                  
                  12
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  86.50Fourth
      Quarter 2009
                  
                  
                  57
                  
                  
                  
                  
                  
                  
                  $
                  60/
                  
                  
                  $
                  77.40Fourth
      Quarter 2009
                  
                  
                  12
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  86.50Full
      Year 2009
                  
                  
                  276
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (10,585
                  )First
      Quarter 2010
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  80.90First
      Quarter 2010
                  
                  
                  9
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  84.14Second
      Quarter 2010
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  80.90Second
      Quarter 2010
                  
                  
                  9
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  84.14Third
      Quarter 2010
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  80.90Third
      Quarter 2010
                  
                  
                  9
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  84.14Fourth
      Quarter 2010
                  
                  
                  51
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  80.90Fourth
      Quarter 2010
                  
                  
                  9
                  
                  
                  
                  
                  
                  
                  $
                  65/
                  
                  
                  $
                  84.14Full
      Year 2010
                  
                  
                  240
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (8,494
                  )First
      Quarter 2011
                  
                  
                  45
                  
                  
                  
                  
                  
                  
                  $
                  65.00/
                  
                  
                  $
                  84.14Full
      Year 2011
                  
                  
                  45
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (1,517
                  )
 30
 Index
  PRIMEENERGY
CORPORATION and SUBSIDIARIES
  NOTES to CONSOLIDATED FINANCIAL
STATEMENTS, Continued
  At
June 30, 2008, we had two natural gas price swap contracts covering our
2008 and 2009 production as follows:
  Natural Gas Price SwapsContract Period
                                
                                Volume
                                  in Mmcf
                                
                                
                                Weighted Average
                                  Price (per Mcf)
                                
                                
                                Net Unrealized
                                  Gain
                                  (In thousands)Third
      Quarter 2008
                                
                                
                                1,005
                                
                                
                                
                                8.07
                                
                                
                                
                                (3,333
                                )Fourth
      Quarter 2008
                                
                                
                                1,005
                                
                                
                                
                                8.07
                                
                                
                                
                                (3,604
                                )Full
      Year 2008
                                
                                
                                2,010
                                
                                
                                $
                                8.04
                                
                                
                                $
                                (6,937
                                )First
      Quarter 2009
                                
                                
                                975
                                
                                
                                $
                                9.75
                                
                                
                                $
                                (2,662
                                )Full
      Year 2009
                                
                                
                                975
                                
                                
                                $
                                9.75
                                
                                
                                $
                                (2,662
                                )
  We are
exposed to market risk on these open contracts, to the extent of changes in
market prices of natural gas and crude oil. However, the market risk exposure on
these hedged contracts is generally offset by the gain or loss recognized upon
the ultimate sale of the commodity that is hedged.
  The
preceding paragraphs contain forward-looking information concerning future
production and projected gains and losses, which may be impacted both by
production and by changes in future market prices of energy commodities. See
“Forward-Looking Information” for further details.
  (13)
Income Per Share (restated):
  Basic
earnings per share are computed by dividing earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflect per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
The following reconciles amounts reported in the financial
statements:
  Six Months Ended June 30,
      2008
                  
                  
                  Six Months Ended June 30,
      2007Net
                    Income
                  
                  
                  Number of
                    Shares
                  
                  
                  Per Share
                    Amount
                  
                  
                  Net
                    Income
                  
                  
                  Number of
                    Shares
                  
                  
                  Per Share
                    AmountNet
      income per common share
                  
                  $
                  6,750,000
                  
                  
                  
                  3,074,725
                  
                  
                  $
                  2.20
                  
                  
                  $
                  6,111,000
                  
                  
                  
                  3,199,343
                  
                  
                  $
                  1.91Effect
      of dilutive securities:Options
                  
                  
                  
                  
                  
                  
                  753,132
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  753,089Diluted
      net income per common share
                  
                  $
                  6,750,000
                  
                  
                  
                  3,827,857
                  
                  
                  $
                  1.76
                  
                  
                  $
                  6,111,000
                  
                  
                  
                  3,952,432
                  
                  
                  $
                  1.55
 
 Three Months Ended
                    June 30, 2008
                  
                  
                  Three Months Ended
                    June 30, 2007Net
                    Income
                  
                  
                  Number of
                    Shares
                  
                  
                  Per Share
                    Amount
                  
                  
                  Net
                    Income
                  
                  
                  Number of
                    Shares
                  
                  
                  Per Share
                    AmountNet
      income per Common share
                  
                  $
                  4,019,000
                  
                  
                  
                  3,057,831
                  
                  
                  $
                  1.31
                  
                  
                  $
                  2,794,000
                  
                  
                  
                  3,185,640
                  
                  
                  $
                  0.88Effect
      of dilutive Securities:Options
                  
                  
                  
                  
                  
                  
                  753,563
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  753,264Diluted
      net income per common share
                  
                  $
                  4,019,000
                  
                  
                  
                  3,811,394
                  
                  
                  $
                  1.05
                  
                  
                  $
                  2,794,000
                  
                  
                  
                  3,938,904
                  
                  
                  $
                  0.71
  31
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  Item 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  This
discussion should be read in conjunction with the financial statements of the
Company and notes thereto.
  LIQUIDITY
AND CAPITAL RESOURCES
  Cash flow
provided by operations for the six month period ended June 30, 2008 was
$53,919,000. Excluding the effects of significant unforeseen expenses or other
income, our cash flow from operations fluctuates primarily because of variations
in oil and gas production and prices or changes in working capital accounts. Our
oil and gas production will vary based on actual well performance but may be
curtailed due to factors beyond our control. Hurricanes in the Gulf of Mexico
may shut down our production for the duration of the storm’s presence in the
Gulf or damage production facilities so that we cannot produce from a particular
property for an extended amount of time. In addition, downstream activities on
major pipelines in the Gulf of Mexico can also cause us to shut-in production
for various lengths of time.
  Our
realized oil and gas prices vary due to world political events, supply and
demand of products, product storage levels, and weather patterns. We sell the
vast majority of our production at spot market prices. Accordingly, product
price volatility will affect our cash flow from operations. To mitigate price
volatility we sometimes lock in prices for some portion of our production
through the use of financial instruments.
  The
Company’s activities include development and exploratory drilling. The Company’s
strategy is to develop a balanced portfolio of drilling prospects that includes
lower risk wells with a high probability of success and higher risk wells with
greater economic potential.
  For 2008
we have budgeted $60 million for exploration and development in our core
operating areas. As of August 2008, the Company has committed approximately $27
million on wells in these areas that have been spudded since January 1,
2008. We expect to continue to make significant capital expenditures over the
next several years as part of our long-term growth strategy.
  If our
exploratory drilling results in significant new discoveries, we will have to
expend additional capital in order to finance the completion, development, and
potential additional opportunities generated by our success. We believe that,
because of the additional reserves resulting from the successful wells and our
record of reserve growth in recent years, we will be able to access sufficient
additional capital through additional bank financing.
  The
Company has in place both a stock repurchase program and a limited partnership
interest repurchase program. Spending under these programs in 2007 was $4.8
million. As of June 30, 2008 the Company has expended approximately $4.5
million on these programs. The amount of treasury stock the Company may purchase
is restricted by debt convents with the Company’s primary lender.
  The
Company currently maintains two credit facilities with a bank totaling $360
million, with a combined current borrowing base of $119 million. The bank
reviews the borrowing base semi-annually and, at their discretion, may decrease
or propose an increase to the borrowing base relative to a redetermined estimate
of proved oil and gas reserves. Our oil and gas properties are pledged as
collateral for the line of credit and we are subject to certain financial
covenants defined in the agreement. We are currently in compliance with these
financial covenants. If we do not comply with these covenants on a continuing
basis, the lenders have the right to refuse to advance additional funds under
the facility and/or declare all principal and interest immediately due and
payable.
  32
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  Item 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS  (continued)
  During
the second quarter of 2008, the Company’s offshore subsidiary arranged a
subordinated credit facility with a private lender controlled by a director of
the Company. The facility provides availability of $50 million and is secured by
properties released by the bank and pledged under this agreement. The current
advances of this credit facility are $20 million due January 2010.
  It is the
goal of the Company to increase its oil and gas reserves and production through
the acquisition and development of oil and gas properties. The Company also
continues to explore and consider opportunities to further expand its oilfield
servicing revenues through additional investment in field service equipment.
However, the majority of the Company’s capital spending is discretionary, and
the ultimate level of expenditures will be dependent on the Company’s assessment
of the oil and gas business environment, the number and quality of oil and gas
prospects available, the market for oilfield services, and oil and gas business
opportunities in general.
  RESULTS
OF OPERATIONS
  Revenues
and net income during the six month period ended June 30, 2008, as compared
to the same periods in 2007 reflect the increased oil and gas sales, presented
below, offset by exploration costs and depreciation and depletion of oil and gas
properties. The table summarizes production volumes and average sales prices
realized (including realized gains and losses from derivatives).
  Six months Ended
                    June 30,
                  
                  
                  Three Months Ended
                    June 30,2008
                  
                  
                  2007
                  
                  
                  Increase /
                    (Decrease)
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  Increase /
                    (Decrease)Barrels
      of Oil Produced
                  
                  
                  320,000
                  
                  
                  
                  264,000
                  
                  
                  
                  56,000
                  
                  
                  
                  165,000
                  
                  
                  
                  159,000
                  
                  
                  
                  6,000Average
      Price Received
                  
                  $
                  94.19
                  
                  
                  $
                  56.64
                  
                  
                  $
                  37.55
                  
                  
                  $
                  108.50
                  
                  
                  $
                  57.48
                  
                  
                  $
                  51.02Oil
      Revenue
                  
                  $
                  30,140,000
                  
                  
                  $
                  14,953,000
                  
                  
                  $
                  15,187,000
                  
                  
                  $
                  17,902,000
                  
                  
                  $
                  9,139,000
                  
                  
                  $
                  8,763,000MCF
      of Gas Produced
                  
                  
                  4,723,000
                  
                  
                  
                  4,685,000
                  
                  
                  
                  38,000
                  
                  
                  
                  2,341,000
                  
                  
                  
                  2,663,000
                  
                  
                  
                  (322,000
                  )Average
      Price Received
                  
                  $
                  9.42
                  
                  
                  $
                  7.96
                  
                  
                  $
                  1.46
                  
                  
                  $
                  9.67
                  
                  
                  $
                  7.82
                  
                  
                  $
                  1.85Gas
      Revenue
                  
                  $
                  44,508,000
                  
                  
                  $
                  37,281,000
                  
                  
                  $
                  7,227,000
                  
                  
                  $
                  22,645,000
                  
                  
                  $
                  20,829,000
                  
                  
                  $
                  1,816,000Total
      Oil & Gas Revenue
                  
                  $
                  74,648,000
                  
                  
                  $
                  52,234,000
                  
                  
                  $
                  22,414,000
                  
                  
                  $
                  40,547,000
                  
                  
                  $
                  29,968,000
                  
                  
                  $
                  10,579,000
 33
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  Item 2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS  (continued)
  Oil and
gas prices received excluding the impact of derivatives were;
  Six months Ended
                    June 30,
                  
                  
                  Three Months Ended
                    June 30,2008
                  
                  
                  2007
                  
                  
                  Increase /
                    (Decrease)
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  Increase /
                    (Decrease)Oil
      Price
                  
                  $
                  109.26
                  
                  
                  $
                  55.53
                  
                  
                  $
                  53.73
                  
                  
                  $
                  128.49
                  
                  
                  $
                  56.97
                  
                  
                  $
                  71.52Gas
      Price
                  
                  $
                  9.83
                  
                  
                  $
                  7.14
                  
                  
                  $
                  2.69
                  
                  
                  $
                  10.90
                  
                  
                  $
                  7.59
                  
                  
                  $
                  3.31
  Changes
in production are due to production from properties added during 2007 and early
2008 offset by the natural decline of existing properties. The increase in oil
production is related to our onshore drilling program while the change in gas
production reflects the production from our offshore drilling
program.
  Lease
operating expense for the six months of 2008 increased by $4,047,000 compared to
2007 due to the addition of lease operating expenses of new properties,
increased production taxes related to higher prices and overall price increases
in oil field services.
  General
and administrative expenses remained flat in the first six months of 2008 as
compared to 2007.
  Field
Service income and expense for the six months of 2008 increased $949,000 and
$533,000, respectively, compared to 2007. These increases reflect higher
utilization of equipment combined with an upward trend in rates and costs during
2008.
  Depreciation
and depletion increased to $35,629,000 in 2008 from $20,611,000 in 2007. This
increase is directly attributed to the majority of the Company’s offshore
properties coming on line late in 2007. These additions increased the overall
property basis and production for the company
  This
Report contains forward-looking statements that are based on management’s
current expectations, estimates and projections. Words such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “projects” and “estimates,” and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of
1933, and are subject to the safe harbors created thereby. These statements are
not guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove inaccurate and,
therefore, there can be no assurance that they will prove to be accurate. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements due to various risks and uncertainties. These risks and
uncertainties include, among other things, the possibility of drilling cost
overruns and technical difficulties, volatility of oil and gas prices,
competition, risks inherent in the Company’s oil and gas operations, the inexact
nature of interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, and the Company’s ability to replace and
expand oil and gas reserves. Accordingly, stockholders and potential investors
are cautioned that certain events or circumstances could cause actual results to
differ materially from those projected.
  34
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  Item 3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  Interest
rate and swap activity.
  The
Company is exposed to interest rate risk on its line of credit, which has
variable rates based upon the lenders base rate, as defined, and the London
Inter-Bank Offered rate. Based on the weighted average balances outstanding
during the first half of 2008, a hypothetical 2.5% increase in the applicable
interest rates would have increased interest expense for the Six Months Ended
June 30, 2008 by approximately $1,601,000.
  The
Company entered into interest rate hedge agreements to help manage interest rate
exposure. These contracts include interest rate swaps. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal amounts.
The Company entered into swap agreements for a period of two years, beginning in
April 2008, related to $60 million of Company bank debt resulting in a fixed
rate of 4.375%. The underlying debt contracts are repriced quarterly based upon
the three-month LIBOR rates.
  Derivative
Instruments and Hedging Activity.
  Our
hedging strategy is designed to reduce the risk of price volatility for our
production in the natural gas and crude oil markets. Our hedging arrangements
apply to only a portion of our production and provide only partial price
protection. These hedging arrangements limit the benefit to us of increases in
prices, but offer protection in the event of price declines. Further, if our
counterparties defaulted, this protection might be limited as we might not
receive the benefits of the hedges. Please read the discussion below and Note 11
of the Notes to Consolidated Financial Statements for a more detailed discussion
of our hedging arrangements.
  Hedges
on Production – Collars.
  From time
to time, we enter into natural gas and crude oil collar agreements with
counterparties to hedge price risk associated with a portion of our production.
These cash flow hedges are not held for trading purposes. Under the collar
arrangements, if the index price rises above the ceiling price, we pay the
counterparty. If the index price falls below the floor price, the counterparty
pays us. In the case of a three-way collar if the index price rises above the
third tier price, the counterparty pays us.
  Hedges
on Production – Swaps.
  From time
to time, we enter into natural gas and crude oil swap agreements with
counterparties to hedge price risk associated with a portion of our production.
These cash flow hedges are not held for trading purposes. Under the swap
agreements, if the index price rises above the swap price, we pay the
counterparty. If the index falls below the swap price, the counterparty pays
us.
  35
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  ITEM 4T.
              CONTROLS
      AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  (a)
Management’s Quarterly Report on Internal Control Over Financial
Reporting.
  The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)). Under the supervision and with the participation of our senior
management, consisting of our chief executive officer and our chief financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
as of the end of the period covered by this report (the “Evaluation Date”).
Based on that evaluation, the Company’s management, including our chief
executive officer and chief financial officer, concluded that as of the
Evaluation Date our disclosure controls and procedures are effective such that
the information relating to us required to be disclosed in our Securities and
Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and
(ii) is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
  Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with generally accepted
accounting principles in the United States. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance of achieving their control objectives. In
evaluating the effectiveness of our internal control over financial reporting,
our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. This quarterly report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this quarterly report.
  (b)
Changes in Internal Control over Financial Reporting.
  There
were no changes in our internal control over financial reporting that occurred
during the last fiscal quarter of the period covered by this report that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
  36
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  PART II -
OTHER INFORMATION
  Item 1.
              LEGAL
      PROCEEDINGS
  From time
to time, the Company is party to certain legal actions and claims arising in the
ordinary course of business. While the outcome of these events cannot be
predicted with certainty, management does not expect these matters to have a
materially adverse effect on the financial position or results of operations of
the Company.
   Item 1A.
              RISK
      FACTORS
  Not
required
   Item 2.
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  There
were no sales of equity securities during the period covered in this
Report.
  During
the six months ended June 30, 2008, the Company purchased the following
shares of common stock as treasury shares.
  2008 Month
                        
                        Number of
                          Shares
                        
                        
                        Average Price
                          Paid per share
                        
                        
                        Maximum Number of Shares
                          that May Yet Be Purchased
                          Under The Plan (1)January
                        
                        
                        60,684
                        
                        
                        $
                        50.06
                        
                        
                        
                        224,871February
                        
                        
                        558
                        
                        
                        $
                        54.68
                        
                        
                        
                        224,313March
                        
                        
                        10,465
                        
                        
                        $
                        50.25
                        
                        
                        
                        213,848April
                        
                        
                        5,500
                        
                        
                        $
                        58.05
                        
                        
                        
                        208,348May
                        
                        
                        435
                        
                        
                        $
                        61.23
                        
                        
                        
                        207,913June
                        
                        
                        6,726
                        
                        
                        $
                        55.62
                        
                        
                        
                        201,187Total/Average
                        
                        
                        84,368
                        
                        
                        $
                        51.13
 
 (1)
              In
      December 1993, we announced that our board of directors authorized a stock
      repurchase program whereby we may purchase outstanding shares of our
      common stock from time-to-time, in open market transactions or negotiated
      sales. A total of 2,700,000 shares have been authorized, to date, under
      this program. Through June 30, 2008 we repurchased a total of
      2,498,813 shares under this program for $32,422,977 at an average price of
      $13.38 per share. Additional purchases may occur as market conditions
      warrant. We expect future purchases will be funded with internally
      generated cash flow or from working
capital.
  Item 3.
              DEFAULTS
      UPON SENIOR SECURITIES
  None
  37
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  PART II -
OTHER INFORMATION
  Item 4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  The
Annual Meeting of Stockholders of the Company was held on June 10, 2008.
The only matter submitted to the stockholders was the election of seven
Directors (named below) nominated by management, all of whom were currently
serving as Directors. Proxies were solicited pursuant to Regulation 14A under
the Securities Act of 1934, definitive copies of which were filed with the
Commission. There was no solicitation in opposition to management’s nominees,
and all of the Directors nominated for the re-election were elected. The number
of shares of the Company’s common stock voted at the Annual Meeting was
2,282,932. Those persons nominated and elected as Directors, and the number of
shares voting for or withheld for each, is shown below. There were no
abstentions or broker non-votes.
  For
                  
                  
                  WithheldBeverly
      A. Cummings
                  
                  
                  2,187,879
                  
                  
                  
                  95,053Charles
      E. Drimal, Jr.
                  
                  
                  2,188,349
                  
                  
                  
                  94,583Matthias
      Eckenstein
                  
                  
                  2,181,394
                  
                  
                  
                  101,538H.
      Gifford Fong
                  
                  
                  2,181,180
                  
                  
                  
                  101,752Thomas
      S. T. Gimbel
                  
                  
                  2,278,530
                  
                  
                  
                  4,393Clint
      Hurt
                  
                  
                  2,278,435
                  
                  
                  
                  4,497Jan
      K. Smeets
                  
                  
                  2,192,639
                  
                  
                  
                  90,293None
  Item 5.
              OTHER
      INFORMATION
  None
  38
 Index
  PrimeEnergy
Corporation
 June 30,
2008
  Item 6.
              EXHIBITS
  The
following documents are filed herewith as a part of this report:
   Exhibit No.10.26.2
                  Amended
      and Restated Credit Agreement among Prime Offshore L.L.C. between Guaranty
      Bank, FSB, as agent and the Lenders party hereto effective March 31,
      2008.10.27.3
                  Subordinated
      Promissory Note dated effective March 31, 2008 in the face principal
      amount of up to $50,000,000 executed by Prime Offshore L.L.C. and payable
      to Artic Management Corporation.10.27.4
                  Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C.
      to Mathias Eckenstein TTEE for Artic Management Corporation (first
      lien).10.27.5
                  Mortgage,
      Deed of Trust, Security Agreement, Financing Statement and Assignment of
      Production Dated effective as of March 31, 2008 from Prime Offshore L.L.C.
      to Mathias Eckenstein TTEE for Artic Management Corporation (second
      lien).10.27.6
                  Pledge
      Agreement dated as effective March 31, 2008 between Prime Offshore L.L.C.
      and Artic Management Corporation (General Partner Interest in FWOE
      Partners L.P.)31.1
                  Certification
      of Chief Executive Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended (filed
    herewith).31.2
                  Certification
      of Chief Financial Officer pursuant to Rule 13(a)-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended (filed
    herewith)32.1
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).32.2
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
      herewith).
  39
 Index
 SIGNATURES
  Pursuant
to the requirements of the Securities and Exchange Act of 1934, Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  PrimeEnergy
      Corporation(Registrant)March
      24, 2009
                /s/ Charles E. Drimal,
  Jr.(Date)
                Charles
      E. Drimal, Jr.PresidentPrincipal
      Executive OfficerMarch
      24, 2009
                /s/ Beverly A. Cummings(Date)
                Beverly
      A. CummingsExecutive
      Vice PresidentPrincipal
      Financial and Accounting
Officer
  
 40